Family law attorneys and financial experts converged last week in Las Vegas for the first event co-sponsored by the American Academy of Matrimonial Lawyers (AAML) and Business Valuation Resources (BVR). The AAML has been doing this event for some time, but this is the first one with BVR involved. Attorneys and AAML members David Levy (Berger Schatz) and Barry Sziklay (Friedman LLP) welcomed the attendees (on-site and via live streaming). Attorneys along with valuation, forensics, wealth and other financial experts co-presented the sessions, which gave invaluable perspectives on the topics. Here are a few interesting takeaways from both inside the sessions and the networking events:

• For valuation dates right before the enactment of the TCJA, one way to reflect the impact (if you feel the new law was known or knowable) is in the discount rate, but this must be explained in the report’s narrative;

• The TCJA provision that eliminates the alimony deduction does not sunset—and it’s unlikely that it will be resurrected; the IRS was spending way too much time matching up the deductions to the corresponding income;

• Cryptocurrency is easy to overlook, so you should specifically ask about it during the discovery process for a divorce case;

• Calculation engagements are a “dangerous and treacherous” area, but everyone seemed to agree that they have their place (except in court);

• An expert should advocate for his or her opinion, whereas the attorney advocates for the client’s case;

• If a valuation analyst chooses an equity risk premium of greater than 7% or lower than 4%, call that expert out because someone may be trying to “rig” the valuation;

• Many attorneys underestimate the importance of going through an in-depth examination of an expert’s qualifications in court;

• It’s unclear whether federal law preempts state family law in terms of copyright, and different states have different approaches, so know your case law;

• Valuing intellectual property is difficult and potentially expensive—and there’s a dearth of case law on how to value it; and

• The forensics expert searching for the assets of Stephen Paddock, the Mandalay Bay shooter, says the incident is too fresh for his notoriety to enhance the value of his assets; so far the expert has found $1.5 million for the victims’ families.

We’ll have more coverage in future BVWires and in Business Valuation Update. Congratulations to the conference committee and organizers for a fascinating event—the next divorce conference will be in 2020 and then every two years after that.

Appreciation analysis reveals owner's substantial contribution to company's success

Appreciation of separate property is a knotty issue whose analysis can be challenging for attorneys and valuators, but a recent Tennessee appeals court decision helps practitioners understand the framework a court may use to decide whether the nonowner spouse has a claim to the increase in value.

Successful liquor business: During the marriage, the husband and his two brothers each owned a one-third interest in a liquor distributorship that their father had started. When the brothers acquired their interests, the business was operating at a loss. But, during the marriage, the company grew into one of the state’s largest wine and spirits distributors. In 2012, the company sold itself for over $10 million. Each brother received nearly $3.7 million for his shares. While working at the company, the husband was operations manager and vice president.

The trial court had to determine whether any part of the proceeds to the husband was a marital asset. The court first classified the husband’s interest as separate property and set the starting value at $75,000. Next, the court found any appreciation in the value of the separate property was marital property if “each party substantially contributed to [the separate property’s] preservation and appreciation.” The parties stipulated that the wife’s efforts as homemaker represented a substantial contribution to the appreciation and preservation of the asset. At issue was whether the husband’s efforts similarly qualified.

The husband tried to downplay the role he played at the company, arguing he had delegated much of his role as operations manager and was not particularly instrumental in the sale of the company. He said the negotiations surrounding the sale were “more of a collective group of the three of us deciding what price do we want to sell it.” The evidence contradicted this portrayal, the court found. It noted the husband at all times took an active role in running the company. As a member of the executive management team, he was involved in important financial decisions on cutting expenses, raising prices, and expanding the brands the company carried. Testimony from the husband’s brother showed the husband handled the negotiations on behalf of the company when it looked to sell itself. Consequently, the trial court found that the increase in value, minus the $75,000 (which was the husband’s separate property), was marital property subject to equitable division.

