Crypto theft not a ‘direct physical loss,’ court affirms

The 4th Circuit Court of Appeals has affirmed a district court’s ruling that a homeowner’s insurance policy does not cover the theft of cryptocurrency because it is not a “direct physical loss” as required by the policy. The individual held the crypto in a third-party hot storage digital wallet provided by APYHarvest and subsequently found that all of it (over $170,000) was stolen. He put in a claim on his homeowner’s policy (from Lemonade Insurance), which was denied because the insurer said the policy does not cover loss of cryptocurrency (although the insurer did pay out $500 under a different provision of the policy).

Definitions of cryptocurrencies supported the decision of the lower court to rule that there was no direct physical loss. For example, the IRS defines cryptocurrency as “virtual currency that uses cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a blockchain.” Based on these definitions, the court concluded that crypto has no physical or tangible existence, so there was no direct physical loss.

The case is Sedaghatpour v. Lemonade Ins. Co. (II), 2024 U.S. App. LEXIS 26924, and the opinion as well as a case digest and full opinion of the district court case are on the BVLaw platform.

Stout warns against using simple benchmarks for DLOM

During a recent free BVR webinar, Patrick Polomsky, who is with Stout, where he maintains the Stout Restricted Study database, explained the ins and outs of the study and noted that the typical method analysts have used to estimate a discount for lack of marketability (DLOM) is not as comprehensive as it should be, that is, simply looking at the averages of the Stout study and/or other studies to estimate the DLOM. This “benchmark average approach” can be problematic because it often relies too heavily on generalized data without considering the specific financial characteristics and market dynamics that impact discounts for lack of marketability, according to Polomsky. The courts have had a problem with simple benchmarks, he noted.

The Stout study emphasizes the importance of understanding the unique attributes of the subject company rather than just applying a broad benchmark. The Stout Calculator embodies this approach, which is driven by the financial characteristics of your subject company as well as the volatility of the market. The results can be used to augment your qualitative analysis (e.g., Mandelbaum factors), and the calculator’s output data can be used in an appendix to your valuation report.

Updated user’s guide: The 2024 edition of the “Stout Restricted Stock Study Companion Guide” is now available, and it reflects updated tables and graphs that contain new transactions. The study is the most widely used restricted stock transaction database for providing empirical support for a DLOM, according to BVR surveys.

To download the new guide, which is free to everyone, click here. To listen to the free one-hour webinar with Polomsky, click here.

What level of staff bonuses and raises are you considering?

That’s the topic of this month’s “Two-Minute Practice Builder” survey. Will your 2024 bonuses be more or less than last year? What do you estimate for your average staff salary increase for 2025? Please take just a few minutes to give us your observations—click here to take a fast survey. The survey deadline has been extended to November 29, and we’ll share the results in the December 4 issue. Thanks for participating!

CEIV MPF being revamped; CVFI alive and well

The Mandatory Performance Framework (MPF), which was issued in connection with the now-discontinued Certified in Entity and Intangible Valuations (CEIV) credential, will be revised to become the Valuation Performance Framework (VPF). A draft will be available for public exposure in 2025, according to Mark Smith (AICPA) and Austin Lee (BDO), who did a presentation at the recent AICPA & CIMA Forensics & Valuation Services Conference in Dallas.

The ASA, AICPA, and RICS co-developed the MPF as part of the CEIV credential, but the AICPA is doing the transition to the new VPF. The document defines the necessary work to provide supportable and auditable fair value measurements for financial reporting purposes. Better documentation helps make auditors more comfortable with valuation estimates, especially for intangibles, and it eases the concerns of the SEC and PCAOB. Big Four firms as well as the larger valuation firms adopted the MPF in their standards.

A question from the audience: Will valuation firms make the VPF mandatory? Probably, since the large firms are all at the table developing the VPF.

CVFI still around? There is also a Financial Instruments Performance Framework (FIPF), which was designed for the AICPA’s Certified in the Valuation of Financial Instruments (CVFI) credential. The FIPF is almost identical to the MPF and embodies the same principles. A question from the audience: Is the CVFI still active? Yes, the speakers said, and so is the FIPF.

Histograms added to DealStats’ visual output

A new feature has been added to the DealStats database to help visualize the distribution of data from a selected set of comparable companies. The “Insights” tab now includes histograms for all six valuation multiples--actually 12 if you include the six Pure Play MVIC multiples, another recent addition (see below).  The histograms are organized by ranges of values (bins) on the horizontal axis and counts on the vertical axis to show the frequency of the multiples. The newly added histograms will provide you with yet another way to visualize the data for your comparable company set, allowing you to gain additional insights into the transaction data as you determine a valuation multiple to apply to the subject company.

