Cryptocurrency, financial projections, and inputs into the cost of capital were just a few of the important topics discussed at the annual business valuation conference of the New York State Society of CPAs (NYSSCPA) on May 20 in New York City. BVWire attends this event every year, and there is always something interesting to learn. Here are a few takeaways from the sessions:

• Initial coin offerings (ICOs) are being used to fund startups instead of traditional venture capital; investors buy tokens that are also being issued to employees; valuation is tricky as there is no company yet, just an idea;

• More professional scrutiny is needed over financial projections management provides—and don’t assume that a highly detailed projection is automatically reasonable;

• It’s important to consider a start date for historical return data behind a cost of capital estimate; you need to choose the part of history that you believe best represents investor expectations of the future;

• Automatic usage of a size premium is giving way to more thought; recent research reveals that the size effect is conditional and more complex than the simple notion that smaller firms have higher returns than larger ones;

• Becoming an “authority” on an aspect of valuation is key to scaling a practice;

• Economists don’t generally clash with financial experts; they are in sync except when differences arise over matters of fact;

• Option pricing models are evolving as the primary way to value contingent consideration; and

• Computers and artificial intelligence can be your best friend or your worst enemy—it’s what’s between your ears that really counts.

Our congratulations to the conference organizers Mitchell H. Chosak (Forfeiture Support Associates LLC) and Jean J. Han (Baker Tilly Virchow Krause LLP) for another excellent event. The July issue of Business Valuation Update will have more details on the topics presented.

Flip-flopping, Florida Supreme Court adopts Daubert

In a startling move, the Florida Supreme Court recently ruled that, “effective immediately upon the release of this opinion,” the state would adhere to the Daubert standard when assessing the admissibility of expert testimony. Doing so, the court reversed its October 2018 decision to stick with the Frye standard.

The issue of which standard to follow is a contested one in Florida. In 2013, the Florida legislature rejected the long-standing Frye standard by amending the Florida code, section 90.702, dealing with expert testimony, to incorporate the Daubert standard in the state’s rules of evidence. Then, in October 2018, the state’s Supreme Court found the legislature had overstepped its authority, declared the amendment unconstitutional, and reinstated the Frye standard.

As our prior reporting noted, the validity of the Daubert standard became an issue in a personal injury case in which the plaintiff claimed the defendants’ products exposed him to asbestos that caused his illness. Following a split between the trial court and the appeals court on the applicable standard, the plaintiff petitioned the state Supreme Court for a determination of whether the 2013 legislative change on expert testimony infringed on the high court’s rule-making authority. The Supreme Court said it did.

It said: “Frye and Daubert are competing methods for a trial judge to determine the reliability of expert testimony before allowing it to be admitted into evidence.” Frye, the Court explained, relied on the scientific community to assess reliability, whereas Daubert “relies on the scientific savvy of trial judges to determine the significance of the methodology used.”

A majority of the court concluded: “With our decision today, we reaffirm that Frye, not Daubert, is the appropriate test in Florida courts.”

Seven months later, the court walked it all back. “We now recede from the Court’s prior decision not to adopt the Legislature’s Daubert amendments to the Evidence Code and to retain the Frye standard.” The court said the “grave constitutional concerns” some opponents of the amendments had expressed “appear unfounded.” Moreover, “the Daubert amendments will create consistency between the state and federal courts with respect to the admissibility of expert testimony and will promote fairness and predictability in the legal system, as well as help lessen forum shopping,” the court stated.

It added that the latest move accorded with the court’s “exclusive rule-making authority and longstanding practice of adopting provisions of the Florida Evidence Code as they are enacted or amended by the Legislature.”

To read the Florida Supreme Court’s most recent decision, click here.

