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Another big win for ESOP valuations vs. the DOL

Valuation experts have long maintained that the Department of Labor (DOL) has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. But a court has rejected the valuations the DOL did in a case alleging that an ESOP overvalued (and thus overpaid for) the stock of its sponsoring company.

Mercer’s latest on restricted stock studies

Chris Mercer (Mercer Capital) has been writing a series of articles designed to provide a complete analysis of the historical restricted stock studies many business appraisers rely on for estimating a discount for lack of marketability (DLOM).

Simons v. Simons

The Nebraska Supreme Court allowed a fair value determination by the wife’s expert as the appropriate value for a divorce case and did not include any discounts that might apply in a fair market value determination. Much of the opinion dealt with the issue of a constructive trust, which the trial court determined results in a 50% ownership by the wife in the family business.

Nebraska Supreme Court Allows Fair Value Determination for Family-Owned Business and Does Not Allow Discounts

The Nebraska Supreme Court allowed a fair value determination by the wife’s expert as the appropriate value for a divorce case and did not include any discounts that might apply in a fair market value determination. Much of the opinion dealt with the issue of a constructive trust, which the trial court determined results in a 50% ownership by the wife in the family business.

Misusing the Market Prices of High-Vote Shares When Estimating a Discount for Lack of Voting Rights

When analysts estimate a valuation discount for the lack of voting rights in the stock of a private company, they typically look to the public market. Many studies have compared the market prices of publicly traded high-vote shares with the market prices of publicly traded low-vote shares. Unfortunately, when the inputs into these studies are examined, the emperor has no clothes.

Fair v. Fair

The primary issue in this appeal was the value of Surgical Imaging Specialists Inc. (SIS), a subchapter S corporation that the parties formed in 2002. Stephan Fair, the husband, was the sole registered shareholder of SIS. Darlene Fair, the wife, was listed on all tax returns as an equal owner. The trial court awarded all community property interest to the husband and eliminated 25% of SIS’ goodwill as personal goodwill. On appeal, the husband contended that the trial court undervalued the personal goodwill discount and failed to apply a discount for lack of marketability. The husband also appealed the separate property award of an IRA account and a reimbursement to the wife for additional salary payments made by SIS to the husband. The court of appeal affirmed the trial court value of SIS, remanded the issue of IRA gains, and affirmed the reimbursement for additional salary payments.

Appellate Court Rules on the Value of the Marital Business as to Personal Goodwill, Minority, Liquidity, and Marketability Discounts

The primary issue in this appeal was the value of Surgical Imaging Specialists Inc. (SIS), a subchapter S corporation that the parties formed in 2002. Stephan Fair, the husband, was the sole registered shareholder of SIS. Darlene Fair, the wife, was listed on all tax returns as an equal owner. The trial court awarded all community property interest to the husband and eliminated 25% of SIS’ goodwill as personal goodwill. On appeal, the husband contended that the trial court undervalued the personal goodwill discount and failed to apply a discount for lack of marketability. The husband also appealed the separate property award of an IRA account and a reimbursement to the wife for additional salary payments made by SIS to the husband. The court of appeal affirmed the trial court value of SIS, remanded the issue of IRA gains, and affirmed the reimbursement for additional salary payments.

No discounts in New Jersey shareholder buyout case

New Jersey is one of several states that allow discounts for lack of control and marketability in fair value situations if it is proven that the discounts are fair and equitable, but, in a recent case, the trial court disallowed the discounts—and an appellate court agreed.

Trugman’s Approach to Assessing Company-Specific Risk

This is an excerpt from the new sixth edition of Understanding Business Valuation, which has a companion website that includes a good selection of full sample valuation reports and other supporting material.

BV News and Trends June 2022

A monthly roundup of key developments of interest to business valuation experts.

Sipko v. Koger, Inc.

The Supreme Court of New Jersey, in its second attempt to resolve this long-running shareholder dispute, a “thoroughly chewed apple”, and buyout, reversed the appellate court and remanded the case to the trial court for reinstatement of its valuation of the shareholder’s interest in two businesses and also agreed with the trial court that no marketability discount should be allowed to reduce the amount to be awarded to the plaintiff. The defendants chose not to call their own expert to provide an opinion of the fair value of the shareholder’s interests.

