BVR Logo June 16, 2021 | Issue #225-2

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

In Jackson case, Tax Court dismisses IRS expert’s revenue projections as ‘simply
not reasonable’

When Michael Jackson died, his image and likeness was besmirched, and yet, once competent executors took charge, they were able to make a lot of money for the estate in the immediate post-death years. The issue was to what extent this subsequent development could factor into the image-and-likeness valuation. In explaining his high valuation, the IRS’ expert offered a theory of “foreseeable opportunities” that the U.S. Tax Court found unpersuasive.

‘Reasonably foreseeable’: Michael Jackson died in 2009. The litigation in the U.S. Tax Court was over the fair market value of three contested assets at Jackson’s death, including the value of Jackson’s name and likeness. At trial, the estate established that, although Jackson was once an admired musician and superstar, at the time of death, his reputation was compromised in the wake of allegations of child sexual abuse and a criminal trial of which he was acquitted. He accumulated serious debt and was at risk of bankruptcy.

The estate’s image-and-likeness experts found this asset was worth about $3 million. In contrast, the IRS’ expert, also using a discounted cash flow analysis, valued this asset at over $161 million. The court said the expert took a “wildly different approach,” which, among other things, resulted in much higher revenue projections. Rather than using income Jackson had earned before his death from his image and likeness as a starting point, the IRS’ expert considered “foreseeable opportunities,” i.e., opportunities that the expert believed were reasonably expected at the time of death and would create revenue attributable to Jackson’s image and likeness. They included themed attractions and products, branded merchandise, a Cirque de Soleil show, a film, and a Broadway musical.

The court rejected the analysis “as fantasy.” Among its flaws was the inclusion of unforeseeable events. The valuation date, the court noted throughout its long opinion, was the time of Jackson’s death. “Foreseeability can’t be subject to hindsight,” the court said. However, a court may consider subsequent events “to the extent that they were reasonably foreseeable at the decedent’s death.” The court found here the opportunities the IRS’ expert designated as foreseeable “bear some considerable resemblance to deals the Estate, under its competent management, did do in the years after Jackson’s died.” Although the IRS expert “carefully said he didn’t rely on events after Jackson’s death in his valuation, he did look at them to assess the reasonableness of his projections,” the court noted.

In reviewing the claimed “foreseeable opportunities,” the court found four of the five revenue streams included in the IRS valuation were unforeseeable at the time of death. The court said the same problem “lurk[ed] everywhere in our analysis of the value of Jackson’s image and likeness—his poor reputation other than as an entertainer.” In the last 10 years of his life, Jackson received almost no revenue from his image and likeness “despite being one of the most well-known persons on Earth.” According to the court: “Any projection that finds a torrent of revenue, and not just a trickle, from such a man’s image and likeness—especially one who in the last two years of his life was so unpopular he did not even have a Q score—is simply not reasonable.” The IRS’ expert ignored “this rather severe limitation.”

The court assigned a value of approximately $4 million to this asset.

A digest of Estate of Michael J. Jackson v. Commissioner, T.C. Memo 2021-48 (May 3, 2021), as well as the court’s opinion are available at BVLaw.

A lot going on in fair value, per speakers at ASA conference

Some important developments in the area of fair value for financial reporting were covered at the 2021 ASA Fair Value Virtual Conference, held June 10. Conference chairs Bill Johnston (Empire Valuation Consultants) and Ray Rath (Globalview Advisors) put together a great full-day event, and here are some insights:

  • COVID-19-specific disclaimers, particularly surrounding the risk of projections, are starting to be removed as firms get a better handle on their outlook;
  • Lack of support and documentation for inputs and assumptions remain the most common deficiency in fair value work (it has improved, but it’s still a problem);
  • The SEC will get more under the hood in terms of fund valuations (e.g., new SEC Rule 2a-5 will trigger more scrutiny by fund boards on the valuation process, which may be met with pushback due to proprietary methodologies);
  • FASB will propose to bring back goodwill amortization (10-year straight line with some impairment testing) in a future exposure draft (the valuation community will have some strong comments about this);
  • Environmental, social, and governance (ESG) factors will have a direct impact on value—just how much remains to be seen—more ESG-related disclosures will be required; and
  • Artificial intelligence is increasingly being used to prepare valuations (especially in real estate) but is that really a valuation? (the topic is on the agenda at the International Valuation Standards Board).

A great deal more was discussed, and additional details will be in the August issue of Business Valuation Update.

Extra: Someone mentioned PAPM, but none of the panelists from the Big Four knew what it was. It stands for the popularity asset pricing model, which builds on CAPM. BVWire covered it last year—click here for more.

