Six things to know from the NJCPA BV conference

While we enjoy attending the major valuation conferences, we also look forward to attending local state CPA society conferences that focus on valuation. They represent “hidden gems” that offer excellent speakers and interesting topics. And, since the pandemic triggered more usage of streaming technology, these local events are now beamed all over the world. Such an event was the recent Forensic and Valuation Services Conference hosted by the New Jersey Society of Certified Public Accountants (NJCPA). Hosted by Roy Kvalo, director of litigation and valuation services at The Curchin Group (Red Bank, N.J.), the event was excellent—and here is some of what we picked up:

• The easiest way to get sued for malpractice is by filing a collection lawsuit against a client—they will countersue and find an expert to say you fouled up;

• More calculation reports are showing up in divorce courts—one side does it, so the other side follows suit, and the judges understand the need to save money;

• If the IRS audits your valuation, check the agency’s math—one expert finds math errors 30% to 40% of the time, which can be used against them;

• Using Excel and its regression add-on for lost profits analysis should be fine for court (the tools are widely used and accepted), but it’s how you use them that counts;

• DeFi is the new source of crypto theft on the market—in 2021, it accounted for 76% of all thefts; and

• Getting a lot of subpoenas to produce documents and bringing in your liability insurer does not raise your malpractice premium—your insurer is happy to handle them.

We’ll have detailed coverage in a future issue of Business Valuation Update.

Tennessee moonshine formula caught up in business divorce

A partner in a Tennessee distillery making flavored moonshine felt the other two partners improperly disaffiliated him. He had not contributed to the partnership financially, but he provided his expertise and formulas for the mountain dew. He claimed the other partners stole the formulas, so he wanted to be paid for them as well as for his time and effort.

DLOM but no DLOC: The court found that the partnership owned the formulas, but the ousted partner was entitled to his one-third share of the business as of the date he left, which was December 2015. His expert’s valuation used information from 2017 and then discounted it back to 2015 to get a value of $258,000. The defendants’ expert used information known as of December 2015 and then applied discounts for lack of marketability and control to come up with a value of $23,000 for the plaintiff’s share. The court sided with the defendants’ expert. On appeal, the court noted that state statute prohibits a discount for lack of control, so the valuation was adjusted to a final value of $35,000.

The case is Boesch v. Holeman (II), 2022 Tenn. App. LEXIS 335, and a case analysis and the full opinion can be found on the BVLaw platform.

Another call to discard CAPM

“Unfortunately—and I write this with a heavy heart—the CAPM is not just imperfect; it is so badly wrong that it is best ignored,” writes Ivo Welch (UCLA Anderson Graduate School of Management) in an article “The Cost of Capital: If Not the CAPM, Then What?” (click here for a download).

Why is CAPM still so prominent? Why is it still taught and used in practice so much? Welch’s comments are similar to those of Pablo Fernandez (University of Navarra), another well-respected academic in his paper “CAPM: An Absurd Model.” He found that academics still teach CAPM because it takes up a lot of class hours and there’s nothing to replace it. Welch agrees, saying it’s “we academics who committed the original sin” and became so “enamored” by the model that they “simply ignored the evidence.” CAPM “provides one basic prediction: high-beta stocks should outperform low-beta stocks on average, because high-beta stocks are riskier. Unfortunately, the data say the opposite,” Welch writes. He does offer some recommendations as to how analysts and investors can do better than CAPM.

Willamette focuses on wealth transfer valuation

Estate and gift tax planning and valuation issues are the focus of the Autumn 2022 Insights from Willamette Management Associates. Some examples of the articles are:

• “Disguised Dividends and Shareholder/Employee Compensation” (Eliza Jones and Lisa H. Tran);

• “Valuation of Promissory Notes for Transfer Tax Purposes” (Timothy C. Ladd);

• “Valuation Considerations for Preferred Equity Interests” (Ben R. Duffy and Aiden B. Gonen); and

• “Noncompete Agreement Taxation and Valuation Considerations in Corporate Acquisitions” (Robert F. Reilly).

The editor for this issue is Weston C. Kirk. The issue is available if you click here.

