BVWire #45-1

June 7, 2006 | www.BVResources.com | Issue 45-1

Introducing BVWire™: Your inside source to the
business valuation profession
The BV profession has entered its prime, evolving and expanding on an almost daily basis. To keep up with industry advances, the new BVWire will bring you current, cutting-edge information on a weekly basis. From the buzz of this summer's conferences to the latest free resources; from the impact of last week's tax case on this week's calculation of discounts—look for BVWire to be your inside source to the business valuation profession.

IRS to BV analysts: The oversight train has left the station
The IRS is switching its auditing focus from FLPs to fractional interest discounts and discounts in general according to the IRS update presented at NACVA's Consultants Conference in San Francisco last week. The Service is also increasing and improving its internal resources under §6701(a) (concerning appraiser liability); they’ve now credentialed 40% of their internal appraisers, and “have more work than we know what to do with.”

“Like any government agency, we’ve been slow to get going,” the IRS rep admitted. Currently, they only have 20 appraiser liability cases nationwide—and half of these concern conservation easements. “But the train has left the station, and is building up steam.”

And just where are those AICPA BV Standards?
If you’ve been looking for the latest (and last) public exposure draft of the AICPA’s BV Standards—which were supposed to be posted online at the AICPA web site by May 30th, we’ve now got it from a good source that the Draft Standards “should” appear online no later than June 15, 2006, especially as the Institute hopes to make them effective by September 30th. This same inside source says that’s the “promise,” but then adds, “don’t hold your breath.” Our advice: Keep breathing—and checking the web site at http://bvfls.aicpa.org.

Your first line of defense against an attack on DLOM
Shannon Pratt's rebuttal on pre-IPO studies, first published in the June 2004 BVU, was recently hailed by Jim Hitchner at the latest AICPA/AAML divorce valuation conference in Las Vegas as “what to use to prepare for an attack on your DLOM.” For a free copy of Dr. Pratt’s article, go to http://www.bvresources.com/bvwirecentral/.

Want to see what happened when a recent divorce court determined the discounts on a 50% interest? (Hint: the Judge might have been thinking more of Solomon than Shannon Pratt). Download your complimentary case abstract of Nowels. v. Nowels from http://www.bvresources.com/bvwirecentral/.

A veritable treatise on tax-affecting
The latest opinion from the Delaware Chancery Court reads like a veritable treatise on the pricing of a closely-held S corporation. In Delaware Open MRI Radiology Associates, P.A. v. Kessler, et al. (April 26, 2006), the Vice Chancellor provides his own “independent” valuation analysis, including an authoritative discussion of tax affecting that belongs beside the annals of such experts as Dr. Shannon Pratt, Z. Christopher Mercer and Franklin Fisher (all whom the V.C. cites liberally in his opinion). We’ll have an extensive write-up of the case in the forthcoming issue of the Business Valuation Update™, available to subscribers July 1.

In the meantime, don’t miss the June 8, 2006 BVR telephone conference on tax affecting, featuring a stellar expert panel—George Hawkins, Nancy Fannon, Michael Paschall and Dan Van Vleet—and covering all that you’d ever want to know about tax affecting. For more information, go to www.bvresources.com/conferences.

What do small companies really sell for now?
Of the approximately 9,000 transactions in BIZCOMPS®, the mean sale price to gross sales is 0.48 (median is 0.40). But the mean sale price to "seller's discretionary earnings" (EBITDA plus the salary of one working owner) is 2.0, and the median is 1.8. Jack Sanders, BIZCOMP's author, notes one factor that influences these "multiples:" for the very smallest businesses (under $150,000 annual sales), the seller is often "buying a job," so owner's comp is far more important than transaction price. Still, this average might shock a lot of small business clients who come to an appraiser with rule of thumb or other justifications of why their business is worth much more. Incidentally, the "average" small business takes 180 days to sell. BIZCOMPS is available through www.bvresources.com.

Expert Witness Services Growing at 40% per year
Chris Mercer points out in a recent blog (www.merceronvalue.com) that the litigation support industry is booming—the demand for expert witnesses is growing at 40% per year. Our advice: BV principals should be strategizing right now about how to win more of this high-growth market.

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