BVR Logo January 25, 2023 | Issue #244-3

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

More courts KO DLOM when business won’t be sold

Keep an eye out for courts in more states deciding to eliminate a discount for lack of marketability (DLOM) depending on whether the business will be sold. During a recent webinar that discussed several recent valuation-related cases, the observation was that it appears that more states are applying this factor as an issue. This seems to be a modification of the fair market value standard, i.e., a hypothetical sale is ignored. In one divorce case discussed, Fair v. Fair in Louisiana, the expert applied a discount to the husband’s 100% interest. While there’s no consensus in the valuation profession that a discount should be taken on a 100% interest, there is supporting evidence for the discount, and many experts do apply it or at least consider it. But the court appeared to focus on the fact that the company was not to be sold, so it rejected the DLOM, and an appellate court affirmed. Will this apparent trend become more widespread regardless of jurisdiction? Stay tuned!

BVLaw editor Jim Alerding (Alerding Consulting LLC), veteran valuation expert Jim Ewart (James D. Ewart LLC), and attorney Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP) conducted the webinar, BVLaw Case Update.

High ESG scores lower the cost of capital, study finds

A recent paper says there is significant evidence that companies having a higher environmental, social, and governance (ESG) score have a lower cost of capital. While the “ESG score does not seem to have a significant impact on the cost of equity and the beta,” the paper says, the impact is on the cost of debt because “firms having a high ESG score can significantly obtain more leverage.” Researchers analyzed the relationship between the ESG score and the cost of capital of 600 large, mid- and small capitalization companies across 17 countries of the European region being a component of the EURO STOXX 600 Index. The paper is “The Impact of a Firm’s ESG Score on Its Cost of Capital: Can a High ESG Score Serve as a Substitute for a Weaker Legal Environment?” and the authors are Randy Priem (Financial Services and Markets Authority; Saint-Louis University, Brussels; KU Leuven; United Business Institutes) and Andrea Gabellone (United Business Institutes).

Valuation impacts of the Inflation Reduction Act

Expect to see increased scrutiny on business valuations for tax purposes as a result of the Inflation Reduction Act of 2022 (IRA). The new law provides additional funding for the Internal Revenue Service to beef up its enforcement efforts. Part of the agency’s new efforts is its search for 14 new business valuation experts to join its ranks. Of course, estate and gift valuations will get caught up in the agency’s widening net, but so will other tax-related valuations, such as stock-based compensation (409A “cheap stock”), valuations for deductions of worthless stock, intangible property valuations for intercompany transactions, and more. Also, the IRA has provisions that will impact certain industries, such as the energy, pharma, and biotech sectors. McKinsey has a nice summary of the IRA and its provisions.

Extra: Chris Campbell (Kroll) will conduct a two-hour webinar on February 2, The Inflation Reduction Act—What Valuation Professionals Need to Know.

Values of tech brands have nosedived, per new study

Shifting consumer demand patterns and inflation have taken their toll on the world’s most valuable brands, particularly in the tech sector. Apple dropped out of the No. 1 ranking after losing $57.6 billion in value, according to “Brand Finance Global 500 2023.” Taking its place at the top of the list is Amazon, despite losing $51 billion in value. Not all brands in the tech sector have plummeted: Instagram is up 42%, and LinkedIn saw a 49% gain in value, which the report attributes to “well-executed strategy to commercialize their services.” Other gains were seen by electric car manufacturers Tesla, which is up 44% (interesting, given Elon Musk’s recent woes), and BYD, up 57%, “as demand grows for electric cars as part of a broader transition to a low carbon economy,” says the report.

Reminder: The 2023 Pepperdine private cost of capital survey is now open

Every year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. A BVWire poll found that 40% of respondents use the survey results for estimating small private-company cost of capital. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is here.

The survey results are used to produce annual Private Capital Markets Report (reports from prior years are available if you click here). The price for the annual report is normally $125, but it’s free if you fill out the survey—plus you’ll get it a week early.

