NACVA and the CTI’s 2020 Business Valuation and Financial Litigation Virtual Super Conference MARCH/APRIL 2020 PRSRT STD U.S. POSTAGE PAID SAL T LAKE CITY , UT PERMIT NO. 6563I Want to Sell My Business I Need Estate Planning I'm Getting a Divorce Certified Valuation Analyst I'm Missing Out My Partnership is Dissolving Co-Sponsored by the National Association of Certified Valuators and Analysts® (NACVA®) Visit Early registration discounts available. Dates and locations subject to change. Consultants' Training Institute® Business Valuation Certification and Training Live Classroom Schedule October 26–31, 2020 . . . . . . . . . . . . . . . . . . . . . . New Orleans, LA November 16–21, 2020 . . . . . . . . . . . . . . . . . . . . . . San Diego, CA December 7–12, 2020 . . . . . . . . . . . . . . . . . . . . Ft . Lauderdale, FL Live Online Webcast Schedule May 4–8, 2020 June 22–26, 2020 July 13–17, 2020 July 27–31, 2020 August 24–28, 2020 September 21–25, 2020 October 5–9, 2020 November 9–13, 2020A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES on the cover t h e v a l u e e x a m i n e r MARCH | APRIL 2020 3 in this issue … 8 12 17 6 Uncharted Territory: Impact of COVID–19 on the Valuation Profession By Daniel Shiffrin, Editor, The Value Examiner For valuation professionals, the crisis has a wide-ranging impact on their practices, affecting everything from the valuation process itself to client relations, practice management, business development, and information security. The New Revenue Accounting Standard: Impact on Economic Damages Analyses By Ralph Nach, CPA and Michael D. Pakter, CPA, CVA, MAFF In the January/February 2020 issue, we explored the impact on business valuation of the new revenue recognition accounting standard. The purpose of this article is to continue educating readers by examining the standard’s impact on financial analyses prepared in connection with economic damages engagements and by discussing the factors that damages experts should consider when performing these engagements. Just Compensation for Taking Property Under the Fifth Amendment Part II: Legal Process and Determination of Just Compensation By Alan B. Clements, PhD, Esq., CPA Part I of this article explained the legal foundation for a Fifth Amendment takings case, including the legal definition of a taking and the public use requirement. Part II focuses on the procedural steps in the takings process and the unique valuation issues that arise in connection with calculating just compensation. Navigating the New Reality: A Preview of NACVA and the CTI's Virtual Super Conference With Brien Jones, NACVA's Chief Operations Officer and Executive Vice President of Business Development and Daniel Shiffrin, Editor, The Value Examiner The ink was barely dry on NACVA and the CTI's 2020 conference brochure when the COVID-19 outbreak changed everything. Fortunately, the organizations were able to switch to a virtual model without missing a beat. The Value Examiner had an opportunity to speak to Brien Jones about the virtual conference and the enhanced benefits it offers. I Want to Sell My Business I Need Estate Planning I'm Getting a Divorce Certified Valuation Analyst I'm Missing Out My Partnership is Dissolving Co-Sponsored by the National Association of Certified Valuators and Analysts® (NACVA®) Visit www.theCTI.com/BVTC or Call (800) 677-2009 Early registration discounts available. Dates and locations subject to change. Consultants' Training Institute® Business Valuation Certification and Training Live Classroom Schedule October 26–31, 2020 . . . . . . . . . . . . . . . . . . . . . . New Orleans, LA November 16–21, 2020 . . . . . . . . . . . . . . . . . . . . . . San Diego, CA December 7–12, 2020 . . . . . . . . . . . . . . . . . . . . Ft . Lauderdale, FL Live Online Webcast Schedule May 4–8, 2020 June 22–26, 2020 July 13–17, 2020 July 27–31, 2020 August 24–28, 2020 September 21–25, 2020 October 5–9, 2020 November 9–13, 2020A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 4 MARCH | APRIL 2020 t h e v a l u e e x a m i n e r EDITORIAL STAFF CEO & Publisher: Parnell Black Editor: Daniel Shiffrin, JD Associate Editor: Lynne Johnson EDITORIAL BOARD Chair: Lari B. Masten, MSA, CPA, ABV, CFF, CVA, ABAR, MAFF Past Chair: Michael Goldman, MBA, CPA, CVA, CFE, CFF Ashok Abbott, MBA, PhD John E. Barrett Jr., MBA, CPA, ABV, CVA, CBA Gary W. Baum, MBA, CPA, CVA Neil J. Beaton, CPA, ABV, CFF, CFA, ASA Rod P. Burkert, CPA, CVA Lorenzo Carver, MS, MBA, CVA Wolfgang Essler, CVA (Germany) Richard W. Goeldner