BVR Logo January 8, 2020 | Issue #208-1

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:

BV 2020: What to watch for in the new year

Our last issue covered some highlights of the year 2019 in business valuation, so now let’s look ahead to 2020. Here are some major issues and developments to watch for this year.

Guidance: Several sets of valuation guidance are in the works, including:

  • The AICPA’s “Business Combinations Accounting and Valuation Guide” (a working draft of the guide’s inventory valuation section has already been issued);
  • Estimating company-specific risk is the subject of new voluntary guidance being developed by The Appraisal Foundation; the group has already issued four advisories on other topics; and
  • A set of international valuation practice standards for financial instruments from the International Valuation Standards Council (IVSC), which is evaluating feedback on the project.

Probably the most important guidance issue for 2020 is the possible change to goodwill impairment. The FASB is considering moving back to amortization or a hybrid approach, and valuation experts have serious concerns about this. To its credit, the FASB is carefully gathering and analyzing the views of various stakeholders in order to understand what information is relevant before it proceeds further.

Tax affecting: In the wake of two major 2019 court decisions that support tax affecting pass-through entities (PTEs), several more are expected on this matter, including the Cecil case and the estate of pop star Michael Jackson. The IRS has long resisted tax affecting the income stream of PTEs to account for the difference between public market data used to derive cost of capital and the subject PTE to which it is applied.

Fair value: Watch for the Certified in Entity and Intangible Valuations (CEIV) credential to be bestowed on more professionals because the Quality Monitoring (QM) program has been finalized. The credential (offered by the AICPA, ASA, and RICS) is designed for professionals who perform fair value measurements for corporate entities and intangible assets. The Mandatory Performance Framework for the credential may also undergo a revision this year.

Court cases: In addition to the cases mentioned above, intellectual property damages experts are keeping their eyes peeled for the outcome of the Romag Fasteners case, which is now in the hands of the U.S. Supreme Court. This is a trademark infringement case that will hopefully resolve the split between appellate courts over whether willfulness has to be shown before an infringer’s profits can be awarded.

Globalization: Under new leadership, the IVSC will continue its push for global standards. The group’s International Valuation Standards (IVS) have been translated into 10 languages and are now in use by more than 100 countries. In terms of the impact of global crises, such as Brexit, on business valuation, experts advise that, whatever your assumptions are, it’s important to maintain internal consistency between the three basic elements of valuation (cash flow, growth rate, and discount rate). Now more than ever, matching the cash flows to your expectations and the consistency of those expectations with the economic environment are critical elements in a valuation.

Other topics to watch in 2020 include valuations for divorce (such as goodwill and active/passive appreciation), ESOPs (the DOL will continue its tough stance on valuations), statutory appraisals (Delaware has been looking to market evidence to establish fair value), private equity/venture capital valuations (in the wake of recent guidance), inputs to the cost of capital (always an interesting debate), BV practice management (amid increasing market pressure), and other matters that will surely pop up during the year, so stay tuned!

ESOP defendants sue for indemnification to limit financial exposure

In the face of several key rulings against ESOP fiduciaries, ESOP defendants, concerned about incurring substantial financial obligations, have begunto pursue claims for indemnification and/or contribution against other defendants or third parties to limit their exposure, as a recent case illustrates.

DOL claims survive: In many ways, this is a typical overpayment case. The subject is a manufacturing company in Minnesota. Before the contested transaction, the ESOP owned almost 25% of the company’s stock. The chairman of the board of directors owned the remaining 75%. In October 2011, he sold it to the ESOP in a transaction that was vetted by three nonrelated board members and overseen by an independent trustee the board had retained to represent the ESOP’s interests. The seller died in 2012, and, in this litigation, his daughter, who also used to serve on the board, represents his estate.

The DOL found it suspicious that, in late April 2011, a financial advisor stated the equity purchase value of the company shares was $28.7 million. In July 2011, after consultations with the three board members, the financial advisor valued the contested shares at $39.1 million. The ESOP trustee later hired an ESOP appraiser to produce a “written fairness report” as to the fair market value of the 75% block of shares. The ESOP appraiser also arrived at a price of $39 million. To finance the transaction, the ESOP obtained loans from the company and seller. A contemporaneous price support agreement applicable to the shares of company employees put the stock’s fair market value at $55.29 per share.