The ASA Difference Campaign has launched

This past September, we reported that the American Society of Appraisers (ASA) would be launching a campaign to help elevate the ASA brand in the appraisal profession. The ASA Difference Campaign is now underway (watch this video), and ASA members have been given a marketing toolkit that includes all kinds of material, including digital ads that can be customized, talking points, logos, and how-to videos.

IPEV updates PE/VC valuation guidelines

International Private Equity and Venture Capital (IPEV), a trade group that sets valuation practices for private funds, has published the 2022 edition of its guidelines. The update takes developments on international standards into account and also incorporates the last two special issues of guidance from 2020 and 2022 (related to COVID-19 and the Ukraine war) and expands on the concept and impact on valuations on distressed markets.

New chair of the IVSC standards board

Susan DuRoss, executive director, global valuations, at Harvest Investments, has been appointed the new chair of the Standards Review Board (SRB) at the International Valuation Standards Council (IVSC). She will assume the role in March 2023 and takes over from Mark Zyla (Zyla Valuation Advisors), who has led the board since 2017, during which time the IVSC issued two editions of the International Valuation Standards, established and appointed international experts to the three technical standards boards, and formed several important collaborations, among other accomplishments.

BV movers . . .

People: Chris Ham has joined Chartwell Financial Advisory as a director in Atlanta, where he will provide business valuation services for a variety of purposes including ESOP and ERISA administration, corporate planning, financial reporting, fairness opinions, and solvency opinions … Steven P. Napier, associate partner in EY’s Valuation, Modeling & Economics (VME) practice in the region of the Bahamas, Bermuda, British Virgin Islands, and Cayman Islands, has relocated from the Bermuda office to the Grand Cayman office; the VME practice is dedicated to the offshore financial services industry (hedge funds, private equity, and asset management) as well as the offshore legal community … T. Eric Blocher, CPA, ASA, CVA, has been promoted to partner at McKonly & Asbury, based in Camp Hill, Pa; he is the firm’s director of business valuation services with over 25 years of business valuation consulting experience … Gregg Hamilton-Piercy, CFA, ASA, has been appointed to lead the newly formed valuation practice at Chicago-based Baker Tilly; he joined the firm in 2021 through the acquisition of accounting and advisory firm The MFA Companies, where he spent 10 years and helped build a valuation practice … Andrew Stafford has been promoted to equity principal at Knoxville, Tenn.-based PYA; his work for the firm’s Transaction Advisory Services team for healthcare entities includes merger and acquisition facilitation, quality of earnings analyses, and other due diligence services, business valuation, feasibility studies, strategic planning, and physician compensation analysis.

Firms: Fairfield, N.J.-based Smolin Lupin & Co. is adding Roche Miseo Barchetto LLC of Parsippany, N.J., which specializes in accounting for contractors, as well as wholesale distributors, professional service entities, and real estate professionals … Parsippany, N.J.-based Sax LLP is adding Schall & Ashenfarb CPAs of New York City, which provides accounting services to nonprofit organizations … Woodland Hills, Calif.-based Duffy Kruspodin is adding Lazarus Goldbarg & Associates of San Diego, which provides accounting and tax services to clients across an array of industries, including real estate, manufacturing, and trusts and estates … Glastonbury, Conn.-based Fiondella Milone & LaSaracina LLP is adding Stamford, Conn.-based Bregman & Co. PC, which provides tax and advisory services to closely held businesses, as well as high-income and high-net-worth individuals … Irvine, Calif.-based JLK Rosenberger LLP has acquired Mark F. Wille CPA of Newport Beach, Calif., which serves developers, bankers, and clients in the real estate, mortgage, construction, and service industries … San Francisco-based BPM LLP has acquired O&S CPAs and Business Advisors of Long Beach, Calif., a firm that provides tax, accounting, advisory, and forensic accounting services to clients in Los Angeles, Orange, Riverside, and San Bernardino counties.

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