II, ASA, CBA, CVA Judith Heim O’Dell, CPA, CVA Andrew M. Malec, PhD Danny A. Pannese, MST, CPA, ABV, CVA, CSEP Kevin Papa, CPA, MST, CVA, ABV Donald Price, CVA, ASA Angela Sadang, MBA, CFA, ASA, ABV Keith Sellers, CPA, ABV Todd Zigrang, MBA, MHA, FACHE, CVA, ASA The Value Examiner® is a publication of: National Association of Certified Valuators and Analysts® (NACVA®) 5217 South State Street, Suite 400 Salt Lake City, UT 84107 Tel: (801) 486-0600, Fax: (801) 486-7500 E-mail: ANNUAL SUBSCRIPTION United States—$215 International—$255 U.S. Funds Free to accredited university libraries The Value Examiner® departments SUBMISSION DATES Issue Submission Dates Publish Dates July/Aug. May 15 Aug. 17, 2020 Sept./Oct. July 1 Oct. 12, 2020 Nov./Dec. Sept. 1 Dec. 1, 2020 ALL SUBMISSIONS The Value Examiner is devoted to current, articulate, concise, and practical articles in business valuation, litigation consulting, fraud deterrence, matrimonial litigation support, mergers and acquisitions, exit planning, and building enterprise value. Articles submitted for publication should range from 800 to 4,000 words. Case studies and best practices are always welcome. SUBMISSION STANDARDS Manuscripts should be submitted via the Scholastica professional journal management platform. For more information, or to submit an article, please via Scholastica" button, you can view detailed editorial and submission guidelines. If you have questions, please contact Dan Shiffrin, Editor, Johnson, Associate Editor, REPRINTS Material in The Value Examiner may not be reproduced without express written permission. Article reprints are available; call NACVA at (800) 677-2009 and/or visit the website: Production: Mills Publishing, Inc.; President: Dan Miller; Art Director/Production Manager: Jackie Medina; Magazine Designer: Jackie Medina; Graphic Designers: Ken Magleby, Patrick Witmer; Advertising Representatives: Paula Bell, Dan Miller, Paul Nicholas, Chad Saunders Administrative Assistants: Jessica Alder, Caleb Deane. Mills Publishing, Inc., 772 East 3300 South, Suite 200, Salt Lake City, Utah 84106, (801) 467-9419. Inquiries concerning advertising should be directed to Mills Publishing, Inc. Copyright 2020. For more information please visit millspub.com. Cover designed by: Chris Peterson, Creative Director, Digital Paint Booth, digitalpaintbooth.com PRACTICE MANAGEMENT Practicing Solo: Kimberly Tavares By Rod P. Burkert, CPA, CVA The author interviews sole practitioner Kimberly Tavares, CVA, from Newport Beach, California. Is Practicing Solo a Risk Reduction Strategy? By Rod P. Burkert, CPA, CVA The author answers the question: Is it riskier to be practicing solo or to be part of a firm? 40 44 36 LEGAL INSIGHTS Courtside View: Valuation Perspectives from the Bench By Kimberly Tavares, CVA This column highlights recent decisions by federal and state courts addressing significant valuation and economic damages issues. These cases offer valuable insights to business valuation and forensic litigation services professionals that can help them develop sound, defensible valuation and damages analyses, and present them more effectively in court. 28 HEALTHCARE INSIGHTS Healthcare Valuation Implications of COVID-19 By Todd A. Zigrang, MBA, MHA, FACHE, CVA, ASA and Jessica L. Bailey-Wheaton, Esq. The COVID-19 global pandemic has brought a time of grave uncertainty for U.S. healthcare and the greater economy, which may have significant valuation implications —both now and in the future. ACADEMIC REVIEW Academic Research Briefs By Peter L. Lohrey, PhD, CVA, CDBV This column provides readers with summaries of contemporary research in valuation and forensic accounting. Summarized manuscripts—selected from numerous academic research outlets—cover significant developments that affect the ever-changing valuation and forensic accounting landscape. The objective is to increase awareness of recently completed research that advances knowledge of these subjects. 