BVR Logo June 10, 2020 | Issue #213-2

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

ESOP trustee defends dismissal of lawsuit and rejects comparison to Brundle

In response to the plaintiff’s appeal in the Lee ESOP case, the defendant trustee said the district court’s dismissal of the case for lack of standing was appropriate. The trustee’s brief also accuses the plaintiff of “annexing itself to the very different facts in Brundle,” a precedential 4th Circuit decision in favor of the plaintiff.

As we recently reported, the case arose out of the 2016 sale of shares in a construction company to an ESOP. The defendant trustee oversaw the transaction, and an experienced ESOP appraisal firm prepared the valuation underlying the transaction and subsequent annual valuations. The ESOP paid $198 million for an 80% ownership stake in the company. The transaction was financed with a loan from the company and the selling shareholders received warrants that would enable them to acquire additional voting stock. A 2016 year-end annual appraisal, which came 18 days later, valued the shares at $64.8 million.

The plaintiff’s complaint suggested that the two figures showed the trustee overpaid for company stock. Last fall, the district court dismissed the case, finding the plaintiff had not shown an “injury in fact” and had no standing “to pursue her claims in this Court.” The court also said the plaintiff “fundamentally misunderstands” the transaction and the subsequent valuation and that the ESOP “realized an immediate equitable benefit.”

On appeal, the plaintiff essentially argued the court dismissed the case prematurely. The complaint stated facts sufficient to show an injury. The plaintiff’s appeal claimed this case was similar to the Brundle case and asked the 4th Circuit to allow the case to proceed to discovery.

Nothing like Brundle: The trustee’s response says there was no harm to the plaintiff; therefore, the plaintiff lacked standing to sue. The plaintiff’s “skeletal” complaint merely alleged the ESOP “was not created in the best interests of the employees.” However, the complaint was devoid of any allegations “regarding the decision-making processes or other diligence conducted by [the trustee] or any of the other fiduciaries of the ESOP.” Further, there was no allegation that the plaintiff lost money invested in the ESOP or would be harmed in the future because of the transaction, the response brief says.

The trustee notes the ESOP purchased 80% of company stock through a leveraged transaction and came to own 100% of the stock when the company bought the remaining 20% from the selling stockholders. “Employees put none of their own money into the transaction. Instead, the transaction forming the ESOP was financed entirely by the selling shareholders and the company,” the brief states. Further, the plaintiff “wrongly equates the enterprise value of the Company … with the company’s equity value, i.e., the enterprise value less the impact of the debt used to finance the transaction.”

The trustee’s brief contends the plaintiff “sings the siren song of Brundle in an attempt to escape dismissal.” But, says the trustee, the allegations pled in Brundle were “far different—and more significant—than the barebones allegations in the Complaint here.” By way of example, in Brundle, the plaintiff alleged the ESOP purchased company stock for $201.5 million in December 2013 and the company sold itself six months later for $119.7 million. The sales price comparison enabled the Brundle plaintiff to support an allegation that the value of the company dropped significantly in a relatively short time, the trustee notes. No such comparison exists here, the trustee says. It also says that the Brundle plaintiff “plausibly argued” that the valuation underlying the ESOP transaction was “too high relative to prior recent-in-time valuations that had been performed.” The plaintiff’s complaint alleged no such facts, the trustee notes. “Federal courts are called to sort viable ERISA claims from those that are merely would-be clones of Brundle,” the trustee argues in support of the district court’s dismissal of the case.

Stay tuned for further developments in this case.

A digest of the district court’s ruling in favor of the defendants in Lee v. Argent Trust Co., 2019 U.S. Dist. LEXIS 132066 (Aug. 7, 2019), and the court’s opinion, are available to subscribers of BVLaw. Digests for Brundle v. Wilmington Trust N.A., 241 F. Supp. 3d 610 (E.D. Va. 2017); Brundle v. Wilmington Trust N.A., 258 F. Supp. 3d 647 (E.D. Va. 2017); and Brundle v. Wilmington Trust N.A., 919 F.3d 763 (4th Cir. 2019), and the courts’ opinions also are available at BVLaw.

Takeaways from the NYSSCPA BV/Litigation conference

Conference season is here but, of course, in virtual form due to the pandemic. BVWire attends the New York State Society of CPAs Business Valuation/Litigation Services Conference every year, and the one held May 18 continued its tradition of presenting excellent sessions with top-level speakers. Last week’s BVWire covered Chris Mercer’s keynote session, and here are some takeaways from a few of the other sessions.

‘Hazard pay’ for ESOP valuers: The description to the session on ESOP valuations says that valuers working in this area “feel that they deserve hazard pay.” Unclear rules, aggressive enforcement by the Department of Labor, and regulation by litigation have created a number of “hot button” issues and controversies, according to Jeffrey S. Tarbell (Houlihan Lokey). These issues involve warrants, projections, terminal value, control, DLOM, the GPC method, and the negotiation process surrounding ESOP transactions. You would think that, since the passage of ERISA in 1974, there would be a settled body of law and guidance with respect to ESOPs. Not so, says Tarbell. The DOL has not issued any formal rules that address when ESOP fiduciaries may reasonably rely on a valuation provided by an independent appraisal expert.