Hope for clarity on S corp valuations

The recent Kress case indicates approval of S corp tax affecting, but the court was neutral on the issue of an S corp premium (see prior coverage). As to how far this decision goes toward ending the tax-affecting controversy, keep in mind that the Kress case is not a U.S. Tax Court memo or a precedent-making decision from a U.S. Court of Appeals. However, a pending case in Tax Court could bring more clarity to this matter. That case is the Cecil case, in which the valuation experts for both the taxpayer and IRS have tax affected the earnings of an S corp and applied an S corporation equity adjustment multiple (SEAM) that was calculated using the Van Vleet model. The trial was held in 2016, and a decision has been pending for three years. “Given the amount of time that has elapsed, I’m beginning to suspect that the Chief Judge of the Tax Court has ordered the opinion to be reviewed by the full Tax Court,” writes Daniel R. Van Vleet (The Griffing Group), the developer of the Van Vleet model, in the June issue of Business Valuation Update. Such a review is likely to happen if a draft opinion a trial judge issues overrules Tax Court precedent, Van Vleet points out. “If a full review has been ordered, this may be an optimistic sign that the Tax Court is prepared to reverse earlier decisions and allow S corp tax affecting so long as the analysis includes an S corp adjustment that reflects the valuation-related tax differences between C corps and S corps,” he says. (The pending Cecil case is William A. V. Cecil, Sr., Donor, et al. Petitioner(s) v. Commissioner of Internal Revenue, Respondent.)

When the SEC reviews financial statements and disclosures of public firms, it may send a comment letter to the company if it has questions or sees problems. You can learn a lot from these letters about fair value measurement issues. PwC has posted its latest version of “SEC Comment Letter Trends“ (comment letters publicly issued in the 12 months ended March 31, 2019), which includes topics such as business combinations, fair value (valuation techniques and inputs), and goodwill and other intangibles. Examining the issues in the comment letters can help you make sure you have addressed these areas properly in your own engagements.

Survey finds small biz market may have peaked

Seller’s market sentiment is down in all market segments except for businesses with $5 million to $50 million in enterprise value. Looking back a year, seller’s market sentiment has decreased notably for businesses valued between $1 million and $2 million, dropping six percentage points from Q1 2018 (72%) to Q1 2019 (66%). According to the “Q1 2019 Market Pulse Report,” published by the International Business Brokers Association (IBBA), M&A Source, and the Pepperdine Private Capital Market Project, seller’s market sentiment increased for businesses valued from $5 million to $50 million, rising from 77% in Q1 2018 to 81% in Q1 2019. “This is the first time in years that we’ve seen four out of five sectors report a dip in seller market sentiment. This is a sign the market may have peaked and more people are expecting a correction in the year or two ahead,” said Craig Everett, Ph.D., director of the Pepperdine Private Capital Markets Project at the Pepperdine Graziadio Business School. “Sellers should consider selling now or waiting another few years before the market will cycle back up to current conditions. To be clear, this doesn’t mean you won’t be able to sell your business over the next few years, but you probably won’t get the multiples you can get today. Any market pessimism or uncertainty will drive down value across the board.”

Extra: Some appraisers use Pepperdine surveys to estimate the cost of capital for small private businesses. See the article, “Appraiser Shuns Public Data for Private Cost of Capital” in the May 2019 issue of Business Valuation Update (purchase required).

ASA/USC fair value conference in Los Angeles June 20

Last year’s event was sold out for in-person attendance, so you may want to register now for the ASA/USC 14th Annual Fair Value Conference at KPMG in Los Angeles on June 20. The conference agenda has presentations from nationally recognized speakers who are profession leaders, covering a range of fair value measurement and valuation topics, as well as other current and future expected trends regarding the FASB, SEC, and international accounting standards. If the event is sold out again or you can’t make it in person, BVR will be webcasting all of the sessions live (earn up to eight CPE credits).

Report from the TEGoVA conference

Dubrovnik was the backdrop for an eventful TEGoVA European Valuation Conference and General Assembly in May 2019, hosted by the Croatian Association of Court Expert Witnesses and Valuers (HDSVIP). TEGoVA is a very strong and significant player on the world valuation stage. Ninety delegates representing 45 valuer associations from 24 of the 37 member countries attended the General Assembly. Additional attendees included 12 board members of the International Institute of Business Valuation (iiBV), including the current and incoming chairs of the iiBV board of directors, Edwina Tam and Anton Lezhja, respectively. Also speaking and participating was the secretary general of the International Association of Certified Valuation Specialists (IACVS), Bob Brackett, from the USA.