23 Now you can — and it’s absolutely free! Professional services are in the midst of a digital transformation. In this study of over 1,000 professional services firms, the Hinge Research Institute uncovers how today’s top-performing firms generate exceptional growth and profits despite a widening competitive landscape. What you’ll learn: • The latest growth trends in professional services • How “digital disruptors” are growing at least 3X faster • What marketing initiatives high-growth firms are likely to pursue • Which skill areas are stronger within high-growth firms hingemarketing.com/highgrowth Download the executive summary for free: ESSENTIAL MARKET INTELLIGENCE What if you had access to the marketing plans of your fastest growing competitors? What would that intelligence be worth to you? 2020 HIGH GROWTH STUDY EXECUTIVE SUMMARYNow you can — and it’s absolutely free! Professional services are in the midst of a digital transformation. In this study of over 1,000 professional services firms, the Hinge Research Institute uncovers how today’s top-performing firms generate exceptional growth and profits despite a widening competitive landscape. What you’ll learn: • The latest growth trends in professional services • How “digital disruptors” are growing at least 3X faster • What marketing initiatives high-growth firms are likely to pursue • Which skill areas are stronger within high-growth firms hingemarketing.com/highgrowth Download the executive summary for free: ESSENTIAL MARKET INTELLIGENCE What if you had access to the marketing plans of your fastest growing competitors? What would that intelligence be worth to you? 2020 HIGH GROWTH STUDY EXECUTIVE SUMMARYA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 6 MARCH | APRIL 2020 t h e v a l u e e x a m i n e r VALUATION Last fall, the co-chairs of the National Association of Certified Valuators and Analysts (NACVA) and the Consultants’ Training Institute’s (CTI’s) 2020 Business Valuation and Financial Litigation Super Conference chose as the theme: New Decade. New World. New Perspectives. Little did they know how different the world would look in just a matter of months. The ink was barely dry on the conference brochure when the COVID-19 outbreak changed everything. Like most organizations, NACVA and the CTI have replaced the in-person conference, originally scheduled for June 17–20 in Philadelphia, with a virtual conference. But unlike many organizations, they were able to switch to a virtual model without missing a beat, having broadcast their conferences to an online audience for several years. The virtual conference will be held June 15–19 and repeated, live, August 3–7. This expanded format gives participants greater flexibility to schedule their learning when it is convenient for them as well as the opportunity to attend more sessions than they could on-site. The Value Examiner had the opportunity to speak with Brien Jones, NACVA’s chief operations officer and executive vice president of business development, about the virtual conference and the enhanced benefits it offers. TVE: In light of current events, the original conference theme seems remarkably prescient. What was your thinking when you first developed this theme, and how has the COVID-19 crisis changed your perspective? Jones: Our original theme was “new decade, new world, fresh perspectives,” hosted in Philadelphia, one of America’s founding cities. Philadelphia’s history is all about a new country, in a new world, embarking on a new mission and purpose. And we thought it was appropriate to go back to such a historic city as we launched into a new decade in a world that was facing a new set of challenges, even before the current crisis. The accounting and finance professions were grappling with globalization, rapid technological advances, a move to more and more digital services, and the commoditization of many services. We felt that fresh perspectives were needed. We also felt that there were opportunities for different generations—baby boomers, Generation X, and the younger generations—to work together in a fresh, new way. In recent years, these generations have been somewhat fractured, but the COVID-19 crisis has brought everyone together with a singular mindset that focuses on what is really important: protecting our families and communities, safeguarding their health, and keeping our businesses running. It’s a real opportunity to bring the profession together. In addition to moving the conference to a virtual format, NACVA has launched a COVID-19 public service campaign, “Staying in Business,” an expansive webinar series designed to enlighten and educate the global business valuation community, help members keep their businesses afloat and support their clients’ businesses during this crisis, and build and expand members’ global networks of qualified experts. TVE: How will the absence of an “in-person” event affect the conference? Jones: Actually, not very much, at least in terms of content. We’ve been broadcasting online since the early to mid-2000s, back when platforms like GoToMeeting and GoToWebinar were brand new. We