BVWire Issue #170-2 | November 9, 2016

Next stop in Sec. 2704 battle: Washington, D.C.

Now that the November 2 comment deadline has passed, all eyes will be on the public hearing scheduled for December 1 at the IRS. Witnesses will urge the Treasury to withdraw or substantially revise the controversial IRC Section 2704 proposed regulations designed to rein in estate valuation discounts for family-owned entities.

Final tally: The Treasury website shows a total of 9,802 comments received from individual taxpayers, family businesses, attorneys, wealth planners, and, of course, valuation practitioners and valuation professional organizations (VPOs). The VPOs have a number of individuals scheduled to testify.

The American Society of Appraisers (ASA) filed written comments (available here) along with the American Society of Farm Managers and Rural Appraisers (ASFMRA). Testifying at the hearing on behalf of for the ASA will be William Frazier (Stout Risius Ross Inc.).

The National Association of Certified Valuators and Analysts (NACVA) also filed a comment letter (available here) and will have the following individuals testify on its behalf: Peter Agrapides (Western Valuation Advisors), Robert J. Grossman (Grossman Yanak & Ford LLP), Mark Hanson (Schenck SC), and Robert M. Weinstock (Strategic Valuation Group).

Testifying on behalf of the AICPA will be Justin P. Ransome (Ernst & Young LLP) and Michelle F. Gallagher (Gallagher, Flintoff & Klein PLC).

Of course, BVWire will be there to give you on-the-spot coverage.

Extra: BVR has a new special report, Proposed IRC Section 2704: Potential Impacts on Estate and Gift Valuations. This report includes emailed updates covering the Dec. 1 public hearing and any other developments on the proposed regulations as they unfold.

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Practice tips from victorious ESOP valuation expert

Jeffrey M. Risius (Stout Risius Ross Inc.) was the defense expert in the recently profiled case Fish v. GreatBanc (prior coverage here). As such, he was asked to assess whether the ESOP’s financial advisor, Duff & Phelps, had followed due process and performed defensible valuation analyses for the 2003 transaction. The court credited Risius’ “credible and persuasive” testimony in concluding there was no overpayment.

Risius offers a few takeaways from working on this and similar cases:

  • In ESOP transactions, process and proper documentation are critical. Both sides of the transaction should retain independent financial and valuation advisors, as they did in Fish.
  • The standard for any review is “what was known or knowable as of the transaction date.” This means performing robust research of the economic, industry, and company conditions prevailing at that time.

The company in Fish was a leader in the scrapbooking industry. In 2003, the rise of social media and technological advances such as the iPhone were unforeseeable, but they ultimately led to the industry’s collapse. By analyzing valuation multiples related to comparable companies, Risius was able to show the company’s decline was not a function of the transaction but mirrored the industry’s decline.

  • A fair market value determination has to connect to how the market actually works. Any deviation from management’s projections begs for a solid explanation.

In Fish, the court discredited the opposing expert’s DCF analyses for basing projections on downside feasibility models and a statistical modeling technique (ARIMA) that, by all accounts, no financial expert used for valuation purposes.

  • Go “into the inner workings of company projections” and work with management to adjust for company-specific risk factors, as D&P did, rather than impose an arbitrary risk premium. Also, beware of double dipping: making downward adjustments to management’s projections and also applying a company-specific risk premium to the rate of return.
  • In an ESOP valuation, you cannot simply deduct the repurchase obligation from the value of the company, especially if the company is redeeming the ESOP participants’ shares.

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Use SEC comment letters to improve your fair value work

You can learn from the mistakes of others by reviewing the large amount of back-and-forth communications between the SEC and companies over fair value measurement issues, says Lisa Swanson (Blue Abaco Consulting). If the SEC is asking why a certain valuation method was used or why certain assumptions were made, you can bet that your clients, their auditors, or other valuation reviewers will ask you the same questions, she pointed out during a recent BVR webinar.

Fly on the wall: The SEC must review financial statements and disclosures of public firms at least once every three years. When it does, it may send a comment letter to the company if it has questions or sees problems. Companies have 10 days to respond, and all of these responses and comment letters are made public via the SEC website ( You can do a keyword search on specific issues, such as business combinations, impairment, intangibles, stock-based compensation, and the like. Examining the issues in the comment letters can help you make sure you have addressed these areas properly in your valuation report, advises Swanson.

