BVR Logo March 15, 2023 | Issue #246-3

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

Reilly examines key Tax Court case on reasonable comp

Nationally known valuation expert Robert Reilly (Willamette Management Associates) has done a comprehensive 17-page article on the Hood case—a Tax Court case with some important and practical guidance on determining reasonable compensation. While the case involved a federal tax matter, the guidance may also be helpful in other contexts, Reilly notes. The case involved a private company,Clary Hood Inc. (CHI), a C corporation in the construction industry. The outcome was “generally favorable” to the IRS, with the company paying back taxes and penalties for taking tax deductions for an unreasonable amount of compensation.

Multifactor approach: Of particular importance, Reilly points out, is the court’s thorough analysis of “the multifactor approach” to assessing the reasonableness of executive compensation. This approach takes into consideration certain factors, such as the employee’s qualifications; the nature, extent, and scope of the employee’s work; the size and complexities of the business; and others. The court’s assessment of these factors was largely in favor of the company, except that it noted that the company never declared or paid a cash dividend even though it was profitable, an indication that some of the compensation paid was a disguised dividend.

Other jurisdictions use an “independent investor” test, which essentially asks whether an inactive, independent investor in the company would receive a reasonable return taking into account the compensation that was actually paid.

Experts stumble: Also important in this case, Reilly says, is the guidance it gives to experts who testify in reasonable comp matters. That’s where things really went wrong for the company, which presented two experts to testify as to how CHI’s compensation compared to similar companies. The first expert was not that familiar with the contents of the report that he co-wrote with a colleague (who was not called to testify). The court said that “perhaps most egregious” was the comparison of CHI, a private regional specialty construction firm, to the multinational conglomerate Caterpillar Inc., with “little attempt” at adjusting for the obvious and stark differences between the two. Also, the report focused on the independent investor test, not the multifactor test, which was controlling in that jurisdiction.

The second expert for the company had not written the report to which he was testifying although he reviewed and agreed with it. The court found the report lacked necessary supporting calculations and relied on unsound assumptions. For example, the report used data from much larger companies and discounted the data by 20%, a rate not supported by any empirical data. The court gave this expert’s testimony little or no weight.

On the other hand, the expert for the IRS prevailed, providing “the most credible and complete source of data, analyses, and conclusions in the record regarding what similar companies might be willing to pay” in terms of compensation, the court said. The amounts were significantly higher than the estimates provided in the IRS deficiency notice but were much less than the amounts the company originally deducted on its returns. Plus, the court found the company liable for a substantial understatement accuracy-related penalty for one of the years at issue.

Reilly discusses a number of other important issues in the article, which is available if you click here. The case is Clary Hood, Inc. v. Comm’r, T.C. Memo. 2022-15.

Size effect is hibernating, per new paper

The size premium is more significantly related to monetary policy than to firm quality or to business cycle troughs, according to a new paper. The authors conclude that monetary tightening eliminates the size premium and it re-emerges when that policy is eased whether or not one controls for quality. “Furthermore, the quality minus junk (QMJ) factor is insignificant in explaining the size premium in the 21st century,” they write. The paper is “The Resurrected Size Effect Still Sleeps in the (Monetary) Winter,” by Marc William Simpson (University of Toledo) and Axel Grossmann (Georgia Southern University). The paper is a preprint and not yet peer reviewed. To download it, click here.

Tell job candidates a story

The search for BV talent has never been more challenging, so anything that can help land a good candidate is very welcome. In his latest newsletter, John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years, advises interviewers to tell candidates a story about the kind of workplace they have. This is better than simply saying “we’re very entrepreneurial here.” Give an example. Get stories from your employees and use those to illustrate. “Bob was interested in exit planning, so we encouraged him to start a new service line—and he’s now leading that area of our practice.” Have the candidate talk to Bob at some point—and to other employees who can give their personal stories about the workplace. This is much more effective than spouting a bunch of self-serving assertations, notes Borrowman. To read more of his observations, click here.

Low-cost alternative for public-company data

BVWire recently met with Derek Zweig, a valuation practitioner who saw the need for a more affordable source of financial data when doing a guideline public company analysis. In 2021, he founded Value Analytics, a firm that has developed a low-cost platform that provides preprocessed public-company financial statement and equity data, as well as customizable data analysis tools. BVR now offers the Value Analytics Excel Add-In, which provides direct access to financial, equity, and company profile data for all U.S. exchange-traded companies available in the Value Analytics database. The user gets unlimited access to data through the Excel plug-in, which also allows for integration into the user’s proprietary models. Price: $495 per year. For more information, including an Excel template and a template for the guideline public company section of a valuation report, click here.