Fair value disclosures: Mark Zyla (Zyla Valuation Advisors) discussed a document from the technical standards board of the International Valuation Standards Council, “Dealing With Valuation Uncertainty at Times of Market Unrest.” Zyla is chair of the IVSC Standards Review Board. He pointed out that the phrase “valuation uncertainty” does not refer to “risk” as appraisers typically think of the term, but rather it refers to the notion that the process of valuation now faces uncertainty in terms of market disruption, the availability of inputs, and the analyst’s choice of a valuation method or model. Zyla stresses the importance of disclosures in your valuations about your assumptions. For example, if the current environment has rendered certain data unusable, explain how you made your adjustments for that. If you change your valuation approach or method, explain the reasons why.

TCJA and COVID-19: Daniel R. Van Vleet (Griffing Group) covered the valuation-related characteristics of the Tax Cuts and Jobs Act, under which the value of most businesses increased in 2018, with C corps seeing a greater value increase than pass-through entities (PTEs), he noted. He also observed that the value benefit of PTE service business versus C corps has diminished and will decline further during the 2018-to-2025 TCJA sunset period. Also, the value benefit of PTE nonservice business versus C corps is still material but will decrease during the sunset period. Various state tax attributes and sunset provisions of the new tax law continue to be important considerations for PTE valuation.

Van Vleet co-wrote an article that provides a series of quantitative solutions that address the tax law changes, as well as the changing nature of the absolute and relative values of C corps and PTEs during the 2018-to-2025 TCJA sunset period. He also pointed to another article on valuing bonus depreciation. Both of these articles appeared in Business Valuation Review, the journal of the American Society of Appraisers (the journal’s archive is part of the BVResearch Pro platform).

As for COVID-19, Van Vleet pointed out that valuation methods should be revisited for valuation dates occurring after mid-February 2020, which is generally recognized as the point when the virus began to impact the capital markets. He offered alternative market-based methods to consider for valuation dates occurring after mid-February. (BVWire has an example of one of the alternatives he offered.)

Kudos to conference chairs Mitchell Chosak (FSA LLC), Jean Han (Clarion Consulting Associates LLC), and Andrew Park (Andrew M. Park, CPA, PC).

AICPA issues FAQs on valuation considerations related to the CARES Act

The latest in a series of very useful material from the AICPA is a document that includes FAQs that address questions about the impact of the CARES Act on business valuation. The document also includes a summary of four key CARES Act provisions: the Paycheck Protection Program (PPP), Emergency Economic Injury Grants (EEIGs), Economic Injury Disaster Loan (EIDL), and the Small Business Debt Relief Program. There are additional FAQs for these provisions. You can access the document if you click here.

“The COVID-19 pandemic has had an unprecedented impact on businesses, large and small, and has substantially impacted the value of many of those businesses,” says Eva Simpson, the AICPA’s director for valuation services. “The CARES Act is intended to help businesses weather this pandemic, but it also adds new considerations to business valuations. We developed these FAQs to provide broader clarity to guide valuation professionals through that process.”

The AICPA CARES Act Valuation Impact Task Force developed the FAQs. The lead authors are Nathan DiNatale, Ethan Hitchcock, Shaun Maloney, Thomas Reck, Maureen Rutecki, Josh Shilts, and Paul Wapner.

SOS: Pepperdine Private Capital Markets Project needs funding

Some appraisers feel that using public market data when estimating the cost of capital for a private company requires too many assumptions and adjustments to convert data from actively traded stocks into proxies for private-company valuation. An alternative analysis has been available based on an ongoing survey of expected rates of return of providers in the private capital market. The Private Capital Markets Project from Pepperdine University’s Graziadio Business School has provided this analysis regularly.

Bad news: Unfortunately, this project will be closed down—unless an external source of permanent funding can be found. Up to now, the project has been internally funded since 2007, but that cannot continue. If you know of an organization or individual that might be interested in funding this project on an ongoing basis, please contact Craig Everett, the project’s director at The project can be reopened at any time if it gets funded.

Digging into COVID-19 is the key to understanding its impact on BV

Healthcare valuation expert Mark Dietrich (Mark O. Dietrich CPA, PC) has done over 100 hours of research digging into the “science” of COVID-19—its origin, how it spreads, protection methods, testing, and so on. You might wonder what all of this has to do with the valuation and financial community. The answer is that, for the economy to recover, these matters must be understood. “Much of the economy is highly localized and the nightmare in the greater New York City area and the northeastern United States is not present in most of the rest of the country,” says Dietrich. “That will impact future cash flow of the smaller businesses most of us work with.”

