BVR Logo September 29, 2021 | Issue #228-4

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:



Major win in ESOP valuation case vs. DOL

A district court has ruled “decisively” against the Department of Labor (DOL) in an ESOP valuation case, stressing that the DOL failed to follow standard valuation practices. “The decision is one of the most comprehensive rebukes of DOL arguments in valuation cases,” says Corey Rosen, founder and senior staff member of the National Center for Employee Ownership (NCEO), in a blog post.

The case is Walsh v. Bowers, 2021 U.S. Dist. LEXIS 177184 (Sept. 17, 2021), and it involved the ESOP company Bowers + Kubota (an architecture and engineering firm). The DOL had alleged that the ESOP paid more than fair market value for stock of the sponsor company. Valuation experts have long maintained that the DOL has been playing by its own valuation rules—rules that are not consistent with accepted valuation standards.

Stay tuned for more coverage of this important case. A copy of the opinion is available on the BVLaw platform, and a case digest analysis will be available soon.

Takeaways from the NJCPA BV conference

The New Jersey CPA Society held its Business Valuation and Litigation Services Conference last week, and event chair Don DeGrazia (Gold Gerstein Group LLC) put together an excellent program of cutting-edge and relevant topics. Here are just a few takeaways:

  • Inflation appears to be moderating, the Fed will soon rein in its stimulus efforts, we’re a “long way” from interest rates being raised, and the underlying drivers of consumer confidence are in “pretty good shape”;
  • COVID-19 will never be totally “over” because pandemics becomes endemic (e.g., the 1918 Spanish flu is still with us);
  • New healthcare regs on the Stark Law confirm that the use of compensation surveys for determining the fair market value of physician compensation is on its way out;
  • There is a growing opportunity to act as a court-appointed neutral in valuation disputes, but there are some definite pitfalls;
  • Read the Nelson Tax Court case—it “has it all” in terms of valuation issues (analysis available at BVLaw);
  • The company-specific risk premium (CSRP) for cannabis firms seems to have tempered—it was in the 30%-to-40% range a few years ago, but a 2020 engagement shows a 15% CSRP (30% cost of equity);
  • Seventy-five percent of special-purpose acquisition companies (SPACS) are trading below their listing price after announcing deals (after nearly always rising), while 95% that have not announced deals are trading below; and
  • A judge advises that, if you make an error in your valuation report, fess up to it immediately—if it comes out on cross, your credibility takes a huge hit.

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

Value of Coke’s secret formula could end up in Supreme Court

At last week’s New Jersey CPA Society’s Business Valuation and Litigation Services Conference, Barry Sziklay (Friedman LLP) gave an update on the huge battle between Coca-Cola and the IRS over transfer pricing that involves the trademark and secret formula for the soda giant’s iconic beverage. Coke is facing a more-than-$3 billion tax bill in a dispute over the valuation method used for determining the royalty charged to suppliers that provide the soda concentrate to bottlers.

Not refreshing: Coca-Cola had been using a “10-50-50” method that the IRS had approved in the wake of the agency’s audit of the company for the years 1987 to 1995. The approval came in the form of a closing agreement executed in 1996 between the company and the IRS. Going forward, the company continued to use that transfer pricing method for 11 years with the approval of the IRS. Then, when the IRS audited the company for its 2007-to-2009 tax years, the agency did an about-face and rejected the “10-50-50” method in favor of the “comparable profits method” for apportioning income between the U.S. parent company and its foreign supply points (i.e., manufacturers who produce Coca-Cola concentrate using The Coca-Cola Co.’s secret formula, which they, in turn, sell to unaffiliated bottlers who turn the concentrate into the soft drink retailers sell worldwide).

The 10-50-50 method permitted the supply points to retain as profits 10% of their gross sales with the balance of the profit split 50-50 between the parent company and the supply points. The comparable profit method (set forth in U.S. Treasury Reg. Sec. 1.482-5) attempts to determine an arm’s-length apportionment result based on the amount of operating profit an uncontrolled “comparable” company would earn in comparison to the subject company (The Coca-Cola Co. and subsidiaries). In this case, the IRS expert based his analysis on a return-on-assets metric. Result: an approximate more-than-$9 billion increase to the company’s taxable income and a more-than-$3 billion bill for back taxes. The matter went before the Tax Court.

On Nov. 18, 2020, the Tax Court judge ruled in favor of the IRS. Sziklay told the conference audience that, on June 21, 2021, Coca-Cola filed a “motion for reconsideration,” which includes a separate motion requesting that all Tax Court judges rule on the case, not just the one who rendered the original decision. “Stay tuned,” says Sziklay. “This case could end up before the U.S. Supreme Court.”

Sziklay points out that this is a very important case because transfer pricing is becoming ever-more important as the world moves toward a global minimum tax regime as the Organization for Economic Co-operation Development has articulated in its July 2021 issuance of OECD/G20 Base Erosion and Profit Shifting Project, “Addressing the tax challenges arising from the digitalization of the economy.”

