The ability to gather all kinds of useful tips and advice from leading valuation practitioners is one of the benefits of attending conferences. There was no shortage of good ideas at the annual conference of the National Association of Certified Valuators and Analysts (NACVA) in Las Vegas. Here are just a few pieces of helpful guidance from some of the sessions.To read more about each of these ideas, download the complete article.
1. Augment the standard DCF for the TCJA.
A number of sessions dealt with the Tax Cuts and Jobs Act (TCJA), which impacts “everything” in business valuation. There is still much to be learned, and further IRS guidance on the various provisions (especially the new qualified business income deduction for PTEs) is highly anticipated. In general, the new tax law may trigger higher costs of capital due to changes in the corporate tax rate and new limitations for interest expense deductions. But there are competing effects due to the expectation of increased net cash flows. Of course, a key part of the analysis is what the subject company will do with the future tax savings.
2. Avoid the advocacy trap.
How can two highly qualified valuation experts come up with such different conclusions? Different legitimate assumptions about the many variables and inputs in a business valuation can affect the opinion of value, pointed out Marc Bello (Edelstein & Co. LLP) and Courtney Sparks White (Blue Sky Business Valuation LLC). There can also be differences in legal guidance, information availability, and access to management and other materials during the due diligence process. And, of course, mistakes can be made, the speakers observed.
3. Consider exit planning services.
A case study presented by Bob Grossman and Melissa Bizyak (both with Grossman Yanak & Ford LLP) illustrated the nightmare of an ambiguous buy-sell agreement. This points up a good opportunity for valuators to help craft these and also do an annual valuation—part of an exit planning practice area.
4. Read the business interruption policy.
The most important piece of advice when calculating the value of business interruption (BI) is to read the insurance policy, said Kerrie Merrifield (Axiom Forensics). And don’t ignore the fine print. What the policy says will dictate what you do from a valuation standpoint. For example, there are restrictions that limit the loss value that can be claimed, such as a “waiting period.” If there’s a disaster and people can’t get to your business, the business interruption loss clock starts to tick after a certain number of business hours have elapsed. Also, business interruption may not be covered if the triggering event, such as an earthquake, is not covered.
5. Dig into weeds to value cannabis firms.
Valuing a cannabis firm? It’s the ultimate challenge, say Ron Seigneur (Seigneur Gustafson LLP) and Stacey Udell (HBK Valuation Group), co-authors (along with Brenda Clarke) of a new book, The Cannabis Industry Accounting and Appraisal Guide. Risk is a major factor, with company-specific risk premiums ranging from 30% to 40%. When valuing a cannabis firm, focus on four specific issues:
- License rights;
- Location; and
- Legislative environment.
6. Use forensics.
Don’t get blindsided by the opposing expert doing a forensic analysis and making large normalization adjustments, warned Marc Bello and Courtney Sparks-White. Especially for a valuation in a litigation setting (such as marital dissolution), the expert should have both valuation and forensic experience so that forensics can be included in the analysis. This helps the engagement run smoothly and at a reasonable cost, without requiring two separate experts.
7. Check state law regarding personal financial data.
Some audience members were surprised to learn that, in some states, financial expert witnesses are required to turn over their personal financial information to determine whether or not they are a “professional witness.” But such is the case, according to Alan Zipp (Alan Zipp, CPA, PC), a CPA, attorney, and accredited in business valuation. Check your state’s rules on this, he advised, also noting that there’s no definition for “professional witness.”
8. Pay more attention to compensation.
Under the new tax law’s 20% PTE deduction rules, it’s more important than ever to make sure your analysis of reasonable compensation will survive the increased regulatory scrutiny that’s expected. The concept of the determination of reasonable compensation from a valuation standpoint hasn’t changed, but more diligence is needed in collecting information that will support your determination, said Stephen D. Kirkland (Atlantic Executive Consulting), an expert who deals solely in compensation issues.
9. Check out FAQs on calculation engagements.
Not many attendees were aware that the AICPA has issued a document that includes 48 FAQs on calculation engagements. We’re aware that some valuation experts will not get involved with calculation engagements, but we saw no evidence of that stance here. Zachary Meyers, the incoming chair of the NACVA standards committee, said he used calculation reports “quite a bit” in litigation engagements. They are what attorneys want, and they can be a “perfect fit” for helping in a settlement, and 98% settle, in his experience, he said.
10. Check your pretax discount rate.
Here’s a common error even the “big shots” make, said Everett Harry (Harry Torchiana LLP) in his session on modelling and discounting damages. Is it correct to convert an after-tax discount rate (ATDR) to a before-tax discount rate (BTDR) using this formula: BTDR = ATDR/(1 - tax rate)? No, he says. The correct formula for computing BTDR from ATDR, assuming a constant growth rate (g) and tax rate (TR), is:
BDTR = [(ATDR - g)/(1 - TR)] + g
This avoids tax affecting the growth rate, he pointed out.
11. Don’t bury your calculations.
Veteran valuation expert Chris Mercer (Mercer Capital) gave a wonderful keynote address on the business valuation (BV) profession in transition, pointing out that there’s a great opportunity for Gen Xers and millennials because of the aging of the profession. A show of hands revealed that most attendees at the conference were baby boomers. Mercer presented statistics that backed this up. For example, the median age of NACVA members is 53 years old, similar to the age of BV professionals in the other valuation professional organizations.
12. Consider intervening causes for lost profits.
If you are involved in a lost profits engagement on the plaintiff side, include any intervening causes in your analysis, advised P. Dermot O’Neill (P. Dermot O’Neill, CPA PC). That way, you’re “in control” of the matter. If you don’t address it, the defendant will challenge you, claiming that changes in competition, pricing, economic conditions, or some other factor impacted the plaintiff’s financial results during the damages period.
Get more details on these 12 ideas.
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