BVR Logo June 3, 2020 | Issue #213-1

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:

Mercer using a 1% COVID-19 risk premium—
for now

Veteran business valuer Chris Mercer (Mercer Capital) was a keynote speaker at the New York State Society of CPAs Business Valuation/Litigation Services Conference, which was held online on May 18. Mercer’s session covered his “integrated theory” and addressed the market participant acquisition premium (MPAP) and the discount for lack of marketability (DLOM). He is the developer of the quantitative marketability discount model (QMDM) for estimating a DLOM. QMDM is a shareholder-level discounted cash flow model that values interests in a business in the context of an appraisal of the entire enterprise, the value of which is a function of expected cash flows, their growth, and the risks associated with achieving them.

Focus on cash: In response to a question from the audience regarding the impact of COVID-19 on the marketability discount using the QMDM, he responded that he and his firm are focusing on projections of cash flows and growth. As for risk, he says: “We believe that the overall riskiness is, hopefully temporarily, increased and are adding 1% of ‘COVID risk’ premium in discount rate development for the time being. That decision was made after considerable slicing and dicing of public market performance and multiples. We attempt to focus on cash flow rather than attempting to ‘solve’ the pandemic issues with a large dose of incremental risk discount rates. We will revisit this issue frequently.”

As for the impact of COVID-19 on DLOM using the QMDM, there is no obvious answer because of the assumptions that must be made in terms of cash flow, growth, and risk, as he explains in his blog.

Mercer also told the audience that the third edition of Business Valuation, An Integrated Theory, a book that he co-wrote with Travis Harms (Mercer Capital), will be out this September. The book describes the QMDM in detail.

We’ll have more coverage of the NYSSCPA conference in next week’s BVWire. Kudos to conference chairs Mitchell Chosak (FSA LLC), Jean Han (Clarion Consulting Associates LLC), and Andrew Park (Andrew M. Park, CPA, PC).

South Carolina Supreme Court weighs in on use of discounts in divorce valuations

In a crucial decision on the use of discounts when valuing a spouse’s minority interest in a closely held business, a majority of the South Carolina Supreme Court rejected a bright-line rule, noting it would limit the flexibility family courts must have in apportioning marital assets. Other considerations also militated against a fixed approach, the majority explained. The opinion triggered a dissent.

Disagreement over DLOM: During the marriage, the husband came to own 100% of the stock in a family business. Most of it was found to be a gift from his father and not marital property. In 2009, the husband transferred a 25% equity interest in the business to the wife. A stock agreement contained a transfer restriction. In 2012, the husband filed for divorce. The flashpoint was the valuation of the wife’s 25% interest.

The husband’s expert applied a discount for lack of marketability and lack of control. She explained the DLOM by noting a closely held company was less marketable and less liquid than a publicly traded business. She also pointed to the transfer restriction. A minority discount was appropriate as the interest holder would not have control over the company.

The wife’s expert initially used a DLOM, but, upon learning that the husband did not intend to sell the company, found it was inappropriate. He valued the entire company and divided the result by four.

The family court credited the husband’s expert. Acknowledging a “debate as to whether … discounts should apply in a divorce setting as the business is not actually sold,” the court noted the applicable standard, fair market value, which assumed a hypothetical sale between a willing buyer and a willing seller.

The Court of Appeals reversed on the DLOM. It said the marketability discount was based on the fiction of an anticipated sale, which, under the applicable law, was no longer recognized when there was no evidence of an intent to sell the business, as was the case here. Also, the stock restriction was of no consequence where one spouse intended to retain ownership. The court relied on Moore v. Moore, a pivotal Supreme Court decision that primarily dealt with goodwill. In Moore, the state’s high court found the facts of the case did not justify a DLOM, while declining to make a bright-line rule as to whether DLOM was ever appropriate in divorce proceedings.

The Court of Appeals upheld the use of the minority discount.

Emphasis on FMV: On review with the state Supreme Court, a majority of justices emphasized that FMV was the applicable standard of valuation. The majority also noted a longstanding tension between “proper business valuation principles” and a trial court’s goal of apportioning marital assets “fairly and justly.”

Certainly, if we value flexibility in how the family court apportions the parties’ marital assets—which we clearly do—we should consider that court’s decision when it has chosen to accept the parties’ expert testimony that a marketability discount applies and when the court has found one party’s expert more credible.