Please take a survey about company-
specific risk

BVWire is pleased to present a survey by The Appraisal Foundation’s Business Valuation Resources Panel’s Work Group on Company-Specific Risk Premia to understand how valuation practitioners address such premia within their valuations. While the Working Group’s focus is financial reporting, input from other practice areas is welcome and encouraged. Your input will help to prepare more formal guidance relating to the subjective area of cost of capital. All responses will be confidential. To take the survey, click here. Thank you in advance for participating!

Updated research on MRP and risk-free rates used globally

The average required return on equity used for the U.S. is 7.3%, according to “Market Risk Premium and Risk-Free Rate Used for 88 Countries in 2021,” the latest research from Pablo Fernandez, Sofia Bañuls, and Pablo Fernandez Acin. This paper contains the statistics of a May 2021 survey about the risk-free rate (RF) and the market risk premium (MRP). By June 3, 2021, 1,624 email responses were received (from more than 15,000 sent). In the paper, the authors make these observations:

  • Most previous surveys have been interested in the expected MRP, but this survey asks about the required MRP;
  • For European countries, many respondents use a risk-free rate higher than the yield of the 10-year government bonds; and
  • The coefficient of variation (standard deviation/average) of the risk-free rate is higher than the coefficient of variation of MRP for the euro countries.

Pablo Fernandez, a professor in the department of financial management at the University of Navarra—IESE Business School in Spain, has over 200 papers published on SSRN, many of them related to valuation. He currently ranks as No. 1 in all-time downloads.

Financial reporting watchdogs ‘too lenient,’
say investors

The investor community is pressing the SEC to overhaul its financial reporting infrastructure as well as the PCAOB and FASB (overseen by the SEC), saying the watchdogs “are too lenient towards businesses and the accounting and auditing industry, especially the Big Four firms, that serves the businesses at the expense of investors who provide the capital,” according to an article in Accounting and Compliance Alert. In a letter to SEC Chair Gary Gensler, 34 individuals and organizations urged the commission to make the three entities more investor-centric, pointing out that accounting firm partners or corporate finance executives have been well represented at the FASB and the PCAOB and partners of Big Four firms have dominated the top positions in SEC’s Office of Chief Accountant (OCA). Strong investor advocates have not been as well represented, which has been reflected in their work, especially in recent years, the letter says. A full-scale overhaul is already underway at the PCAOB with the SEC’s removal of its chairman a few weeks ago and a plan to replace the entire board.

Age- and gender-specific risk? A new paper says it exists

We’d like to be a fly on the wall the first time a valuation expert testifies that his or her company-specific risk factor was adjusted for the age and gender of the subject firm’s top managers. In defense of this position, the expert may point to a new paper, “Age, Gender, and Risk-Taking: Evidence From the S&P 1,500 Executives and Market-Based Measures of Firm Risk,” which appears in the new issue of the Journal of Business Finance and Accounting. The paper delves into the question of whether firms with older and female executives are less risky, a notion supported by anecdotal experience and prior literature (in psychology and experimental economics) on age- and gender-related behavioral differences. Using data from the S&P 1,500 firms, the authors find that “firms led by older CEOs and CFOs have less volatile stock returns and lower idiosyncratic risk.” As for gender, their conclusions are “more equivocal,” finding that female-led firms may reduce firm-specific risk tendencies … a little. We don’t envision age and gender being added to company-specific risk models as separate and distinct factors. Typecasting certain individuals when doing an assessment of management could present problems on a number of levels.

Two new resources from BVR

Just released! Two new timely publications from Business Valuation Resources:

  1. BVR Guide to Management Projections and BV—Analysis and Case Law. “Valuation professionals utilize projections in a variety of settings, yet there are no ‘bright-line’ rules practitioners can lean on to validate their projections,” writes contributing editor Josh Shilts (Shilts CPA LLP) in this new BVR resource. The guide is a collection of articles from BVR’s cache of “greatest hits” written by some of the top thought leaders in the profession that discuss a variety of elements, issues, and techniques practitioners should consider when utilizing management projections. Plus, the guide includes close to 100 digests of court decisions that involve projections and forecasts (the full court opinions are also available to buyers of the guide).

  2. Control Premiums: A Deep Dive Into the New Data on Invested Capital Premiums (a BVR Briefing). The thinking about control premiums now includes analyzing such concepts as invested capital premiums and equity-based premiums, transaction synergies and strategic values, marketability, and levels of control. This briefing discusses important concepts about the proper quantification and application of acquisition premiums and control premiums, including the benefits of using market-based invested capital premiums rather than market-based equity premiums in certain situations.
Note: You already have these two new resources in your BV library if you are a subscriber to the Digital Library or BVResearch Pro.

