The Kress gift tax case is brimming with valuation issues (see our prior coverage), but one aspect in particular has captured the valuation community’s attention. In valuing the minority shares of an S corp, experts for both the taxpayers and the government applied a C corp tax rate to the company’s earnings and then considered adjustments because of S corp status. The government’s expert applied an S corp premium to account for the tax advantages related to S corp status, the taxpayers’ expert ultimately did not make a discrete adjustment related to it. The court adopted his approach. Importantly, although the court did not accept the government expert’s analysis, the experts’ and the court’s attitude toward tax affecting provides an argument against longtime attempts by the Internal Revenue Service to eliminate tax affecting of pass-through entities.

The court’s opinion has left it unclear which S corp model the government’s expert used, but there have been hints that he used the S corp premium based on the S corporation equity adjustment multiple (SEAM) formula. We now know more.

Modified SEAM used: According to Daniel R. Van Vleet (The Griffing Group), the S corp adjustment the government’s expert used was a modified form of the SEAM formula. Van Vleet developed the formula in 2002 as part of the Van Vleet model. “In the [government expert’s] analysis, the SEAM formula was modified to reflect the possibility that the S corp structure of the company would terminate in 10 to 15 years after the valuation dates,” he says. “Ordinarily, the SEAM reflects the concept that the shareholders will benefit from the S corp structure in perpetuity.”

Van Vleet provides more details on the valuation experts’ S corp tax-affecting analyses in an article soon to appear in the June issue of Business Valuation Update. Certain details of the experts’ analyses are from a source with knowledge of the facts. Van Vleet does not typically comment on cases, but he feels that some commentary on the Kress case has been questionable, particularly with regard to the valuation treatment of S corp equity. In the article, he also urges readers to be “somewhat cautious when interpreting the published decisions of any court regarding valuation matters. That is certainly the case with Kress.”

ASA plays to a packed house at its fair value event in New York City

An excellent program was presented to an eager crowd at the American Society of Appraisers (ASA) Fair Value Conference in New York City April 30. Here are some interesting takeaways:

• ’There’s a substantial disconnect in thinking about the size effect between practitioners and academics, so experts should take a fresh look at this and not just plug in a size premium by rote;

• One hundred and three countries have now adopted IVS global valuation standards from the IVSC, which is also working on much-needed valuation standards for financial instruments;

• The ASA is upping its collaboration with international groups, such as RICS, Korea appraisers, and the iiBV;

• When valuing debt, consider the quality of collateral when estimating yield, especially for early-stage money-losing firms;

• Funds are using third-party valuers more, and some stakeholders are pushing for it to be a requirement;

• The Big Four have trained their staffs but stopped short of credentialing them with the CEIV until the quality control and review process are ironed out;

• Jaws dropped in the audience when told that “ISQM1” will be a huge regulatory sea change that will impact everyone right down the line, including valuation experts—but virtually no one in the audience had heard of it; and

• Recent proposed inventory valuation guidance from the AICPA is not “new” but rather an “enhanced view” of all existing guidance pulled into one place.

Johnnie White, the ASA’s new CEO, was on hand to greet the enthusiastic audience, which included practitioners from all across the U.S. and at least five countries.

Congratulations to conference chair Bill Johnston (Empire Valuation) for an excellent event. We’ll have more coverage in future BVWires and in Business Valuation Update.

Private-company selling price/EBITDA median is 4.4x, per DealStats

The median selling price/EBITDA multiple across all industry sectors is 4.4x, according to the 2Q 2019 DealStats Value Index (DVI). As the graph below shows, EBITDA multiples are highest for the information sector (11.1x) and the mining, quarrying, and oil and gas extraction sector (8.4x). Meanwhile, the lowest EBITDA multiples are in the accommodation and food services (2.6x) and the other services sectors (3.0x).

Selling Price/EBITDA by Sector

(Click here or on image to view full size)

The DealStats Value Index (DVI) summarizes valuation multiples and profit margins for private companies that were sold over the past several quarters. The DVI is a quarterly newsletter and is complementary with a subscription to DealStats.

The American Institute of CPAs has issued a white paper that explains the new Certified in the Valuation of Financial Instruments (CVFI) credential. The newly launched credential is not designed exclusively for CPAs but for any valuation professional who performs fair value measurements of financial instruments for financial reporting purposes. To obtain the credential, qualified candidates must meet education requirements covering the CVFI Body of Knowledge, an exam based on the Financial Instruments Performance Framework and the Body of Knowledge, and more than 3,000 hours of experience related to fair value estimates for financial instruments in the five years preceding the application.

