CFOs don’t value appraisals done for 409A compliance
The Tax Court recently issued its first reported opinion on IRC Sec. 409A, but although Slater v. Commissioner (T.C. Summary Opinion 2010-1) confirms the restrictive requirements of 409A, it doesn’t address the broader valuation and reporting concerns. Now a new survey of 800 CFOs of privately held, VC-backed companies by Lisa Davis, VP of Sales and Strategic Alliances at Aranca (New York), reveals the true, insomnia-inducing issues around 409A valuations, paramount among them: cost (big concern) and quality (surprisingly, not so much).
The common view of 409A valuations from this group?
- While 409A is simply a “compliance” issue – there is still perceived benefit from external analysis.
- A 409A valuation is considered a commodity service - and cost is of paramount importance to CFOs.
- Little if any value is derived from the report beyond the compliance checkmark.
In fact, one CFO blog recently voted 409A the Worst Tax of the Decade. “An amazing 67% of survey respondents single out cost as the key factor in making the decision to go forward with a 409A vendor,” writes Davis. Lest we kid ourselves, only 12% of respondents say that “quality” determines their choices. The majority of CFOs still see 409A as a “commodity service, [with] little value derived from the report beyond a compliance checkmark,” Davis says. In fact, the word “evil” was mentioned in 15% of the CFO responses (with only a few adding the qualifier “necessary.”)
A business opportunity for appraisers? “Although 409A is simply a ‘compliance’ issue, there is still perceived benefit from external analysis,” Davis concludes. The vendor’s “brand” may have little value to the CFOs surveyed (some even believe the analysis “is not difficult to do”), but the providers who balance cost and quality may find the best success in the early-stage and VC market. Davis’ complete survey on §409A Compliance: From the Perspective of the CFO is a provocative read for all 409A analysts—although we wouldn’t suggest it at bedtime. And if you believe that 409A work is in danger of becoming “commoditized” to the lowest-cost providers, email your thoughts and ideas for selling higher quality (and value) to the editor, and we’ll feature them in a future issue.
Bilksi affirmed, rejecting sole test for patentable process
In one of the most highly anticipated, long-awaited patent decisions, the U.S. Supreme Court finally decided Bilski v. Kappos just this past Monday. The Court held that the Federal Circuit Court’s so-called “machine or transformation” test is not the only test for a patentable process (requiring it to be tied to a particular machine or apparatus, or one that transforms an article into a different state or thing). Business methods can also be patentable under the current statutory scheme (35 U.S.C. 273), the Court ruled.
Under this interpretation, the Court still threw out the Bilksi patent, which explained through a series of mathematical steps how commodities buyers and sellers in the energy market could protect, or hedge, against the risk of price changes. “This is an unpatentable abstract idea,” the Justices held. By doing away with the machine or transformation test as the sole test for determining whether an invention is patentable subject matter, “the Supreme Court has kicked open the door and will not allow it to be closed on new technologies and innovations that we cannot today imagine,” says a recent posting by the Practicing Law Institute.
PCAOB and SOX stay largely intact, Supreme Court rules
For the past three years, as the litigation worked its way up through the federal appeals process, we’ve been following claims that Sarbane Oxley’s creation of the Public Company Accounting Oversight Board (PCAOB) is an unconstitutional usurpation of executive power (see BVWires # 52-1, #71-4 and #87-2).Just this past Monday, the plaintiffs—a two-person CPA firm in Henderson, NV, representing a class of similar firms (and the small private companies they serve)—enjoyed one small success, however: a divided U.S. Supreme Court struck down key provisions of the PCAOB as violating the Separation of Powers clause—this appears to give the SEC more power to appoint members at will.
“A majority of justices agreed that the current structure of the PCAOB fails to adhere to constitutional provisions governing removal of important officers,” explains a recent Statement by the Competitive Enterprise Institute (CEI), which helped spearhead the litigation. The group believes SOX wastes resources (which it frequently does) and fails to address material accounting issues, as a result—hence the suit in the first place.
Experienced Valuation Analysts for Chicago Office
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How will healthcare reform impact your subject
The answer is "it depends, and ‘depends’ is always good from a healthcare valuation perspective,” Elliott Jeter (VMG Health) said in BVR's June 10th webinar on healthcare reform and business valuation with co-presenters Don Barbo (Deloitte Financial Advisory Services) and Mark Dietrich, CPA/ABV. Barbo agreed, adding that health care reform presents a “wonderful opportunity” for healthcare valuation professional services, “not only because of the increase in activity but because of how we can help guide our clients through this.”
The impact of healthcare reform depends a lot on the business you are valuing. When valuing a healthcare entity, “look for things that might affect reimbursement …and the things that might have fees that are specific to that industry,” says Barbo. Elliott also asks “how does the reform impact the payer mix…is it favorable or unfavorable?” For example, Barbo reports healthcare reform is not necessarily favorable to the home healthcare market because of government efforts to reduce reimbursement.
For more information on the webinar click here.
Valuation of hedge fund GPs complex and ambiguous
“The formulas by which GP limited partners are compensated are complex, and the stakes are frequently high,” says Don May (Marks Paneth & Shron) in his recent article “Strategies for Avoiding Valuation Disputes in Connection with Breakups of Hedge Fund General Partnerships” in the Hedge Fund Law Report. And when the GP limited partner wants to leave a hedge fund GP, and the hedge fund holds illiquid or esoteric investments, the challenge becomes even more complex. May outlines two principals to follow in this type of valuation:
- Have agreed-upon guidelines in place prior to the formation of the GP
- Categorize different asset types and investments strategies
“Guidelines for the valuation of investments—a fundamental input into the valuation of the general partnership—must be linked to the assets in which the fund invests and the fund’s investment strategy. Such guidelines are necessary for any breakup agreement,” says May.
For the full text of the article click here.
Update on fairness opinions – learn from the experts
On Thursday, July 15 valuation expert Craig Jacobson (Citrin Cooperman & Company) and attorney Jeffery Rothschild (McDermott Will & Emory) will join BVR for “Fairness Opinions: Judging Transactions in Today’s Economy.” Through their 100-minute webinar, Jacobson and Rothschild will review how changes in regulation, case law, and the economy have changed the landscape for fairness opinions, thereby increasing the challenges inherent in this already difficult field. It all begins at 10:00 am PT/1:00 pm ET. Two CPE credits are available. Click here for more information or to register.
Statutory fair value guide now available
The 2010 update of BVR's Guide to Fair Value in Shareholder Dissent, Oppression and Marital Dissolution is now available. In addition to the print copy, the guide provides additional online access that includes real time updates to recently published court opinions and case abstracts, new articles, conference presentations, podcasts, news and blog feeds. The Guide is also available in digital format and can be loaded onto any eBook reader. The 2010 edition features:
- Articles from leading experts such as Jay Fishman, Bruce Silverstein, and others.
- A reference chart summarizing the shareholder dissent/oppression statutes in all 50 states, categorized according to how the state’s courts typically address the application of discounts in fair value appraisals
- Complete transcript of the teleconference "Standards of Value," with experts Jay Fishman, Shannon Pratt, and William Morrison
- Abstracts of all the most recent, leading statutory fair value cases (originally published in the Business Valuation Update™).
- Each case abstract also comes with the full-text of the court’s opinion—along with other “landmark” decisions in the statutory fair value realm.
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