Business Valuation Year in Review: The Most Important Developments of 2019

It was an exciting year for the business valuation profession in 2019! Some of the developments include important court rulings on tax affecting pass-through entities, a possible upending to the goodwill model, a new cost of capital platform gaining traction, and advances in fair value for financial reporting.

For 25 years, Business Valuation Update has chronicled these developments as well as the latest thinking in methodologies and changes in regulations and professional standards, new and updated resources, and practice-building ideas. Here are some of the notable happenings of 2019, which were covered within the pages of BVU.

Tax affecting. 

Since the Gross case in 1999, valuation experts have been unable to convince the Tax Court of the need to tax affect the earnings of a pass-through entity when doing the valuation. In subsequent cases, the IRS continued to win on its stance of “no tax affecting.” Two major court decisions emerged in 2019 that may be a lasting victory for tax affecting. First, the Kress case was the game changer in that both the taxpayer and the government tax affected the earnings of the subject S corp. But the decision was from a federal court, not a U.S. Tax Court memo or a decision from a U.S. Court of Appeals, so there was a question about its precedential value.

Then came a U.S. Tax Court ruling in an Oregon gift tax dispute, accepting the taxpayers’ tax-affected valuations of a PTE without overturning Gross. The court recognized there are tax consequences to PTE owners that valuation experts must address by quantifying the burden and benefit related to flow-through status. That case is Estate of Aaron Jones v. Commissioner, T.C. Memo. 2019-101 (Aug. 19, 2019), which provides further support for the use of tax affecting. Another case (which is still pending as of this blog post) is Cecil et al. v. Commissioner of Internal Revenue, and it involves a gift of shares in the Biltmore Co., which operates the famous Biltmore estate that is now a tourist attraction. When that case is decided, more clarity may be given to S corp valuations.

Revisiting goodwill. 

A very important issue reared its head in 2019 with the FASB revisiting the idea of annual impairment testing versus amortization of goodwill. The group issued an Invitation to Comment (ITC) on how to account for certain identifiable intangible assets acquired in a business combination. Private companies and not-for-profit organizations got relief from the rules after struggling with the burden of annual testing. In preliminary outreach with public-company stakeholders, the FASB received mixed feedback “indicating that the benefit of certain intangible asset and goodwill impairment information might not justify the cost of preparing and auditing that information,” according to the 34-page ITC.

The FASB received almost 100 comment letters on the ITC. Also, a roundtable discussion was held at FASB headquarters in November with a mix of stakeholders. Members of the valuation profession expressed serious concerns over going back to a model that treats goodwill as a wasting asset. Also, the point was made that the acquisition of a business assumes a going-concern premise, so the concept of goodwill amortization is not compatible with this premise.

The FASB has done an excellent job of laying out the issues and soliciting comments from a wide variety of stakeholders. But this is just the first step. Next, the comments will be processed, and a presentation will be made to the FASB board, which will decide on what action to take. Typically, an exposure draft would be issued and go through one or more revisions before rules are finalized. This entire process can take up to several years to complete.

Cost of capital. 

2019 was the first full year of operation for an online platform, the Cost of Capital Professional, launched by Business Valuation Resources. This is an independent, transparent, and less complex resource rooted in academics that is affordable to all, not just the big firms. How does this platform stack up against the Duff & Phelps Cost of Capital Navigator? During a conference session, Jim Hitchner (Financial Valuation Advisors Inc.) put both platforms through their paces using a hypothetical subject company using various input options —and the results were similar. The result was a cost of equity range of from 15% to 17% from both platforms for the buildup method and 15% to 16% for the modified CAPM, which is “not that much different,” he said.

In the audience were users of each platform, so they both clearly have a place in the valuer’s toolbox. The BVR Cost of Capital Professional is not the massive system that the Duff & Phelps Navigator is, but in its simplicity lies its appeal to some users. In fact, some users have both platforms and compare the results, which is certainly a welcome option in this very challenging process.

Fair value for financial reporting. 

Business Valuation Update attended the RICS Business Valuation Symposium in New York City, and one session chronicled the events and developments in fair value for financial reporting that strikingly illustrated the advances the profession has made in enhancing the public trust. What regulators once viewed as a “fractured” profession has pulled together to respond to criticisms over a perceived lack of unified qualifications, standards, and enforcement in this area. Anthony V. Aaron, formerly with EY and now an adjunct professor at the University of Southern California (Leventhal School of Accounting), and Jay E. Fishman, managing director at Financial Research Associates, conducted the session. Both of these individuals—along with other speakers and attendees in the room—have been personally responsible for much of the progress the profession has made.


A highlight of 2019 was in the area of healthcare—groundbreaking research and data analytics that challenge commonly held beliefs about survey data, physician compensation, and fair market value. Mark O. Dietrich (Mark O. Dietrich, CPA, PC) wrote a peer-reviewed article, which BVU was allowed to reprint from the journal of the Healthcare Financial Management Association (HFMA). In the article, Dietrich makes the case for the entire healthcare industry to rethink its approach to the fair market value of physician compensation. He advises that the use of surveys should be limited to rough benchmarking and the focus should rather be on localized relative value unit (RVU) data that reflect actual local-market conditions.

A few other articles of note from the BVU concerning methodology:

  • A method to adjust enterprise values that were calculated using pre-TCJA M&A multiples;
  • Determining and applying an appropriate market rate in the valuation of privately held promissory notes;
  • How an appraiser looks to the private capital market to estimate cost of capital for private-company valuations;
  • The application of option pricing model techniques to the valuation of interests in early-stage enterprises based on a new AICPA accounting and valuation guide; and
  • A testifying expert explains how to value a financial advisor’s book of business.

Also, in 2019, BVU started a series of articles called “Tales From the Trenches,” designed to present valuable lessons based on the experiences of seasoned valuation experts. While you may be able to find some of this advice in books, only real-life experiences can highlight the nuances that can only be found in the minds of the experts who have lived through many engagements. Veteran appraiser Robert Kleeman kicked off this series, and Jim Alerding also contributed. 

Practice management. 

In 2019, BVR released its survey-based Firm Economics & Best Practices Guide, which provides business valuation, forensic, and litigation support (BVFLS) professionals with the largest and most thorough analysis of best practices in financial management, marketing, human resources, compensation, and professional and ownership standards. BVU covered some key findings from the report, including preferred research sources, how business valuation firms win new business, and best ways to manage staff.


We’ve just touched on some of what happened in the business valuation world in 2019, so we invite you to see view the January 2020 issue of the Business Valuation Update and journey back through the pages of BVU for much more. We look forward to continuing to keep you fully informed in 2020.