recognized early on the importance of bringing people together online who could not travel to a live event. So, I don’t think the absence of in-person sessions will affect the learning component of the conference because our education team is able to bring presenters—including panel sessions—live to the audience, complete with Q&A. Of course, the virtual format will /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Navigating the New Reality: A Preview of NACVA and the CTI’s Virtual Super Conference With Brien Jones, NACVA's Chief Operations Officer and Executive Vice President of Business Development and Daniel Shiffrin, Editor, The Value ExaminerA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MARCH | APRIL 2020 7 have an impact on networking with other participants and engaging with exhibitors. TVE: Let’s talk about that for a minute. Clearly, there’s no substitute for face-to-face interaction, so what steps are you taking to come as close as possible to an in-person environment? Jones: We’ll be using robust virtual meeting tools to bring people together. In addition to Q&A sessions during presentations, we’ll be bringing many of our presenters and panelists into smaller virtual “roundtables” where they can interact with participants—sort of like a “lunch and learn” event. We’re also creating a virtual exhibit hall where vendors and sponsors will be able to demonstrate their products and services in much the same way they would have done in a physical exhibit hall. We’ll also facilitate one-on-one meetings between participants and representatives from exhibiting organizations. TVE: How will the virtual format affect participants’ ability to attend sessions and the availability of CPE credit? Jones: It significantly increases the learning opportunities available as well as the amount of CPE attendees will be able to earn. Previously, the conference was compressed over 3½ days, with a full day dedicated to “pre-conference” sessions for attendees seeking recertification. The virtual conference will be spread out over five full days, making it easier for people to attend more sessions and increasing the amount of CPE that can be earned from 26 to 34 credits—more if they purchase any of the recertification courses. Plus, people who register for the June conference will receive a free pass to attend any sessions they miss when the conference is repeated in August, allowing them to earn even more CPE. TVE: What if someone isn’t able to attend the entire conference? Will there be an opportunity to purchase individual live sessions a la carte? Jones: Yes, people will be able to purchase as many individual sessions as they’d like. This is something we’ve never done before. TVE: Tell me about Ty Bennett’s keynote address, entitled “Partnership is the New Leadership—Cultivating Commitment, Collaboration, and Consensus.” What is the significance of his message for BVFLS professionals? Jones: For some time, there’s been a disconnect between generations—with older workers emphasizing their knowledge and experience and younger workers touting their education and technology skills as they compete for leadership roles. As millennials overtake baby boomers as the largest demographic group in the workforce, Ty Bennett’s message is that an “us versus them” mentality is counterproductive. Leadership is not about titles or years of experience. To move forward and make progress, we need to recognize each generation’s strengths and work more collaboratively. When we chose Bennett as our keynote speaker, the COVID-19 crisis wasn’t on our radar, but given the world we’re living in now, we believe that his message is even more important than before. TVE: As usual, this year’s agenda gives attendees a wide variety of interesting topics to choose from; some cutting edge and others that reinforce the fundamentals. Are there any particular sessions you would like to highlight? Jones: Sure. One session that comes to mind is Ben Podraza’s presentation on cloud migration best practices for sole practitioners and small accounting firms, particularly relevant for firms that are now dealing with a work-from- home environment. Also, Mel Abraham’s session: A New Way of Thinking, A New Path to Growth—Building Your Business in the New Decade. Abraham has focused his practice on helping small businesses learn how to brand and build million-dollar companies. We also have two full days of • NACVA and the CTI's 2020 Business Valuation and Financial Litigation Virtual Super Conference: • NACVA's Staying in