BVWire Issue #194-2  | November 14, 2018


New tax law gets the spotlight at the AICPA FVS conference

BVWire attended the AICPA Forensic & Valuation Services Conference November 5-7 in Atlanta where there were a number of good sessions on the Tax Cuts and Jobs Act (TCJA), which impacts “everything” in valuation. Overall, speakers were surprised at the lack of guidance from the IRS as compared with prior tax law changes that were followed up with an abundance of guidance. One speaker called it an “eerie silence” as practitioners grapple with understanding the new law’s many provisions.

More due diligence: Speakers all agreed that it is now necessary to have more consultative conversations with management over its plans in light of the new law changes that overall will increase a company’s cash flow. But not all of this extra cash will go to the bottom line. The company may increase wages, accelerate capital expenditures, invest in R&D, and the like. Are these plans reflected in the projections you get from management? Will the company change its capital structure? For fair value purposes, do these plans translate into what market participants might do? These are just some of the questions to think about.

Here are a few more takeaways, and we’ll have more coverage here in the BVWire and in a future issue of Business Valuation Update:

  • The IRS is expected to follow a strict interpretation of the rule that eliminates the deduction for alimony payments that becomes effective December 31; that is, a marital settlement agreement must be approved by the court—not just agreed to by the parties—before that date for the alimony to be deductible;
  • There will likely be many disputes over what was “known or knowable” if you have a valuation date between the dates President Trump was elected and when the new tax law was passed; some will factor in a pre-enactment expectation into their valuations;
  • Although the tax effects of certain provisions extend more than five years out, you can still do a standard five-year DCF and use separate analysis modules (bolt-ons) for the cash flow effects of those provisions;
  • Consult with a tax attorney over how the new law applies to your subject company; for example, is the company a “service” business with respect to the new QBI deduction for pass-through entities?
  • There are a number of industries that get special tax breaks under the new law; and
  • Don’t lose sight of the notion that, overall, companies are more valuable under the new tax law.

Extra: Attendance at this year’s conference was about half of what it has been in recent years, partly due to the boycott by ABVs over their opposition to the AICPA’s decision to open up the ABV credential to non-CPAs.

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Expert’s inability to defend income analysis ‘is decidedly troubling,’ court says

Judges are alert to incongruities in valuations, as is clear from a recent condemnation case in which landowners hired three experts to calculate the compensation owed to them. The court excluded all experts under Daubert, and it had particularly harsh words for the valuation expert who was unable to support critical elements of the valuation. The income analysis lacked “any indicia of reliability” and the capitalization rate determination was “entirely suspect,” the court said.

A pipeline reached agreements with most landowners whose property was affected by the construction. However, the company litigated the compensation issue with a couple of property owners who operated a Christmas tree farm on some of the condemned land. They argued the construction altered the soil composition and growing conditions, making it impossible, going forward, to grow the “highly coveted Fraser fir tree.” Also, the construction forced the owners to prematurely harvest their Christmas trees, which resulted in a substantial loss.

The correct measure of damages was the difference between the property’s fair market value immediately before and after the taking, plus any incidental damages to the remaining property. Further, the court declined to exclude, as a matter of law, evidence of lost profits.

However, the court found the loss analysis the landowners’ BV expert offered was fatally flawed. Assuming no trees would ever grow on the property again, she valued the business under the asset, market, and income approaches. The first two analyses resulted in a loss to the landowners of $167,000 and $157,000, respectively. The income approach, which the expert said best captured the loss, increased the amount to $888,000.

Using the build-up method to determine the capitalization rate, the expert relied on Duff & Phelps (D&P) figures for her risk-free rate of return and equity risk premium. But she rejected D&P’s 5.9% small stock risk premium, using a 1% rate instead. The court noted the effect on the loss calculation was dramatic, where using a 5.9% rate would have reduced the expert’s proposed $888,000 loss to about $339,000, leaving all the other inputs the same. The expert failed to explain “why she used the ‘generally accepted’ Duff & Phelps numbers when they raised her valuation but ignored the guide’s suggested number when it lowered her valuation,” the court said. It also questioned other inputs. Even though experts in disciplines requiring the use of professional judgment are generally less likely to be excluded, they are not immune, the court cautioned. Professional judgment alone, without a demonstrated basis in facts or data, is insufficient to support opinion testimony,” the court said. It deemed the expert’s opinion inadmissible.