CFOs ignoring cyber risk despite huge losses

A Kroll report finds that 82% of the executives in its survey said their companies suffered a loss of 5% or more in their valuations following their largest cyber security incident in the previous 18 months. At the same time, 87% of CFOs are either very or extremely confident in their organization’s cyberattack response, the report says. This is at odds with the level of visibility CFOs have into cyber risk issues, given only four out of 10 surveyed have regular briefings with their cyber teams. The report, “Cyber Risk and CFOs: Over-Confidence Is Costly,” is available if you click here.

Extra: A BVR briefing: “Cybersecurity in Business Valuation: Addressing the Impact of Data Breaches on Value,” discusses some emerging ideas and techniques that are helping to pave the way to understand and measure the impact of data security and cyber liability risks on the value of a business better. The briefing includes insights from appraiser Mike Blake (Brady Ware & Co.) and cybersecurity expert Charles Hoff (Data Security University).

ASA signs MOU with India VPO

The American Society of Appraisers (ASA) and the Association of Valuation Professionals (AVP) of India have signed a Memorandum of Understanding (MOU) to pursue potential future collaboration in information exchange, education, and potentially accreditation. The collaborative efforts will include offering continuing education to each other’s members, sponsoring professional events, exploring designation reciprocity or course equivalency, and more. The ASA has many strategic partners around the world (click here for more information).

BV movers . . .

People: Nick Newsad and Cody Taylor have joined LBMC’s healthcare valuation team as senior managers; Newsad performs valuation and litigation support services for private and publicly held companies and is focused on healthcare compensation valuation and LBMC’s Pulse FMV Calculator, while Taylor specializes in providing valuation, transaction advisory, and consulting services to the healthcare industry … Matt Stelzman, MAFF, CVA, ASA, has been promoted to principal at Windham Brannon (Atlanta); he specializes in forensic and litigation services, providing and testifying on valuations for marital dissolution purposes, lost earnings and lost profit calculations for businesses, wrongful termination or death cases, commingled funds, personal injury analysis, and economic damages … Shlomo Lang, CEIV, ABV, ASA, has joined CohnReznick LLP as managing director in its Valuation Advisory Services practice; based in New York City, Lang has more than 22 years of experience with valuations of businesses and business interests, intangible assets, and liabilities for various purposes, including financial reporting, tax planning and compliance, transactions, restructuring, dispute resolution, and other corporate and litigation-related matters.

Firms: Savant Wealth Management has acquired World Trend Financial and Terry Lockridge & Dunn, both located in Cedar Rapids, Iowa; World Trend Financial is an RIA with $730 million (as of July 15, 2022) in assets under management (AUM) and Terry Lockridge & Dunn provides tax, accounting, payroll, business valuation, and other consulting services … Aprio LLP will relocate its Atlanta-based corporate office to a new and innovative 55,000-square-foot office located within Perimeter Summit in the North Brookhaven community; the new space features an open layout that supports a hybrid work model, allowing team members to have the autonomy to work in office, remote, and on the go … Larson Gross, a leading CPA & Consulting firm based in the Pacific Northwest, has completed its merger with Homchick Smith & Associates (HSA), an accounting firm located in Wenatchee, Wash.; the combined firm will operate as Larson Gross PLLC … Mandeville, La.-based Griffin & Furman LLC is expanding its footprint in Louisiana with the addition of a Baton Rouge office by adding Michael R. Choate and Co. CPAs.

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

CPE events

• Valuation Considerations in High Inflationary Environments, October 18, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: William E Harris (Trugman Valuation). CPE credits: 2.0.

Valuation analysts now have to consider macroeconomic factors that have not been present in the U.S. economy in over 20 years. This webinar will include a discussion of how high inflationary periods have impacted stock market valuations in previous years and what this means for valuations of closely held companies in the current economic environment.

• Leases Pieces—Digesting the New Accounting Standards and Business Valuation Impacts, October 19, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Michelle F. Gallagher (Adamy Valuation), Jacob Helwick (Adamy Valuation), Sara Fetke-Sweers (BDO), and Chris Hickmann (BDO). CPE credits: 2.0.

A review of the new ASC 832 lease standard, including a breakdown of its accounting implications and presentation in GAAP financial statements, and the methods that ensure these changes are properly addressed in a valuation context.