Exposure drafts issued in fair value quality initiative

The ASA, AICPA, and RICS have issued two exposure drafts for public comment that relate to the ongoing initiative to improve the quality of financial reporting valuations for U.S. publicly traded companies. The initiative will significantly impact appraisers who prepare financial reporting valuations, and it includes the development of a new credential for valuation professionals. The credentialing process will be subject to ongoing quality oversight and compliance with a “mandatory performance framework,” which is the subject of the new exposure drafts.

Comments due June 24: The two exposure drafts issued are: Proposed Mandatory Performance Framework for the Fair Value Quality Initiative and Proposed Application of the Mandatory Performance Framework for the Fair Value Quality Initiative. Written comments should be sent either to the AICPA, ASA, or RICS and will be available for public inspection at the offices of the respective organization for one year beginning July 11, 2016.

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Key ESOP ruling zeroes in on valuation and remedies issues

In a gnarled ESOP case, the 5th Circuit Court of Appeals recently issued an important decision on fiduciary liability and remedies in case of breach. The trial court had found the trustees violated their duties of loyalty and prudence and engaged in a prohibited transaction assisted by a disreputable appraiser. It expressly noted the remedy questions were harder to resolve than the liability questions, and it suggested its valuation-related findings might be “vulnerable” on appeal. It need not have worried.

Overpayment: When the owner of a closely held company wanted to divest himself of the company, he orchestrated a series of transactions to sell 100% of the company’s shares to its employees by way of an employee stock ownership plan. In each transaction, the plan bought stock through an employee stock ownership trust for which the owner-seller and two persons with whom he had a close working relationship served as trustees. The trustees based the share price on valuations an appraiser, who was beholden to the owner-cum-seller-cum-trustee, had performed.

Subsequently, the DOL and two plan participants filed separate lawsuits alleging the trustees overpaid for the stock because the appraiser’s valuations did not reflect the fair market value (FMV) of the stock. The district court, which consolidated the suits, found that neither the appraiser nor the trustees were truly independent and looking out for the interests of the ESOP and that it was not reasonable for the trustees to rely on the appraiser’s valuations.

The court rejected the DOL’s demand to rescind the transactions and instead awarded over $4.5 million in equitable restitution in the amount the ESOP overpaid. Overpayment was a function of the contract price and the stock’s fair market value on each transaction date. To calculate FMV, the court considered the testimony of three noted valuation experts retained by the plaintiffs, the DOL, and the defendants, respectively. The experts were equally credible, the court said. Different experts used different methods, different assumptions, different estimates, and they reached different conclusions. To arrive at a final value determination, they all averaged the results. “This method tempered the outliers that some methods produced,” the court observed with approval. For its part, the district court averaged the experts’ valuations but weighted the results the defendants’ expert achieved at 50% and the much lower valuations the DOL’s expert and the individual plaintiffs’ expert proposed at 25% each. It dismissed the appraiser’s valuations as “not credible.”

‘Thoughtful approach’: The defendants appealed the liability and remedy findings with the 5th Circuit, and the DOL cross-appealed on the remedy. The appeals court largely affirmed. It noted that the parties “fought bitterly” over valuation and remedies issues. On appeal, the defendants and the DOL particularly objected to the district court’s averaging process. (The plaintiffs defended it.) Their arguments had no traction.

Prior decisions “have frequently accepted an average of expert valuations or estimates falling within a range of evidence offered,” the 5th Circuit pointed out. Here, the district court “carefully” set forth its findings and explained their basis in the record. The district court acknowledged its approach would be wrong if one expert were more credible than another, and it reached a reasonable average supported by evidence, the appeals court said. The district court’s “thoughtful approach to a complex question was founded in established valuation methodology,” the appeals court concluded.

Takeaway: In a complex ESOP case in which valuation and remedies issues were paramount, the 5th Circuit upholds the district court’s decision to grant equitable restitution based on the lower court’s computation of how much the ESOP overpaid.

Find an expanded discussion of Perez v. Bruister, 2016 U.S. App. LEXIS 8046 (May 3, 2016) (Bruister II), in July’s Business Valuation Update; the court’s opinion will be available soon at BVLaw. A digest and the opinion of the district court, Perez v. Bruister, 2014 U.S. Dist. LEXIS 148314 (Oct. 16, 2014), are already available at BVLaw.

