BVR Logo January 29, 2020 | Issue #208-4

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

Criticisms of pre-IPO data addressed in free webinar today

A valuation expert recently told us that, in an engagement he just completed, he did not use any of the pre-IPO studies in developing a discount for lack of marketability (DLOM). It was not that he took a look at the studies and then decided not to consider them—he simply didn’t go there at all. His reason? The criticisms these studies have received over the years. But experts should think twice about automatically dismissing this approach. Many of the criticisms have been rebutted, authoritative valuation textbooks and course offerings support the use of pre-IPO studies, and they have made a comeback in the courts.

Biased data? One common criticism is that the pre-IPO studies are biased. That is, they only contain data on IPOs that were successful and there are no data on firms that tried but did not complete an IPO. Excuse us, but couldn’t you say the same thing about other transaction databases experts use all the time? Take DealStats, for example. It contains transactions of private companies that actually sold. There are no data about companies that tried to sell but could not. What were those companies worth? Would they have had very different multiples that would change my analysis? Who knows? The point is, this kind of “bias” exists in many sources of data valuation experts use, so is this criticism fair?

As with any approach or data, pre-IPO studies can be a valuable tool—if used wisely, i.e., if you understand the underlying data and the issues and limitations of the data and address all of that in your analysis. Of course, this approach may not be appropriate for your subject company, but you won’t know that unless you look.

Free webinar: Tune in today (January 29, 10 a.m. PT/1 p.m. ET) to Pre-IPO Revival: Up Your DLOM Game in 2020, a free webinar that will explore the largest pre-IPO study and will discuss the misconceptions about these data. If you can’t attend live, a recording will be made available to all who register (also free of charge).

Connecticut court says ‘no’ to tax affecting but limits the reach of its ruling

In a buyout dispute involving a Connecticut family business, an appellate court recently upheld the trial court’s decision not to tax affect the earnings of the company in valuing the departing shareholder’s interest, even though experts for both sides tax affected. However, this particular ruling is unlikely to change the direction in which courts recently have headed on tax affecting.

Fair value determination: Three siblings each held a one-third interest in a specialty freight company that was organized as an S corp. After a falling out in 2011, the departing sibling’s employment as a driver and occasional dispatcher at the company was terminated. A few months later, he also resigned as officer and director of the corporation. Two years later, the remaining shareholders sued the departing sibling and his new company. He countersued, alleging oppression and asking for a dissolution of the company. Under the applicable statute, the company elected to buy his shares. Trial ensued in late 2015 and early 2016 as the parties could not agree on the fair value of his shares. The opposing experts valued the company under an income approach and tax affected earnings. The company’s expert applied a 25% rate, and the departing shareholder’s expert applied a 12.6% rate.

The trial court, “for the most part,” agreed with the company’s expert but did its own valuation. It declined to tax affect, at least in part because the company had a practice of making funds available to shareholders to meet their individual tax liabilities on earnings from the company. The company made “loans” to the shareholders that they repaid via “bonuses.”

The company appealed the trial court’s valuation on several grounds, including the failure to tax affect, which “artificially inflated” the company’s value. The appellate court said tax affecting has long been “the subject of considerable debate, and there is no Connecticut law that mandates a specific approach to tax affecting.” In surveying the legal landscape, the court found some courts “have chosen to reject an adjustment to S corporation cash flows based on taxes,” noting in particular the U.S. Tax Court’s decision in Gross v. Commissioner, which the 6th Circuit upheld. The Connecticut appellate court called it “the only reported decision on tax affecting by a United States Court of Appeals.” But the appellate court also acknowledged other landmark cases such as Delaware MRI and Bernier, in which courts approved of tax affecting.

The trial court’s position had to be seen against this “complicated legal backdrop,” the appellate court said. It noted that “the issue of tax affecting continues to be an open debate among experts in the field.” Finally, given the company’s policy of covering the shareholders’ tax liabilities, “the present case seems particularly ill-suited to tax affecting earnings,” the appellate court said. It also said its upholding the trial court on tax affecting was “based on the facts of this case.” The appellate court added: “We discern no bright line rule in this area.”

