How do you resolve a divorce case during COVID-19, when many businesses in all kinds of industries are coping with significant losses and continuing uncertainty over future performance? This was the topic of an excellent panel discussion during the recent AAML/BVR virtual divorce conference that included both business valuation experts and an attorney. Jason Naimi (Naimi & Cerceo), Briggs Stahl (Baker Tilly), and Tracy Farryl Katz (Gursey | Schneider LLP) presented the session, Where There Was None: Creative Settlements When Working With Distressed Businesses and Catastrophic Losses. Here are key points to keep in mind.

Initial questions: As the valuator, figure out whether and how COVID-19 affected the business. Although many sectors of the economy have felt the negative impact of the pandemic, some industries or some companies within an industry have done well. Make sure you keep doing industry research and understand where the subject company fits in.

Distressed business: Divorce itself is a stressful situation, made worse when the business whose assets may make up a substantial part of the spouses’ marital property is suddenly underperforming and there is no end in sight to the economic downturn. The panelists note there are ways to get out of this intractable situation, but none are easy.

One way is to make the ex-spouse a business partner, at least for the time being. However, this may be difficult where spouses seriously dislike and mistrust each other. If they accept this arrangement, it may include a plan to compensate the operating spouse (in-spouse) for work on behalf of the business and ensure the nonoperating spouse (out-spouse) has a right to review all financial documents to be kept abreast of business developments.

If time is less of the essence, the parties could take a wait-and-see approach and agree to determine the value of the business in six months, a year, or a year and a half. The expectation is that, by then, the owner and the financial experts have a better understanding of the effect COVID-19 has had on the business and industry and what to expect in the future regarding business performance.

Regarding the owner spouse’s support obligations, if a business’s earnings have been down, the parties could agree to a lower monthly payment for the time being with a kicker when more money comes. As the professional working on behalf of the nonowner spouse, make sure the increase in support goes into effect automatically, at an agreed-upon date. The nonowner spouse should not have to monitor a business’s developments and relitigate access to financial data.

COVID-19 discount: If the parties are determined to settle, the attorney and valuator can develop a payment plan that uses a formula applied to company performance for a specified number of years (i.e., two to five years). If your client is the out-spouse, consider a settlement that requires a minimum down payment with installment payments and a balloon payment at the end of the agreed-upon payment term. The valuators on the panel also say it’s not uncommon to apply a “COVID-19 discount” to any valuation, which can be a fixed or flat amount or a specified percentage. Also note that some businesses may actually have seen an increase in value because of the pandemic. Valuators need to consider this bump in income but also be aware that it may be a one-term occurrence. Determine the extent of the increase, and divide it between the parties.

Investment portfolios: Many couples have investments in stocks. The valuators on the panel caution that stock portfolios should be divided in kind. Make sure you and your client understand the makeup of the portfolio and when the various stocks were bought. Know the basis of the stock and use the same valuation dates for all assets in investment accounts to ensure an equitable distribution, the valuators recommend.

Key insights from the VSCPA BVFLS conference

BVWire attended this year’s two-day Business Valuation, Fraud & Litigation Services (BVFLS) Virtual Conference sponsored by the Virginia Society of CPAs (VSCPA), now in its 21st year. Conference chair Harold Martin (Keiter) greeted the online audience with a quote from the Grateful Dead that it’s been a “long, strange trip” with what’s been going on this year. Here are a few insights we gleaned from this excellent conference:

• If you are comfortable wearing a target on your back, use a calculation report in court—opposing counsel will take dead aim with a barrage of challenging questions;

• Guideline transactions during COVID-19 need special scrutiny—the target firm may be particularly strong or there are some powerful synergies in the deal;

• Make sure your estimate of the cost of equity is higher than before the pandemic—a by-the-book estimate will give you a lower figure due to today’s low interest rates;

• It’s now is the “golden age” of estate planning, as there almost certainly will be a new tax law after the election—this could be the first time ever that the estate tax exemption goes down;

• When doing a review of a valuation report, never attack the appraiser—attack the report;

• Most attorneys are clueless about business valuation—it’s the expert’s job to educate them;

• Consider using a Kovel arrangement with attorneys when acting as a consulting expert—properly executed, it puts the valuer’s work and communications in the zone of attorney-client privilege;

• There’s not much an attorney can do if his or her expert witness is struggling on the stand—one idea is to call for a break so the witness can regroup; and

• Think about creating a suite of “minimum viable services”—just unbundle all of the tasks you do in a full-blown valuation and market them separately, such as cash-flow forecasting, industry analysis, quality of earnings, and the like.

Full coverage of the conference will be in the November edition of Business Valuation Update.

Latest paper in the size-effect debate

Some appraisers believe that the size effect has diminished or disappeared since it was first documented in 1981. Other appraisers believe it is alive and well. There have been a number of recent papers questioning the size effect (for example, see our coverage here and here). The newest paper in this same vein is “There Is No Size Effect: Daily Edition” by Cliff Asness (AQR), whose firm has done similar papers (you can see the current paper and links to their other papers if you click here).

Dr. Michael A. Crain (Florida Atlantic University) tells BVWire: “One finding of this paper is to the extent the size effect exists in listed firms (dubious), it is due to illiquidity of smaller firms. This suggests that taking a discount for marketability and a size premium may be double counting illiquidity at least in some degree.”

