ESOP litigation has become 'risky business,'
says Alerding

As BVWire recently reported, the latest development in the long-running Brundle ESOP litigation is a lawsuit the trustee has filed against the very ESOP appraiser it once had hired to work on the case. After paying the $30 million judgment, the trustee is currently trying to obtain contribution from the nonfiduciary ESOP appraiser based on a number of valuation errors the Brundle court cited in its ruling. Veteran appraiser Jim Alerding (Alerding Consulting) has the following comments.

Alerding says this offshoot from the notorious Brundle case is shaping up to be a battle of experts on technical business valuation issues. He notes that the Brundle court had taken particular issue with the ESOP appraiser’s approach to determining beta. The court later acknowledged that it had misinterpreted what beta measured, i.e., the risk of a particular industry relative to the risk of the market as a whole, but this misunderstanding didn’t change the overall outcome of the case.

Alerding says he is “not a fan at all of Betas.” He notes the selection of an industry risk is a judgment call by the valuation analyst. “I am sure if this litigation over contribution continues, there will be valuation analysts willing to testify on both sides of the issue, which makes this a good case for settlement.”

As Alerding sees it, “regardless of the outcome, this case puts valuation analysts on notice that performing valuations for ESOP transactions is risky business. There is no doubt in my mind that the Department of Labor has been on a crusade to wipe out ESOPs, and litigations such as the Brundle suit provide a map as to how to get there.” “I have valued ESOPs a number of times in my career, but I would not touch one now,” Alerding says.

DLOM for a 100% interest in a
private company?

One-third of valuation practitioners apply a discount for lack of marketability to a 100% interest in a private company, and 50% say “maybe,” reveals preliminary results of BVR’s DLOM survey. This is just one of the interesting results from the survey, which was launched during a recent webinar. The survey examines the methodologies and specific tools practitioners use to estimate DLOM. About 100 responses have come in so far, and, if you have not taken the survey yet, please do so by going to this direct link: surveymonkey.com/r/3Q2Z5NJ. It will take just three minutes, and all responses are anonymous. We’ve run this survey several times over the past 10 years, so it will be interesting to see what has changed over time. Thanks for your participation!

Van Vleet comments on use of SEAM in
Ryan case

BVWire recently reported on the Ryan Trust v. Ryan case, a buyout dispute in which the Nebraska Supreme Court affirmed the district court’s decision to credit the valuation testimony of the expert for the late majority shareholder. As part of their analyses, both parties’ experts applied an S corp premium whose rate was based on the SEAM model. Daniel Van Vleet (GriffingGroup), the developer of the SEAM model, has the following comment on the case.

“In Ryan, testimony was provided by two nationally recognized valuation experts. Both opposing experts initially valued the subject S corp on a C corp equivalent basis. The Van Vleet Model (described as the ‘S Corporation Economic Adjustment Model’—aka SEAM) was used to adjust the C corp value to reflect the ‘economic benefits’ associated with an S corp.

“Both experts initially concluded a SEAM of 1.14 (14% equity adjustment). However, one of the experts adjusted the SEAM downward by 50% to a 7% equity adjustment (SEAM of 1.07). This subjective adjustment was made to reflect the assumed risk that the subject company would become a C corp in the future. But the district court was not convinced that this adjustment was appropriate and used this treatment as further evidence of the ‘downward bias’ of the expert.

“The SEAM is a mathematical formula that is primarily based on federal and state tax rates. I generally recommend against making subjective adjustments to the calculated SEAM absent significant empirical support data. In Ryan, it appears the court found that the subjective adjustment to the SEAM was not appropriate.”

A digest of Ryan Trust v. Ryan, 308 Neb. 851 (April 9, 2021), as well as the court’s opinion, are available at BVLaw.

A busy initial public offering (IPO) market

June had over 60 initial public offerings, and the second quarter of 2021 was the busiest quarter for IPOs in over 20 years. Valuation Advisors will be updating its quarterly summary DLOM statistics, which are available to subscribers of the database, by the middle of this month. The Valuation Advisors Lack of Marketability Pre-IPO Discount Database is the largest DLOM database in the world, with over 17,000 pre-IPO transactions. Some of the recent companies you might recognize were LegalZoom.com, Krispy Kreme, DiDi Global, and Oatly.

Check out the lineup of presenters for the ASA International Conference

A veritable who’s who of the business valuation profession will make presentations at this year’s International Appraisers Conference to be held October 24-26. The conference is presented by the American Society of Appraisers (ASA). You can see the lineup of presenters if you click here. Their sessions include a mock trial (multisession), cost of capital inputs, cannabis, earnouts, debt valuations, digital assets, VC/PE funds, sports businesses, global issues, and much more. This will be a hybrid conference featuring a live in-person event at Planet Hollywood in Las Vegas combined with a simultaneous virtual online option for remote attendees. Up to 16.2 CE hours may be earned at the conference. Early-bird pricing is currently available.

NACVA adds 79 newly credentialed members

In the second quarter of 2021, 79 members of the National Association of Certified Valuators and Analysts (NACVA) earned their credentials, according to an announcement. Most of those (57) earned the Certified Valuation Analyst (CVA) credential, and 22 members earned the Master Analyst in Financial Forensics (MAFF) credential. These members completed the training, exam, and credentialing processes for the two credentials.