A digest of Rover Pipeline LLC v. 10.55 Acres, 2018 U.S. Dist. LEXIS 157188 (Sept. 14, 2018), and the court’s opinion will be available soon at BVLaw.

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FAQs posted for new cost of capital platform

A set of FAQs for BVR’s Cost of Capital Professional (CCP) has been added to the webpage that explains the new independent service for estimating the cost of equity. The Cost of Capital Professional is designed to move away from a complex “black box” of applied mathematics and bring more flexibility, professional judgment, and common sense back into the process. It supports the build-up method and CAPM calculations for any valuation date and is available on a free-trial basis using CRSP market return data up to Sept. 30, 2018. Later, the platform will be available with a subscription and will contain FY2018 data and beyond. New data will be added in March 2019. To sign up for the free trial, click here.

Free webinar: The authors of the platform, Michael Crain (Florida Atlantic University) and Ron Seigneur (Seigneur Gustafson LLP CPAs), will conduct a free webinar on November 20 to demo the new platform and discuss the thinking behind it.

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New paper finds scant evidence of a size effect

“The bottom line is that after addressing the facts and fictions of the size effect, we find neither strong empirical evidence nor robust theoretical support for a prominent size premium.” That’s the conclusion of a new paper by Ron Alquist and Ronen Israel (both with AQR Capital Management LLC) and Tobias J. Moskowitz (Yale University). The size effect is the phenomenon that “small” stocks (i.e., those with lower market capitalizations) on average outperform “large” stocks (i.e., those with higher market caps) over time, on average. Some of the facts and fictions they examine are:

  • Fact: The size effect has disappeared or weakened since its discovery;
  • Fiction: The size effect is robust to how you measure size;
  • Fact: The size effect mostly comes from microcap stocks;
  • Fiction: The size effect is likely more than just a liquidity effect; and
  • Fact: The size effect receives disproportionately more attention than other factors with similar or much stronger evidence.

Although this paper backs up other academic research, there is still confusion and debate about the size effect, the authors say. “We examine many claims about the size effect and aim to clarify some of the misunderstanding surrounding it by performing simple tests using publicly available data.”

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Alternative payment models in healthcare

A significant impact on the revenue picture for healthcare providers is coming from alternative payment models, such as value-based payments and bundled payments. An article in the ABA’s Health Lawyer, “Understanding Alternative Payment Models and Related Regulatory Issues,” reviews value-based contracting models between payers (government payers and commercial payers) and providers and discusses the relevant legal, regulatory, and valuation issues arising under the value-based contracting arrangements in both Medicare and the commercial market. The authors are Colin McDermott (VMG Health) and Lisa G. Han, Esq. (Jones Day).

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Latest study of private equity valuations

Private equity firms paid a median valuation multiple of 11.9x EBITDA for new investments during the first nine months of 2018, according to the “2018 Q3 Private Equity Valuations Report” from Murray Devine Valuation Advisors. The report breaks down private equity activity in 2018 between deal size and sector. While valuations remain near historic highs, multiples have come down slightly in all but the small market, the report says. Still, debt markets and considerable sums of dry powder available to private equity investors have allowed sponsors to pay a considerable premium over strategic acquirers as of the end of the third quarter.

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Global BV News

Serbia to translate iiBV courses

The International Institute of Business Valuers (iiBV) and the National Association of Valuers of Serbia (NAVS) signed a new licensing agreement for iiBV courses that will further promote the advancement of the business valuation profession in Eastern Europe. NAVS has begun translations of iiBV courses into Serbian, and Vesna Stefanovic, chairman of the NAVS Managerial Board, is being trained as the region’s first certified instructor. This is the second regional licensing agreement for the iiBV. The first agreement was made with the Saudi Authority for Accredited Valuers (TAQEEM) covering the Arabic-speaking countries. The iiBV is continuing discussions with other professional organizations in India, Brazil, and around the world to license their education courses and course materials in other languages.

