BVWire Issue #168-2 | September 21, 2016


Action steps to take now over Sec. 2704 regs

“Weird logic,” “make-believe,” “bad timing,” and “new definition of FMV” are just some of the comments about one of the most discussed topics at the ASA Advanced Business Valuation Conference last week in Boca Raton, Fla. Of course, we’re talking about the proposed IRC Section 2704 regs designed to curb estate tax valuations. The regs came out after the conference schedule was set, so a special early-morning session was added to the program. Even though it was the wee hours, the session was well attended and the audience was totally engaged. Speakers urged attendees to:

  • Understand the regs. This is difficult to do, as even the top tax lawyers in the country “can’t agree on what these regs really mean,” says William Frazier (Stout Risius Ross). He presented an example that showed that, under the new rules, the tax bill for estate and gift taxes might rise by up to 50%. Bruce Johnson (Munroe, Park & Johnson) says that the regs would provide a disincentive for family transfers. “The regulations would create a two-tiered tax system where a family-owned business would pay higher taxes on transfers than a 3rd-party owned business,” he says. “As a result, family businesses might be forced to sell or take on debt to pay the additional tax burden.” Johnson is on an ASA task force studying the regs and preparing official comments. BVWire’s prior coverage (latest is here) has more information and links. Also, BVR will present a webinar on September 29 with Curtis Kimball (Willamette Management Associates) and Z. Christopher Mercer (Mercer Capital).
  • Craft comments to the IRS. “Comments really matter,” says Jeff Tarbell (Houlihan Lokey), who says that what the valuation profession is facing is akin to the battle with the DOL over classifying appraisers as fiduciaries for ESOPs. After a concerted effort by the valuation profession, the DOL backed off of that proposal. Tarbell was involved in the DOL matter and is also on the ASA task force. The ASA will shortly make a template available with some suggested points to make in a comment letter. The regs have instructions for submitting comments (due November 2).
  • Write to Congress. Contact your congressperson, especially those on the Senate Finance Committee or House Ways & Means, which have oversight of the IRS. Speakers noted the “bad timing” of the regs in this regard, due to the changes in Congress by election time.
  • Contact the SBA. John Russell, the ASA’s director of government relations, says the Small Business Administration wants to hear about the impact on family businesses, which could be “devastating,” say the speakers. The SBA needs to voice its concerns, so contact Dillon Taylor at the SBA’s Advocacy in Washington, D.C., at 202-401-9787 or
  • Reach out to clients. Speak with clients who have family-owned entities that these rules would affect. If these entities can currently be discounted for transfer tax valuation purposes, make sure clients understand the implications and consider doing some planning in advance of the regs being finalized. Of course, they may never be finalized, but planners are assuming they will.

BVWire congratulates the ASA on an excellent conference, and we will have more takeaways next week!

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Chancery says new case ‘takes the prize’ for most polarized valuations

You cannot trust post-transaction expert valuations, but you can trust your own discounted cash flow analysis to arrive at fair value. That’s the conclusion the Delaware Court of Chancery drew in a recent statutory appraisal action.

The focal point was a successful privately held company that marketed a contractor database assisting users with record keeping and compliance. In January 2013, the company merged with its wholly owned subsidiary. The controlling shareholder offered certain minority shareholders $38,317 per share in cash. The two minority shareholders demanded a statutory appraisal. For trial, all parties offered expert valuation testimony. The three witnesses used a variety of valuation methods and weighted them “as they saw fit.”

Alarm bells: Once again, the court began its analysis by lamenting the huge divergence in value conclusions. An optimist, “a.k.a. someone other than a judge presiding over appraisal trials,” might assume that experts valuing the same company by analyzing the same set of financial data would reach a similar fair value result, the court said. Not so. Typically, the petitioner’s expert reaches a DCF value at least twice that of the respondent’s (company’s) expert. This case went much further. The gap in the experts’ value conclusions was “alarmingly” wide, the court found. It emphasized that the fair value of one petitioner expert was eight times that implied by the DCF the company’s expert provided.