What we’re eyeing at next week’s
NACVA conference

The first of the national BV conferences—the National Association of Certified Valuators and Analysts (NACVA) 2021 Business Valuation and Financial Litigation Hybrid and Virtual Super Conference—is next week, June 21-25, in Park City, Utah. The entire agenda is packed with interesting sessions in multiple tracks, so it’s hard to choose, but here are a few that caught our eye:

  • A three-day track of sessions on best practices in business valuation including case studies and sample reports (Jim Alerding, Jim Hitchner, and Jim Ewart);
  • The Future of the Business Valuation Profession (Chris Mercer);
  • Empirical Research Regarding Discounts for Lack of Marketability (Marc Vianello);
  • Stark Law Modernization: The Healthcare Valuation Implications (Jessica Bailey-Wheaton and Todd Zigrang);
  • Fundamentals of Financial Forecasting (Michael Pakter);
  • Applying BV Review Standards to Damage Measurement Reporting (P. Dermot O’Neill);
  • How to Best Sell BVFLS Services With Zoom (Rod Burkert);
  • Valuing Goodwill in Professional Practices and the Use and Misuse of the Excess Earnings Method (Ron Seigneur and John Tatlock);
  • Finally! Senior IRS Valuation Managers Answer Your Questions: Live (Ron Cerruti, Howard Lewis, and Dorothy Taylor); and
  • Two sessions of Hardball With Hitchner (Jim Hitchner).

Of course, there are many more sessions we can’t list here, so click here to check out the full agenda. See you there!

IVSC issues second paper on ESG

Earlier this year, the International Valuation Standards Council (IVSC) issued a Perspective Paper of business valuations and environmental, social, and governance (ESG) factors (see our coverage here). A second paper has now been issued that takes the topic further, exploring the impact of ESG on value creation and “how such a framework may be incorporated into the capital allocation process and bring much needed financial discipline to ESG investments,” the organization says. To download the new paper, click here.

Today! Three-day CBV Congress begins with BV

The Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO), will present a very special Congress to mark the great milestone of reaching 50 years of service as a CBV profession. The CBV Congress 2021 is a three-day event that starts today, June 16, and runs through June 18. The first day is devoted to business valuation, and there will be a keynote by Dr. Aswath Damodaran (New York University Stern School of Business). The second day will examine the world of litigation, and the third is devoted to recent trends in M&A. You can check out the full agenda if you click here.

BV movers . . .

People: Sonia Desai, CPA, ABV, ASA, CBV, has been named a partner at Houston-based Weaver; she is in the firm’s forensics and litigation services and valuation services practice groups and is in the Austin, Texas, office; she has over 16 years of experience in valuation, litigation, investigations, and audit, including serving as an expert witness … The American Society of Appraisers (ASA) College of Fellows (FASA) is the highest honor the ASA bestows; the newest members in the business valuation discipline are: J. Mark Penny, FASA (ARM, BV); William Quackenbush, FASA (BV); Raymond D. Rath, FASA (ARM, BV); and Gary R. Trugman, FASA (BV).

Firms: San Ramon, Calif.-based Armanino LLP is expanding into the Midwest by acquiring St. Louis-based Brown Smith Wallace; the deal will become effective on August 1 … Cleveland-based CBIZ has acquired Schramm Health Partners LLC (dba Optumas) of Scottsdale, Ariz.; the 33-employee firm specializes in providing actuarial services to state government healthcare agencies to assist in the administration of Medicaid programs.

Preview of the July 2021 issue of Business Valuation Update

Here’s what you’ll see:

  • Ghaidarov Offers a New Framework for DLOM” (BVR Editor). Analyst Stillian Ghaidarov, who has published papers related to option price models for estimating a discount for lack of marketability (DLOM), presents a new concept for illiquidity discounts.
  • Valuers and Attorneys Advise How to Stay Out of Daubert Trouble” (BVR Editor). Several sessions at the inaugural BVR National Economic Damages Virtual Conference discussed how valuation experts can avoid the nightmare of having their testimony excluded in court, much of which applies to any type of case, not just damages, of course.
  • Alerding Gives an Update on BV Standards and Guidance” (BVR Editor). What have you missed in terms of new and updated standards and guidance? Find out from veteran valuation expert Jim Alerding (Alerding Consulting), who has been involved in the development of some of the key standards.

The issue also includes:

  • A full section of “BV News and Trends/Global BV News and Trends.”
  • Regular features: “Ask the Experts” and “Tip of the Month.”
  • BV data spotlight: “DealStats MVIC/EBITDA Trends,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the July 2021 issue of Business Valuation Update.

CPE events

A former IRS manager will address key rules for federal expert witnesses, valuation issues with the IRS, identify key recent BV federal cases, and reveal what to expect in 2022.

Learn the pros and cons of the methods for estimating a discount for lack of marketability (DLOM) and how to apply and support them. Part 2 will present a case study.

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


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