Appellate court KOs discount for trapped-in capital gains taxes

In a Louisiana case, a dissenting shareholder was withdrawing her shares in a company and the valuation of her interest was in dispute, so a trial was held. The experts for both sides agreed on the valuation method to be used: the adjusted net asset method. The company owned a lot of real estate, and its expert took a discount for the capital gains taxes that would be owed if the properties were sold. The expert testified that, even though the company had no intention of selling any of the properties, “it is common and accepted to recognize the trapped-in capital gains taxes as a liability on the balance sheet.” The trial court allowed the discount for the taxes. However, the appellate court overturned this, saying that, while there may be times when the discount can be taken, there must be a factual basis. In this case, a sale of the assets was an unknown future event, so it ruled that the trial court should not have allowed such a discount.

The case is ShopRite, Inc. v. Gardiner, 21-371 (La.App. 3 Cir. 12/29/21), and a case analysis and full court opinion can be found on the BVLaw platform.

Hitchner’s primer on three transaction databases

“Read the instructions” to transactional databases is the advice Jim Hitchner (Financial Valuation Advisors) stressed several times in the February 2022 issue of Hardball With Hitchner. He gives a primer on three databases—DealStats, BIZCOMPS, and ValuSource Market Comps—analysts typically use for the guideline company transactions method. All three of these databases include instructions and user’s guides that explain how to use their data—and each of them are different, he points out. He also provides a nice checklist that points out what he sees as some mistakes that can be made when applying the data, such as:

• Using transactions that were in a different economic or industry cycle;

• Averaging widely dispersed multiples;

• Not knowing whether the transaction price includes a strategic premium;

• Finding only one year of financial information available; and

• Not knowing or guessing at what assets and liabilities were transferred.

Hardball With Hitchner is a monthly publication. For subscription information, click here.

Start due diligence before accepting an engagement

This is one of the tips in an article from the latest journal of the Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO) and standard-setter. When you talk with the attorney, in addition to learning about the engagement, you can get a sense of whether you will be pushed in one direction or another. While most lawyers “understand that their duties as advocates differ from yours,” if you get the feeling that “you might be pressured from a lawyer you have not worked with before, we would encourage you to do some research on their past cases to see if you’d be comfortable taking this case.” The article, “Tips to Help You Avoid Blurring the Line Between Impartiality and Advocacy,” by Andrew Cochran (EY), Shaun Laubman (Lax O’Sullivan Lisus Gottlieb), and Lindsay Campbell (Hoare Dalton Litigation and Valuation Services), is in the Journal of Business Valuation, 2021 edition. Other articles discuss causation and financial losses, COVID-19 impact on valuations, forecast validation for economic losses, and the challenges of litigation engagements for smaller businesses. Some very interesting reading here! The journal is on the BVResearch Pro platform, a clearinghouse of 20,000 BV-related articles, books, court cases, webinar transcripts, and much more.

Newest valuation data for A/E firms

The latest transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries (A/E firms) is now available in the Architecture/Engineering Business Valuation and M&A Transaction Study, 9th edition. This study includes data from over 225 distinct stock transactions collected from a confidential survey. Among other information, the study provides statistical data on 10 separate valuation ratios or multiples representing both minority and controlling interests in privately held firms, as well as minority interests in publicly traded companies and minority interests in employee stock ownership plans (ESOP) sponsoring companies. The study is from Rusk O’Brien Gido + Partners and its team of accredited business appraisers with decades of experience valuing privately held A/E firms.

‘Brain drain’ is top challenge to appraisal profession, per ASA’s White

“Perhaps the greatest challenge facing the appraisal profession now and soon is the sunsetting of careers by baby boomers and their exit from the workforce,” says Johnnie White, CEO of the American Society of Appraisers, in an interview. While this will provide job opportunities for fledgling appraisers, in the short term, “there will be a collective brain drain as these senior experts with decades of experience retire.” White sees professional organizations such as the ASA and International Valuation Standards Council (IVSC) “playing a pivotal role during this transition helping new valuers fill this knowledge gap with professional development, accreditation, advocacy, networking and many other valuable programs, products, and services.” In the interview, he also discusses his other observations as well as his vision for the future of the appraisal profession. The full interview is available if you click here.

DealStats Hall of Fame members for 2021

Thanks to business brokers and other intermediaries who contribute data, DealStats is the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2021 are:

• Teija Heikkila, National Kennel Sales & Appraisals (Grand Junction, Colo.);

• Roger Rumble, The Stratford Associates Inc. (Kalamazoo, Mich.);

• Lee Trammell, Drake Business Services (Tyler, Texas); and

• Sanjay Ahuja, Sunbelt Business Brokers (Marlborough, Mass.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Looking for a few good industry experts

BVR has done a series of webinars and What It’s Worth guides that cover specific types of firms, such as restaurants, construction companies, law firms, breweries, wineries, automobile dealers, and even paving contractors. Our latest industry webinar was on diagnostic imaging centers, and, today, we have a webinar on valuing nightclubs. Our latest What It’s Worth guide is on insurance agencies, and we have one in the works on the casino industry. Valuation experts with experience in these industries generously contributed to these reports and webinars. Do you have an industry that is your specialty? If so, we want to hear from you for potential articles or for you to conduct a webinar. We’re particularly interested in these industries: auto repair shops, prepackaged software, landscapers, grocery stores, gas stations, gyms, child day care services, advertising agencies, and signs/advertising specialties. If you have experience valuing one of these–or any other—types of firms and are willing to share your expertise, please let us know. Send an email to andyd@bvreasources.com. Thanks, and we look forward to hearing from you!