You can find the Tax Court opinion and continuing coverage on BVR’s BVLaw platform. The case is: Coca-Cola Co. v. Comm'r, 155 T.C No. 10 (Nov. 18, 2020). Also join the Gift and Estate Tax Valuation Update Update with Barry Sziklay on October 19.

Today! Take a fresh look at the GPC method

What are the best sources of data for the guideline public-company (GPC) methodology when valuing a closely held interest? How do you narrow down the initial comps? What about adjusting for size and growth differences from the subject business? Get the answers to these questions and more from veteran valuer Rob Schlegel (Houlihan Valuation Advisors). He’s conducting a webinar today, September 29, titled Relying on Guideline Public-Company Data in Appraisals of Closely Held Interests, and you can register if you click here (no charge to holders of BVR’s Training Passport Pro).

NACVA adds 51 newly credentialed members

In the third quarter of 2021, 51 members of the National Association of Certified Valuators and Analysts (NACVA) earned their credentials, according to an announcement. Of these members, 49 earned the Certified Valuation Analyst (CVA) credential, and two members earned the Master Analyst in Financial Forensics (MAFF) credential. These members completed the training, exam, and credentialing processes for the two credentials.

Extra: Did you know that NACVA has more credentialed appraiser members than both the AICPA and American Society of Appraisers (ASA) combined? Click here for more details.

2021 Johnson/Park DLOM study is now available

The Johnson/Park empirical method to estimate a discount for lack of marketability (DLOM) is one of the most popular methods business appraisers use for this purpose, according to a recent BVR survey. The method highlights the relation of the DLOM to the return on the investment and quantitatively measures the impact of the rate of return as a function of the DLOM. This methodology has been used in several tax court cases including the first family limited partnership (FLP) case to go to trial. The “2021 Discount for Lack of Marketability Study” provides objective rate-of-return measures to implement the Johnson/Park empirical method and includes a thorough explanation and example on how to apply these data.

Did you ever value a bar or nightclub?

If so, then BVR wants to hear from you! We are preparing the newest in our What It’s Worth series of special reports, and it’s on bars, nightclubs, and adult entertainment venues. We already have an expert on the adult clubs, but we need some help on bars and nightclubs, i.e., value drivers, risk analysis, unique operational considerations, M&A landscape, a sample valuation report (redacted), etc. If you can help us, please contact the BVWire editor at andyd@bvresources.com. Thanks!

Market risk premium reverts in Germany

Recent analysis on the German market suggests that the perceived risk of equity investing has dropped back to its precrisis levels, according to Alvarez & Marsal, which does a regular analysis of pricing dynamics in Germany. In terms of pricing levels, forecasted 2021 EV/EBITDA multiples rank significantly above historical levels for certain industries. “In a 10-year comparison, Healthcare, Energy & Materials and Software & IT rank highest among industries, while Retail & Wholesale Trade is priced at a significant discount,” the report says. You can read the full report, “A&M Germany: Valuation Insights,” September 2021, if you click here.

BV movers . . .

People: Ben Smith, CPA, ABV, a senior manager at Clayton & McKervey of Southfield, Mich., has been promoted to a shareholder of the firm; he leads the consulting practice, specializing in buy- and sell-side financial and tax due diligence, quality of earnings, working capital analysis, and data analytics … The National Association of Certified Valuators and Analysts (NACVA) has named its outstanding members for the third quarter of 2021: Glenn Block, CPA, ABV, CVA, a partner in the accounting firm of Block & Aldinger (Allentown, Pa.), a firm with a focus on divorce, business valuation, forensics, and litigation support; Dorothy Haraminac, MAFF, who provides consulting and testimony in criminal and civil litigation, including complex commercial disputes as well as matrimonial disputes; and Josh L. Horn, CPA, ABV, CVA, whose firm, Horn Valuation and Tax, provides business valuations for family law, litigation, and exit planning.

Firms: San Ramon, Calif.-based Armanino LLP is acquiring Brigante Cameron Watters & Strong LLP (BCWS) of Torrance, Calif., effective on November 1; the deal will create Armanino’s sixth office in Southern California … Ridgeland, Miss.-based HORNE LLP has acquired healthcare data analytics company REDi Health … Flemington, N.J.-based BKC CPAs PC is adding Hodakowski & Hodakowski CPAs, also of Flemington … Calgary, Canada-based MNP has acquired Woodstock, Ontario-based MacAlpine and Co., a 35-member firm with a client base that ranges from farmers to machine shops with a special emphasis on a quick service restaurant (QSR) franchise … Indianapolis-based Katz, Sapper & Miller has launched a new state and local government consulting practice that will offer project management, grant and federal funds management, request for proposal management, and other services.

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

CPE events

What are the sources of public-company transaction data, and how do you develop a solid list of guideline firms? How do you adjust the multiples for size and growth? This webinar answers these questions and takes a fresh look at the guideline public-company method.

Professor Abbott continues to refine his methodology for separating active and passive appreciation of assets in divorce cases. His method is based on sound theory, good empirical evidence, and a clear common-sense framework.

 




We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) at: info@bvresources.com.

 


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