Webcast this week of the National Divorce Conference

Couldn’t make it to Vegas for this week’s AAML/BVR National Divorce Conference May 8-10? No problem—it is being webcast starting tomorrow, Thursday May 9 at 8:10 a.m. (PT). Earn up to 14.5 CPE/CLE credits from the comfort of your home or office. This is the only event of its kind, and it brings together the leading matrimonial attorneys and financial and valuation experts. Check out the conference agenda and join us online!

Early bird ends soon for ASA's 2019
BV Conference

Early bird pricing is in effect through May 15 for the ASA 2019 Advanced Business Valuation Conference in New York City on August 25-27. You can also register for live streaming if you can’t attend in person. In addition to the regular sessions, there are some preconference education courses August 22-25, such as a four-day BV201 (Introduction to Business Valuation, Market Approach) and BV203 (Introduction to Business Valuation, Asset Approach, Discounts and Premiums) and AR201 (Appraisal Review and Management Overview). BVR is proud to be a sponsor of this event—one of the must-attends of the year.

Scope issue re: exposure draft on nonfinancial liabilities

A large number of comments were received on IVS 220 Non-Financial Liabilities, a draft standard the Business Valuation Board of the International Valuation Standards Council (IVSC) developed. The most common theme in the comments centered around what is included in the scope of the standard, according to Andreas Ohl, the board’s chair. “As a board, we had spent a fair amount of time prior to drafting the exposure draft looking at the issue of scope, and it seems we may need to do a little bit more work to get it clear,” Ohl says in an interview. “We will do that over the next few weeks, and our goal is to publish the final standard by the end of June. It is possible that the end result will be that there are a few things that are scoped out that we will deal with in separate projects starting over the summer.” Nonfinancial liabilities include such items as deferred revenue, warranties, environmental liabilities, asset retirement obligations, certain contingent consideration obligations, loyalty programs, certain litigation reserves and contingencies, and certain indemnifications and guarantees.

New IACVS chapter for Singapore and Cambodia

The Association of Asian Chartered Certified Valuation Specialists (AACVS) is the new Singapore and Cambodia chapter of the International Association of Certified Valuation Specialists (IACVS). The chapter leaders are A/Prof. Wilson Lim and A/Prof. Don Prasad, both of whom have been involved with business valuation for many years and see the need for valuation professionals to be represented in the IACVS global association/network. IACVS is a not-for-profit organization dedicated to the education and excellence of the global business valuation profession, and it offers the International Certified Valuation Specialist (ICVS) credential. You can find more information, including the ICVS training schedule, if you click here.

BV movers...

People: Monica H. Kaden, ASA, ABV, CHFP, has joined Sobel Valuations LLC as a director of business valuations; she has been performing business valuations and litigation support for more than 20 years; Sobel Valuations LLC is a wholly-owned subsidiary of SobelCo (Livingston, N.J.) … Bruce Zicari has been named the new CEO of The Bonadio Group (Rochester, N.Y.) as of May 1, which is the culmination of a CEO succession plan that was announced three years ago; Thomas Bonadio, the firm’s founder, had been CEO since 1978, and he will serve as a senior consultant … Julie Teigland was appointed the new leader for the Europe, Middle East, India, and Africa (EMEIA) geographic area of EY, effective July 1; she is the first woman to lead this area.

Firms: Accounting Today has named Los Angeles-based NKFSB the No. 1 fastest-growing firm; among other services, it supports insolvency and litigation matters including developing damage calculations and lost profits … Kingston Smith LLP, an award-winning top-20 U.K. accounting and business advisory firm, has joined Moore Stephens International, a global accounting and advisory network … Chicago-based BDO USA LLP has acquired TAXPE LLC, a firm focused on improving income tax reporting processes for large corporate tax departments … McGuire Sponsel of Indianapolis, a specialty tax and consulting firm, announced a merger with Ernst & Morris of Marietta, Ga.; both firms specialize in cost segregation, a process of reclassifying assets to maximize personal property and optimize depreciation deductions that results in substantial cash flow benefits.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

• AAML/BVR National Divorce Conference (May 9-10). A two-day live webcast that will feature presentations from leading matrimonial attorneys, financial, and valuation experts covering important valuation topics related to marital dissolution. Up to 14.5 CPE/CLE credits available. See conference agenda for session and speaker information.
  
  

• Valuation of Technology Companies: A Fair Value Update (May 16), with Antonella Puca (BlueVal Group LLC), Andreas Dal Santo (BlueVal Group LLC), and Adam Kindreich (BlueVal Group LLC). This is part of BVR’s Special Series on Fair Value.
  
  Get an update on the guidance to fair value measurement under ASC 820 as applicable to the valuation of software companies, based on the guidance in the AICPA Guide on the Valuation of Portfolio Investments of Venture Capital and Private Equity Funds and Other Investment Companies and Other Best Practices.