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BV movers . . .

People: Dan Peters will be the managing partner of Valentiam, a new firm formed by valuation and transfer pricing experts; Carl Hoemke will helm valuation services, and the transfer pricing partners are Dan Peters, Clark Chandler, Sean Faulkner, David Talakoub, and Jared Walls; locations are Greater New York City, Philadelphia, Dallas, Los Angeles, Seattle, and South Florida Bethany Hearn (CliftonLarsonAllen) has been named the Business Valuation Volunteer of the Year by the AICPA, which also named David Duffus (Baker Tilly) as the Forensic and Litigation Services Volunteer of the Year … Eli Neal, CPA, CFF, ABV, of Cogence Group in Portland, Ore., was one of 26 high-achieving young CPAs recognized with the FVS Standing Ovation by the AICPA.

Firms: MWA CPA + Business Advisors, with offices in Plano, Texas, and Fort Worth, Texas, joined Minneapolis-based CliftonLarsonAllen on November 1 … Canfield, Ohio-based HBK CPAs & Consultants expands its presence in the Sarasota, Fla., region with the acquisition of the Michael W. Monahan CPA firm … Councilor Buchanan & Mitchell (CBM), with offices in Bethesda, Md., and Washington, D.C., acquired May Barnhard Investments (MBI) on November 1 … UHY Advisors and UHY LLP expanded in the Northeast by acquiring Flynn, Walker, Diggin CPA PC, a firm in Saratoga Springs, N.Y., effective November 8 … Smith Elliott Kearns & Co. will be moving its Hagerstown (Md.) office to larger space in the town to accommodate continued growth … E. Cohen and Co., CPAs (Rockville, Md.) has launched a wealth management firm, Impact Capital LLC Akron, Ohio-based Apple Growth Partners will consolidate approximately 35 employees from its Ohio offices in Independence and Beachwood into a new office, also located in Beachwood; the new space is larger and is designed to foster collaboration … Newport Beach, Calif.-based Squar Milner is expanding with two partners—Tom Goddard and Phil Wright—and some associates of Oliva Goddard & Wright (OGW); Squar Milner has seven offices throughout California with over 500 professionals and staff … Seattle-based Moss Adams has agreed to combine with Baker Peterson Franklin of Fresno, Calif., effective Jan. 1, 2019; 42 professionals, including seven partners and one director, will join Moss Adams, expanding the firm’s Fresno office to 71.

Please send your professional and firm news to us at

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CPE events

  • Portfolio Equations and Applications in Valuation (November 15), with Gary Schurman (Applied Business Economics). Part of BVR’s Special Series on Advanced Modeling and Methodologies.

    A discussion of valuing basket options, loan guarantees collateralized by a portfolio of risky assets, sizing and pricing risk tranches in structured finance, determining capital requirements for banks, risk assessment, and more.
  • FREE WEBINAR: Cost of Capital Professional: Transparent. Simple. Free. (November 20), with Dr. Michael Crain (Florida Atlantic University) and Ronald Seigneur (Seigneur Gustafson LLP).

    A first look at the newest resource for developing cost of equity capital estimates that will be available on a free-trial basis. This new cost-effective independent resource integrates data from multiple sources, including University of Chicago’s Center for Research in Security Prices (CRSP) data, Professor Aswath Damodaran’s data resources, and the U.S. Federal Reserve on Treasury bond yields.

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New and Trending
LinkedIn Discussions

Comparing BVR’s New Cost of Capital Professional With D&P’s Navigator

Is a Merger Causing a Culture Clash in Your Organization?

OPM Backsolve and Convertible Debt Financing

Your discussion could be featured here—BVR’s LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you’re not already a member, request to join:

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Holiday break

BVWire will be taking a break to enjoy the U.S. Thanksgiving holiday next week. We will resume publication on Wednesday, November 28. We wish you a very happy holiday!

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

AICPA FVS confab

Daubert KO


Size effect study

Healthcare payments

PE valuations

Global news

BV movers . . .

CPE events

LinkedIn discussions

Holiday break



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