As such, this case, “so far, takes the prize,” in terms of generating the greatest judicial skepticism regarding valuation, said Vice Chancellor Glasscock, who handled the case. The court rejected all valuation methods but the DCF. It said the guideline public companies analysis, which all experts used to some extent, was inappropriate because the subject had no “direct” public competitors. It found none of the reasons supporting the use of a direct capitalization of cash flow analysis applied. And it disapproved of the company expert’s analysis of two precedent transactions, remarking that these transactions lacked certain hallmarks of an arm’s-length deal.

The best way to a reliable indicator of value was the DCF, “a simple and powerful concept,” the court explained. It noted disagreements among the experts on many assumptions and inputs and decided to perform its own DCF analysis using the company expert’s DCF study as a framework. The company’s fair value was $98,783 per share, the court decided.

The case is In re ISN Software Corp. Appraisal Litig., 2016 Del. Ch. LEXIS 125 (Aug. 11, 2016). A case digest and the court’s opinion will be available in October at BVLaw.

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Most BV firms expect to do better this year

About two-thirds of business valuation firms we polled say they expect to do more business in 2016 than last year. Most of the revenue is coming from certain areas, the top area being tax, gifts, and estates, respondents say, which represents about one-third of total revenue on average. This is according to preliminary results from BVR’s Firm Economics Survey conducted during June and July of this year.

About 170 BV firms, sole practitioners, CPA firms, and other entities with business valuation practices responded to the survey. The responses reveal how firms stack up in terms of performance, compensation, billing rates, marketing and practice development, and more. Responses are being analyzed, and a full report will be available soon. More details on the preliminary results are in the October issue of Business Valuation Update.

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BVR is a proud partner on Thompson’s Guide to Private Equity Regulatory Compliance—Complete with free webinar!

BVR is excited to offer Thompson’s Guide to Private Equity Regulatory Compliancethe celebrated new resource covering all aspects of the complex web of regulatory requirements for private equity firms. We also invite you to a free, 45 minute webinar on September 29, hosted by Scott Gluck of the Guide. Mr. Gluck will update the audience on new compliance concerns arising under Dodd-Frank, the Consumer Protection Act and federal securities laws—including regulations that could hinder the ability to raise capital. Sign up today as a BVR guest to learn where to find the compliance pitfalls and how Thompson's Guide to Private Equity Regulatory Compliance can help navigate around them.

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New challenge to IRC Sec. 280E by the cannabis industry

One of the biggest problems of the legal marijuana industry is the inability to take tax deductions for normal business expenses. That’s because of IRC Section 280E, which KOs the deductions because marijuana is illegal under federal law. Cannabis is legal in many states, and that’s the thrust of the latest challenge to the tax law.

New case: Harborside Healthcare Center is in Tax Court with the IRS arguing that Sec. 280E should not apply to businesses that are legal under state law. The argument is that this was not the intent of Congress—the intent is to target illegal drug dealers. Harborside is the country’s largest cannabis dispensary ($30 million in sales) and is facing a $2.4 million bill from the IRS.

There have been several court cases on this issue, and the industry is now able to deduct COGS, but this case propels the fight to a whole new level. In the meantime, this industry is faced with effective tax rates of 60% to 90% because of the taboo on business expense deductions.

Extra: BVR has a new guide, What It’s Worth: Value and Business Challenges in the Budding Cannabis Industry.

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Reminder: Comments due October 14 on 2018-19 USPAP

The Appraisal Foundation’s Appraisal Standards Board (ASB) has issued the Second Exposure Draft of proposed changes for the 2018-19 edition of the Uniform Standards of Professional Appraisal Practice. Some of the proposed changes deal with the definition of “report” and communication of assignment results. The ASB is also proposing a revision of the definition of “appraisal review,” as well as splitting the existing Standard 3 into two standards to be consistent with the other standards in USPAP. Written comments are requested by Oct. 14, 2016, and can be sent to

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Global BV news:
China valuators seek to be the best

At last week’s ASA Advanced BV conference in Boca Raton, Fla., I had the great pleasure of meeting Han Liyang, deputy secretary general of the China Appraisal Society. She tells me there are 40,000 valuation professionals in China, and very large firms do most valuations. The profession is regulated by the government, which issues different licenses for valuing state-owned assets and public companies. She noted that there is great interest in advancing the valuation profession there in terms of education and the development of specialties.

