SEPTEMBER/OCTOBER 2020Duff & Phelps Cost of Capital Navigator: U.S. Cost of Capital Module PRICING U.S. Cost of Capital Module Basic (two most recent years) Single User . . . . . . . . . . . . . . . . . . . . . $295 . . . . . . . . . +$129 per Basic additional user U.S. Cost of Capital Module Pro (all years, 1999 to present) Single User . . . . . . . . . . . . . . . . . . . . . $595 . . . . . . . . . . +$299 per Pro additional user *The U.S. Cost of Capital Module Basic subscription has EVERYTHING contained in the regular Basic U.S. Cost of Capital Module, but limits the number of cost of capital analyses/downloads based on your subscription level. The limits are three cost of capital analyses/downloads for Silver, seven for Gold, and ten for Platinum. Data is updated quarterly. Duff & Phelps Cost of Capital Navigator: U.S. Cost of Capital Module (Basic*) NOW INCLUDED IN KeyValueData® Titanium continues to include the U.S. Cost of Capital Module (Pro). Silver, Gold, or Platinum subscriptions. Duff & Phelps Cost of Capital Navigator: U.S. Cost of Capital Module DATA INCLUDED IN THE U.S. COST OF CAPITAL MODULE SIZE PREMIA AND RISK PREMIA g CRSP Deciles 1–10 size premia, plus the 10th Decile split g Risk Premium Report Size Study size premia and “risk premia over the risk-free-rate” g Risk Premium Report Risk Study “risk premia over the risk-free rate” g High-Financial-Risk Study size premia and “risk premia over the risk-free rate” gComparative Risk Study (fundamental risks of companies comprising Risk Premium Report Size Study portfolios) RISK-FREE RATES g Spot long-term risk-free rates (from the Federal Reserve, updated daily) g Duff & Phelps long-term normalized risk-free rate (adjusted for impact of flights-to-quality, actions of the Federal Reserve, and inflation expectations) U.S. EQUITY RISK PREMIA (ERPS) g 1926–present Historical (i.e., realized) ERP g 1926–present Supply-side ERP g Duff & Phelps Recommended ERP (reflecting current point in business cycle) “SIZE” TABLES Includes CRSP Deciles Size Study and Risk Premium Report size premia tables that are viewable within the Navigator. ESTIMATE WACC Develop into weighted average cost of capital (WACC) estimates. ENHANCED OUTPUTS Export more robust and comprehensive documentation of the user’s cost of capital assumptions, sources, analysis, and results as PDF or in Excel. EXCEL ADD-IN This powerful new tool enables users to directly import cost of capital data in their own Excel spreadsheets. BETAS g Industry-level betas (Full- Information, Vasicek-Adjusted, Sum, and High-Financial-Risk Betas) g Industry Risk Premia for use in the Build-up Method g Debt betas (for unlevering and relevering betas) COMPANY LISTS g List of companies used to calculate Full-Information Betas and Industry Risk Premia (updated quarterly) g List of companies used to calculate “Pure-Play” U.S. industry statistics (updated quarterly) The Duff & Phelps Cost of Capital Navigator is an interactive, web-based platform that guides valuators through the steps of calculating Cost of Capital, a key component of any valuation analysis . To learn more, visit or call Member/Client Services at (800) 246-2488. NEW ENHANCED FEATURES NEW! Now Included in KeyValueData Bundles at no additional cost, OR BUY standalone! 1 1 4 5 2 3 2 3 4 Duff&PhelpsAdJan2020.indd 11/23/20 1:36 PMA 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 SEPTEMBER | OCTOBER 2020 3 in this issue … 14 22 SEPTEMBER/OCTOBER 2020 6 The Transaction Databases: Some Statistical Questions and Concerns By Mark G. Filler, CPA, ABV, CVA, AM, CBA Before a valuation analyst can predict price based on sales, seller’s discretionary earnings, gross profit, etc., the analyst needs to answer two basic questions: Is there a statistically significant linear relationship between the two variables? And even if there is, does it have any explanatory power? Analysts often select an array of ratios, assume that it is not symmetrical, and select the median as their measure of central tendency. Or they remove the outliers from the array, making it symmetrical, and use either the arithmetic mean or the weighted harmonic mean as their measure of central tendency. In either case, the analyst has assumed what he or she needs to prove—that the numerator and denominator are linearly correlated and have sufficient explanatory power. In this article, we outline the exploratory steps necessary to test these assumptions. Profit Margin Adjustments: The Fine Line Between Supporting a Conclusion of Value and Withdrawing from the Engagement By Jason R. Pierce, CPA, CMA, CFM, CVA, MAFF This article explains how making a profit margin adjustment to a subject company’s forecasted earnings may be an alternative to withdrawing from valuation engagements involving limited information and artificially reduced