BVPro adds new guide on valuing fitness clubs

The BVResearch Pro platform adds new content continually to its collection of over 16,000 articles, books, special reports, court case digests, webinar transcripts, and more. Just added is a 146-page guide, What It’s Worth: Valuing Fitness Centers, Health Clubs, and Gyms. The guide includes industry intelligence (from Vertical IQ), key benchmarks from DealStats, and insights and rules of thumb from the Business Reference Guide. Plus, it includes a detailed case study from Gary Trugman based on one of his actual engagements (that ended up in litigation).

If you are not a subscriber to BVPro, you can purchase the guide on an a la carte basis if you click here.

IVSC and WIPO collaborate on IP and intangibles

The International Valuation Standards Council (IVSC) together with the World Intellectual Property Organization (WIPO) has signed a memorandum of understanding (MoU) with the goal of strengthening cooperation and collaboration on issues related to the valuation of intellectual property and other intangible assets. The MoU will facilitate the exchange of information and expertise between the two organizations and will include collaboration in research and development activities, training and capacity building, and the promotion of best practices in the valuation of intellectual property and other intangible assets. “Intellectual property is a rapidly growing asset class, and this MoU will help ensure that valuation professionals have the knowledge and skills they need to provide accurate and reliable valuations of these assets,” said Nick Talbot, IVSC chief executive, in a statement.

Preview of the April issue of Business
Valuation Update

Here’s what you’ll see:

  • “New Damages Guide Examines Crypto Landscape” (BVR Editor). An understanding of the current issues and developments within the cryptocurrency industry, plus a look at some emerging case law, are crucial for damages experts in this area. This is an excerpt from the upcoming 7th edition of The Comprehensive Guide to Economic Damages.
  • “Feedback Wanted on New Model for Small Firm Risk” (BVR Editor). A variation of the multiattribute utility model (MUM) used along with Monte Carlo simulation forms the basis of a new model for estimating a company-specific risk premium (CSRP) for small, closely held businesses. Excel templates are available from the model’s developer, David Goodman (Jesson, Oslin & Associates), and feedback is welcome.
  • “A Look Back: Including ESG in Valuation Models” (BVR Editor). Quantifying the impact of environmental, social, and governance (ESG) factors and measuring their effects is not a new phenomenon. Thanks to the BVResearch Pro platform, here are two ways experts have done this before.

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and
  • BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the March 2023 issue of Business Valuation Update.

BV movers . . .

People: John-Henry Eversgerd, CFA, ASA, has launched a new boutique valuation firm, Hewlett & Murray, based in Sydney, Australia; the firm already has a team of six professionals specializing in business valuation, intellectual property valuation, economic loss quantification, and expert witness services; Eversgerd is the former co-leader of FTI Consulting’s Australian valuation practice.

Firms: The M&A Advisor’s 17th Annual Turnaround Awards named Valuation Research Corp. (VRC) the Valuation Firm of the Year … Pittsford, N.Y.-based The Bonadio Group has acquired forensic accounting firm Webber CPA of Rochester, N.Y. San Francisco-based BPM LLP has acquired the RiMo Consulting Group team of Las Vegas, a firm that provides risk advisory services to clients across the U.S. FORVIS (the new firm name for the merger of BKD and DHG) has opened an office in South Florida (Boca Raton), its third office in the state (the others are in Jacksonville and Tampa) … In Canada, Calgary-based MNP is adding Shawinigan, Québec -based Sylvain Béland CPA, a firm that provides a wide range of accounting and tax services to organizations throughout the Mauricie region of Québec … Los Angeles-based MGO expands its reach in Silicon Valley by adding Young Craig & Co. LLP of Mountain View, Calif. … St. Louis-based RubinBrown LLP is joining forces with Birmingham, Ala.-based KnowledgePath Consulting, a provider of technology consulting services.

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CPE events

This is a rebroadcast of a well-received webinar, and the speaker will be on hand live to answer all your questions. Participants are eligible to receive two CPE credits.

With real estate holding companies, the timing of an exit event is the single most important variable affecting value.

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) at:


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