It’s also a good way to do your due diligence when deciding to accept a new client for a fair value engagement. “One of the first things I do is check the prospective client’s SEC comment letters and responses,” she says. Is the company’s response clear and well thought-out? Or is it argumentative? What you find may make the difference in whether you take the engagement or turn it down.

Swanson reviewed a number of specific SEC comments on certain fair value issues during her webinar, Fair Value Valuation: Takeaways from SEC Comment Letters. You can access a recording of the webinar if you click here.

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A new DLOM method to consider

A member of the IRS staff of experts who review taxpayer-provided appraisals for estate and gift tax purposes tells BVWire of an article in the Journal of Entrepreneurial Finance, “Determining Lack of Marketability Discounts: Employing an Equity Collar” by Lester Barenbaum, Walter Schubert, and Kyle Garcia.

Better way: “The hypothetical framework developed by the authors more closely mirrors an investor’s financial realities in holding a non-marketable interest in a closely-held company than do the more widely accepted synthetic put option models,” says Harry Fuhrman, an IRS financial analyst who was formerly with Deloitte. The authors conclude that the DLOM resulting from the synthetic put option model is substantially overstated. Fuhrman, whose opinions are his personal views and not those of the IRS, says the article is well written with a well-laid-out analysis and deserves attention.

BVWire welcomes reader feedback on the article, which is available for free here.

DLOM survey: We are about to close our survey on the use of DLOM methods, so, if you haven’t taken it yet, please do so by clicking here. And make a note that, on December 8, BVR will present a special four-hour DLOM Day: An Advanced Workshop.

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Showcase your expertise to build BV business

An article in the CPA Practice Advisor points out ways to market and grow a business valuation practice. One method is to get exposure for your specific expertise in order to get referrals. This can involve presenting case studies or testimonials on your website or on social media. It can also mean contributing articles to industry publications to highlight your knowledge and expertise.

We can help: BVR is always looking for interesting articles from valuation experts on a wide range of topics. If you’re new to writing and just have an idea, we can work with you to develop it. If you’re interested, please contact the BVWire editor.

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White House urges ban on noncompete deals for rank and file

Noncompete agreements often are a factor in business valuations, including when valuing a workforce in place. The Obama administration is calling on U.S. states to ban noncompete agreements for many workers, saying it would lead to a more competitive labor market and faster wage growth, according to a report from Reuters. The ban would apply to low-wage workers and other employees who are not privy to trade secrets or other special circumstances. The White House says 20% of U.S. workers are bound by noncompete agreements, including 14% of those earning less than $40,000 per year.

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Two powerhouse conferences from NACVA wrap up 2016

Between now and year-end, NACVA will present two events: Expert Witness & Financial Forensics Conference in Chicago (November 14-16) and the Financial Consultants' Super Conference in Las Vegas (December 5-7).

Sessions of note: At the Chicago event, featured sessions include How Experts and Attorneys Drive Each Other Crazy—Helpful Hints to Avoid the Asylum (Michael G. Kaplan and Joel Goldman), Valuation of Distressed Businesses and Plan for Reorganization (Robert Reilly), Divorce Valuations—Who Owns the Personal Goodwill? (Alan Zipp), and many more. Jim Hitchner will present one of the keynotes at the Las Vegas event, and some of the featured sessions include Valuing Earn-Outs and Other Performance-Based Contracts (Chris Hamilton), Cost of Capital—Who Cares if You Have it “Right” Up Through the Alleged Size Premium? It’s the Next Step that Makes All the Difference (Peter Butler), and many more.

Can’t attend in person? That’s OK because both conferences will be streamed online!

Discount code: BVR is pleased to sponsor these events and offers special discount codes to use when you register. The codes are: 16BVR (a $50 discount for a one-day specialty conference registration) and 16BVR2 (a $100 discount for a two-day specialty conference registration). Both codes expire Dec. 7, 2016. Please jot down the codes for when you go to register, which you can do if you click here for the Chicago event or here for the Las Vegas event.

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Global BV News
New IVSC-WAVO pact to promote global valuation standards

The International Valuation Standards Council (IVSC) and The World Association of Valuation Organisations (WAVO) are strengthening ties by signing a memorandum of cooperation (MOC) to jointly promote the importance of adopting the international valuation standards. The MOC will be accomplished, in part, with WAVO encouraging its members to adopt standards that are compliant with the IVSC standards. In addition, WAVO will seek to educate, train, and promote the use of IVSC standards to its members and other valuation organizations. The MOC was signed last week during the 8th WAVO Congress in Daegu, Republic of Korea.