New edition released of the BV in
Divorce Compendium

The most current summary and analysis of U.S. legal decisions involving business valuation and divorce is in the just-released fifth edition of BVR’s Business Valuation in Divorce Case Law Compendium. The book is in two parts: Part 1 contains the latest insights from top valuation and legal experts, including the impact of COVID-19, the valuation of goodwill, the double-dipping problem, passive appreciation, serving as an expert witness, and more. Part 2 contains court case digests and a summary table so you can quickly find the cases you need. The book also includes an update to BVR’s Charting Goodwill Jurisprudence, a handy state-by-state breakdown of each state’s basic position toward enterprise and professional goodwill—an invaluable tool for valuations. To check out the book’s Table of Contents, click here.

Strong program for the ASA’s annual conference October 12-13

The pandemic has not put a crimp in the quality of the sessions and speakers you expect to see at the annual conference of the American Society of Appraisers. Plus, the agenda has some names you don’t see every day, such as Bradford Cornell (UCLA) on the “Big Market Delusion” and Roger G. Ibbotson (Yale, Zebra Capital Management) on “Popularity: Pricing and Premiums.” The event, the 2020 ASA International Conference, will be virtual online October 12-13. For more information and the agenda, click here. A notable feature of this year’s event is that, if you miss a session (and there 70 of them!), they will be available on demand after the conference is over.

Check out the platform: BVWire took a walkthrough tour of the 3D vFairs platform the ASA will use, and it looks very interesting. You start off in a virtual lobby, where you can access the scheduled presentations, explore the exhibit hall, wander into the networking lounge, or check out a silent auction. There’s even an info desk if you have questions. You can do a walkthrough if you click here.

Cost of capital parameters in Europe as of
June 30, 2020

ValueTrust has released a sixth edition of its “European Capital Market Study” that serves as a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. ValueTrust usually releases this study on a semiannual basis but is now issuing it more frequently given the current COVID-19 crisis and the “strong” decline in market capitalization. The study also includes trading multiples and total shareholder returns across a wide range of industries. Here are a few key findings:

• In comparison to March 31, 2020, the European risk-free rate continued its decline, decreasing from 0.11% to 0.06% as of June 30, 2020;

• After a severe decline in market capitalizations in the first quarter of 2020, market capitalizations have mostly recovered and the implied market return (ex ante) for the European market decreased significantly, from 9.1% as of March 31, 2020, to 7.3% as of June 30, 2020;

• As of June 30, 2020, the healthcare sector has the highest forward revenue multiples, compared to all other sectors, with 3.7x. The energy sector has the lowest, 0.7x; and

• Overall, the technology sector shows the highest valuation level on average, followed by the healthcare sector; the financial sector shows the lowest average valuation level.

Reminder: IVSC Virtual AGM October 6-15

This year’s Annual General Meeting (AGM) of the International Valuation Standards Council (IVSC) will include presentations on the economic and market outlook, retail valuations, internally generated intangibles, and more. The AGM will be held via Zoom Webinar over the course of two weeks in October, and there will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. You can check out the agenda if you click here.

BV movers . . .

People: Paula K. Barrett, CPA/ABV, CVA, CGMA, CEPA, a partner in the business consulting services group at RKL LLP, has been named a 2020-21 Executive-in-Residence at Alvernia University (Reading, Pa.) in a program in which local entrepreneurs and students can benefit from her business valuation expertise … The Oklahoma Society of CPAs has inducted David Greenwell, CPA, CFF, CFE, into the Oklahoma Accounting Hall of Fame; he recently retired as a partner at RSM US and had previously maintained ABV and CVA credentials.

Firms: New York-based PKF O’Connor Davies is adding Albrecht Viggiano Zureck & Co. (Hauppauge, N.Y.); the deal adds nine partners and 45 staff members and bolsters the firm’s presence on Long Island … Fort Worth, Texas-based Whitley Penn LLP is adding Midland, Texas-based Johnson Miller & Co. in a deal that will increase Whitley Penn to nearly 600 employees across eight offices throughout Texas and New Mexico … Atlanta-based Mauldin & Jenkins has acquired Plush Smith PA of Sarasota, Fla., a firm that provides tax, financial reporting, and consulting services to individuals, fiduciaries, commercial businesses, and other organizations … Adams, Brown, Beran & Ball, Chartered (ABBB) has changed its name to Adams Brown as part of a rebranding effort to celebrate the firm’s 75th anniversary.

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

CPE events

• Valuation of Inventory: Taking Stock of the Guidance, October 8, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Anthony J. Pumphrey (Valuation Research Corp.). Part of BVR’s Special Series on Fair Value.

Given divergences in both practice and guidance, inventory valuation can seem challenging. This webinar illustrates simple, straightforward modifications to the valuation of inventory that you can incorporate into your valuation process.

• Valuing Micro and Small Businesses in the Shadows of COVID-19, October 14, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Gregory R. Caruso (Harvest Business).

This webinar is a deep dive into problematic areas of actual small-business valuation cases, with multiple case studies, audience questions, and succinct opinions welcomed.