Automatic DLOC for a minority interest? Not so fast

Business valuation analysts generally agree that minority interests in a privately held company are worth less on a per-share basis than controlling interests. But if a company is being run optimally, what benefit would a minority owner have by taking control? Possibly none, so why apply a discount for lack of control (DLOC)? Courts in Canada have latched onto this notion and are questioning DLOCs that get automatically applied to minority interests, according to panelists during a recent webinar, co-presented by the Alternative Investment Management Association (AIMA) Canada and the CBV Institute.

Explain it: The DLOC analysis has become more nuanced, the panelists said. Instead of merely applying a discount derived from traditional sources, adjustments need to be made based on the specific subject entity. The courts will question the fairness of the DLOC and wonder whether it’s a windfall to the remaining owners. Analysts will need to justify the discount based on subject-specific facts and circumstances.

The February 15 webinar, Trends in Canadian Business Valuations Confirmation, also discussed secondary transactions, regulatory scrutiny, ESG issues, and more, The panelists were: Kevin Hutchinson, senior vice president, investment finance and valuations—OMERS; Chris Polson, partner, forensic services—PwC Canada; and Cameron McInnis, chief accountant—Ontario Securities Commission (OSC). The moderator was Peter Neelands, director investments, Third Eye Capital. Click here for the event page.

Neutral valuer does what he can with limited info

In a California divorce case, a court-appointed valuation expert was caught in the middle of a squabbling couple who didn’t provide enough information to value all the marital assets, including business interests. The couple had agreed to mediation, which produced a settlement agreement and a stipulated judgment. But the wife had second thoughts and asked that the judgment be set aside, accusing the husband of hiding and undervaluing assets. Along the way, the valuation expert’s assignment kept changing and he continued to ask the parties for the information he needed to do a complete job.

Stuck it out: Instead of resigning from the engagement, the expert informed the parties and the trial court that he could not value certain assets or even verify their existence because he was not given sufficient information. The trial court declined to set aside the judgment, noting that the wife failed to prove any misrepresentations by the husband. The wife appealed, but she did not prevail.

The case is In re Hembree, 2024 Cal. App. Unpub. LEXIS 196; 2024 WL 135942, and a case analysis and the full opinion are available on the BVLaw platform.

Today! Hitchner’s annual BV update webinar

BVWire looks forward to Jim Hitchner’s annual webinar where he reviews new concepts, data, models, and methods that have emerged in business valuation over the past year. This is a two-hour program today, February 21 (1 p.m.-3 p.m. ET), that also includes a free issue of his monthly Hardball With Hitchner publication. For details and to register, click here.

On his agenda is a response to an article in the January issue of Business Valuation Update, “Valuation Impact of Corporate-Owned Life Insurance on SCOTUS’ Agenda,” written by Roger Grabowski (Kroll). Hitchner notes that he testified in the Blount case in Tax Court, which “started a lot of this.” He’ll also discuss topics such as normalizing the risk-free rate, new concerns over plagiarism in BV reports, three-stage DCFs (the new norm?), Rule 702 changes, what his new “Myth Busters” group is up to, and much more. See you there!

Afraid of AI? Get over it, say tax pros

“Whether or not you’re afraid of AI, we’re going to need it to meet the demand for services,” said Scott Kadrlik, managing partner at Meuwissen, Flygare, Kadrlik & Associates, quoted in an article for Accounting Today. His firm is a full-service accounting services, tax, and consulting firm that includes a business valuation practice. He continued: “Anything that will reduce the repetitive nontechnical tasks will be greatly appreciated.”

This comment hits upon the good news behind AI, particularly for business valuation, that is, using AI as a tool to handle the grunt work to free up the valuer’s time to do more analysis. A common flaw in many valuations is the failure to tie the numbers to the narrative. Often, numbers are presented, but there is no explanation as to how the numbers relate to the subject company. How do the numbers help tell the story? Redirecting a valuer’s time away from number crunching and more toward storytelling is a great advantage of AI. But always remember this: An AI tool cannot do 100% of a business valuation—a healthy dose of professional judgment will always be needed.

Reminder: Take our short survey on how valuation firms are using AI in their practice. To take the survey, click here. We will publish the results in the February 28 issue of BVWire. Our thanks to those of you who have already participated!

Business tax break extensions stalled

At the time of this writing, the tax extenders legislation is still tied up in the Senate. At the end of January, the House passed the Tax Relief for American Families and Workers Act and sent it to the Senate, where it may be subject to changes.

Biz breaks: In terms of businesses, the bill would increase the amount of business interest that a taxpayer could deduct for tax years starting after Dec. 31, 2021, and prior to Jan. 1, 2026. Also, it would increase the amounts eligible for immediate expensing for qualifying property placed in service in 2024 and would allow taxpayers to deduct amounts paid for domestic research or experimental costs for tax years beginning after Dec. 31, 2021. Bonus depreciation, enacted by the Tax Cuts and Jobs Act (TCJA), began phasing out in 2023 and will disappear for the 2027 tax year. The proposed legislation would allow 100% bonus depreciation of qualified property placed in service after Dec. 31, 2022, and prior to Jan. 1, 2026.

