October 2, 2013 | Issue #133-1  

New IPO law has ripple effect on DLOM

A little-known law has had a noticeable impact on the number of IPOs in 2013—and an impact on lack of marketability.

The Jumpstart Our Business Startups Act, which Congress passed in 2012, makes it easier for smaller, emerging-growth companies (EGCs) to have an IPO by lessening the financial reporting requirements. Through Aug. 31, 2013, there had been 132 U.S.-based IPOs, a number that has already exceeded the total of 128 IPOs from all of 2012, according to an article by Brian K. Pearson, managing member of Valuation Advisors LLC. Of course, the gradual rebound in the economy has helped the process, but a much bigger impact on IPOs this year is due to the new law, he says.

Greater discounts: According to the Valuation Advisors Lack of Marketability database (available at BVResources.com), the size of the discounts in 2013 is greater than 2012, while the company size (based on revenues) is significantly smaller. Clearly, this is a result of EGCs with more speculative futures going public under the less restrictive new law.

BVR is making available a free copy of the article, The Increase of Initial Public Offerings (IPOs) in 2013 and the Impact on Lack of Marketability, which includes details on the new law and its impact on lack of marketability. To access the article, click here.

Concerns about the distributor method

The multi-period excess earnings model (MPEEM) has been the traditional method of choice in the valuation of customer relationships. But in the May 2012 issue of Business Valuation Update (BVU) Ed Hamilton and PJ Patel outlined the distributor method (DM) as a more suitable alternative for some circumstances. Now a response by Dan Guderjohn and Robert Reis in the October 2013 issue of Business Valuation Update raises concerns about this method.

Conceptual and practical issues: The basic premise of the distributor method is that the returns to a customer relationship asset are analogous to the economic profits earned by a hypothetical intermediary. It attempts to show how the subject company’s economic characteristics would differ if the investment in customer relationships were relegated to an outside entity. Guderjohn and Reis (both with Corporate Advisory Associates), say that, “on further inspection, a number of concerns, both conceptual and practical, become evident.”

For one thing, the distributor method ignores any potential value in the relationships between a company and its distributors, according to the authors. “Contractual agreements and value-added services provided by a distributor can generate customer relationship value at the distributor level,” they say. Also, they point out that distributors are not homogeneous. “While conjuring up a hypothetical distributor might sound easy, it becomes a very difficult task once one begins to consider the myriad forms a distributor can take,” they contend. The article details more of the authors’ concerns.

Learn more: Hamilton and Patel (both with Valuation Research Corporation), the authors of the original BVU article, will conduct a session on the distributor method at the upcoming ASA Advanced Business Valuation Conference October 13-16 in San Antonio. BVWire will be there—we hope to see you!

Can’t make ASA’s Advanced BV Conference? Let them bring the conference to you!

Live web streaming will deliver the best of the Fair Value Track from ASA’s Advanced BV Conference. Tune in Tuesday, Oct. 15, and catch industry leaders speaking on key topics that are important to the valuation professional. Save time, save money, and earn eight hours of CPE (seven A&A) credits quickly and conveniently.

Click here for a detailed agenda and registration details.

Convergence is top priority, says FASB chairman in first speech

In his remarks at the FASB@40 conference, FASB chairman Russell Golden discussed the future of independent standard setting and outlined what he believes should be the board's priorities.

“For the remainder of this year and next, the FASB’s top priority will be to complete our major convergence projects,” he says. This will end a 10-year period of “intense, bilateral standard setting” with the International Accounting Standards Board.

Golden continued: “We hope to release a final standard on revenue recognition in the fourth quarter of this year. We plan to issue final standards on our two financial instruments projects—classification and measurement, and impairment—in 2014. A final standard on leasing also should be completed in 2014, and we will finalize decisions on insurance thereafter.”

Call your congressman about ESOP fiduciary legislation, says the AICPA

Valuation analysts may want to jump on the bandwagon and consider doing what the AICPA is urging its members to do—contact their representatives and senators and ask them to cosponsor legislation introduced in the House (H.R. 2041) and Senate (S. 273). This legislation would prohibit the Department of Labor (DOL) from changing its definition of fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA) to include appraisers of employee stock ownership plans (ESOPs). The legislation was proposed because the DOL’s pending reissuance of its 2010 proposal is likely to include a fiduciary duty for appraisers of employee benefit plans.

Bad idea: Including appraisers as fiduciaries would force them to purchase expensive fiduciary insurance, employ specialized ERISA counsel, and expose CPAs to unwarranted litigation. “Moreover, any DOL proposal that treats appraisers as fiduciaries would create a conflict between a fiduciary’s strict duty of loyalty to plan participants and beneficiaries, and professional appraisal standards, which require an appraiser to perform assignments with impartiality, objectivity and independence,” says the AICPA in its appeal to members.