Extra: NACVA has more credentialed appraiser members than both the AICPA and American Society of Appraisers (ASA) combined, according to an analysis presented at the 2021 Business Valuation and Financial Litigation Hybrid and Virtual Super Conference.

Framework proposed for cross-border
DCF valuations

A paper in the Journal of Business Economics presents a comprehensive framework to cross-border discounted cash flow valuation, something that “has not yet been proposed,” says the author, Andreas Schüler (Bundeswehr University Munich). The paper addresses not only the valuation of a foreign company, but also the valuation of a domestic company that generates cash flows in foreign currency and/or uses debt in foreign currency. The paper is available if you click here.

BV movers . . .

People: Lucas M. Parris, CFA, ASA-BV/IA, and Jay D. Wilson, CFA, ASA, CBA, of Mercer Capital have been promoted to senior vice president; Parris leads the firm’s Financial Reporting Valuation Group and Wilson leads the Financial Technology Industry Team … Adam Sutton, CA, CVA, MSc, has joined Grant Thornton UK LLP as partner within the valuations and modelling team; he has over 20 years of experience in senior valuation roles in London and Singapore, supporting corporates, private equity houses, and funds … For the second quarter of 2021, the National Association of Certified Valuators and Analysts (NACVA) has recognized outstanding members who passed away in the past year: John D. Davis, CPA, ABV, CVA, CFE, who was the founder of Davis & Co. CPAs, and Jason McCain, CPA, CVA, MAFF, CFE, who was a manager in valuation, forensic accounting, and litigation services at Johnson Price Sprinkle PA.

Firms: New York City-based EisnerAmper LLP is adding technology consulting firm ZenTek Data Systems of Fort Lauderdale, Fla. … Further expanding its footprint in Southern California, San Francisco-based BPM LLP is adding Gumbiner Savett of Santa Monica, Calif., a firm with 10 shareholders and approximately 100 staff members … Maumee, Ohio-based William Vaughan Co. is adding Radel Smith & Associates of Bowling Green, Ohio … Reading, Pa.-based Herbein + Co. is adding HR services firm Mosteller & Associates, also of Reading … New York City-based Friedman LLP expands its presence in Florida by adding Bohlmann Accounting Group of Miami … Seattle-based Moss Adams LLP is combining with Salt Lake City-based risk management and advisory firm The Cadence Group; the deal adds 75 professionals, including 10 partners, to the firm.

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

Preview of the August 2021 issue of Business Valuation Update

Here’s what you’ll see:

• “New Ballgame for FMV in Healthcare Under Final CMS Rules” (BVR Editor). The valuation profession is now in the driver’s seat with respect to the definition of fair market value for healthcare regulatory purposes. This is according to the final rules from the Centers for Medicare & Medicaid Services (CMS) related to the Stark Law. There is also a call for papers.

• “Input Needed to Develop New Guidance on Company-Specific Risk” (BVR Editor). This is an update on new guidance being developed by The Appraisal Foundation’s Business Valuation Resources Panel’s Work Group on Company-Specific Risk Premia (CSRP). It needs input from practitioners on this topic.

• “Damodaran Says COVID-19 Crisis Puts More Emphasis on the Story Behind a Valuation” (BVR Editor). The keynote address by Dr. Aswath Damodaran (New York University Stern School of Business) at the CBV Congress 2021 includes a five-step framework to help develop an effective narrative.

• “Three Court Cases You Must Read Before Writing Your Next Valuation Report” (BVR Editor). Former IRS officials give their insights into the thinking of the IRS on business valuations. This was a session at NACVA’s recent 2021 Business Valuation and Financial Litigation Hybrid and Virtual Super Conference.

• “Forecasting Expenses for an Economic Damages and Lost Profits Analysis” (BVR Editor). Several experts at the two-day BVR National Economic Damages Virtual Conference discussed projections in a damages and lost profits context. This article focuses on projecting expenses.

• “Premier ASA Complex Securities Conference Breaks Attendance Record” (BVR Editor). Summaries and takeaways from the American Society of Appraisers’ first ASA Complex Securities Virtual Conference.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends.”

• Regular features: “Ask the Experts” and “Tip of the Month.”

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the August 2021 issue of Business Valuation Update.

CPE events

• Cryptocurrency Fraud and Forensics: What Valuation Professionals Need to Know, July 14, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Katerina Gaebel and Mark DiMichael (both with Citrin Cooperman). CPE credits: 2.0.

The discussion includes an introduction to cryptocurrency, how it works, and the current regulatory environment. Other topics include the types of frauds committed using cryptocurrency, U.S. tax rules, and how cryptocurrency can be investigated and traced using publicly available blockchain data.

• Embracing the Hockey Stick: Alternative Approaches to Formulating and Assessing Projections, July 15, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Michael Blake. CPE credits: 2.0.

Learn about some potential new tools for creating and/or validating projections. The discussion also includes a review of existing quantitative and empirical methodologies.