Sigh of relief—somewhat—over proposed DOL regs on ESOP valuations

“Not as bad as expected.” “Could have been worse.” That’s the gist of initial comments we’ve heard over the long-awaited proposed regs the Department of Labor issued in draft form last week. There will be a 75-day comment period beginning on the date they are published in the Federal Register, which was scheduled for today, January 22. But, due to the new administration’s regulatory freeze, the actual publishing date remains to be seen.

Long conflict: The valuation community has been concerned over these rules, designed to clarify how to establish fair market value for shares of a closely held business an ESOP will acquire, i.e., “adequate consideration.” The DOL won a number of court cases alleging inflated values, then lost a few, with the valuation profession continuing to criticize the agency for not following valuation standards. This has been an issue of much contention and litigation over the years, and the worry was that the DOL would propose rules that are not consistent with accepted valuation theory and practice.

The proposed regs state that a “valuation report must be prepared in accordance with generally accepted professional standards.” Of course, this goes for both sides—the valuation experts on the ESOP side and the experts for the DOL who are reviewing the valuation.

The DOL issued a second proposal for a narrower safe harbor class exemption that would govern ESOP initial stock purchase transactions that meet certain criteria.

No bright-line rules: The 128-page document that includes the proposed regs is not a treatise or textbook on how to determine fair market value of closely held stock an ESOP acquires from the sponsoring company. But it does go into some issues the DOL is concerned about, especially the validity of cash-flow projections and the use of a control premium. Some analysts do not use a premium and instead reflect control in the cash flows if possible and appropriate.

The ESOP Association, which had drafted model regulations, was less than enthusiastic over the proposals. “While the Department’s proposals today are an important first step toward accomplishing the ESOP community’s longstanding request for specific rules governing ESOP transactions, unfortunately, both proposals will require substantial modification if they are to further Congress’s goal of expanding employee ownership through ESOPs,” the organization said in a press release.

Much will be written and discussed on these proposed regs, and they will certainly be a topic of discussion during BVR’s Power Panel webinar on February 12, which will include ESOP valuation experts Jeff Tarbell (Houlihan Lokey) and Ken Pia (Marcum).

Will it survive? Some industry observers believe there is a possibility that the new administration will withdraw and possibly rewrite the proposal. Indeed, all new regulations have been put on hold under the new administration’s regulatory freeze. Others are optimistic that it will survive, pointing out that the nominee for Secretary of Labor, Lori Chavez-DeRemer, is supportive of ESOPs.

Appellate court rejects valuation date in damages case

In a 2023 Florida case, a jury awarded rapper Flo Rida more than $82 million in a breach of contract case. He had agreed to endorse Celsius energy drinks in exchange for company stock, but the company never gave him the shares. The company appealed, and one of its arguments was over the valuation date of the shares.

Wrong date: The jury used the date of trial to figure the stock value when calculating damages, but the appellate court agreed with the company that the trial date (January 2023) was the wrong date to use. The valuation should have been based on the stock’s value on the date of the breach (April 2021) or the date when the stock could have first been sold (November 2021). The case was remanded back to the lower court to determine the proper valuation date.

The change in valuation date could cut the award in half, according to reports.

The case is Celsius Holdings, Inc. v. Strong Arm Productions USA, Inc., 2024 Fla. App. LEXIS 9594; 2024 WL 5063357, and a case analysis and full court opinion are available on the BVLaw platform.

BVR offers free resources in wake of disasters

For business valuation experts grappling with business interruption (BI) and damages matters in the wake of this year’s natural disasters, BVR is offering some free resources. You can download two full chapters from The Comprehensive Guide to Economic Damages, 7th edition, that deal with BI, lost profits, and damages claims:

1. Chapter 9, “Context of the Lost Profits Damages Claim,” by Jonathan M. Dunitz, Esq. (Verrill), and Tyler L. Farmer, Esq. (Harrigan Leyh Farmer & Thomsen LLP). To download this chapter, click here.

2. Chapter 45, “Business Interruption and Damage Claims,” by John Garaffa, Esq. (Butler Weihmuller Katz Craig LLP). To download this chapter, click here.

Also, we’ve uploaded a video clip from BVR’s symposium “Calculating Damages for Insured Claims” in which Dunitz discusses the limitations in claiming damages based on the indirect effects of natural disasters, such as the speculative losses due to increased demand following a hurricane or flood. To view the clip, click here.

We hope you will find these resources helpful.

Damodaran posts his first data update for 2025

At the beginning of each year, Professor Aswath Damodaran (New York University Stern School of Business) generously posts a great amount of data on his website that include risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. He does a series of posts on his blog based on these new data, which contain his thoughts on what the data are best suited for and some caveats for users. His first post explains some of these data and gives the background of his annual analysis and contains links to his data.

