BVR Logo March 25, 2020 | Issue #210-4

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

Thoughts and advice on valuations amid the COVID-19 crisis

As the coronavirus pandemic continues its relentless march across the globe, we have reached out to members of the Business Valuation Update Editorial Advisory Board to begin to gather their thoughts on the impact of the crisis on valuations. We will assemble the full comments of the board into a free document and make that available soon. In the meantime, here are a few observations and pieces of advice we have received so far from experts the world over.

From the U.S.: Gary Trugman, Trugman Valuation (Plantation, Fla.): “Developing cost of capital in troubled times should be nothing new. We saw this in 2008 after the financial crisis and it should be dealt with in a similar fashion. What is critical to remember is that we value businesses based on what is known or knowable at the valuation date and we must consider what the investing public is thinking at the date of the valuation. While many tried to deal with risk-free rates and the ‘flight to safety’ back in 2008, that almost became the new normal. Thought must be given to the fact that the risks associated with the cash flow of the particular business that you are valuing is what the discount rate must be based on. If all you do is a mechanical computation to build up a discount rate, you are most likely going to be wrong. You need to use common sense and think about how the risk of receiving the cash flows is impacted at the date of the valuation.”

Ron Seigneur, managing partner, Seigneur Gustafson LLP (Lakewood, Colo.): “My sense in all of this is the ‘risk-free’ rate is not really risk free and we will see more emphasis on how to get our arms around the unsystematic risk associated with investments as this is where I think the extra risk we now have ahead of us should be captured. All that said, ask me again tomorrow and next week on all of this as it sure seems like we are in that sort of environment just now.”

Gilbert E. Matthews, chairman of the board and a senior managing director of Sutter Securities Inc. (San Francisco): “Since volatility is a factor in discounts for lack of marketability (DLOM), the extreme volatility of the market in recent weeks will materially increase DLOMs. In addition, I would argue that DLOMs should be adjusted upward because:

  • “The abnormal conditions in the market will necessarily cause buyers to be reluctant to invest in illiquid securities; and
  • “The restrictions being put in place to limit the spread of COVID-19 are limiting the ability of prospective buyers of restricted securities from conducting due diligence and even to meet with financial and legal advisors.

“There is no data to quantify these factors, but they should be considered, and valuators should use their professional judgment.”

Harold Martin, partner-in-charge of valuation and forensic services for Keiter (Richmond, Va.): In terms of what was known or knowable, “the issue actually goes back to late February and early March when the virus started to spread, and the stock market began to reflect the expected economic impact. For purposes of assessing the impact on a valuation completed on or after those dates, an appraiser would essentially do what they always should do for any valuation:

  • “Perform an analysis of the current and expected economic and industry conditions based on what was known or knowable as of the effective valuation date;
  • “Assess the impact of these factors, as well as the financial and operational characteristics of the subject company, on the subject company’s expected growth rate; and
  • “Assess the risk resulting from these factors on the company’s ability to achieve projected future cash flows and reflect this in the company-specific risk component of the discount rate.

“Further, to the extent that there is a lapse of time between the valuation date and the report date, the appraiser should consider reporting material developments as a subsequent event.”

From the UK: Andrew Strickland, former corporate partner at Scrutton Bland Chartered Accountants (UK), now a consultant to the firm: “In the UK, the short-term risk-free rate was reduced from 0.75% to 0.1% in short order. The impact on the cost of equity must be far more than that movement of 0.65%, and in the opposite direction from that indicated by CAPM. Times like these lead us to challenge the very fundamentals of our training. But challenge and enquiry are always positive attributes, making us into better valuers.”

From Australia: John-Henry Eversgerd, senior managing director of the valuation and litigation consulting practice in the Sydney office of FTI Consulting: “I’m expecting some significant asset impairments in a number of industries, particularly in Australia, since we have some every strict ‘continuous disclosure’ rules. Those rules require public company boards to announce almost immediately any impairments or other factors that would impact the share price significantly. It is a very low bar, which means boards have little choice but to impair.”

From Hong Kong: Edwina Tam, partner at Deloitte in Hong Kong: “For the development of cost of capital, given the market uncertainty, one needs to critically consider the impact of the current market uncertainties (COVID-19, U.S.-China trade war, etc.) on the business operations in developing the forecast. In determining the nature and extent of the impact on the business and valuation assumptions, the following potential issues may need to be considered:

  • “Store or facility closures;
  • “Loss of customers or customer traffic;
  • “The impact on distributors;
  • “Supply chain interruptions;
  • “Production delays or limitations;
  • “The impact on human capital;
  • “Regulatory changes; and
  • “The risk of loss on significant contracts.

“Implicitly, these uncertainties need to be reflected in the cash flows; however, a risk-appropriate discount rate also needs to be considered. There is no set approach to account for market uncertainties as the impact will be different for different businesses in different regions.”