The DOL has claimed the defendant directors and the ESOP trustee breached their fiduciary duties to the plan and caused it to pay more than fair market value for the decedent’s stock. The director defendants, in a pretrial motion, asked the court to dismiss the DOL’s suit. The court found dismissal this early in the proceedings was inappropriate. It said the DOL presented “plausible” claims and any defenses the defendants might raise would turn on disputed facts that could not be resolved through a motion to dismiss or for judgment on the pleadings.

Moreover, the directors and the ESOP trustee filed third-party complaints for indemnification against the seller’s estate, prompting the seller’s daughter, as executor, to file a motion to dismiss the complaints. The ESOP defendants argued the late seller most benefitted from the contested transaction. In case the defendants were found liable under ERISA, the estate was required to cover their losses.

The court found there was no basis for a claim of indemnification against the estate. Under the applicable 8th Circuit law, ERISA does not provide for co-fiduciary contribution or indemnification. The 8th Circuit also has held that ERISA preempts state law claims. Further, the court found a contract-based indemnification claim also failed. The contractual provision on which the defendants relied was not a promise of indemnification from the seller to the defendants. If anything, it was a promise from the seller to the ESOP to reimburse the plan if a court found the plan had overpaid. Also, if the defendants were found liable under the DOL’s theory of the case, it would be for breach of fiduciary duties. By law, the estate’s executor could not indemnify them for losses related to this misconduct. The defendants’ own indemnification agreements with the company precluded this kind of liability sharing, the court pointed out.

Circuit split: There is a circuit split as to the right under ERISA for indemnification and contribution against co-fiduciaries. In a recent case, Remy v. Lubbock Nat’l Bank (profiled here), the 4th Circuit found ERISA provides for indemnification and contribution among fiduciaries but not against nonfiduciaries (e.g., the ESOP appraiser).

A digest of Acosta v. Reliance Trust Co., 2019 U.S. Dist. LEXIS 134453, 2019 WL 3766379 (Aug. 9, 2019) [Kurt], and the court’s opinion will be available soon at BVLaw.

BV data: Sometimes it just ‘is what it is’

Empirical data are the backbone of defensible business valuations, but there are strengths and weaknesses with all data. The key is to acknowledge those strengths and weaknesses, understand the data you are using, and make adjustments when necessary. A good example is pre-IPO data used to develop a discount for lack of marketability (DLOM). These data have been subject to criticisms (and so have restricted stock studies), many of which have been rebutted, but valuation experts continue to use pre-IPO studies. The last survey BVWire did showed that 43% of respondents use pre-IPO studies for estimating DLOM (second behind restricted stock studies). In court, performance has been mixed. Pre-IPO studies took a hit back in 2003 (in the McCord case) but rebounded in 2006 (with the Bergquist case), so you’ll find it being used in current case law.

Here’s the point: Data “is what it is,” meaning they may not be perfect, but having some useful data is better than none at all. The key is to understand the underlying data and deal with the weaknesses—don’t try to hide them because the opposition will surely point them out. Also, do not rely on one data source or method. Assemble evidence from various sources and integrate it into your estimate. One more thing: Don’t simply use averages without doing any analysis of the underlying data and adjusting when necessary.

Extra: BVR will present a free webinar, Pre-IPO Revival: Up Your DLOM Game in 2020, on January 29, conducted by Brian Pearson of Valuation Advisors LLC, which maintains an online database of over 16,000 pre-IPO transactions.

Two new resources from BVR

Valuations in the cannabis industry and BV benchmarks are the subjects of two new resources from BVR.

Cannabis industry: In “Cannabis and Hemp Valuations: A Market Analysis,” authors Ryan Cram and Ron Seigneur (Seigneur Gustafson LLC) pursue an alternative to the “one-size-fits-all” application of the market approach in the cannabis industry by putting current cannabis market sentiment in context of private growth assets. The two experts scrutinize the math behind the headline-grabbing deals and stock prices used in exit values and market multiples in today’s environment.

Rules of thumb: Now in its 30th year, the Business Reference Guide (BRG) by Tom West has been updated for 2020. It contains the latest industry-related information including rules of thumb, pricing tips, benchmarking information with comparison data, industry resources, and general industry data on over 600 types of businesses. There’s also an online version with a fully searchable database, and it includes the print version of the guide.

