BVWire attended the annual business valuation conference of the New York State Society of CPAs (NYSSCPA) in New York City. As usual, it was an excellent conference, and here are just a few takeaways (we’ll have more in the next issue).
Committee chair Jeffrey Gibralter (Klein Liebman & Gresen LLC) opened the conference and introduced veteran valuator and business broker Toby Tatum, who discussed his total market method when using the BIZCOMPS database. He uses inferential statistics to select comps from this database of “Main Street” private-company transactions. He also has done a new analysis of the entire database and revealed some interesting findings. For example, all-cash deals are priced 10% lower than those with seller financing, so you need to adjust for that. You also need to take company size into account as there is “clearly a size effect” on the data. But there’s no need to adjust for geographical regions or if the deal was done years ago, according to his analysis.
Eric J. Barr (Marks Paneth) described his modified Delaware MRI method for valuing PTEs, which adjusts for things such as entity-level PTE income taxes, income retained in the business, effective income tax rates of the owners, state income taxes, and other factors. He also mentioned that for the first time there is a case pending in Tax Court that may result in a change in the IRS’s no-tax-affecting stance on valuing PTEs (see our prior coverage on this case).
Attorney Neil Katz (Smith and Chwat Inc.) mentioned an alarming statistic: 78% of small-business owners need to monetize their ownership in their firms to afford retirement. And more effective succession planning is needed, as only 15% of firms are successful in transferring to the next generation—that’s down from 30% 20 years ago.
“Sheer guesses” and “ludicrous” are the words Baruch Lev (New York University Stern School of Business) uses to describe some of what you see in financial reports today. There’s an average of 150 estimates in financial reports today as opposed to just 30 in 1995, he points out. The result is a mishmash of historical accounting and fair value estimates that render traditional financial statements useless. His recommendation is to recognize “strategic assets”—those that: (1) generate benefits; (2) are limited in supply; and (3) are difficult to imitate. These are the assets that create value, says Lev who explains more in the book The End of Accounting, which he co-wrote with Feng Gu (SUNY Buffalo).
Our congratulations to conference co-chairs Mitchell H. Chosak (FSA LLC) and Jean J. Han (Baker Tilly Virchow Krause LLP) for putting together an outstanding event!