We will bring you more thoughts and advice in future issues of BVWire and Business Valuation Update. For now, we leave you with these words from Andrew Strickland: “We are in a privileged position. We are members of a profession which has developed the techniques to value that which cannot readily be valued: fractional holdings in private companies are assets for which there is no ready market, yet we are prepared to ascribe values to them using our professional judgement and training within a discipline developed over many years. We all see further by standing on the shoulders of giants. We therefore have the skills to value businesses when the lubrication in the market runs dry.”

Extra: BVR will present a free webinar on April 7 with a panel of thought leaders to discuss how valuation experts should respond to today’s volatility and risk—and to answer your questions.

Tax Court spurns IRS’ gift tax valuation theory and methodology

In a gift tax dispute, the U.S. Tax Court recently found for the taxpayer when it rejected the unusual reasoning and methodology the Internal Revenue Service’s trial expert proposed to keep low the discounts applicable to the nonvoting membership units in two limited liability companies (LLCs).

Nonmarketable, noncontrolling interest: In late 2013, as part of his estate plan, the taxpayer transferred his 99.8% interest in an LLC called Rabbit to a grantor retained annuity trust (GRAT) and his 99.8% interest in another LLC, Angus, into an irrevocable trust. The GRAT transfer was structured to avoid gift tax liability. The taxpayer’s 99.8% interest in both LLCs represented class B nonvoting units. A management entity that belonged to the taxpayer’s daughter solely owned the remainder 0.2% interest. This interest represented class A voting units. Both LLCs held securities, investments, and promissory notes. Neither of the two entities’ class B membership units were ever offered for sale or sold since the transfers.

The taxpayer filed a Form 709 gift tax return with valuations an appraisal firm had performed. In January 2018, the Internal Revenue Service (IRS) issued a deficiency notice, finding the taxpayer had understated the FMV of both companies’ class B units.

The taxpayer petitioned the Tax Court for review. The court was presented with three valuations, including those attached to the tax returns, valuations from the petitioner’s trial expert, and valuations from the IRS’ trial expert.

To account for the noncontrolling, nonmarketable aspects of the class B units, the firm preparing the original appraisal applied discounts for lack of control (DLOC) of 13.4% and 12.7% and a 25% discount for lack of marketability (DLOM) for both companies. The taxpayer’s trial expert prepared his own valuations and applied slightly higher DLOCs.

The IRS’ expert proposed a theory of what the hypothetical buyer and hypothetical seller would do under the facts, which aimed to minimize the applicable discounts. Per the expert, a reasonable buyer of the 99.8% interest made up of class B units would try to maximize the buyer’s economic interest by acquiring the remainder 0.2% interest consisting of class A units. Doing so would consolidate control of the respective company and further increase the value of the class B units by decreasing the discount a hypothetical buyer would pursue. To buy the class A units, the hypothetical buyer would have to pay a “reasonable” premium, which the expert determined to be 5%. Basically, he subtracted the premium amount from the undiscounted net asset value of the LLCs. The result was a significantly higher valuation for each company than those the taxpayer’s appraisers offered.

The Tax Court, citing Estate of Giustina, in which the very court had cautioned against “imaginary scenarios as to who a purchaser might be,” found the IRS expert’s approach was not supported by facts, case law, or among peers. “We are looking at the value of class B units on the date of the gifts and not the value of the class B units on the basis of subsequent events that, while within the realm of possibilities, are not reasonably probable, nor the value of the class A units,” the Tax Court said.

For Rabbit, the court adopted the NAV to which the parties stipulated. For Angus, it adopted the NAV the original appraiser calculated.

A digest of Grieve v. Commissioner, T.C. Memo 2020-28 (March 2, 2020), and the court’s opinion, will be available soon at BVLaw.

COVID-19 updates and guidance from the valuation community

Valuation professional organizations, special interest groups, and valuation and accounting firms are issuing updates and guidance amid the coronavirus pandemic. Here’s some of what’s going on in that regard.

The ESOP Association is developing a joint committee article on the pandemic’s impact on valuation and the potential need for updated valuations for distributions.

The AICPA has formed a task force from its BV and forensic committees to examine the impact of COVID-19. At its first meeting, members discussed general valuation issues, liquidity risks, and the potential for an increase in fraud (such as virus-related charity donation fraud).

The ASA’s in-person classes and events are in the process of being rescheduled or converted to online access, according to the organization’s COVID-19 update web page, where you’ll also find news about ASA office closures, memberships, and credentialing.

The Big Four are issuing alerts on understanding the impacts of the coronavirus on business operations, such as this one from PwC.

Houlihan Lokey has a series of COVID-19 updates on various industries, including transportation and logistics, human capital management, valuation of structured products, marketing services, and facilities services.

Duff & Phelps has a COVID-19 Resource Center with links to a number of alerts and resources on how the coronavirus is impacting businesses globally.

We’ll keep you informed as these resources develop.

Extra: The Big Four as well as many other public accounting firms have temporarily shut their doors and implemented mandatory work-at-home policies.