The Chinese economy has moved from heavy investments in fixed assets to a focus on intangible assets, innovation, and internet-related technology. In terms of intangibles, Liyang tells me there is great interest in developing a “brand ranking” system for China similar to several we see here in the U.S. In fact, China has a ministry for quality working on this to help consumers identify the quality between one particular brand versus another.

Ray Moran (MG Valuations), who has worked with Chinese firms for 15 years, says outbound Chinese M&A will hit record levels this year. China will be directing large investments to agribusiness, dining/lodging, and technology. He also noted that China is very different culturally than anywhere else in the world, so forging a proper business relationship with Chinese clients is very important.

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Get up to speed on global BV

The Southeast Chapter of Business Appraisers (SECBA) and the International Association of Consultants Valuators and Analysts (IACVA) have joined forces to present Business Valuation in an Upside Down World, a two-day conference in Atlanta on September 30-October 1. Topics include an international update on peer review and standards, cost of capital, current economic research, and more. There will also be an expert panel on “troubling topics” including tax affecting PTEs, recent IRS developments, and changes to database methodologies. BVR is pleased to sponsor this event, and BVWire will be there—will we see you? For details and to register, click here.

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AICPA bolsters FVS conference with new sessions

Apropos of holding its Forensic & Valuation Services Conference in Nashville, Tenn., the AICPA has just added a general session, Music Industry Valuation Methods, to the agenda. Another session has also been added on what will end up to be the most-discussed topic of 2016: Detangling the Proposed IRC 2704 Regulations. The event will be held November 6-8 at the fabulous Gaylord Opryland Hotel.

This year, the AICPA has added two new learning paths, Family Law and NextGen, as well as a new Fair Value Measurements track. In addition, there are enhanced tracks for Forensic Case Studies, Trending Now FVS, and Specialized Skills. Plus, the conference also offers incredible networking opportunities. For details and to register, click here. Hurry! Early-bird discount expires September 24.

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New valuation resources for the healthcare industry now available

Two new titles for appraisers in the healthcare industry have recently been released.

BVR's Guide to Physician Practice Valuation, 3rd edition, contains contributions from 21 of the top healthcare valuation experts and attorneys in the profession. Edited by renowned healthcare valuation thought leader Mark Dietrich, this new guide provides current and comprehensive "how-to" guidance on valuation approaches in this evolving industry.

The Business Valuation and Healthcare Case Law Compendium features the most discussed and the most recent court cases involving business valuation disputes in the healthcare industry. BVR’s legal analysts have crafted this one-of-a-kind resource, which breaks down the cases and the decisions to save you hours of research.

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BV movers . . .

People: Brian Burns has been named director of the forensics and valuation practice of Dixon Hughes Goodman in Virginia … Todd Bryarly has been promoted to principal leading the HBK Valuation Group, a division of the Canfield, Ohio-based Hill, Barth & King … Glen Marku has joined Grant Thornton’s Chicago offices as a managing director in the transfer pricing practice … Kevin McElroy has joined Valuation Services Inc. (VSI) as a director in its New York City office … Colleen Murray has been named shareholder at Perkins & Co., Portland, Ore. … John J. O’Donnell has joined the New York-based Friedman LLP as a partner in the forensic accounting, litigation support, and valuation services (FLVS) practice and is based in the firm’s Philadelphia office.

Firms: The Ohio-based Rea & Associates has acquired PMAgroup, another Ohio firm that exclusively consults dentists on practice management, business development, and succession planning, specifically M&A activities.

Please send your professional and firm news to us at

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Upcoming CPE events

NEW DATE: Report Writing: Do’s and Don’ts (September 22), with Stuart Weiss (Stuart Weiss).

The IRS’ Proposed Section 2704 Regulations: The Impact on and the Future of Estate and Gift Valuation (September 29), with Curtis Kimball (Willamette Management Associates) and Z. Christopher Mercer (Mercer Capital).

Manufacturing Companies: Assembling the Valuation Components (October 4), with Kevin Janke.

Valuing Trained and Assembled Workforces in Healthcare Provider Entities: A Deep Dive (October 13), with Timothy Smith and Angie Smith. This is Part 6 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

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:

Take action re: 2704

Chancery alarmed

BV firms’ revenues

Private equity compliance resource

Cannabiz tax case

USPAP 2018-19

Global BV news

AICPA FVS conference

New healthcare resources

BV movers

CPE events


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