Learn more: The DOL proposal, along with other factors, has made pension and ESOP valuations a mine field for appraisers. Listen to the recording of a recent BVR webinar, Valuation and ERISA Fiduciary Liability: Traps for the Unwary Appraiser.

IRA-based business strategy runs afoul of tax regulations

It’s not uncommon for aspiring business owners to use their retirement accounts, including 401(k)s and IRAs, to start up businesses, a September 13 report in the New York Times makes clear. But, as a recent tax court case illustrates, what may seem like a smart investment strategy can go awfully wrong when the budding investor disregards expert advice on the applicable tax rules.

Better watch out: Two taxpayers decided to buy an alarm and fire safety company for investment purposes. They hired an accountant to structure the transaction and perform due diligence. He developed a multistep strategy that used self-directed IRAs to defer until retirement any income tax liability on the gain they hoped to make on the asset. In 2001, each IRA acquired 50% of the stock of a new company (Newco) the taxpayers had formed to buy the target’s assets for $1.1 million, including cash from various loans and—critically—a $200,000 promissory note from Newco to the sellers. The note was secured by personal guaranties from the two taxpayers and remained in effect until the profitable sale of Newco to a third party.

At the outset of the transaction, the accountant provided an opinion letter that warned of the special tax rules applicable to IRAs. It said “the taxpayer could not engage in transactions with the IRA that the IRS would determine to be ‘prohibited transactions.’” Another letter cautioned that “any actions you take on behalf of the corporation must be taken by you as an agent for the corporation and not by you personally.” When the IRAs sold Newco in 2006 each received in total more than $1.6 million in proceeds during 2006 and 2007.

In their federal income tax returns for those two years, the taxpayers did not include capital gains related to the Newco stock sale. The IRS subsequently issued deficiency notices arguing that the taxpayers’ IRAs had stopped qualifying as IRAs from the moment the taxpayers made the personal loan guaranties in 2001. The guaranties were “prohibited transactions” under section 4975(c)(1)(B) of the Internal Revenue Code. On review, the Tax Court agreed with the IRS. The guaranties triggered a liquidation of the IRAs in 2001; their assets were distributed to the taxpayers, who owed income tax on the gain they made in 2006 and 2007, the court found.

For a complete discussion of Peek v. Commissioner, 2013 U.S. Tax Ct. LEXIS 13 (May 9, 2013), see the October issue of Business Valuation Update; the court opinion is also available at BVLaw.

More horsepower added to GPC research tool

New features and upgrades to the PitchBook/BVR Guideline Public Company Comps Tool reinforce its position as the single most cost-effective and robust search engine available for your comps research. New features include:

  • Dedicated search tabs for key fields, SIC codes, industry, location, financials, multiples, and ratios;
  • A searchable glossary;
  • Real-time display of comps count by industry; and
  • An even more user-friendly interface.

Now’s the time to take a fresh look at the leading tool to help you build a list of comparables with comprehensive financials and links to source documents, income statements, balance sheets, and statements of cash flow.

Click here to request a demo.

Renowned BV speakers in Oakland on October 16

Damage calculations, the effect of taxes, valuing pass-through entities, how valuation experts can improve the courts’ view of their work—these are just some of the topics featured at CalCPA’s FSS All Forensic Services Section: All Sections Joint Meeting in Oakland, Calif., on October 16.

This all-day event, with a total of 6.5 hours of CPE, will include leading BV thought leaders and experienced speakers, such as Nancy Fannon (Myers, Harrison & Pia LLC) who will present the latest on S-corps and a second session on how the courts view valuation experts. Also, Richard Bimholz Esq. (Irell & Manella LLP) will discuss Apple v. Samsung and other recent federal court decisions relating to patent damages.

Sign up now for this important event.

Upcoming CPE events

Asset Tracking and Fraud Analysis in Divorce (October 4): Donald DeGrazia (Gold Gerstein Group) and Donald Glenn (Glenn & Dawson) show how to identify, analyze, and quantify claims for fraud in marital dissolutions. This is Part 4 of BVR’s Advanced Webinar Series on Business Valuation in Divorce.

Advanced Workshop on Estate & Gift Valuations for the IRS (October 10): Former IRS territory manager Michael Gregory (Michael Gregory Consulting) gives an inside look at how to survive an IRS review of estate and gift valuations, including S-corp and FLP valuations, DLOMs, and control adjustments.


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