Some great tips from the NACVA conference
BVWire was at the National Association of Certified Valuators and Analysts (NACVA) conference in New Orleans. Here are a few insights we picked up at the sessions.
- Keynote speaker Sam Allred, CPA, says practice development is about having a sincere desire to help people.
- One way to help clients do business with you is to accept electronic payments from them (e.g., PayPal, ACH, wire, Apple Pay).
- NACVA unveiled new standards that deal with an engagement to review another practitioner’s valuation report.
- The market approach may emerge as a more prevalent method for valuing intangible assets due to increased transactions and merchants in this space.
- “Relief from pay per click” is a new approach to measure damages due to trademark misuse over the Internet.
- When valuing family limited partnerships, make sure you read the entire document even if the lawyer says it’s a standard agreement.
- Don’t use the word “draft” to label a draft report—use “incomplete work product.”
- Pending research reveals there is significant double counting if you use a size premium and also DLOM.
- An extensive analysis of existing research reveals that shareholder taxes definitely affect value of PTEs, refuting the IRS and Tax Court position.
- Valuation practitioners should volunteer to give talks at the local bar association to get on the radar of attorneys and trigger new business.
- Valuators need to specialize and become an expert in a niche area in order to grow their practice.
- A great book about how to become an expert in a particular field is The Visible Expert, a free e-book available at www.hingemarketing.com.
More details coming up in the August issue of Business Valuation Update. Congratulations to NACVA for an excellent conference!
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Discovery reveals expert’s lack of independence
It does not pay to fudge on an expert report. That’s the message from a court in a state statutory appraisal action in which discovery evidence cast doubt on the expert’s truthfulness and independence.
Arm’s-length transaction: When a broker raised the possibility of a sale to two related construction companies that had run into dire financial straits as a result of the economic downturn, they agreed to the deal. The sale was deemed to be arm’s length. But two minority stakeholders objected to the transaction, and one of them was the companies’ former CFO, CEO, and chairman.
The sale price was $75.01 per share, which the objector claimed did not represent the fair value of his shares. At trial, both parties offered expert testimony from CPAs who also were credentialed business valuators and who agreed that in this instance the net asset value approach was the preferred valuation methodology. But their differing treatment of the companies’ accounts receivables and “backlog” resulted in a big value gap. Backlog referred to “future work that the [companies] had contracted to do but which had not yet been completed.”
The objector’s appraiser valued the accounts receivable at over $42 million and the backlog at about $16.5 million. His calculation yielded a per-share price of approximately $199. In contrast, the companies’ expert valued the accounts receivable at a little over $18 million and the backlog at only $1.5 million, yielding a per-share price of $70.81, thus less than the sale price.
Expert adopts client’s valuation: The trial court discredited the testimony from the objector’s expert. It noted “clear errors” in the expert’s report, which the companies’ expert had corrected, and it questioned the independence of the appraiser based on a letter from the appraiser to the objector and his counsel and the objector ’s responses to discovery questions from the opposing side. This discovery evidence suggested that the appraiser used the client’s valuation as a “starting and stopping point,” the court said. Also, the expert failed to account for the obligations the company earlier had incurred in connection with substantial layoffs and which it could not meet at that time. The court pointed out that “such reporting is clearly required under all applicable standards for business value reporting.” And the expert did not disclose or discuss the assumptions underlying his accounts receivable and backlog calculations.
The trial court adopted the company expert’s valuation and the state Court of Appeals affirmed, finding the trial court gave detailed reasons why that valuation was more credible.
Takeaway: Nothing beats an expert’s careful, honest work and knowledge of the applicable discovery rules. Here, the expert testimony self-destructed due to technical errors and claims that a skilled opposing attorney could easily prove to be flimsy.
Find an extended discussion of TWC I, L.L.C. v. Damos, 2015 Iowa App. LEXIS 438 (May 20, 2015), in the August edition of Business Valuation Update; the court’s opinion will appear soon at BVLaw.
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Insider’s view of IRS job aid on reasonable comp
At the recent NACVA conference in New Orleans, former IRS manager Michael Gregory (Michael Gregory Consulting LLC) did a session on the recently released IRS job aid on reasonable compensation. Gregory worked on the job aid while he was with the agency.
Practice tips: The IRS uses three sources of data—Watson Wyatt, RMA’s Annual Statement Studies, and the Economic Research Institute (ERI)—when examining reasonable compensation, but ERI is used only for classification purposes, not for bottom-line numbers, according to Gregory. In examining compensation issues, the IRS looks at ratios for red flags, he points out. For example, if a company is operating in the 25th percentile and its compensation is in the 90th percentile, the IRS is likely to “take a look.” Also, if compensation reported by a pass-through entity drops materially (without a corresponding drop in financial performance), the IRS will take note but will typically not take any action. However, if this continues in a second year, an audit could be triggered if the IRS feels the company is trying to avoid payroll taxes.
Gregory will conduct a webinar on the IRS job aid on August 4. He also has a new book, How the IRS Determines Reasonable Compensation with Job Aid Commentary by the Original IRS Champion. The IRS job aid is available from BVR as a free download.
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Word of caution for healthcare valuators in new court ruling
When valuing a business arrangement or transaction between a healthcare entity and physicians, the valuation must not include a consideration of anticipated referrals. If it does, the hospital or healthcare system making payments under the arrangement could face huge penalties for making illegal kickbacks to physicians, as a recent appellate court ruling illustrates.
