Van Vleet comments on use of SEAM in Ryan case

BVWireIssue #226-1
July 14, 2021

judicial dissolution
expert testimony, fair value, mergers and acquisitions (M&A), buyout, discounted cash flow (DCF), s corporation, corporate dissolution, majority shareholder, guideline publicly-traded company method

BVWire recently reported on the Ryan Trust v. Ryan case, a buyout dispute in which the Nebraska Supreme Court affirmed the district court’s decision to credit the valuation testimony of the expert for the late majority shareholder. As part of their analyses, both parties’ experts applied an S corp premium whose rate was based on the SEAM model. Daniel Van Vleet (GriffingGroup), the developer of the SEAM model, has the following comment on the case.

“In Ryan, testimony was provided by two nationally recognized valuation experts. Both opposing experts initially valued the subject S corp on a C corp equivalent basis. The Van Vleet Model (described as the ‘S Corporation Economic Adjustment Model’—aka SEAM) was used to adjust the C corp value to reflect the ‘economic benefits’ associated with an S corp.

“Both experts initially concluded a SEAM of 1.14 (14% equity adjustment). However, one of the experts adjusted the SEAM downward by 50% to a 7% equity adjustment (SEAM of 1.07). This subjective adjustment was made to reflect the assumed risk that the subject company would become a C corp in the future. But the district court was not convinced that this adjustment was appropriate and used this treatment as further evidence of the ‘downward bias’ of the expert.

“The SEAM is a mathematical formula that is primarily based on federal and state tax rates. I generally recommend against making subjective adjustments to the calculated SEAM absent significant empirical support data. In Ryan, it appears the court found that the subjective adjustment to the SEAM was not appropriate.”

A digest of Ryan Trust v. Ryan, 308 Neb. 851 (April 9, 2021), as well as the court’s opinion, are available at BVLaw.

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