Business Public Service Campaign: covid-19 Continued on page 35 FOR MORE INFORMATIONA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 8 MARCH | APRIL 2020 t h e v a l u e e x a m i n e r VALUATION /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Uncharted Territory: Impact of COVID–19 on the Valuation Profession By Daniel Shiffrin, Editor, The Value Examiner Seemingly overnight, the COVID-19 pandemic has affected nearly every aspect of public life in every corner of the globe. And while our highest priority should be the health and safety of our families, friends, colleagues, and communities, the pandemic’s economic impact is a close second. For valuation professionals, the crisis has a wide-ranging impact on their practices, affecting everything from the valuation process itself to client relations, practice management, business development, and information security. Here is what some of the experts are saying. Valuation Analysis in Uncertain Times Valuation practitioners are accustomed to dealing with uncertainty created by external factors, such as economic and market conditions, political events, regulatory developments, natural disasters, and even outbreaks of illnesses. But COVID-19 is different, in part because issues with testing and a limited understanding about how this new virus spreads make it difficult to predict its ultimate impact. Valuations under the market approach will be particularly challenging. “I believe valuation analysts utilizing valuation dates after January 31, 2020—or possibly as early as December 31, 2019—and likely through the remainder of the year, should use caution when relying primarily on the guideline public company method,” says Donald Price, CVA, ASA, managing director of business valuation and litigation support at Baker Tilly in Southfield, MI. “The EBITDA and revenue valuation multiples derived from public companies are going to be all over the place for the foreseeable future,” Price observes, and “even if adjustments are made to the multiples, they will likely be more subjective than empirically supported.” That is not to say that the subjective component is a bad thing. Arguably, it reflects what valuation analysts are ultimately trying to capture: the market’s perspective of the value of businesses as of the valuation date. What about the income approach? Often, Price says, “the capitalization of cash flow (CCF) method is best suited to the valuation of mature companies with steady earnings. But in light of current volatility and the expected short-term decline in economic conditions, it may make sense to look at two or three years of discounted cash flow when valuing these mature, stable companies. This allows the valuation analyst to capture the current disruption to business and then return to a ‘normal’ level of profitability.” Lari Masten, MSA, CPA, ABV, CFF, ABAR, MAFF, director of Masten Valuation in Greenwood Village, CO, agrees. Masten asserts that “for the foreseeable future, depending on the appropriate treatment of subsequent events, the CCF model should probably be shelved in favor of preparing a discounted cash flow (DCF) model. In the next few years, some analysts may adopt a CCF model that simply applies no weight to 2020 and possibly 2021, but that historical-based model and weighting will probably not have accounted for long-term changes to revenues, expenses, and necessary changes to business models moving forward and past COVID-19.” Greg Reagan, CPA, CFF, ABV, CFE, CVA, managing member of Reagan FVL, LLC, in Charlotte, NC, comments that “when it comes to using the CCF or DCF methods, the specific industry and company will drive the method of choice. While some companies in certain industries are not reporting a significant impact, all are affected to some degree. Some industries are actually benefiting from this crisis. In certain circumstances, a CCF method may still be useful. But DCF may make better sense for heavily leveraged businesses and those in struggling industries that are having difficulty accessing needed capital to ride out the storm as well as those experiencing an unusual uptick in business. Will these effects continue or are they temporary?” Reagan also advises valuation professionals that “regardless of the method you choose, great care must be taken to avoid ‘double counting’ A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MARCH | APRIL 2020 9 when developing assumptions about cash flow and the capitalization or discount rate. It is more important now than ever before to dig