BVWire attended the annual business valuation conference of the New York State Society of CPAs (NYSSCPA) on May 21 in New York City. As usual, it was an excellent conference, and here are a few takeaways from the sessions:
Several speakers and attendees talked about developing “bolt-ons” to help with DCF valuations under the new tax law. Cash flow effects from long-term sunsetting provisions (such as bonus depreciation) are analyzed separately and then bolted on to the standard five-year DCF.
Too many business valuations are rigged—and the attorneys know it—says Jim Hitchner (Valuation Products and Services). Sometimes it’s the clients who rig them by manipulating projections that don’t get enough scrutiny by appraisers.
Goodwill averaged 35% of purchase consideration in 2016 per Houlihan Lokey’s Purchase Price Allocation study, says the firm’s Michael DeLuke.
Monte Carlo is one way to provide the sensitivity analysis the Tax Court now wants to see in BV reports, points out Toby Tatum (Alliance Business Appraisal).
When valuing a cash-intensive business for divorce, while you’re not required to ferret out unreported income, you should do a “smell test” for it, says Jean J. Han (Baker Tilly Virchow Krause). Comparing ratios to similar firms and a lifestyle analysis are a few techniques to use, says Stacy A. Statkus (MPI).
Under an expedited process, it can take just 18 to 24 months to develop IP to boost value in a firm targeted for M&A, say Nancy Edwards Cronin (ipCapital Group Inc.) and attorney Alozie N. Etufugh (Etufugh Law). It may not be worth it to seek global protection because patents can be expensive to obtain and tough to enforce in other countries, says Etufugh.
Stephani Mason (DePaul University) handed out a survey regarding research the University of Wisconsin is doing on fair value measurements. If you’re involved in this area of practice, please take the survey. You can access it if you click here.
Can a business that never made a profit make a claim for lost profits? Yes, say David Gralnick and Joshua S. Sechter (Klein Liebman & Gresen). Also, it can claim lost profits plus lost business value as long as the lost profits are figured up to the valuation date. Otherwise, it’s a double dip.
Average price-to-value discounts are down to 22% for real estate holding companies per Partnership Profiles Inc. (PPI) data, says Martin Greene (Greene Valuation Advisors). He says the key court cases to know regarding noncontrolling interests in these entities are: Andrews, Weinberg, Giustina, andTanenblatt (all available from BVLaw).
Our congratulations to the conference committee Mitchell H. Chosak (Forfeiture Support Associates LLC), Jeffrey Gibralter (Klein Liebman & Gresen LLC) and Jean J. Han (Baker Tilly Virchow Krause LLP) for putting together a fine event! The July issue of Business Valuation Update will have a detailed recap.
Arkansas court clarifies law on personal goodwill in a nonprofessional business
In divorce cases, Arkansas has followed the rule that enterprise goodwill is marital property but personal goodwill is not. But the waters got a little muddy in recent years because of the Brave case, in which a restaurant owner claimed personal goodwill. Two different courts seemed to adopt conflicting positions on whether the owner of a nonprofessional business can claim personal goodwill that is excludable from the marital estate. The question arose again in a recent case and prompted the appeals court to issue a clarification on where matters stand after Brave.
In the instant case, the husband was the sole owner of a business that sold motors to operate gates. The husband claimed first that the business was not profitable and, in the alternative, that whatever value there was in the business was goodwill attributable to the husband. He said the success of the business relied on client relationships, which he had established and cultivated. If he were to sell the business, he would not be able to transfer his personal goodwill to the buyer.
The trial court said the argument that there was personal goodwill in a nonprofessional corporation “has been soundly rejected by the appellate courts of the State of Arkansas.” The court also credited the wife’s testimony that the business was worth more than what was reflected in the books and financial documents.
The state Court of Appeals affirmed the trial court’s value findings, saying “we cannot ascertain any significant personal goodwill in a business such as this, which involves the selling of motors to operate gates.” The appeals court pointed out that the husband cited to the 2013 Brave v. Brave appeals court decision, which allowed there was personal goodwill in a nonprofessional corporation, the restaurant. However, the state Supreme Court later vacated the 2013 Brave decision. The high court in Brave declined to decide whether there was personal goodwill in a nonprofessional business as opposed to a professional practice.
According to the Court of Appeals ruling on the instant case, “although it is settled law that personal goodwill is not a proper consideration in dividing a professional practice or business upon divorce ... this concept has not been extended by the supreme court to encompass a nonprofessional business such as the one involved here.”
A digest of Atherton v. Atherton, 2018 Ark. App. LEXIS 264 (April 11, 2018), and the court’s opinion will be available soon at BVLaw. Digests and the courts’ opinions for Brave v. Brave, 2013 Ark. App. LEXIS 570, and Brave v. Brave, 2014 Ark. LEXIS 232, are available at BVLaw.
The Appraisal Standards Board has issued a First Exposure Draft of proposed changes for the 2020-21 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). There will be a live online briefing on June 8 at 1:00 p.m. ET, and you can provide your comments during the briefing. Click here to register. You can also submit comments in writing by emailing them to ASBcomments@appraisalfoundation.org by July 15.