The Supreme Court of New Jersey Accepts Trial Court’s Value of Companies and Denies a Marketability Discount in a Contentious Buyout Dispute

The Supreme Court of New Jersey, in its second attempt to resolve this long-running shareholder dispute, a “thoroughly chewed apple”, and buyout, reversed the appellate court and remanded the case to the trial court for reinstatement of its valuation of the shareholder’s interest in two businesses and also agreed with the trial court that no marketability discount should be allowed to reduce the amount to be awarded to the plaintiff. The defendants chose not to call their own expert to provide an opinion of the fair value of the shareholder’s interests.

BV News and Trends May 2022

A monthly roundup of key developments of interest to business valuation experts.

Estate and Gift: The Complete Valuation Package (A BVR Workshop)

Unwrap all things estate and gift in this engaging session with Marissa Turrell and Carla Glass. This presentation will assume a basic understanding of business valuation, of both operating companies and holding companies, and focus on specifics related to valuing ownership interests for estate and gift purposes. Some topics will focus on issues that arise only in valuation for gift and estate purposes, such as seminal court cases on the matter, Chapter 14, working with ...

New Jersey Appellate Court Affirms Valuation of Shopping Mall, Disallows Any Control or Marketability Discounts, Affirms Proper Dissociation by Plaintiffs

This case was a partnership dispute where the defendant partners tried to buy out the plaintiff partners. On appeal before the New Jersey Superior Court Appellate Division, the defendants argued that the plaintiffs’ dissociation was wrongful and damages should be assessed, discounts for lack of control and marketability should be applied to the value, and the partnership value should be reduced to account for partnership outstanding debts and other amounts. The plaintiffs argued that the trial court erred by relying on the defendants’ expert’s report and not their expert’s report, refusing to increase the value by personal loans taken by the defendant partners, and failing to find that the partnership overpaid management and accounting fees. The appellate court affirmed the trial court with one exception, whether the partnership agreement disassociated properly. On that count, the appellate court determined that the disassociation was appropriate.

Robertson v. Hyde Park

This case was a partnership dispute where the defendant partners tried to buy out the plaintiff partners. On appeal before the New Jersey Superior Court Appellate Division, the defendants argued that the plaintiffs’ dissociation was wrongful and damages should be assessed, discounts for lack of control and marketability should be applied to the value, and the partnership value should be reduced to account for partnership outstanding debts and other amounts. The plaintiffs argued that the trial court erred by relying on the defendants’ expert’s report and not their expert’s report, refusing to increase the value by personal loans taken by the defendant partners, and failing to find that the partnership overpaid management and accounting fees. The appellate court affirmed the trial court with one exception, whether the partnership agreement disassociated properly. On that count, the appellate court determined that the disassociation was appropriate.

BV News and Trends April 2022

A monthly roundup of key developments of interest to business valuation experts.

Kroll increases U.S. normalized risk-free rate to 3.0%

Kroll has increased its recommended normalized risk-free rate to 3.0% from 2.5%, effective April 7.

Twitter poll on the size effect

Wes Gray, a Ph.D., financial analyst, and CEO of Alpha Architect, recently conducted a poll on Twitter about the size effect (implicit in traded stocks where returns can be observed).

Blockage Discounts: How Volume Can Impact Value

Join Pasquale Rafanelli for an exciting look into the complex topic of blockage. Learn what blockage is and how to apply it when valuing securities, stocks, and even artwork. Understand how blockage is different than a discount for lack of marketability. With real-world examples that are applicable to your practice, this event will help you build a defensible conclusion.

BV News and Trends March 2022

A monthly roundup of key developments of interest to business valuation experts.

Damodaran updates his implied ERP in wake of Ukraine invasion

In his blog post on how the crisis in Ukraine is playing out in the markets, Professor Aswath Damodaran (New York University Stern School of Business) updated his implied equity risk premium to 4.73% as of March 16, up from 4.24% at the start of 2022.

Updated versions of two closed-end fund reports for estimating DLOC

Closed-end fund (CEF) data are commonly used to derive discounts for lack of control (DLOC) for closely held holding companies invested in marketable securities.

No valuation adjustment for alleged acts of oppression

In a Connecticut case, four siblings were partners in a number of restaurant properties and one of the partners (who had a 25% interest) was ousted by the others.

AICPA offers free webcast on estate/gift valuations

A two-and-a half-hour webcast on estate and gift valuations is available free of charge from the AICPA.

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