COLI valuation case now on SCOTUS’ calendar

March 27 is the date the U.S. Supreme Court will hear arguments in the Connelly case, according to the court’s calendar. The question to be resolved is: How should corporate-owned life insurance (COLI) designed to fund the redemption of a deceased shareholder’s stock impact the fair market value of the subject company and the value of the decedent’s gross estate?

Circuit split: In Connelly v. United States, the IRS argued that the insurance proceeds should be included for purposes of valuing the corporation for estate tax purposes. On appeal, the U.S. Court of Appeals for the 8th Circuit sided with the IRS, creating a split with the 11th Circuit, which, in the 2004 Blount case, ruled that it should not be included. A complete analysis of the valuation issues in the case by Roger Grabowski (Kroll) is in the January issue of Business Valuation Update.

Expert’s critique of opposing valuation gets excluded

In a Tennessee damages case, the defense engaged a valuation expert to do two things: (1) critique the valuation report of the opposing side; and (2) offer his own estimate of damages. The expert was the target of a Daubert challenge with respect to both his critique and his estimate of damages.

Falls short: In his critique, the expert had a “fundamental misconception” of the nature of the subject business, the court found. For example, the business (in the cannabis industry) was a manufacturer, wholesaler, and online retailer but was “mischaracterized” by the expert as a small “brick-and-mortar, local, storefront retailer,” the court wrote. Also, the articles the expert cited to back up his opinions were “not scholarly” and didn’t cite any “legitimate data sources.” The court found that all the expert’s critiques were unreliable and inadmissible.

The court also noted that the critiques were “largely a matter of common sense” and an expert was not needed to examine the perceived inadequacies and oversights in the report, which could be done through cross-examination. While the expert’s critique was excluded, his own estimate of damages survived the Daubert challenge and was not excluded.

How BV firms are coping with remote workers

Early results from our latest “Two-Minute Practice Builder” survey reveal that the vast majority of BV firms are on a hybrid work arrangement, i.e., some staff in-office and some working remote. Firms see definite advantages to this setup—but also some definite disadvantages, especially for new hires who are remote. One firm has a good idea: use the “buddy” system, i.e., assign someone specific to the new hires who they can contact for general questions, concerns, and guidance.

Got an idea? Take two minutes to take a survey and share your experience with remote work at your firm—click here for the survey. It will close this Friday, March 22, and we’ll present the full results in next week’s issue. Thanks for participating!

Kroll examines the staffing industry

Here are a few insights on the North American staffing and human capital industry from Kroll:

• M&A activity slowed in 2023;

• Strategic buyers continue to dominate the sector;

• The IT staffing/consulting sector again claimed the top spot for most M&A activity in 2023; and

• Private equity exits are expected to rebound in 2024.

Valuation data are included in a report, which includes public-sector performance, comparables, and M&A transactions. Click here to download the report.

A lot of musing going on

Some thought leaders in the business valuation profession are shaking things up with their musings. We now have “Musings on Markets” (Damodaran), “Musings on Myths” (Jim Hitchner), and “Mercer’s Musings” (Chris Mercer). Can you have too many musings? We don’t think so. Musing is a good thing—a thought-provoking process that triggers a fresh look at some ideas, concepts, and notions that have been kicking around for a long time (maybe too long). Of course, there will not be universal agreement on some (or all) of them, but it encourages a healthy discussion, which is how a profession evolves.

New issue of ASA’s BV Review added to BVResearch Pro

Among many other resources, the BVResearch Pro platform contains the full archive of the Business Valuation Review going back to 1982. This is the business valuation journal of the American Society of Appraisers. The Spring 2023 issue has been added to the platform, and it includes these articles:

• “Midyear or End of Year Present Value Factors? Clues From Valuation in Discrete and Continuous Time” (Jay Abrams);

• “On Improving Estimation of Co-Movements in Stochastically Correlated Inputs in Monte Carlo Simulations” (James Herr and Jonathan Grubbs); and

• “Letter to the Editor” (Victor E. Jarosiewicz), which raises several concerns about the business valuation profession.

If you are not a subscriber to the BVResearch Pro platform, you can do a stand-alone subscription to the ASA’s BV Review if you click here.