profits. The author provides a theoretical framework for profit margin adjustments, including a practical example using a hypothetical fact pattern for a company whose owners receive excessive compensation and benefits. Valuing Small Private Companies for ESOP Transactions: A Practical Guide By Judith H. O’Dell, CPA, CVA Employee stock ownership plans (ESOPs) are becoming a popular exit strategy for owners of smaller private companies. According to the National Center for Employee Ownership, ESOPs are the most common structure for broad- based employee ownership in the U.S. A company planning an ESOP transaction will need a valuation with a date as close as possible to the planned closing date. This article discusses some of the issues that are unique to these valuations. Duff & Phelps Cost of Capital Navigator: U.S. Cost of Capital Module PRICING U.S. Cost of Capital Module Basic (two most recent years) Single User . . . . . . . . . . . . . . . . . . . . . $295 . . . . . . . . . +$129 per Basic additional user U.S. Cost of Capital Module Pro (all years, 1999 to present) Single User . . . . . . . . . . . . . . . . . . . . . $595 . . . . . . . . . . +$299 per Pro additional user *The U.S. Cost of Capital Module Basic subscription has EVERYTHING contained in the regular Basic U.S. Cost of Capital Module, but limits the number of cost of capital analyses/downloads based on your subscription level. The limits are three cost of capital analyses/downloads for Silver, seven for Gold, and ten for Platinum. Data is updated quarterly. Duff & Phelps Cost of Capital Navigator: U.S. Cost of Capital Module (Basic*) NOW INCLUDED IN KeyValueData® Titanium continues to include the U.S. Cost of Capital Module (Pro). Silver, Gold, or Platinum subscriptions. Duff & Phelps Cost of Capital Navigator: U.S. Cost of Capital Module DATA INCLUDED IN THE U.S. COST OF CAPITAL MODULE SIZE PREMIA AND RISK PREMIA g CRSP Deciles 1–10 size premia, plus the 10th Decile split g Risk Premium Report Size Study size premia and “risk premia over the risk-free-rate” g Risk Premium Report Risk Study “risk premia over the risk-free rate” g High-Financial-Risk Study size premia and “risk premia over the risk-free rate” g Comparative Risk Study (fundamental risks of companies comprising Risk Premium Report Size Study portfolios) RISK-FREE RATES g Spot long-term risk-free rates (from the Federal Reserve, updated daily) g Duff & Phelps long-term normalized risk-free rate (adjusted for impact of flights-to-quality, actions of the Federal Reserve, and inflation expectations) U.S. EQUITY RISK PREMIA (ERPS) g 1926–present Historical (i.e., realized) ERP g 1926–present Supply-side ERP g Duff & Phelps Recommended ERP (reflecting current point in business cycle) “SIZE” TABLES Includes CRSP Deciles Size Study and Risk Premium Report size premia tables that are viewable within the Navigator. ESTIMATE WACC Develop into weighted average cost of capital (WACC) estimates. ENHANCED OUTPUTS Export more robust and comprehensive documentation of the user’s cost of capital assumptions, sources, analysis, and results as PDF or in Excel. EXCEL ADD-IN This powerful new tool enables users to directly import cost of capital data in their own Excel spreadsheets. BETAS g Industry-level betas (Full- Information, Vasicek-Adjusted, Sum, and High-Financial-Risk Betas) g Industry Risk Premia for use in the Build-up Method g Debt betas (for unlevering and relevering betas) COMPANY LISTS g List of companies used to calculate Full-Information Betas and Industry Risk Premia (updated quarterly) g List of companies used to calculate “Pure-Play” U.S. industry statistics (updated quarterly) The Duff & Phelps Cost of Capital Navigator is an interactive, web-based platform that guides valuators through the steps of calculating Cost of Capital, a key component of any valuation analysis . To learn more, visit www.NACVA.com/store_home.asp or call Member/Client Services at (800) 246-2488. NEW ENHANCED FEATURES NEW! Now Included in KeyValueData Bundles at no additional cost, OR BUY standalone! 1 1 4 5 2 3 2 3 4 Duff&PhelpsAdJan2020.indd 11/23/20 1:36 PMA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 4 SEPTEMBER | OCTOBER 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 Jan./Feb. Nov. 2 Feb. 1, 2021 Mar./Apr. Jan. 4 Apr. 1, 2021 May/June Mar. 1 June 1, 2021 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: www.NACVA.com. 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, Administrative Assistants: Jessica Alder 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: Chris Leventis By Rod P. Burkert, CPA, CVA The author interviews sole practitioner Chris Leventis, MAcc, CPA, CVA, CMA, CFE, from Columbia, South Carolina. 42 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. 