New ruling: In a new ruling, a three-judge panel of the 4th U.S. Circuit Court of Appeals unanimously upheld a $237 million judgment against the Tuomey Healthcare System in South Carolina in a false Medicare claims case. Prosecutors said the fraudulent claims totaled $39 million. The government was awarded additional damages and civil penalties bringing the total to $237 million.
A jury had found the hospital guilty under the Stark Law and False Claims Act of providing illegal kickbacks to a group of local doctors under part-time employment contracts that the government said paid well above fair market value. Although the deals made no mention of referral fees, the government argued that the excess amount was paid to ensure that they would continue to get those fees for clinical procedures. The hospital argued that it had both legal and fair market value opinions that backed up the appropriateness of the employment agreements. However, the jury disagreed, and an appellate court has upheld the ruling.
The case is U.S. ex rel. Drakeford v. Tuomey, No. 13-2219 (4th Cir. 2015).
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Healthcare providers dodge a bullet in Supreme Court ruling
The recent decision by the U.S. Supreme Court in King v. Burwell is good news for hospitals, which faced the threat of losing billions of dollars in patient revenue. The ruling upholds subsidies under the Affordable Care Act for individuals who buy insurance through federally sponsored exchanges.
A report from the Urban Institute projected that the hospital industry would lose $6.3 billion in revenue if the subsidies were struck down. Some insured patients would have dropped coverage, and bad debt and uncompensated care would have risen. The average hospital in a state that relied on a federal exchange could have lost more than $1 million in patient revenue per year, the report estimates.
The ruling should not have much of an impact on healthcare providers, as they will continue to implement strategies consistent with the ACA.
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Global BV news
IIBV moves ahead with global courses
Due to a demand for a recognized global designation, the International Institute of Business Valuers (iiBV) is proceeding with its first educational courses this fall, according to an interview with Michael Badham, executive director of iiBV. “Working with our partners in the Education Committees of ASA and CICBV, we hope to have plans finalized soon for the iBV designation.” The courses will be localized but will retain a consistent basis, according to Badham. “The initial course material will be in English, but we’re looking at offering in Arabic as well,” he says. There are other regions interested in offering the programs. “There’s a lot of interest from Latin America,” he says. “I recently visited Bogota, Colombia, to discuss with valuers, intermediaries, and regulators, and we have discussions underway.”
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Pratt’s Stats hall of famers for 2Q15
More than 310 deals were added to Pratt's Stats, which now lists over 23,000 private-company merger and acquisition (M&A) transactions in its database. Business brokers and other intermediaries who contribute the most transactions are inducted into the Pratt’s Stats Hall of Fame. For the second quarter of 2015, they are:
- Ian MacLachlan (Business Team Inc.);
- Steve Josovitz (The Shumacher Group Inc.);
- Stanley Pollock (Professional Practice Planners); and
- Trevin Rasmussen (Bristol Group).
BVR would also like to congratulate the second-quarter iPad Mini raffle winner, Gary Rogers (Kingsley Group), and the $250 New Contributor raffle winner, Christine Baker (Charter Capital Partners). BVR extends sincere thanks to these and all of the individuals who have helped BVR build Pratt’s Stats into the important data source that it is today.
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Free on-demand demo of new PitchBook Excel Plugin
A new Excel plugin for the PitchBook/BVR Guideline Public Company Comps Tool will drastically reduce the time it takes to develop and analyze a set of defensible comps. BVR recently conducted a webinar that demonstrates the new plugin, and you can have free access to a recording if you click here (free registration required).
The recently launched PitchBook Excel Plugin helps users easily integrate data with Excel, build their own model, or choose from existing templates. With this plugin, users can easily examine, manipulate, and update analysis with one click. Designed specifically for business valuation professionals, the PitchBook/BVR Guideline Public Company Comps Tool builds a list of comparables with comprehensive financials and links to source documents, income statements, balance sheets, and statements of cash flow. Set your criteria, do the search, and then easily review and modify the list. You can access the complete Excel Plugin User Guide here.
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BV movers . . .
People: Steven Boyles, partner at Hemming Morse LLP’s San Francisco office, was appointed co-chair of the Forensic Accounting & Litigation Support specialty group of The International Accounting Group (TIAG), a worldwide alliance of independent accounting firms with more than 115 member firms in over 65 countries … P. Dermot O’Neill (P. Dermot O’Neill, CPA PC) received the 2015 Thomas R. Porter Lifetime Achievement Award from NACVA at its annual conference in New Orleans … Margaret Shanley was named a principal and national director of transaction and advisory services for CohnReznick and will be based out of the Los Angeles office … Michael Tobiason joins REDW LLC as a practice leader in the Business Valuation, Forensic and Litigation Services department and will work out of the firm’s Phoenix office.
Firms: Citrin Cooperman was honored as the “CPA Firm of the Year” at the Association for Corporate Growth New York Chapter’s Fifth Annual Champion’s Awards … HLB International recently grew its network with the addition of the Bangalore, India, firm Guru & Jana, which has over 200 staff and provides services across audit and accounting, tax, business advisory, and consulting. In Europe, HLB added the Italian firm Marchionni & Partners of Pesaro, which specializes in tax litigation in the following industries: engineering, furniture, cookware, software, and building and construction industries. Lujan Auditores of Las Palmas de Gran Canaria, Canary Islands, also joined the network to provide a wide range of audit, tax, and consulting services across multiple sectors including tourism, fish industry, energy, retail, real estate, car rental, automotive distribution, health, and the public sector … Ryan formed a strategic alliance with AARK & Co, a chartered accountants firm based in India, to support the firm’s global expansion across Asia.
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July heats up with CPE events
Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist bvreducation@bvresources.com.
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