Implied ERP of 4.33%: For the ERP, Damodaran favors a forward-looking method known as the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP in the U.S. to be 4.33% as of Jan. 1, 2025 (trailing 12-month cash yield).

Poll reveals methods and data sources for ERP

The Kroll Cost of Capital Navigator continues to be widely used and accepted for estimating cost of equity (COE), per the results of a poll during BVR’s recent Cost of Capital Virtual Conference. Over 100 attendees were asked: Which methods/data sources do you use for the equity risk premium (ERP) in your cost of equity estimates? (select all that apply). The responses:

Other poll questions asked about cost of capital models used, the size premium, company-specific risk frameworks, and whether ESG is factored into estimates. We will present more results in next week’s issue.

BVResearch Pro adds new guide on valuing dental practices

BVR’s BVResearch Pro platform has added a 150-page guide, What It’s Worth: Valuing Dental Practices. The guide includes industry intelligence (excerpts from IBISWorld and Vertical IQ), key benchmarks from DealStats, insights from valuation experts, court cases, and rules of thumb from the Business Reference Guide. Plus, there are links to four sample valuation reports. If you are not a subscriber to BVResearchPro, you can purchase the guide on an a la carte basis if you click here.

TAF seeks public interest board members

The Appraisal Foundation (TAF) announced today that it is seeking qualified candidates to fill three to four public interest positions on its board of trustees. One term is a three-year term, and the remaining terms are four years. All terms begin on Jan. 1, 2026. Applications are open to any qualified member of the public with an interest in valuation. For more information and to apply, click here. The deadline to apply is March 1.

V20 launch webinar January 30

Tune in to a free webinar on January 30 that will reveal the themes, agenda, and key opportunities available at the V20 Valuation Summit and Conference. The V20 is scheduled to take place September 15-16 in Cape Town, South Africa. The launch webinar will feature Ben Elder (RICS), Dean Ward (City of Cape Town), Di de Wet (South African Institute of Valuers), Mashilo Pitjeng (Academy of Construction and Real Estate), Molefi Kubuzie (IVSC), and Ray Moran (FON Advisory LLC). To register, click here. The V20 event coincides with the annual G20 summit (also in South Africa this year) to promote recognition of the V20 and the valuation profession within the G20 group.

BV movers . . .

People: The National Association of Certified Valuators and Analysts (NACVA) has named its outstanding members for the fourth quarter of 2024: Gregory M. Clark, CPA, CVA, MAFF, the founder and managing member of GMC & Co., who leads the firm’s valuation, litigation support, and consulting services for a wide range of industries and has testified on issues including business valuation as well as issues related to marital dissolution, child support, shareholder disputes, economic damages, and lost profits analysis and who also currently serves as the chair of NACVA’s Standards Board, and Andrew Kelly, ABV, CFE, MAFF, a director on RSM US LLP’s Financial Investigations and Dispute Advisory Services team based in Philadelphia who serves as a financial forensics expert witness and litigation consultant with concentrations on valuation, financial analysis, and forensic accounting services and who currently serves as the chair of NACVA’s AI and Machine Learning Commission.

Firms: South Florida-based Fiske Advisory LLC, an accounting, tax, business valuation, and advisory services firm, has joined forces with Dallas-based Springline Advisory, a business advisory platform backed by private equity firm Trinity Hunt Partners; under the arrangement, Fiske will benefit from increased access to the resources and broader reach of a larger firm while maintaining its personalized service and client relationships … New York City-based EisnerAmper has acquired Greenwood Village, Colo.-based firm HDA Accounting Group, which specializes in dental practices; the deal will allow HDA to offer its clients additional services such as cybersecurity, real estate, business valuation, wealth management, and more … Atlanta-based Aprio has expanded into Baltimore by acquiring Nardone Pridgeon & Co. PA … Grand Forks, N.D.-based Brady Martz & Associates expands its dealerships’ practice with the addition of Corinth, Texas-based Green & Miller PC; the firm’s dealerships’ client base has grown from 18 to 24 states.

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

CPE events

Valuation Case Studies and the Application of Valuation Methodologies; Compelling Case Studies: A BVR Series, January 22, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Andrew Mackson (InteleK Business Valuation & Advisory) and Mikhail Munenzon (InteleK Business Valuation & Advisory). CPE credits: 2.0.

Actual real-world valuation case studies across various industries and valuation purposes, including the valuation approaches and methodologies considered, selected, and applied in these valuations, are presented.

Mind the Gap: Education and Practice in Business Valuation, Part of a BVR Series, January 29, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Josh Shilts (Shilts CPA LLC) and Victor Jarosiewicz (Georgia State University). CPE credits: 2.0.

Using both practitioner and academic perspectives, the speakers examine persistent valuation issues to bridge the gap between theory and practice.