This new feature comes on the heels of the addition of Pure Play MVIC (PPMVIC) prices and multiples. The Pure Play MVIC price creates a secondary price that includes only the market value of the target’s fixed assets and total intangibles. The Pure Play MVIC multiples are the multiples calculated using the Pure Play MVIC price. The Pure Play MVIC price and PPMVIC multiples may be helpful if you have a group of comparable companies that include asset and stock sales or if you have a group of asset sale transactions where some comparables include inventory or accounts receivable and some do not. You no longer need to examine the individual transactions and adjust the selling price of your comps. This is also helpful after applying the multiples to determine what needs to be added back to reach an equity value.

If you have any questions about these new features, please contact BVR at dataquestions@bvresources.com, or review the DealStats FAQ page and companion guide.

NACVA sessions we’re eyeing at its December conference

The third of the big three business valuation conferences is the NACVA and the Consultants’ Training Institute’s 2024 Business Valuation & Financial Litigation Super Conference December 12-13 at the MGM Grand in Las Vegas. BVWire will be there in-person to take advantage of the opportunities to network—and to check out the four tracks and almost 40 sessions, plus a full-day preconference program. There will be several sessions on artificial intelligence and automated valuation models for valuation and forensics, including a perspective from the courts. Here are a few more sessions we don’t want to miss:

• The Company Specific Risk Premium—Identification and Quantification, with Roger Grabowski (Kroll), who is on The Appraisal Foundation Working Group studying the topic (a formal advisory is in the works);

• State of the Valuation Profession, with Chris Mercer (Mercer Capital), an update to a popular session from last year;

• New Perspectives on the Age Old DLOM Challenge, with Dr. Ashok Abbot (West Virgina University) and Frank Wisehart (BRG), introducing the use of exchange option models for estimating DLOM/blockage discounts—and they will present an online application to estimate the discount;

• Global Economic Update: Impact on Cost of Capital and Valuations, with James Harrington (Kroll) and Carla Nunes (Kroll), always a very informative session; and

• What the IRS Looks for in a BV Report, with Mike Gregory (Michael Gregory Consulting), former IRS manager who always reports on the latest goings-on at the agency.

There are many more sessions, and there will be something for everyone. You can attend in-person or virtually, and there is an á la carte option for virtual attendees. For details and to register, click here.

2024 Thomas Burrage Award scholarship recipient named

As part of the annual Thomas Burrage Award, a scholarship stipend of $2,000 is presented to a student at the University of New Mexico (UNM). The 2024 recipient of the scholarship is Caitlin Beery, who is in the Master of Accounting program at UNM. Burrage was known for giving his support and guidance to young people in the profession, and UNM was his alma mater.

The late Thomas Burrage was highly respected for his expertise in litigation, forensic accounting, business valuation, and taxation, but he is remembered most as a kind and generous man who gave back to the profession. Earlier this year, the 2024 Burrage Award for compassion, collegiality, and character was bestowed posthumously to Rick Adamy, the founder of Adamy Valuation. The Expert Resource Connection, co-founded by Burrage, which is a group of business valuation and forensic accounting professionals who share resources and collaborate on engagements, gave the award.

If anyone is interested in making a tax-deductible donation to the Burrage Scholarship Fund, please send a check payable to:

The Thomas F. Burrage Scholarship Fund
Attn: Heather Russ
940 Wadsworth Blvd., Suite 200
Lakewood, CO 80214

European PE buyout multiples have rebounded, per VRC

European median PE buyout EV/EBITDA multiples declined in 2023, to 11.0, versus 2022, but, “through the third quarter of 2024, median EV/EBITDA multiples have rebounded to 12.8x,” according to the “European Private Market Update Q3 2024” from VRC. The report further states: “For the remainder of 2024, higher public market valuations and lower expected borrowing costs should bring higher deal volumes and higher valuations.” The report has a great deal more information and insights into the European private markets.

Preview of the December issue of Business Valuation Update

Here’s what you’ll see:

• “AI Sessions Draw Big Crowds at AICPA FVS Conference” (BVR Editor). There was a great deal of interest in sessions dealing with artificial intelligence and large language models (LLMs) at the recent AICPA & CIMA Forensics & Valuation Services Conference in Dallas. Readers of this newsletter have seen a number of our articles on AI usage in business valuation, so we will not repeat what we have already reported but will cover some new thoughts and perspectives that add to the conversation.

• “BVR Extends Reach of Groundbreaking Research Tool” (BVR Editor). BVR has taken the next step in deploying its new research tool that uses the latest technology, the Research and Data Assistant (RADA). It has been available only to subscribers of the BVResearch Pro platform, but now it can also be used with other BVR offerings.

• “A Dozen Tips From the VSCPA Forensic and Valuation Services Conference” (BVR Editor). Business Valuation Update attends a great many conferences and webinars, but we never fail to learn something new. Yes, the topics can be the same, but, no matter how many times you hear about something, a different presenter will offer some new information or give a different perspective on it, which is very valuable. Such was the case at the recent two-day Forensic and Valuation Conference held by the Virginia Society of CPAs (VSCPA), which had an excellent mix of topics and speakers.