“The MOC is an important step towards establishing a long-term relationship between IVSC and WAVO,” says Sir David Tweedie, IVSC board chairman. “We will capitalize on the wealth of knowledge and wide network of both organizations in our common goal of establishing a globally accepted set of valuation standards.” Dr. Lim Lan Yuan, WAVO executive president, added: “There are various valuation standards in certain parts of the world such as those in the Asia Pacific region. We are happy to collaborate with IVSC, and will take the opportunity with this MOC to educate, train and develop the valuation profession to adopt a globally accepted set of standards.”

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Test your hospitality valuation IQ

How up-to-date are you on the lodging industry? Find out by taking this quick quiz. Then make a reservation to join experts Art Marshall and Scott Brush for this five-star session where they'll give a historical perspective on how the lodging industry has developed and an outlook on the current and future health of the industry, including the cycle of product supply. They will also discuss the relationship between the real estate component and an operating business entity and how it impacts the valuation analysis.

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Pratt’s Stats hall of famers for 2Q16

Pratt's Stats now lists over 25,000 private-company M&A transactions—thanks to business brokers and other intermediaries who contribute the data. Individuals who send in the most transactions are inducted into the Pratt’s Stats Hall of Fame. For the second quarter of 2016, they are:

  • Scott Perry, Gateway M&A (Carrollton, Texas);
  • Neil Gerritsen, Alberta Business Sales Inc. (Edmonton, Alberta, Canada); and
  • Ben Olsen, The DVS Group (Leawood, Kans.).

Our thanks to these individuals—and all the rest—who help BVR build Pratt’s Stats into the most reliable data source of its kind. We’d also like to point out that the database now includes secondary and tertiary SIC and NAICS codes, new dedicated purchase price allocation fields, and new search fields including sale region, whether a company was a franchise, and whether the purchase included real estate.

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BV movers . . .

People: Berdon’s New York office has added Michael Angerhauser as a principal Michael Crain, consultant and senior advisor to Miami-based Kaufman Rossin, has joined the faculty of Florida Atlantic University as the director of the recently established center for forensic accounting … Prairie Capital Advisors, a corporate advisory and investment banking firm based in Oakbrook Terrace, Ill., announced the promotions of Hillary Hughes and Shaun McGehee to directors … PwC’s Marc Panucci has been appointed deputy chief accountant in the SEC’s Office of the Chief Accountant International association LEA Global named Jim Sikich, CEO and managing partner of Naperville, Ill.-based Sikich, an “Accounting Industry Legend” … Christopher Turtell has been elected new partner at the Reading, Pa.-based Herbein + Co. Alex Walther, a senior manager in Baker Tilly Virchow Krause’s Houston office, received a “Standing Ovation Award” from AICPA.

Firms: New York-based EisnerAmper was named the “Most Innovative Advisory Firm” at the annual HFM Week’s U.S. Hedge Fund Services AwardsEquale & Cirone, of Bethel, Conn., has merged with Friedberg, Smith & Co. of Bridgeport; the firm will rebrand as Cirone Friedberg Sikich has made their third acquisition of 2016: Stanfield & Associates, a wealth management firm located in Downers Grove, Ill., specializing in individual and small-business accounting.

Please send your professional and firm news to us at

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Upcoming CPE events

Hospitality Valuation: Check In Time (November 10), with Scott Brush (Brush & Co.) and Art Marshall (BerryDunn).

Using Guideline Public Company Data for Private Company Valuation (November 17), with Linda Trugman (Trugman Valuation Associates Inc.) and Robert Schlegel (Houlihan Valuation Advisors).

MIPS and MACRA: What Healthcare Valuators Need to Know Now (November 29), with Joe Wolfe (Hall Render Killian Heath & Lyman). This is Part 7 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

Sell-Side Advisory Services: A Savvy Way to Excel in the ESOP Market (November 30), with Brian Bornino (GBQ Consulting) and Tracy Woolsey (Horizon Trust & Investment Management).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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

2704 milestone

ESOP tips

Fair value help

New DLOM idea

Build BV biz

Noncompete deals

NACVA events

Global BV news

Hospitality quiz

Pratt’s Stats HOF

BV movers

CPE events

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