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Some key takeaways from the NYSSCPA BV conference

BVWire attended the recent annual business valuation conference of the New York State Society of CPAs (NYSSCPA) in New York City. It was an excellent conference, and here are a few takeaways:

• George Wilfert of the PCAOB said that there’s an increase in the number of audit deficiencies regarding auditors’ testing of fair value measurements associated with business combinations. He also mentioned that the standards for auditors’ use of specialists, such as valuation experts, will be changing.

• The DOL continues its crackdown on ESOP valuations it perceives as faulty, according to Thomas Leroe-Munoz and Daniel Schiffer, both part of the DOL’s ESOP enforcement efforts. The DOL/GreatBanc Fiduciary Process Agreement serves as overall valuation guidelines, but Leroe-Munoz told the audience that the agreement is “not a totality of all the requirements.”

• Daniel Van Vleet (Stout Risius Ross) revealed that the Van Vleet model (S corporation economic adjustment model) is being used for the first time in a U.S. Tax Court case, and by both the IRS and the taxpayer (see the May 25 issue of BVWire).

• Mark S. Gottlieb (Mark S. Gottlieb, CPA, PC) says his firm spends a good deal of time on an industry-specific review because it can be very meaningful in terms of drawing conclusions of value.

• More companies are performing preacquisition valuations, and experts are being called in earlier in the process, according to Raymond Weisner (Valuation Research Corp.). He also pointed out that 50% of clients’ acquisition models have material errors.

• Craig Jacobson (GlassRatner) mentioned an Internet phenomenon known as “cyberstuffing” where a competitor’s trademark is encrypted into a domain name to redirect the competitor’s customers to the perpetrator. This, of course, can trigger a claim for damages.

Complete coverage of the conference will be in the July issue of Business Valuation Update.

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Meeting the challenge of valuation practice growth

During a recent Twitter Q&A session sponsored by NACVA, Rod Burkert (Burkert Valuation Advisors) and Mel Abraham, a valuation and entrepreneur expert, fielded questions about growing a valuation practice during today’s tough times.

Good advice: One Tweet asked about how valuation professionals can counter a marketplace that sees what they do as a commodity. “Clients aren't asking us for a report—they want us to solve a problem,” says Burkert. “We have to show them the value we bring to the table.” Abraham agrees. “The report is the commodity; our real product is trust,” he says.

During a conversation about specializing and finding a niche in valuation, a Tweet popped up: “Why do you think that’s so important?” Abraham points out that a generalist is not perceived as an expert or an authority. “You can’t be everything to everyone. Make a choice,” he advises. “Nobody goes to a generalist to get their problem solved,” says Burkert. “People seek out specialists. Why should appraisers be any different?”

Many valuation experts are “old school” and are used to traditional advertising. Any advice for them with today’s newfangled marketing technology? “You can't use yesterday's tools in today's market and expect to have a profitable practice tomorrow,” says Burkert, who points out that 80% of clients looking for experts start with an online search. “If you're not comfortable with websites, blogging, or social media, find a virtual assistant who can help you.”

More advice: Burkert and Abraham will conduct a webinar, Today’s Leading Edge Tools For Practice Growth, on June 14. Don’t be left behind!

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Hospitals eye bigger piece of urgent care center market

Hospitals will become bigger players in retail healthcare as the urgent care market consolidates, according to Elliott Jeter and Corey Palasota, who are both with VMG Health, a firm devoted to healthcare valuation. During a recent webinar presentation, Changes in Urgent Care Center Valuation: Are You Keeping Pace? they shared other observations about valuing this type of entity:

• The market is becoming more competitive because of low barriers to entry;

• Buyers are interested in “platform” acquisitions (top facilities in an area that has a corporate infrastructure), and multiples are high for these acquisitions;

• Infrastructure and accreditation are important; and

• The typical buyer will be increasingly strategic.

Learn more: For more information about the webinar, click here. This was the first webinar in a series based on the newly published 4th edition of the BVR/AHLA Guide to Healthcare Industry Finance and Valuation. The next installment in the series will be on June 23—Valuation Techniques for a Physician Practice: Getting it Right, with Mark Dietrich, editor of the healthcare guide.

