Takeaways from the NYSSCPA BV/Litigation conference

BVWireIssue #213-2
June 10, 2020

valuation methods & approaches
fair value, market approach, conference, employee stock ownership plan (ESOP), coronavirus, COVID-19

Conference season is here but, of course, in virtual form due to the pandemic. BVWire attends the New York State Society of CPAs Business Valuation/Litigation Services Conference every year, and the one held May 18 continued its tradition of presenting excellent sessions with top-level speakers. Last week’s BVWire covered Chris Mercer’s keynote session, and here are some takeaways from a few of the other sessions.

‘Hazard pay’ for ESOP valuers: The description to the session on ESOP valuations says that valuers working in this area “feel that they deserve hazard pay.” Unclear rules, aggressive enforcement by the Department of Labor, and regulation by litigation have created a number of “hot button” issues and controversies, according to Jeffrey S. Tarbell (Houlihan Lokey). These issues involve warrants, projections, terminal value, control, DLOM, the GPC method, and the negotiation process surrounding ESOP transactions. You would think that, since the passage of ERISA in 1974, there would be a settled body of law and guidance with respect to ESOPs. Not so, says Tarbell. The DOL has not issued any formal rules that address when ESOP fiduciaries may reasonably rely on a valuation provided by an independent appraisal expert.

Fair value disclosures: Mark Zyla (Zyla Valuation Advisors) discussed a document from the technical standards board of the International Valuation Standards Council, “Dealing With Valuation Uncertainty at Times of Market Unrest.” Zyla is chair of the IVSC Standards Review Board. He pointed out that the phrase “valuation uncertainty” does not refer to “risk” as appraisers typically think of the term, but rather it refers to the notion that the process of valuation now faces uncertainty in terms of market disruption, the availability of inputs, and the analyst’s choice of a valuation method or model. Zyla stresses the importance of disclosures in your valuations about your assumptions. For example, if the current environment has rendered certain data unusable, explain how you made your adjustments for that. If you change your valuation approach or method, explain the reasons why.

TCJA and COVID-19: Daniel R. Van Vleet (Griffing Group) covered the valuation-related characteristics of the Tax Cuts and Jobs Act, under which the value of most businesses increased in 2018, with C corps seeing a greater value increase than pass-through entities (PTEs), he noted. He also observed that the value benefit of PTE service business versus C corps has diminished and will decline further during the 2018-to-2025 TCJA sunset period. Also, the value benefit of PTE nonservice business versus C corps is still material but will decrease during the sunset period. Various state tax attributes and sunset provisions of the new tax law continue to be important considerations for PTE valuation.

Van Vleet co-wrote an article that provides a series of quantitative solutions that address the tax law changes, as well as the changing nature of the absolute and relative values of C corps and PTEs during the 2018-to-2025 TCJA sunset period. He also pointed to another article on valuing bonus depreciation. Both of these articles appeared in Business Valuation Review, the journal of the American Society of Appraisers (the journal’s archive is part of the BVResearch Pro platform).

As for COVID-19, Van Vleet pointed out that valuation methods should be revisited for valuation dates occurring after mid-February 2020, which is generally recognized as the point when the virus began to impact the capital markets. He offered alternative market-based methods to consider for valuation dates occurring after mid-February. (BVWire has an example of one of the alternatives he offered.)

Kudos to conference chairs Mitchell Chosak (FSA LLC), Jean Han (Clarion Consulting Associates LLC), and Andrew Park (Andrew M. Park, CPA, PC). 

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