Does it change anything? In considering the weight of this ruling, note that the trial court decided the issue years before the recent pro-tax affecting decisions by the U.S. district court in Kress and the U.S. Tax Court in Estate of Aaron Jones v. Commissioner (which did not overrule Gross). The appeals court here also did not mention these key cases. Perhaps it wasn’t briefed on them. Also, the appeals court is clear that this is a fact-specific ruling. Given these limitations, it’s fair to question the larger significance of this case to the tax-affecting canon.

Final note: The case also raised important questions about the application of minority and marketability discounts in buyout cases, on which we will report elsewhere.

A digest of R.D. Clark & Sons, Inc. v. Clark, 194 Conn. App. 690 (Dec. 10, 2019), and the court’s opinion will be available soon at BVLaw. Digests and court opinions of the above-mentioned cases are currently available to BVLaw subscribers.

A ‘one-time, historic opportunity’

That’s how Noam Hirschberger describes the burgeoning cannabis industry, which has triggered a critical need for financial and advisory services including valuation and tax planning that will play an important role in the ongoing success of firms in this industry. Hirschberger leads the cannabis practice niche set up last year at New York City-based PKF O’Connor Davies, and he spoke at a recent ASA NYC Chapter dinner that BVWire attended. We’ve been to several of these events, but this one really packed them in!

Rapid growth and change: Over 30 U.S. states have legalized cannabis for either medical or recreational usage (or both) and major developments are happening regularly, so it’s important for the practitioner to keep up with the industry and understand its nuances, Hirschberger notes. The cannabis market has hit $19 billion in the U.S., and one report predicts that global industry revenues will top $40 billion by 2024.

The industry has its share of troubles, such as the fact that cannabis is illegal at the federal level, access to banking services has been hampered, companies cannot deduct business expenses for federal tax purposes, just to name a few. Last summer, the industry got caught up in the “vaping crisis,” which, although it is an issue within the illicit market, as Hirschberger points out, it has had an impact on legal cultivators and distributors as well.

More coverage of Hirschberger’s remarks and insights will be in the March 2020 issue of Business Valuation Update. In the meantime, take a look at PKF’s white paper, “Cannabis: An Industry Growing in Every Sense.” There’s also a recent BVR briefing, “Cannabis and Hemp Valuations: A Market Analysis,” written by Ryan Cram and Ron Seigneur (Seigneur Gustafson LLC).

Implied ERP at 5.2% per Damodaran’s data update

Professor Aswath Damodaran (New York University Stern School of Business) has done his annual posting of data updates on his website that include risk-free rates, equity risk premiums, corporate default spreads, corporate tax rates, country risk premiums, and other data. He will do a series of posts on his blog based on this new data. The first post has already been done and serves to “set the table.” The ERP has been a favorite topic of the professor, and he uses a forward-looking method he calls the “implied” ERP as opposed to the “historical” ERP. “I back this number out from the current market prices and expected future cash flows, an IRR for equities that is analogous to the yield to maturity on a bond.” He estimates the implied ERP to be 5.20% at the start of 2020, and he reports the year-end estimates of the premium going back to 1960.

Advisers urge family biz owners to sell now

Amid a booming economy and political uncertainty, wealth advisers are encouraging family-owned businesses to sell before the “party ends,” according to an article in Bloomberg. For now, there are plenty of deep-pocketed buyers and the tax picture is favorable. But, if Democrats prevail in the next election, taxes on the rich are likely to go up. Indeed, some business owners are catching on. “There is an acceleration of a desire to sell,” says Joan Crain, global family wealth strategist at Bank of New York Mellon Corp., in the article. She says clients who were “lackadaisical” are now “very motivated” to sell.

Some older owners cling to the hope that the kids will step into their shoes and take over the business. But advisers often need to offer a reality check about that daydream. “We can see objectively that’s not going to happen—time is running out,” Crain says. “Sometimes we have to nudge them.” This point was made during the last AICPA FVS Conference in a session on estate planning for valuation experts. The speakers, Lisa Cribben (Wipfli) and attorney Pamela Schneider (recently retired from Wipfli), told the audience that many more firms will be coming onto the market because the owners’ children just don’t want the family business. They also explained why estate planning is an important process for valuation professionals to understand, given the opportunities that will emerge.

NACVA adds to CVA ranks

In the fourth quarter of 2019, 71 members of the National Association of Certified Valuators and Analysts (NACVA) earned the Certified Valuation Analyst (CVA) credential, according to an announcement. These members completed the training, exam, and credentialing process.