Valuation analysts handle these sunsetting provisions either by building the impact into the forecasted financials or by using a bolt-on adjustment. A good thing about a bolt-on is that it clearly shows the impact of the change and can make it easier to explain to a client. A good example of a bolt-on for the bonus depreciation break is in the February issue of Business Valuation Update.

Reminder: TAF seeks candidates for its board of trustees

The Appraisal Foundation (TAF) is searching for candidates to serve on its board of trustees, and three positions are available. Trustees provide oversight to the Appraisal Standards Board (ASB) and Appraiser Qualifications Board (AQB). The board includes individuals from all appraisal disciplines, and it meets twice a year in person and more frequently virtually. Trustees are reimbursed for travel expenses but are not compensated for their time. The individuals selected will serve three-year terms beginning Jan. 1, 2025. Completed applications must be received no later than March 1. Click here for a candidate fact sheet, and, to apply, click here.

Extra: The TAF, in conjunction with the Appraisal Institute, is about to release its second demographic survey of the appraisal profession, a valuable tool in measuring the profession’s growth and diversity through the years. Keep an eye out for it!

Pablo Fernandez needs your input

In their cost of capital analyses, many business valuers refer to a long-standing survey conducted by Professor Pablo Fernandez (IESE Business School, Spain). Every year, he does a survey of global risk premiums and risk-free rates—and he is looking for input for this year’s edition. His message is below. You can cut and paste the questions into an email and send them to his email at PFernandez@iese.edu.

“We are doing a survey about the Market Risk Premium (Equity Premium) and Risk-Free Rate that companies, analysts, regulators, and professors use to calculate the required return on equity (Ke) in different countries. I would be grateful if you would kindly answer the following 2 questions. No companies, individuals or universities will be identified, and only aggregate data will be made public. I will send you the results in about a month.

Best regards and thanks,
Pablo Fernandez. Professor of Finance. IESE Business School. Spain. PhD Finance, Harvard U”

2 questions:

1. The market risk premium that I am using in 2024 for USA is: _______ %
Other countries:
for________ is: _______ %
for________ is: _______ %
for________ is: _______ %
 
2. The risk-free rate that I am using in 2024 for USA is: _______ %
Other countries:
for ________ is: _______ %
for ________ is: _______ %
for ________ is: _______ %

Send your responses to: PFernandez@iese.edu.

BV movers . . .

People: Tom Saris, CPA, CVA, CFE, has been promoted to senior manager, Client Accounting Services, at Brinker Simpson & Co. LLC (Media, Pa.); he recently achieved the Certified Valuation Analyst (CVA) certification from the National Association of Certified Valuators and Analysts (NACVA) … Several promotions at New York City-based Summit Ridge Group LLC, a provider of complex business valuation, financial advisory, and industry analysis in the global telecom, media, and satellite sectors: Fan Jia to director; Daniel-John Perez to vice president; Samantha Lynch, CFA, to vice president; and Katie DiRico to associate.

Firms: Dallas-based VMG Health, a full-service healthcare compliance, strategy, valuation, and transaction advisory firm, has acquired Compliance Risk Analyzer (CRA) from DoctorsManagement, a suite of software-based auditing and predictive analytics tools designed to enhance coding compliance and mitigate the risk of potential recoupments and penalties … Lincolnshire, Ill.-based Mowery & Schoenfeld has merged with Hochfelder & Weber, a firm that specializes in manufacturing and distribution, professional service firms, advertising and radio broadcasting enterprises, and not-for-profits … New York City-based Marcum has acquired Farmington, Conn.-based Federman, Lally & Remis LLC, which strengthens Marcum’s team in New England’s automotive and food and beverage sectors, adding five partners and 12 associates … South Bend, Ind.-based Kruggel Lawton CPAs will add the partners and staff of Cole Gavlas PC of Portage, Mich., which will add 11 new professionals and three partners to the firm and further expand the firm’s reach in southwest Michigan … Rochester, N.Y.-based Bowers CPAs and Advisors has merged with Kasperski Dinan & Rink, also of Rochester … New York City-based PKF O’Connor Davies has announced the addition of SuárezBaldomero of Little Falls, N.J., a tax, accounting, and advisory firm with clients based in a number of countries, including Spain, Mexico, Argentina, Peru, Chile, Venezuela, and the United Kingdom.

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

CPE events

Power Panel: Trends and Issues in Business Valuation, February 27, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Ken Pia (Marcum), Jeffrey S. Tarbell (Houlihan Lokey), Neil J. Beaton (Alvarez & Marsal), and Michelle F. Gallagher (Adamy Valuation). CPE credits: 2.0.

An overview of some of the hottest topics in the business valuation profession. The Power Panel webinar series will continue quarterly throughout 2024.

BVLaw Case Update, February 29, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: R. James Alerding, Alerding Consulting LLC; James D. Ewart, James D. Ewart LLC; and Andrew Z. Soshnick, Faegre Drinker Biddle & Reath LLP. CPE credits: 2.0.

Two veteran valuation expert and a family law attorney/valuation expert examine recent valuation and financial litigation decisions.