New BVR briefing on impact of data breaches on firm value

During this time of crisis, hacking and data breaches are likely to increase. This is a material risk that needs to be considered and captured in a business appraisal. Do you put it into company-specific risk for the income approach? Adjust multiples for the market approach? Treat it as a contingent liability? Use option models? How have stock values been impacted due to public-company breaches? All this—and more—is discussed in a new BVR briefing: “Cybersecurity in Business Valuation: Addressing the Impact of Data Breaches on Value.” Appraiser Mike Blake (Brady Ware & Co.) and cybersecurity expert Charles Hoff (Data Security University) discuss some emerging ideas and techniques that are helping to pave the way to better understand and measure the impact of data security and cyber liability risks on the value of a business.

NACVA, NYSSCPA update BV event plans

Last week, we gave you a rundown of how the coronavirus was impacting BV events. Of course, things are rapidly changing, and here are the latest developments with respect to some of those events. Prospective attendees should keep in contact with event organizers for the latest information.

NACVA and the CTI’s 2020 Business Valuation and Financial Litigation Super Conference and training programs for the Certified Valuation Analyst® (CVA®) and Master Analyst in Financial Forensics® (MAFF®) scheduled the week of June 15-20, in Philadelphia, will not be cancelled. “Though our conference is first on deck for the profession from an information and resource perspective, and just over three months away to plan while in the midst of the global COVID-19 pandemic, we still stay the course,” informs Brien K. Jones, NACVA’s chief operations officer and executive vice president. “We are making plans to restructure these events. Attendees will be able to view conference sessions and training programs and earn NASBA compliant CPE.” The conference is being coordinated in affiliation with the Pennsylvania Institute of CPAs (PICPA).

The New York State Society of CPAs Business Valuation/Litigation Services Conference on May 18 in New York City will go on as planned but will be held via telecommunications, the event’s organizers tell BVWire. More details will be forthcoming.

A sad note …

The American Society of Appraisers announced that ASA International Past President Ronald M. Seaman, FASA, passed away at 88 years old on Tuesday, March 10. He was the founder/president of Southland Business Group (Tampa, Fla.). He was a business valuer for over 25 years, as well as a licensed real estate broker and qualified expert witness in federal, state, bankruptcy, and tax courts. Mr. Seaman also was a frequent presenter and author, who participated at profession events and published numerous articles and a publication, LEAPS and the DLOM, a book that takes a closer look at LEAPS—or publicly traded put options—as proxies for determining the discount for lack of marketability (DLOM) on valuing privately held stocks.

Global VPOs issue guidance and support to valuers during crisis

Valuation experts can look to the latest edition of the International Valuation Standards (under Section 103: “Reporting”) for guidance on valuations during this time of uncertainty, points out Nick Talbot, chief executive of the International Valuation Standards Council (IVSC) in a statement. He also urges valuers to check in with valuation professional organizations that are part of the IVSC’s member network for further guidance and support—you can find a list of VPO links here. The IVSC’s technical boards are also “convening virtually to monitor market developments in order, where required, to issue additional support and direction to valuers in the application of IVS within the current context,” he says, adding: “On behalf of the IVSC, I offer my thoughts and best wishes to all our stakeholders, their staff, members, clients, and families at this challenging time.”

BV movers . . .

People: Jon Klerowski, CPA, ABV, CFE, has joined Massachusetts firm DiCicco, Gulman & Co. LLP (DGC) as a principal and member of the firm’s Business Advisory practice; DGC has offices in Woburn and Boston … Brett Thompson has joined KPMG as a principal in the economic and valuation services practice.

Firms: H&CO, with three offices in South Florida, has added EFA CPAs & Business Advisors of Miami; EFA specializes in the construction industry … Allinial Global, an association of independent accounting and consulting firms, has three new members: Rodney & Associates (Christiansted, U.S. Virgin Islands); Khan Akber & Co. Chartered Accountants (Dhaka, Bangladesh); and TW Thompson & Co. (Bridgetown, Barbados).

Please send your professional and firm news to us at

CPE Events

  • Valuing Rural Healthcare Clinics Wednesday, March 25, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET
    Featuring: Jessica Bailey-Wheaton (Health Capital Consultants) and Todd Zigrang (Health Capital Consultants).

The number of transactions involving rural health clinics is expected to increase as demand for these services is propelled due to the aging baby-boom population. This webinar will review the competitive, reimbursement, regulatory, and technological environments in which these entities operate and discuss resulting valuation considerations and opportunities. This is part of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance.

A rundown of key valuation-related cases from the Delaware Chancery Court. Dr. Kennedy is a managing director in the Boston office of Duff & Phelps and has held various academic positions. He currently serves as adjunct professor for the graduate accounting program at Florida Atlantic University, where he teaches a course on fair value measurement.

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

LinkedIn Icon
Twitter IconYouTube Icon

Business Valuation Resources, LLC
111 SW Columbia Street, Suite 750, Portland, OR 97201
1-503-479-8200 |
© 2019. All rights reserved.