deep into industry and company specific financial and risk analyses.” With regard to developing a discount rate, Masten notes that “Duff & Phelps recently announced an increase in its recommended U.S. equity risk premium, from 5 percent to 6 percent, effective March 25, 2020.”1 This premium, she says, “should be used in conjunction with a 3 percent risk-free rate, rather than a spot rate for the 20-year Treasury rate, per Duff & Phelps published guidance.2 Now we have our first empirical evidence emerging that equity risk premiums are up, so we can use that as a basis for increased current risk, regardless of the cost-of-capital source we elect to use.” What is Known or Knowable? According to John E. Barrett, Jr., CPA, ABV, CBA, CVA, of Barrett Valuation Services in Cranston, RI, “the current crisis underscores the importance of the valuation date and what was known or knowable on that date.” It appears that the first case of COVID-19 in China occurred as early as December 1, 2019, although it was not until December 31, 2019, that China reported a cluster of pneumonia cases of unknown cause in Wuhan. In the second week of January, Chinese health authorities confirmed that the cluster was associated with a new coronavirus, later designated COVID-19, and the first deaths from the virus were reported January 11, 2020. The first confirmed U.S. case was reported around January 20, 2020, and by the end of January 2020, a total of nearly 10,000 cases and more than 200 deaths had been reported in at least 21 countries. On January 31, 2020, the U.S. government declared a public health emergency and issued new restrictions on travel into the U.S. by persons believed to pose a risk of transmitting COVID-19.3 Judith O’Dell, CPA, CVA, president of O’Dell Valuation Consulting in Rockport, ME, understands firsthand the challenges involved in determining what is known or knowable on the valuation date. She is dealing with a valuation for an ESOP transaction involving a U.S. company that was issued in early March 2020, with a December 31, 2019, valuation date. “The dilemma for valuation analysts,” O’Dell explains, is: “Was COVID-19 known or knowable on December 31, 2019? The fact of the disease was known, but were the effects knowable at year end? Does one consider events in China if the company is based in the U.S. and only does business in the U.S.? If the analyst concludes that the effects—that is, that the disease could spread and can be deadly—were knowable, then theoretically the analyst has to take that into account. But how is that done?” Complicating matters further, not all businesses are affected the same way. Some—such as healthcare-related companies and technology firms that offer tools or platforms for remote work—may see revenues rise. Others, even in areas with stay-at-home orders, are deemed “essential” and continue to operate. For example, some contractors—particularly those involved with critical infrastructure projects or repairs— are considered essential. These companies remain open for business and their people are working. But will that change? What if their employees get sick or their supply chains are disrupted and they are unable to meet their contractual obligations? “As an analyst,” O’Dell says, “I don’t know how to deal with these unknowns other than to increase the discount rate to reflect the risk. But how high?” After referring to professional standards (see below), she added a subsequent event appendix to the report to describe the COVID-19 situation. In some transactions, it is possible to use earnout provisions or other techniques to hedge the buyer’s risk of overpaying. In the case of O’Dell’s ESOP transaction, for example, “there will be a one-year clawback provision in the seller’s 1 Carla Nunes and James P. Harrington, “Duff & Phelps Recommended U.S. Equity Risk Premium Increased from 5.0% to 6.0% Effective March 25, 2020,” 2 Ibid. 3 For more information about the COVID-19 timeline, see Michelle L. Holshue, M.P.H. et al., “First Case of 2019 Novel Coronavirus in the United States,” New England Journal of Medicine, March 5, 2020, org/doi/full/10.1056/NEJMoa2001191; James R. Hitchner, CPA, ABV, CFF, ASA and Karen A. Warner, MA, “COVID-19: A timeline of significant events, including the pandemic’s effect on the U.S. stock market,” Valuation Products Complicating matters further, not all businesses are affected the same way. Some—such as healthcare-related companies and technology firms that offer tools or platforms for remote work—may see revenues rise.Next >