• “Free Resources to Help Valuers With Business Interruption Claims” (BVR Editor). For business valuation experts grappling with business interruption (BI) and damages matters in the wake of this year’s natural disasters and tech outages, BVR is offering some free resources. You can download two full chapters from The Comprehensive Guide to Economic Damages, 7th edition, that deal with BI, lost profits, and damages claims. Plus, we provide some tips on uncovering misrepresentations in claims.

• “Maligned and Abused Excess Earnings Method Endures—But Why?” (BVR Editor). During a recent BVR Power Panel webinar on divorce valuations, the panel wondered why, given all the drawbacks of the excess earnings method, it continues to be used, especially for small businesses and professional practices. Also, insights into how judges evaluate an analyst’s use of this method.

• “RESEARCH UPDATE. Featured Paper: ‘Six Principles for the Effective Use of ChatGPT and Other Large Language Models in Accounting’” A monthly roundup of research papers of interest to valuation experts. The featured paper is from 2023, but it is still very relevant and provides some cautions for financial experts. Despite these caveats, the authors, during a recent conference presentation, urged the audience—especially those at firms with limited resources—to get their hands dirty and “experiment with LLMs to improve the efficiency of common language generation tasks.” Other papers listed in this update discuss fraudulent ESG reporting, how AI affects the cost of equity in China, and how sexual abuse scandals have impacted corporate returns.

• BVLaw Featured Case: “New York Appellate Court Finds Bookkeeper Employee Liable for Aiding and Abetting Fraud and Breach of Fiduciary Duty,” Schiano v. Harsanyi, 2024 N.Y. App. Div. LEXIS 4477; 2024 NY Slip Op 04338; 230 A.D.3d 820 (Aug. 28, 2024).

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,” “FactSet/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: A chart of 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 December 2024 issue of Business Valuation Update.

BV movers . . .

People: Andrew Bostian, ASA, has joined Stamford, Conn.-based Scout Valuations LLC; he will lead the firm’s Boston office, providing a complete range of valuation services, including estate and gift, bank financing, litigation support, financial reporting, transfer pricing, and M&A … Matthew Goldberg has joined Alvarez & Marsal as a managing director and co-leader of its Alternative Investments offering; he has more than 20 years of advisory and financial services experience and advises clients across multiple industries on the valuation and analysis of equity and credit investments, and financial instruments … Two valuation professionals have been promoted to principal at BDO: Kevin Wharton, ABV (Philadelphia office), who focuses on valuation, fairness opinions, and mergers and acquisitions, and Manny Ngan (San Francisco office), who focuses on quantitative finance, valuation and capital market advisory, and complex financial instruments.

Firms: Mercer Capital (Memphis, Tenn.), a leading independent business valuation and transaction advisory firm with 60 employees, has strengthened its federal tax services by acquiring Business Valuation Analysts LLC (Winter Park, Fla.), a small firm that focuses on valuations for federal tax and corporate transactional purposes; two professionals will join Mercer: Timothy K. Bronza, CPA/ABV, ASA, president of the acquired firm, joins as a managing director, and senior analyst Elitsa Healy, CFA, joins as a vice president … Indianapolis-based KSM (Katz Sapper & Miller) has acquired ValueKnowledge LLC, a business valuation and financial advisory firm in Downers Grove, Ill.; Jim Krillenberger, CFA, ASA, and Andy Stebbins, ASA, who join KSM as managing director and director, respectively, lead ValueKnowledge … Princeton, N.J.-based Withum has launched a new AI-focused website (withum.ai) designed to offer businesses “cutting-edge services around AI strategy, implementation, engineering, and AI adoption and governance” and will serve as a hub for thought leadership, insights, blogs, webinars, and resources … Atlanta-based Aprio expands its West Coast presence by acquiring Kirsch Kohn & Bridge (Woodland Hills, Calif.), a firm that provides accounting, tax, and business advisory services to businesses and leaders in a wide variety of industries including construction, real estate, professional services, retail, and manufacturing; the deal adds five partners and more than 30 professionals to Aprio.

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

CPE events

Tales From the Trenches—Business Valuation With the IRS and Others, November 21, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Michael Gregory (Michael Gregory Consulting). CPE credits: 2.0.

The speaker, a former IRS manager who led business valuation there, shares case studies and insights that can help you avoid trouble with the agency.

BVLaw Case Update December 2024, December 3, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: R. James Alerding (Alerding Consulting LLC), James D. Ewart (James D. Ewart LLC), and Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP). CPE credits: 2.0.

Two veteran valuation experts and a family law attorney/valuation expert examine recent valuation and financial litigation decisions.

Holiday break

BVWire will be taking a break to enjoy the U.S. Thanksgiving holiday next week. We will resume publication on Wednesday, December 4. We wish you a very safe and happy holiday!