“Planning to sell a closely held business might start with a valuation three to five years before the targeted exit date,” says an article in The Estate Planner. The two-part article gives an overview of the exit planning process for closely held and family businesses. It also cites a PwC study that found an increasing number of small-business owners intend to sell rather than pass their business to family members. However, only a quarter of these businesses have any succession or exit plans. Citing valuation fees, the article says, “[A] certified business appraiser might charge between $5,000 and $10,000, while a specialized boutique investment banking firm might charge between $20,000 and $30,000.”
A survey from KPMG finds that, even though CEOs are highly confident about the U.S. economy, only moderate growth is predicted. The need for disruption has intensified over the past year, and technology has emerged as the only driver of transformation for a majority of U.S. CEOs.
New advisory board overseeing major overhaul of Pratt’s Stats
Pratt’s Stats, the leading private-company transaction database, is evolving into a brand-new powerful platform with better search capabilities, new data fields, easier report generation, and more with its upgrade to DealStats this July. A new advisory board has been formed to support this effort as well as ongoing enhancements. The board members are: Pete Butler (Valtrend LLC), Bob Dohmeyer (Dohmeyer Valuation Corp.), Nancy Fannon (Marcum LLP), Fred Hall (Amador Appraisals and Acquisitions Inc.) and Toby Tatum (Alliance Business Appraisal). The new platform will also include Public Stats to form a combined database of almost 30,000 private-company and 4,000 public-company transactions. Stay tuned for further details!
Extra: Check out the debut of the DealStats platform during a free webinar on July 11!
Save the date! 2019 AAML/BVR National Divorce Conference
BVR has joined forces with the American Academy of Matrimonial Lawyers (AAML) to present the National Divorce Conference in Las Vegas May 8-10, 2019. Leading matrimonial attorneys and financial experts will give you critical insights in sessions covering financial, valuation, forensic, and legal issues surrounding this growing area of practice. “While the final rundown of topics has not been completed, there will be sessions on updated standards of value, cryptocurrencies and the impact on divorce, new law and case law updates and how to best present your case to effectively influence the court—all taught by the best speakers in the country,” says matrimonial attorney David Levy (Berger Schatz). “Of course, it also gives you great opportunities to network with the best lawyers and financial experts in the field on a social basis. Hope you can join us!” The hotel information has just been released—the fabulous Aria Resort and Casino—and there’s an early-bird discount if you register before December 31. This is the only event of its kind, and you can register if you click here.
In general, going-concern value refers to the total value of a property, including both the real property and the intangible personal property, attributed to business enterprise value (assuming the business owns the real and intangible property). For real estate appraisers, the American Society of Appraisers has a new “RP-400 Going Concern Appraising for Real Estate Appraisers, Case Studies” course, which has received approval from The Appraisal Foundation (TAF). Plans are underway to obtain state approvals and schedule upcoming classes at various locations. ASA members currently holding the ASA-Real Property designation will now be able to add an Appraisal Specialty in Going Concern.
Shades of the Good Housekeeping Seal of Approval: The International Valuation Standards Council (IVSC) is proposing to award a “quality mark” to qualified valuation professional organizations (VPOs) that meet a high level of quality in BV technical and professional standards. An IVSC consultation paper gives the background and examples of an approach that could be taken to address concerns about significant inconsistencies in the quality of business valuations around the world. The IVSC welcomes feedback on the proposal, and comments are due by August 1.
Business valuation stakeholders from India, including regulators, corporations, and corporate affairs ministry will discuss the future of valuation in India at the third in a series of BV summits on June 15 in New Delhi. Also on the agenda are sessions on startups, M&A, best practices, and more. To register, click here.
People: Francis Dean Driskell II has joined Willamette Management Associates as a managing director in its Atlanta office; his expertise includes forensic analysis related to financial accounting, lost profits, and economic damages analyses … Houston-based Weaver admitted Adam McArthur as a partner; he’s in the Los Angeles office and oversees the firm’s valuation and litigation support services in California … Michael Ruby has been named managing partner of Shawano, Wis.-based KerberRose; he’ll lead the firm’s growth and expansion throughout Northeast and North Central Wisconsin.
Firms:Private equity firm Accel-KKR in Menlo Park, Calif., has agreed to buy Sageworks, a financial services software firm in Raleigh, N.C., that provides financial software and information, including business valuation software … Appleton, Wis.-based SchenckSC has acquired Brookfield, Wis.-based Winter Kloman Moter & Repp SC, effective July 1; the combo adds 67 team members to Schenck’s 600 … Springfield, Mo.-based BKD announced that RylanderClay& Opitz LLP of Fort Worth, Texas, joined the firm effective June 1 … Chicago-based UHY Advisors expanded in the Northeast with the merger of Del Conte Hyde Annello & Schuch PC, located in Farmington, Conn. … Brad Rhodes & Associates of Greenwood Village, Colo., joined Fargo, N.D.-based EideBailly … Milwaukee, Wis.-based Wipfli LLP announced that the associates of California-based Price Waterman have joined the firm effective June 1; this adds 16 professionals to Wipfli’s more than 2,000 experts.
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