Too many so-called experts: Tired of the endless finger-pointing, and both reporters and “experts” changing their stories as frequently as healthcare providers are supposed to change N95 masks, Dietrich went directly to the source data in various scientific journals and fact-based websites to figure out the real story. What the physician scientists think is going on with this disease is important because, as he says, “I simply don’t think that we can forecast anymore if we don’t know that.”

Dietrich’s research and analysis will be presented in an upcoming BVR Briefing document. He will also join a panel of other healthcare finance and valuation experts who will present a webinar, Healthcare Valuation Townhall: Four-Expert Panel on COVID-19 Impacts and Beyond, on Wednesday, June 24.

Sessions we’re eyeing at NACVA’s upcoming conference

We’re still going through the agenda for next week’s NACVA and the CTI’s 2020 Business Valuation and Financial Litigation Super Conference June 15-19 to choose from the 55 sessions that will be presented in a virtual format. We do know that we will definitely attend the full-day Current Update in Valuations series of sessions (June 17), which, as the title says, gives you current developments on a wide range of valuation topics. We also like the daily Around the Valuation World Morning Show sessions, which give highlights of the prior day’s sessions (because you simply can’t attend all of them). We’re also looking forward to the virtual model that will be used, as it is designed to provide many of the same benefits as being on-site. For those of you who can’t attend next week, the entire conference will be repeated the week of August 3-7 using the same virtual model and viewing options.

ASA announces election results

Congratulations to the members of the American Society of Appraisers (ASA) who were recently elected to leadership positions. International officers include Lorrie Beaumont, ASA (international president); David Crick, ASA (international vice president); and Richard A. Berkemeier, ASA, ARM (international secretary/treasurer). The ASA includes appraisers in several disciplines (business valuation, machinery and equipment, personal property, gems and jewelry, and real estate). The members of the Business Valuation Discipline Committee are:

  • Chair: Kenneth J. Pia Jr., ASA;
  • Vice Chair: Erin Hollis, ASA;
  • Treasurer: Ronald (Ron) L. Seigneur, ASA; and
  • Secretary: Arlene L. Ashcraft, ASA.

Members-at-large (three-year term) four open seats:

1. Jaclyn Burket Franks, ASA-BV;

2. PJ Patel, ASA;

3. Jonathan J. Tang, ASA-BV; and

4. Adam M. Smith, ASA, IA.

You can view the complete election results if you click here.

IVSC issues third and final paper on goodwill amortization vs. impairment

A new paper offers some suggestions for enhancing the goodwill impairment framework in order to improve the information the framework provides. This is the third and final in a series of excellent “perspective papers” from the International Valuation Standards Council (IVSC) that examine this issue. Accounting rule makers are considering changes to the current goodwill impairment model and possibly reverting back to one of amortization. The first IVSC paper concluded that goodwill is not a wasting asset, and the second paper explored the information content of the goodwill impairment test and highlighted reasons for its perceived limitations as a leading indicator. The paper is by Kevin Prall, business valuation technical director, in consultation with the IVSC Business Valuation Board. To download the paper, click here.

BV movers . . .

People: Pablo Alfaro, CFA, has joined Valuation Research Corp. (VRC) as a senior vice president in the Complex Securities Group in the firm’s New York City office; he specializes in valuing complex securities including options, warrants, convertible bonds, and preferred and common stock in privately held companies … Matthew Ruzic, CPA, CVA, FMVA, has been promoted to assurance services director at Sisterson & Co. LLP in Pittsburgh … Jerry Henderson, CPA, has been named as regional managing partner for National Advisory Services (NAS) at BKD CPAs & Advisors.

Firms: Alvarez & Marsal is expanding its Energy Advisory Services in Houston and has added Craig Jones, a 20-year energy industry veteran as a senior director … Westborough, Mass.-based AAFCPAs has acquired Scott A. Goffstein & Associates, a 14-person CPA firm in Waltham, Mass.; AAFCPAs now has 34 partners, a 240-person staff, and four locations in Massachusetts (Boston, Westborough, Wellesley, and Waltham) … New Philadelphia, Ohio-based Rea & Associates has acquired Jones Battles Group of Concord, Ohio; the three employees of Jones Battles will work out of Rea’s Mentor, Ohio, office … New York-based Berdon started a new Friday Kids Korner program via Zoom to briefly relieve parents from the challenges of keeping their children occupied throughout the workday; on the first Friday, over 75 employees and 130 children listened as partner John Fitzgerald, leader of the law firm services practice, read It’s Not Easy Being a Bunny.

Please send your professional and firm news to us at

CPE events

It’s generally recognized that mid-February was the point when the virus began to impact the capital markets. Therefore, when the valuation date occurs after mid-February, analysts may want to consider whether adjustments to the analysis are appropriate.

Perhaps no industry has been impacted more by COVID-19 than the healthcare industry. Four top healthcare valuation and finance experts share their insights.

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


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