Not to do so, the high court's majority suggested, would mean imposing a bright-line rule that the high court earlier had rejected. The majority said Moore was clear that the use of DLOM required a case-by-case analysis. Here, the Court of Appeals “effectively established a bright-line rule disallowing this discount,” the court's majority said. Doing so was error. The facts of the case supported the trial court’s use of a marketability discount. Further, minority status “certainly affects an asset’s fair market value, and therefore, it is proper for courts to consider the propriety of this discount.”

Dissent: The dissent agreed that Moore did not create a bright-line rule as to the DLOM. But the facts here were “not meaningfully different from the facts in Moore,” the dissent said. In both cases, a minority interest, by order of the court, was transferred to the spouse owning the entire remaining interest, and, in both cases, the owner-spouse had no intent to sell the business. Likewise, under the facts of the case, use of a minority discount was inappropriate, the dissent said. Writing for the dissent, Justice James noted he was not abandoning the FMV but, “when facts and common sense dictate, courts should avoid an approach that results in a fictional value being assigned to the asset.”

A digest of Clark v. Clark, 2020 S.C. LEXIS 69 (May 13, 2020), and the court’s opinion, will be available soon at BVLaw. A digest of Moore v. Moore, 414 S.C. 490 (2015), and the court’s opinion are available to BVLaw subscribers.

Business interruption trends and cases triggered by COVID-19

The gleaming billboards of Times Square went dark on May 27 for one minute to alert the nation that pandemic-related business interruption insurance claims are being denied by insurers. Lawsuits are proliferating, and, of course, financial experts play a key role in supporting or disputing damages and valuation claims. BVWire reached out to Luke Brown, a retired insurance attorney and frequent writer on insurance matters, to suggest a few resources to help financial experts get up to date on what’s going on in this area.

An article on gives a good overview of evaluating business interruption claims in a post-COVID-19 world, says Brown. It states that whether the interruption losses can be appropriately measured and supported will ultimately depend on the credibility of the submitted documentation. To access the article, click here (free registration required).

Crowell Moring, a large international law firm with a substantial insurance practice (mostly representing insurers), puts out a regular “Client Alert” that includes a section on new business interruption suits against insurers, with a “a lot of case cites—including links to case documents—and good analysis,” says Brown. The alert for the week of May 18 lists 24 new individual lawsuits and 27 class action suits by businesses across the country, from an oral surgery practice in Washington to Ed’s Burger Joint in Mississippi.

The success or failure of these cases, and the response to them by insurers, remains to be seen. An example of a response can be found in a case in which the Hartford Fire Insurance Co. filed a complaint against one of its insureds (a shoe company) in Connecticut state court. The complaint seeks a declaration that the losses the business suffered are excluded by the policy’s virus exclusion and otherwise not covered by the policy which, Hartford alleges, requires “‘direct physical loss of or direct physical damage to property,’ and the presence or suspected presence of coronavirus does not constitute direct physical loss or damage to property in these circumstances.”

Who will prevail? One case that has global resonance comes from Paris, where a court recently ruled that AXA should pay a restaurant owner two months of revenue losses the virus pandemic caused (AXA plans to appeal). The business owner has received calls from all over the world asking for details of his contract and the court’s ruling, according to a report from Reuters.

IRS change to appraisal review sparks concern from ASA and others

The American Society of Appraisers (ASA) and 10 other appraisal organizations have sent a joint letter to the Internal Revenue Service and the Treasury Department expressing concern over a recent change to the way the IRS reviews appraisals prior to imposing a civil money penalty for valuation misstatements under IRC Section 6695A. This change reduces the number of individuals involved in the decision to impose the penalty and could result in a penalty being imposed without having anyone with valuation experience review the appraisal. The joint letter also takes issue with the fact that this process change was made without any stakeholder notice or engagement and was announced only to relevant IRS staff.

‘Chilling’ effects: In his regular newsletter, former IRS manager Michael Gregory (Michael Gregory Consulting LLC) points out: “Instead of five sets of eyes concurring on a penalty letter being initiated with three sets of eyes having valuation experience, now two sets of eyes having normally no valuation experience could make the decision to launch their investigation. This could have chilling effects on appraisers and valuers.”

Gregory was involved in drafting the letter with the ASA, which other appraisal groups representing business valuers and appraisers of real estate and M&E signed. In his newsletter, Gregory offers some possible language for appraisers to discuss with their attorneys for possible inclusion in engagement letters for tax-related valuations. You can sign up for his newsletter if you click here.