Three valuation firms enter Saudi market

PricewaterhouseCoopers (PWC), Baker Tilly, and Land Sterling have entered the Saudi market, bringing the number of international valuers in the kingdom to nine, according to Saad Al-Baiz, director of communication at the Saudi Authority for Accredited Valuers (Taqeem). Their practices will include the valuation of real estate, businesses, and intangible assets, according to an article in Argaam, a financial news portal in the Arab world. Last November, Al-Baiz said that the total number of valuers accredited by the authority, who obtained membership in various branches (real estate, economic establishments, property and equipment, and vehicle damages) reached about 3,000 valuers, 87% of whom are Saudis, according to Argaam’s data.

Here’s what you’ll see:

• “Book Review: Understanding Business Valuation, 6th Edition” (R. James Alerding, CPA/ABV). Gary Trugman (Trugman Valuations) has updated his book, which shows you how to apply valuation theory with practical examples from actual engagements and sample valuation reports, written in an easy-to-understand style.

• “Book Review: Valuing a Business—The Analysis and Appraisal of Closely Held Companies, 6th Edition” (Harold G. Martin Jr., CPA/ABV/CFF, ASA, CFE). A review of the new edition of Shannon Pratt’s book, which gives a heavy dose of theory and has been updated by a team of 67 contributors and published by the American Society of Appraisers.

• “Appraiser Uses Direct Way to Estimate Private-Company Cost of Equity” (BVR Editor). One appraiser, after 25 years and over 1,000 valuations of small owner-operated businesses, says that these firms bear no relation to public companies, so why look to the public markets for data when estimating cost of capital? Here’s the method he uses, which looks directly at the private capital markets and does not require any expensive resources.

• “Additional Takeaways From the 2021 ASA International Conference” (BVR Editor). Interesting sessions covering risk-free rates, equity risk premia, expert testimony, appraisal reviews, cannabis valuations, and more from the American Society of Appraisers’ International Conference held in Las Vegas.

• “Veteran Valuers Warn of This Fallout From COVID-19” (BVR Editor). Being cooped up because of the pandemic has created a potential problem, say experienced valuers, if appraisers continue to do management interviews and company tours virtually instead of in person.

• “Unique Pitfalls in Valuing a Diagnostic Imaging Center” (BVR Editor). Some advice from Douglas Smith (Phase 4 Radiology Business Strategies LLC), whose his entire practice is dedicated to the diagnostic imaging space. He is not an accredited valuation expert but is called in by appraisers as a third-party expert to perform analyses and forecasts for these entities.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the March 2022 issue of Business Valuation Update.

BV movers . . .

• People: Nick Harris, CPA, ABV, CFA, CFE, has been admitted as a partner at Charlotte, N.C.-based GreerWalker; he specializes in damages valuation, business valuation, forensic accounting, and fraud investigations … Steven Caiazza, CVA, CFE, has been named a manager in the valuation, forensic accounting, and litigation support department at BST & Co. CPAs LLP of Albany, N.Y.; he currently manages some of the firm’s most complex and technical valuation engagements.

  Firms: Dallas-based Generational Group, a middle-market investment bank and advisory services firm for privately held businesses, has acquired a majority stake in tech services firm Precocity that will add technology solutions to the firm’s growing suite of advisory services … Princeton, N.J.-based Withum increases its footprint on the West Coast by adding Encino, Calif.-based Martini Partners LLP, a firm with a particular focus in the consumer products, entertainment, hospitality, healthcare, real estate, and technology industries … E. Cohen & Co. CPAs (Rockville, Md.) is adding DeVan & Lowery PA, also of Rockville … Ken Smith, Casper & Associates, CPAs (Lufkin, Texas) and Axley & Rode LLP have merged and will operate under the latter’s name; Axley & Rode serves East Texas from offices in Lufkin, Nacogdoches, Livingston, and Jasper.

  Please send your professional and firm news to us at editor@bvresources.com.

CPE events

• Shining a Spotlight on Nightclub Valuation. February 16, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Lynton Kotzin (JS Held) and Jason Pierce (JS Held). CPE credits: 2.0.

How do you translate the excitement of nightclubs into value? This session discusses the nuances of valuing bars and clubs, including deconstructing the revenue streams, matching the risk to the business model, properly applying transaction multiples and other benchmarks, and utilizing lessons learned from court cases.

• Carried Interest—What’s It Worth? February 17, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Vladimir Korobov (Marcum) and Kyle Garcia (Financial Research Associates). Part of BVR’s Special Series on Advanced Modeling and Methodologies. CPE credits: 2.0.

Learn about the world of private equity funds including the general approaches used for valuation of carried interests. Also, the fund life cycle and the valuation methods applicable in different stages are discussed. Practical examples of each will be provided.