AICPA issues practice aid on digital assets

Ten questions are asked and answered in a new AICPA practice aid, Accounting For and Auditing of Digital Assets, under U.S. GAAP and GAAS (auditing standards). Digital assets are defined broadly as “digital records, made using cryptography for verification and security purposes, on a distributed ledger (referred to as a blockchain)” and are used for a variety of purposes, including “as a medium of exchange, as a representation to provide or access goods or services, or as a financing vehicle, such as a security, among other uses,” explains the practice aid. Impairment issues are also discussed, as digital assets that are classified as indefinite-lived intangible assets are not amortized but tested annually for impairment subsequent to their acquisition. The practice aid represents nonauthoritative guidance and will be updated as additional topics are completed.

Extra: Several other resources have emerged recently on this topic. The IRS issued guidance on virtual currency: Revenue Ruling 2019-24 and frequently asked questions (FAQs). Also, the CBV Institute published some interesting research, “Decrypting Crypto, an Introduction to Cryptoassets and a Study of Select Valuation Approaches.”

Date set for ASA Fair Value Conference in New York City

The American Society of Appraisers’ series of fair value conference, held in New York City, Los Angeles, and San Francisco, are definite stops on BVWire’s conference trip agenda. This year’s New York conference will be held on Wednesday, May 6, so mark your calendar. The agenda has yet to be announced, but these conferences always feature nationally recognized speakers and timely topics. The full-day New York conference will be held at Ernst & Young in Times Square.

IACVS and ANEVAR sign cooperation pact

Under a recently signed agreement, the International Association of Certified Valuation Specialists (IACVS) and the National Association of Authorized Romanian Valuers, Romania (ANEVAR) will work together in all aspects of member benefits (such as reciprocity) and education opportunities. For several years, IACVS prexy William Hanlin and Dana Ababei, president of ANEVAR, discussed ways of joining forces to carry out various activities, such as research, consulting, and teaching for the greater benefit of their respective organizations and members. For additional information, contact IACVS headquarters ( or ANEVAR headquarters (

BV movers ...

People: Bradford Muir, ASA (candidate), has joined Vallit Advisors LLC as a supervisor; he has experience in complex dispute, valuation, and forensic assignments … David Hazels has been named national managing partner of Advisory Services at Grant Thornton; he joined the firm in 2002, and most recently served as the firm’s national managing partner of risk services … Richard Jones was appointed the next chair of the Financial Accounting Standards Board (FASB), succeeding Russell G. Golden; Jones is chief accountant and partner at Ernst & Young, and his appointment at FASB is effective July 1.

Firms: Milwaukee-area accounting firm Wipfli LLP has acquired accounting firm Stratagem of Lakewood, Colo., in a deal that will create the 11th-largest accounting firm in the Denver metro area; Stratagem focuses on construction and real estate businesses, nonprofit organizations, governmental entities, and high-net-worth individuals … Cincinnati-based Clark Schaefer Hackett has acquired Keelsra Business Services, an outsourced accounting firm specializing in serving nonprofit and small-business clients … New York City-based Citrin Cooperman added Mejia & Kaplan LLP of Beverly Hills, Calif., a boutique entertainment and business management CPA firm with a staff of 28 … Wichita, Kan.-based M&L CPAs is now part of Great Bend, Kan.-based Adams Brown Beran & Ball, which expands the firm’s Kansas presence to 15 offices and a total staff of 205 … Atlanta-based Aprio has added Matthews, N.C.-based LBA Haynes Strand and its nearly 70 team members across five North Carolina offices; since 2013, Aprio has combined with seven firms and plans more deals in the years ahead … Gregg & Bailey (G & B) of Midlothian, Va., has joined Roanoke, Va.-based Brown Edwards; this adds an eighth office in Virginia and 11th overall for the firm … Troy, Mich.-based Doeren Mayhew has grown its footprint in Houston with the acquisition of two firms there: Evans & Chastain and Thrasher & Associates … Naperville, Ill.-based Sikich has agreed to acquire Alexandria, Va.-based Halt Buzas & Powell (HBP), which just marked its 50th anniversary; the deal marks Sikich’s entry into the Washington, D.C., and Baltimore metro markets and expands its presence on the East Coast … Houston-based Calvetti Ferguson of Houston has acquired Kapp & Miller, adding six team members to the firm.

Please send your professional and firm news to us at

Upcoming BVR training events

  • Applications of the Asset-Based Approach to Value Operating Businesses (January 9), with Weston Kirk (Willamette Management Associates) and Robert Reilly (Willamette Management Associates).

    Most valuation analysts rarely apply the asset-based approach for going-concern companies, but it should be used under certain circumstances. This discussion describes when to use the asset-based approach and how to apply it to an operating company.

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:

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