Good deal of interest in new option-based DLOM calculator

We were happy to see the number of readers who were interested in trying out an online calculator for estimating a discount for lack of marketability (DLOM) we announced last issue. The calculator estimates a DLOM based on the analyst’s choice of comparable public companies. The methodology it uses is based on the Margrabe options approach, and Dr. Ashok Abbott (West Virgina University) is developing the calculator. If you would like to try it yourself, you can find a link to it at the end of a very short questionnaire that you can access if you click here. Thanks for your interest!

Registration open for CBV Connect June 20-21

CBV Connect 2024, hosted by the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, will be held at The Bonaventure in Montreal. Registration is now open, and you can click here for details (early-bird discount ends May 15). The conference will have three tracks: Core Business Valuation, Litigation, and Deals. Plus, you get online video access after the event to any sessions that CBV Institute had permission to record. There is also a livestream option for the Core BV track, and then you get access after the event to recordings of the other two tracks.

What’s in the April 2024 issue of Business Valuation Update

Here’s what you’ll see:

• “Perception Grows of Bias in U.S. Valuation Experts” (BVR Editor). During a recent webinar out of Canada, a speaker observed that litigants are bringing in valuation experts from the U.S. because of a “creeping tendency toward bias.” In the U.S., some judges are citing studies they say confirm their feelings about bias in some valuation experts.

• “Popular Real Estate DLOC Database Is Not Going Away” (BVR Editor). Valuation analysts who use the Partnership Profiles real estate database for estimating a discount for lack of control for family limited partnerships have expressed concern about the future of the database. This is a letter from Bruce Johnson with some important news about the database and some recommendations for adjusting methodology.

• “Key Points From Hitchner’s Annual BV Update” (BVR Editor). A recap of Jim Hitchner’s look at the major issues in BV over the past year, including long-term growth rates, the three-stage DCF, normalizing the risk-free rate, cost of capital, plagiarism, lack of liquidity on a 100% interest, and more.

• “What to Glean From the IRS Hiring Binge for BV Experts” (BVR Editor). The IRS needs to hire 31 business valuation experts, and the job announcement provides an interesting perspective as to the valuation issues that are on the agency’s radar.

• “Mercer Extols the Virtues of Writing as a Valuation Career Builder” (BVR Editor). Chris Mercer (Mercer Capital) says writing was an important activity that contributed to his success, and he urges practitioners to do the same. He lays out his 12-step plan for a first-time writer (and BVR adds a few comments).

• “The BV Profession’s ‘Silver Tsunami’ Is More Like a Trickle” (BVR Editor). We keep hearing about the “silver tsunami” in the business valuation profession, meaning a huge wave of retirements as veteran practitioners ride off into the sunset. But it’s not happening quite yet, according to data from BVR’s benchmarking survey.

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 April 2024 issue of Business Valuation Update.

BV movers . . .

People: Derek Kearns, CPA, a partner at Philadelphia-based Centri Business Consulting LLC, has been named the firm’s SEC Financial Reporting Practice Leader … David LaMonte, CFA, ABV, a vice president at Mercer Capital, has earned the right to use the Accredited in Business Valuation (ABV) designation; he specializes in the healthcare sector and provides valuations in support of financial reporting requirements, and consulting and other transaction advisory services.

Firms: Chicago-based Grant Thornton has accepted a significant investment from New York City-based New Mountain Capital; this is the largest private equity transaction in the profession to date … Cleveland-based CBIZ has acquired CompuData, based in Philadelphia, which specializes in offering technology solutions tailored for small and midsize organizations … Atlanta-based Hancock Askew & Co. LLP has merged its advisory practices, Hancock Askew Advisors and Clarity Capital Advisors, under the unified brand of Hancock Advisors … The Kaufman Rossin Group launched a new service line for businesses—Retirement and Executive Benefits—designed to help companies attract, retain, and reward employees of all organizational levels through qualified and nonqualified plans, as well as executive benefits offerings.

CPE events

Harvesting Knowledge: The Valuation of Wineries (A BVR Workshop), March 21, 10:00 a.m.-1:40 p.m. PT/1:00 p.m.-4:40 p.m. ET. Featuring: Joseph Orlando (Exit Strategies Group) and Bradford MacLane (MacLane & Co.). CPE credits: 4.0.

This presentation will dig into the anatomy of a transaction and how deals are priced and closed as well as the valuation of a winery for compliance purposes.

Major Court Decisions and Tax Sunset Provisions: New and Noteworthy Developments in the Valuation of S Corporations, March 26, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Daniel R. Van Vleet (The Griffing Group) and William P. McInerney. CPE credits: 2.0.