The Tennessee Court of Appeals affirmed, noting the trial court devoted over seven pages of findings to the business, examining in detail whether the parties both “substantially contributed” to the husband’s separate property, as required by statute.

Twists and turns: Several points stand out and show the complexity of the analysis. For example, neither court expressly referred to the active/passive framework, although the trial court mentioned the husband’s active role. Also, it was undisputed that the wife’s efforts as homemaker represented a substantial contribution to the business. The parties’ stipulation created the odd situation in which the husband had to prove that his efforts did not qualify as such. This was difficult given his brother’s testimony as to the successful sale and the husband’s own testimony that he and his brothers ran the company and all worked hard to build on what their father had achieved.

A digest of Lucchesi v. Lucchesi, 2019 Tenn. App. LEXIS 27; 2019 WL 325493 (Jan. 23, 2019), and the court’s decision will be available soon at BVLaw.

Study launched on reasonable comp valuation practices

RCReports is currently conducting a study to find out the challenges, needs, and current practice of business valuators when determining and defending reasonable compensation, Paul Hamann, the firm’s founder and president, tells BVWire. The study will examine the amount of time business valuators currently spend on determining reasonable compensation, the processes and technology they employ, and how defensible their determinations are to legal challenges. Please participate in this study by taking just 10 minutes to complete a survey at rcreports.typeform.com/to/EMpxsM. All participants will receive a copy of the published report in July 2019.

RCReports is a cloud-based software application designed to quickly calculate accurate and defensible reasonable compensation for closely held business owners. Its wage database covers hundreds of industries and thousands of job descriptions and provides users with robust and independent data on which to base a client’s reasonable compensation.

The PCAOB continues to find “frequent deficiencies in auditing unobservable inputs used to measure the fair value of certain financial instruments,” according to a staff preview of 2018 inspection observations. Common audit deficiencies include instances where:

• Auditors did not obtain an understanding of the specific methods and assumptions underlying fair value measurements obtained from pricing services and used in the auditors’ testing;

• Auditors did not test the accuracy and/or completeness of company data used to determine the fair value; and

• Auditors, when developing an independent estimate, did not appropriately corroborate the fair value measurement the company determined because the auditor used the same pricing source the company used.

Ongoing deficiencies are also being found in other areas, such as business combinations where the auditors did not evaluate the reasonableness of certain significant assumptions underlying forecasts that management used in determining the fair value of assets acquired. The PCAOB urges the use of more professional skepticism in developing these estimates.

NYSSCPA to webcast BV conference May 20

If you can’t make it to New York City, you can tune in and listen to a number of interesting topics at this year’s Business Valuation Conference on May 20 sponsored by the New York State Society of CPAs. The topics include cost of capital, cryptocurrency, damages methods, use of projections, contingent consideration, scaling the business model for your practice, and a look back at 40 years of the business valuation profession.

Efforts are underway to organize BV in Japan

There are currently no valuation professional organizations (VPOs) in Japan focused on business valuation, reports Tatsumi Yamada, a member of the board of trustees of the International Valuation Standards Council (IVSC). There is a VPO for real estate appraisers, the Japan Association of Real Estate Appraisers (JAREA), but no professional body exists for business valuation practitioners. An “IVSC Roundtable” Initiative has the ultimate goal of supporting the creation of such a VPO for this area of professional practice. Nick Brooke, former trustee of the IVSC, will lead the Initiative,  and the group’s members consist of the Big Four accounting firms, JAREA, Japanese Institute of Certified Public Accountants (JICPA), Duff & Phelps, Royal Institute of Chartered Surveyors (RICS), and others.

Extra: The annual IVSC-WAVO Global Valuation Conference will be June 13-14 in Frankfurt, Germany. HypZert, one of Europe’s leading VPOs, will host.

Preview of the June 2019 issue of Business Valuation Update

Here’s what you’ll see:

• “Kress and S Corp Valuations: Be a Little Cautious” (Daniel R. Van Vleet). Details have emerged about the methodology the government’s valuation expert used in the Kress gift tax case. The case is important because both sides tax affected the earnings of the subject S corp, which is contrary to the position the IRS and the Tax Court have taken in the past.