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Think you’re a good expert witness? ASA to conduct mock trial

A must-see session on our list for the ASA Advanced BV Conference September 11-14 in Boca Raton, Fla., is an all-new mock trial featuring appraisers as expert witnesses. We can’t wait to see what an experienced trial attorney can do to even the best of experts. Plus, some ethical issues will be presented to demonstrate how to stay out of trouble. Check out the mock trial—a first for the ASA conference—as well as the other sessions taught by the world’s preeminent business valuation thought leaders. BVWire will be there—we hope to see you, too!

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Global BV news: IVSC finalizes IVS 2017 exposure drafts The standards board of the International Valuation Standards Council has issued exposure drafts of the chapters that will comprise IVS 2017. Comments are due on two different dates for two groups of exposure drafts. Comments are due July 7 for: IVS 104, Bases of Value; IVS 105, Valuation Approaches; IVS 210, Intangible Assets; and Introduction and Framework for IVS 2017. Comments are due August 31 for: IVS 101, Scope of Work; IVS 102, Investigation and Compliance; and IVS, 103 Reporting; IVS 200, Businesses and Business Interests; IVS 300, Plant and Equipment; IVS 400, Real Property Interests; IVS 410, Development Property; and IVS 500, Financial Instruments. The IVSC wants comments from those who agree with the proposed standards as well as from those who have suggestions for improvement. Those who disagree should be as detailed as possible and suggest alternatives supported by specific reasoning. back to top Ni hao! Valuation issues in China In a YouTube video, Ray Moran (MG Valuations) talks about valuation and cultural issues often encountered when working with China-related transactions. Moran lived in China and has worked with Chinese firms for 15 years and says there is “so much activity” these days. Outbound Chinese M&A will hit record levels this year, he says, with large investments in agribusiness, dining/lodging, and technology. In terms of valuation methodology, cost approaches tend to be more prevalent in China than income-based approaches. China is very different culturally than anywhere else in the world, so it’s important to “form a proper business relationship” with Chinese clients. Extra: The International Institute of Business Valuers (iiBV) recommends establishing a global designation for business valuers to be known as the “IBV” (International Business Valuer) that would be appended to the qualified VPO’s designation and administered by the VPO. Moran is also the chair of the marketing committee for the iiBV. back to top

BV movers . . .

People: Stephen Chipman, former CEO of Grant Thornton U.S., was appointed CEO of the Boston firm, Radius, a provider of global expansion services and solutions … Carla Glass joined Meyers, Harrison & Pia Valuation and Litigation Support as a managing director based in the firm’s New Haven, Conn., office … Bill Kleinschrodt joined Transworld Business Advisors of Alabama, a regional business advisory company based in Mobile, as an M&A advisor … Charles “Chuck” Morgan, formerly of Jackson, Morgan & Hunt PLLC, has joined CliftonLarsonAllen’s Seattle office … Alan Whitman was named chairman and CEO of Baker Tilly Virchow Krause LLP and is based out of the firm’s Chicago office … F. Michael Zovistoski, a partner and managing director at UHY LLP of Albany, N.Y., was installed as the 97th president of the New York State Society of CPAs.

Firms: The Birmingham Business Journal ranked the Birmingham firm Barfield, Murphy, Shank & Smith No. 1 as “Best Places to Work” in the large company category … Lautze & Lautze CPAs & Financial Advisors, a firm in San Francisco and San Jose, Calif., merged with Marcum LLP on June 1 … Morse Wittwer Sampson, based in Fresno, Calif., merged with Moss Adams effective June 30, 2016 … The Rwandan firm Nambiar Associates joined Grant Thornton as a new member and will operate as Nambiar Grant Thornton.

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CPE events heat up

Today’s Leading Edge Tools For Practice Growth (June 14), with Mel Abraham (Mel Abraham Inc.) and Rod Burkert (Burkert Valuation Advisors).

Navigating a Fair Value Audit Review (June 21), with Kesh Iyer (RSM) and Lindsay Hill (RSM). This is Part 4 of BVR's Special Series on Fair Value.

Valuation Techniques for a Physician Practice: Getting it Right (June 23), with Mark Dietrich. This is Part 2 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

Litigation Dynamics and Daubert Challenges: Excelling as an Expert (June 28), with Weston Anson (Consor).

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