After numerous board meetings of the many attending associations, TEGoVA hosted a full day of valuation training (titled “The Role of the Expert Witness in the Valuation of Real Estate and Businesses”) taught by individuals from the many attending associations. The General Assembly met and deliberated on a number of current valuation issues including an easier-to-translate definition of “market value,” a new definition of highest and best use/hope value, insurable value, and the use of automated valuation models and data protection (GDPR).

Brackett tells BVWire that one of the most notable presentations was the topic of implementing the current EU requirements on data security (GDPR) that has had unanticipated impacts on the valuation (business and tangible asset) community. Some of these impacts include:

• Websites and informational pieces can no longer have a person’s face without specific release for the specific use for which it is put;

• Contact information for members cannot be shared with other members (without specific release); thus, people cannot login to the organization’s web page and get linked to anything but a firm’s webpage; no personal information on professionals or emails can be provided;

• Reports cannot contain pictures that have a person’s face, recognizable or not; and

• Reports cannot contain any personal information, such as name, name and address (even in the address of the report), or name and ownership.

The Chamber of Independent Appraisers in Bulgaria (CIAB) will host the autumn meeting of TEGoVA in Sofia October 10-12.

BV movers...

People: Jennifer Cossette, ASA, has joined Dallas-based AltaView Advisors’ San Francisco office as a principal … LBMC (Nashville, Tenn.) has named Andrew Lowe, ASA, CEIV, MAFF, ABAR, Knoxville, Tenn., market leader and head of the valuation and litigation support services group, as a shareholder; also named as a shareholder is Katie Tarr, CHFP, who specializes in compensation valuation services including assisting healthcare organizations in determining the fair market value of physician compensation arrangements … Paul Weisinger, CPA/ABV, CVA, CEPA, a principal at Walthall Rea (subsidiary of Rea & Associates) in its Cleveland office, has been named to the AICPA’s Business Valuations Committee; he will serve a 12-month term, ending May 2020 … Erin Dwyer, formerly with the Center for Audit Quality, has been named deputy director of the Office of External Affairs at the Public Company Accounting Oversight Board (PCAOB); she will serve as the direct point of contact for and liaison to investors, audit committees, and preparers … Danielle Solomon was selected as the firm’s new national industry partner (NIP) of the healthcare practice at Springfield, Mo.-based BKD CPAs and Advisors … Yasmine L. Misuraca, CPA, CFE, has been named partner in charge of the forensic and dispute advisory practice at New York City-based Prager Metis CPAs as part of the firm’s expansion of its expertise in this space … David Kessler was elected the next CEO at New York-based CohnReznick, and he’ll assume the role on Feb. 1, 2020, when current CEO Frank Longobardi completes his term; Kessler is currently the managing partner for the firm’s real estate practice.

Firms: California CPA firm Vavrinek, Trine, Day & Co. will become part of regional certified public accounting and business advisory firm Eide Bailly on July 22; the combination will add 11 California offices and an expanded Phoenix office to Eide Bailly’s footprint … New York City-based Marks Paneth has opened a new office (its ninth) in Philadelphia’s central business district as part of a plan to expand the firm’s presence in the mid-Atlantic area … Knoxville, Tenn.-based Rodefer Moss & Co. is expanding its services in Tennessee and Virginia by merging with Fortner Smalley of Kingsport, Tenn., and Thrower Blanton & Associates of Norton, Va., as of July 1; the combined firm will have 160 employees and offices in Tennessee, Kentucky, Indiana, and Virginia.

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

Upcoming BVR training events

• FREE WEBINAR: Finding Comps in DealStats: Examples and Best Practices, (June 18), with Adam Manson (Business Valuation Resources), Mitchell Cameron (Business Valuation Resources), and Oday Merhi (Business Valuation Resources)
  
  Attend a free one-hour webinar that will demonstrate how to use DealStats (formerly Pratt’s Stats) to identify and analyze private business sales that are comparable to your subject company.
  
  

• Valuation in a Nonlinear World (June 19), with Gary Schurman (Applied Business Economics).
  
  There are areas of valuation that are outside the box of the typical business appraiser because they utilize a much higher level of mathematics and creativity. Robust modeling and analytics are needed where the primary purpose of the valuation is investment, acquisition, liquidation, financial reporting, assessing risk, and/or pricing.