• “Hot Topics Abound at ASA Fair Value Conference in New York City” (BVR Editor). The size premium, globalization, fund valuations, CEIV status, valuing debt, recent inventory guidance, and a new regulatory crackdown highlighted the recent American Society of Appraisers (ASA) Fair Value Conference, which turned out to be an outstanding event.

• “Yukon Court Awards Premium in Fair Value Determination—A Comment on Carlock v. ExxonMobil Canada Holdings ULC” (Chat Ortved and Khaled Abdel-Barr). This case should resonate with all valuation experts involved in M&A work. The court labeled the fairness opinion as “inadequate,” emphasizing that the financial advisor was entitled to a “success fee.” The court also pointed to the lack of disclosure of the analysis underlying the advisor’s conclusion.

• “A Conversation With the New Editor of Business Valuation Review™” (BVR Editor). The American Society of Appraisers (ASA) recently appointed Victor Jarosiewicz as the new editor for its business valuation journal. BVU had the pleasure of talking with him about his new role and his thoughts on the business valuation profession.

• “BVFLS Firms Disclose Their Best Management Practices” (BVR Editor). A focus on quality control, the improvement of work product output, as well as the support of staff are among the most successful new management practices or policies business valuation, forensic, and litigation support (BVFLS) firms used over the past year, according to a BVR survey.

• “RCReports Launches Study on Reasonable Compensation Valuation Practices” (Paul Hamann). A provider of compensation data, RCReports, is doing a study designed to find out the challenges, needs, and current practice of business valuators when determining and defending reasonable compensation.

The issue also includes:

• An expanded 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 “Cost of Capital Center.”
• BVLaw Case Update: The latest court cases that involve business valuation issues.

BV movers...

People: Kenneth Mathieu, CPA/CFF/ABV, has joined CRA International Inc. (CRAI) as a vice president in the firm’s forensic services practice; he provides forensic accounting, litigation consulting, and valuation services as well as the quantification of damages in M&A-related disputes … Kevin Wilson, CPA, CVA, ABV, and Sarah DeKreek, ASA, have joined Savannah, Ga.-based Hancock Askew & Co. as directors of business valuation as the firm grows its transaction and valuation practice, Hancock Askew Advisors; Wilson will work from the firm’s Miami office, and DeKreek will be located in the Atlanta office … Zachary M. Barber and Heath A. Hamby have joined Memphis-based Mercer Capital as financial analysts and will provide business valuation and financial consulting services to public and private companies and financial institutions across the nation … Christopher L. West has been elected CEO of Grand Junction, Colo.-based Dalby Wendland & Co. effective July 1.

Firms: Stayner Bates of Salt Lake City is joining Springfield, Mo.-based BKD on June 1; Stayner Bates specializes in assurance, tax, consulting, and business valuation services and has about 35 team members, including four partners who will work from its existing office in Salt Lake City … Houston-based Briggs & Veselka Co. has acquired Financial Valuation Services (FVS), a business valuation and financial consulting firm in Austin, Texas; FVS and its employees, including founder Edward Fowler, will relocate to the Briggs & Veselka Austin office … San Ramon, Calif.-based Armanino LLP has acquired Bolar Hirsch & Jennings LLP of Irvine, Calif., effective June 1; the transaction expands Armanino into Orange County and builds on the firm’s existing presence in Southern California … Charlotte, N.C.-based Dixon Hughes Goodman is expanding in Texas by establishing a downtown Dallas office in the Victory Park area.

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

Upcoming BVR training events

• 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.
  
  

• Cannabis and Hemp: Valuation and Industry Update (May 28), with Ronald Seigneur (Seigneur Gustafson LLP) and Ryan Cram (Seigneur Gustafson).
  
  Business valuations and damages assessments are in demand in the high-growth cannabis and hemp industry. This webinar will discuss the many “must know” considerations that impact engagements in this highly regulated industry.