NACVA's multiday conference goes virtual
June 15-19

We’re looking forward to attending the NACVA and the CTI’s 2020 Business Valuation and Financial Litigation Super Conference June 15-19, which will use a “virtual model that will provide many of the same benefits as being onsite.” Online attendance options include the ability to attend the entire conference or pick and choose just the sessions you want (55 sessions to choose from). Also, the entire conference will be repeated the week of August 3-7 using the same virtual model and viewing options. There is something for everyone and a good mix of sessions covering business valuation, healthcare, financial reporting, exit planning/M&A, financial litigation/expert witness, and practice management. Hope to “see” you there!

How to avoid trouble when using transaction databases

Understand your data! The backbone of defensible business valuations is empirical data, but there are strengths and weaknesses with all databases, so you must have a full understanding of what you are using. The newly released Comprehensive Guide to the Use and Application of Transaction Databases, 4th edition, covers the most popular transaction databases, including DealStats (formerly Pratt’s Stats), BIZCOMPS, S&P Capital IQ, and more—plus new resources that have come to market, such as Tagnifi and MergerShark. This edition has been edited by Alina Niculita (Morones Analytics) and also covers rules of thumb, prior transactions, common errors to avoid, and an analysis of the differences among the databases.

Extra: If you are a subscriber to the BVResearch Pro platform, you already have this new guide in your library!

At NYSSCPA, Zyla gives update on IVSC

The third in a series of three “perspective papers” from the International Valuation Standards Council (IVSC) on the matter of goodwill amortization vs. impairment is expected to be released soon, according to Mark Zyla (Zyla Valuation Advisors). Zyla, who is chair of the IVSC Standards Review Board, spoke at the recent New York State Society of CPAs Business Valuation/Litigation Services Conference, which was held online on May 18. Accounting rule makers are pondering the idea of upending the current goodwill impairment model and reverting back to one of amortization. The first IVSC paper concluded that goodwill is not a wasting asset, and the second paper laid the groundwork for practical solutions to enhance the information value of the goodwill impairment test, and these solutions will be presented in the third paper.

Zyla updated the audience on other pending guidance:

  • An exposure draft is in the works on issues related to valuation modeling;
  • The IVSC Financial Instruments Board is revising standards related to financial instruments;
  • The IVSC Tangible Asset Board is discussing long-term investing; and
  • The impact of environmental, social, and governance (ESG) and the considerations on valuation is the subject of an analysis.

BV movers . . .

People: The governing council of the AICPA has elected Tracey Golden, CPA, CGMA, as the organization’s new chairperson; Golden, an audit partner at Deloitte, succeeds outgoing chair Bill Reeb, in the volunteer post, having served for the past year as vice chair; Bill Pirolli, CPA, CFF, PFS, CGMA, a partner with DeSanto, Priest & Co., was voted in as vice chair … Chris Dalton, CPA, has been named the new managing partner of BKD CPAs & Advisors’ Transaction Advisory Services (TAS) division … Mark Koziel is the new president and CEO of Allinial Global, an association of independent accounting and consulting firms; he will take over the role August 1 after finishing his tenure as executive vice president of firm services at the AICPA.

Firms: Southfield, Mich.-based Clayton & McKervey has three new service offerings related to loan forgiveness compliance and consulting with the Paycheck Protection Program: loan tracking, a forgiveness calculator, and forgiveness review … Alvarez & Marsal has opened its first office in Oslo, Norway, augmenting the firm’s presence in the Nordics … Saginaw, Mich.-based Yeo & Yeo PC and BFBA (Sacramento, Calif.) have joined PrimeGlobal, an international association of independent accounting firms … Springfield, Mo.-based BKD has moved its BKD Big Data & Analytics from a team within the firm’s Forensics & Valuation Services division to become its own national practice unit rebranded as BKD Analytics … Calgary, Alberta-based MNP has acquired applied data services company T4G, which operates four offices across Canada; the acquisition is designed to strengthen the firm’s digital transformation services.

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CPE events

This is a free webinar that will demonstrate how to use RCReports Software to normalize compensation for owners of closely held businesses using the three IRS approaches outlined in the IRS Job Aid on reasonable compensation.

A lively discussion, debate, and dissection of the pros and cons of using a discounted cash flow analysis, particularly in times of

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:


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