BV education doings in Ethiopia

Participants from 30 banks and insurance companies and several consulting companies attended the Art & Science of Business Valuation conference last month at Addis Ababa University School of Business and Education auditorium. Robert Brackett, secretary general of the International Association of Certified Valuation Specialists (IACVS), and Lisa Guo, member service specialist at the IACVS, appeared at the event, which was organized by the Center for International Business Valuation (CfIBV) and the Florida Institute of Finance College (FIFC) along with several partnering institutions. Conference participants received a “Certificate of Completion” that adds six hours of professional development units (PDU) or continuing units (CU) toward certification requirements.

ICVS-A training: The IACVS Ethiopia Chapter will organize the first training event for the International Certified Valuation Specialist with Advanced Studies in Financial Instruments (ICVS-A) certification in Africa. The class combines both the basic and advanced sections of the ICVS certification. To qualify for the certification, students must attend the five-day training and pass: (1) a five-hour multiple-choice exam; and (2) a submission of a case valuation. For more information and to register for the training, which will be held April 6-10, send inquiries to

The ICVS-A designation can be earned along with the initial ICVS or can be added to enhance a current ICVS credential. Business valuators with a credential such as the ICVS, ASA, ABV, CICBV, BCA, or CVA are eligible for the designation, which requires an understanding of valuation techniques for various financial instruments, ranging from basic securities to complex derivative constructs. The first live training was held in Orlando, Fla., on Dec. 16-18, 2019.

Upcoming conference: “Business Valuation in an Emerging Economy” is the theme of an event being organized by The International Conference on Interdisciplinary Research Studies (ICIRS). It will be held in Addis Ababa on August 1-3. A call for papers and registration information will be made available shortly.

BV movers ...

People: Nancy Czaplinski, managing director in the Duff & Phelps Valuation Advisory Practice, will chair the Business Valuation Resource Panel (BVRP) in 2020; the panel is part of The Appraisal Foundation Robert Valas, CPA/ABV, CFE, CGMA, will join Cullari Carrico (Fairfield, N.J.) as a partner … The following professionals have joined Valuation Research Corp. (VRC) in its various offices: Sarit Rapport, ASA, as vice president (New York City); Jeff Dugo as a senior appraiser, machinery and equipment (San Francisco); Nate Cassani as an associate (Boston); Mason Escherich as an analyst (San Francisco); Alexander Fratti as an associate (Princeton, N.J.); William Greenfield as an analyst (Princeton); Nicholas Klass as an analyst (Princeton); and Sean McIver as an associate (Boston).

Firms: A global investor consortium led by funds managed by Stone Point Capital and Further Global will acquire Duff & Phelps for $4.2 billion; the transaction is expected to close in the second quarter of 2020 … Winchester, Va.-based Yount Hyde & Barbour (YHB) has added Woodcock & Associates of Fredericksburg, Va., a firm that specializes in the construction industry; the deal adds 12 professionals to the YHB staff … Three firms have joined CPAmerica: Fremont, Calif.-based Greenstein Rogoff Olsen & Co.; Wayne, Pa.-based Stephano Slack; and Fond du Lac, Wis.-based Huberty & Associates; CPAmerica, an association of independent CPA firms, is a member of Crowe Global, which has members in more than 750 offices in more than 130 countries … Enterprise, Ala.-based Carr Riggs & Ingram has added Crabtree Rowe & Berger of Huntsville, Ala.

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Upcoming BVR training events

  • FREE WEBINAR: Pre-IPO Revival: Up Your DLOM Game in 2020 (January 29), with Brian Pearson (Valuation Advisors LLC).

    Pre-IPO studies are a viable tool in estimating DLOM, but did you know they can be used for nondiscount valuation information? Learn how plus examine the details of the data as well as hear a discussion of prior criticisms.

  • Stripping Away the Mystery: Valuing Adult Cabaret Businesses (February 6), with Rod Burkert (Burkert Valuation Advisors) and David Shindel (ShindelRock).

    Enter the world of adult nightclubs with this peek into a business with very different operating characteristics than you’re used to seeing. Learn about the various types of clubs, their sources of revenue, entertainer relationships, available data, and the significant risks these establishments face. Don’t miss this one!

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

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