30 34 HEALTHCARE INSIGHTS Valuation of Senior Healthcare (Part I of III) By Todd Zigrang, MBA, MHA, FACHE, CVA, ASA, and Jessica Bailey- Wheaton, Esq. Elderly adults have more options than ever before when it comes to where and how to receive healthcare services, and models vary as to care level and reimbursement requirements to better meet the demands of this growing age cohort. In this three-part series on the valuation of senior healthcare, we examine the “Four Pillars” of the industry: the reimbursement, regulatory, competitive, and technological environments affecting senior healthcare services and organizations. Part I provides a brief overview of the various enterprises and services that make up the senior care industry. It also discusses the differing reimbursement levels and coverage for these enterprises and services, ranging from Medicare, Medicaid, and commercial insurance to no coverage at all.Want it all? • Ultimate Triple Play Subscription— $625 per month for the first user (receive everything included in all three other subscriptions, plus Damages Advocate calculation software) Visit complete listing of what is included in each subscription. • Ultimate KeyValueData® Titanium Subscription— $250 per month for first user (access to 21 separate databases, reports, libraries, and presentations) • Ultimate Software Subscription— $90 per month for first user (licenses to five valuation and report writing software packages, plus technical support) Add to your Ultimate Training and Membership Subscription: For details and to sign up, visit or contact Member/Client Services at (800) 677-2009. Customize Your CPE with Unlimited Options Annual subscription benefits—for first user: • Membership Dues + Tri-Annual Recertification Fee • Recertification Bonus Point Program Registrations + CPE • All Live Classroom Registrations + CPE • All Live Online Broadcast Registrations + CPE • All Live Online Webinar Registrations + CPE • All Live Online Webcast Registrations + CPE • BVTC Recorded Training Videos On-Demand • All CPE On-Demand Courses (nearly 500) + CPE • Business Valuation and Financial Litigation Super Conference Registration + CPE (in-person or live/online broadcasts) • Financial Valuation Conference Registration + CPE (in-person or live/online broadcasts) • Financial Consultants’ Accelerated Training Institute Registration + CPE (in-person or live/online broadcasts) • Electronic Self-Study Courses + CPE (shipping and handling not included for hard copies) • The Value Examiner® and QuickRead® CPE Quizzes • Surgent CPE | Exclusive NACVA/CTI library of NASBA compliant ethics, accounting, auditing, and tax fields of study Ultimate Training and Membership Subscription Unlimited Continuing Professional Education Membership Dues | Recertification Fees (multi-user options available) UltimateMembershipAd_3.17.20.indd 13/17/20 4:01 PMA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 6 SEPTEMBER | OCTOBER 2020 t h e v a l u e e x a m i n e r VALUATION Employee stock ownership plans (ESOPs) are becoming a popular exit strategy for owners of smaller private companies. According to the National Center for Employee Ownership (NCEO),1 ESOPs are the most common structure for broad- based employee ownership in the U.S. A company planning an ESOP transaction will need a valuation with a date as close as possible to the planned closing date. This article will discuss some of the issues that are unique to these valuations. An ESOP is a type of tax-qualified retirement plan, similar to a 401(k) plan that invests primarily in company stock and 1 “What Is Employee Ownership?,” National Center for Employee Ownership, holds its assets in a trust for employees. An ESOP may own 100 percent of a company’s stock, or it may own only a small percentage. ESOP participants (employees) accrue shares in the plan over time and are paid out by having their shares bought back by the ESOP or plan sponsor, typically after they leave the company. ESOPs often are created in the process of selling a business, as an ESOP can buy a departing owner’s shares on terms that are highly favorable to the owner, the employees, and the business itself. This is especially true when the business is organized as a Subchapter S corporation. As shown in Table 1, 52 percent of stand-alone ESOPS are small private companies. /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Valuing Small Private Companies for ESOP Transactions: A Practical Guide By Judith H. O’Dell, CPA, CVA Table 1: Plans, Participants, and Assets2 2 ptember 2019, employee-ownership-by-the-numbers#1. PlansTotal participants Active participants Employer securities (millions) Total plan assets (millions) All stand-alone ESOPs 6,41614,071,98710,342,760$271,438$1,456,662 Private companies 5,7832,001,0591,466,224$137,727$183,880 Large private companies 2,4201,855,2931,356,257$124,158$167,787 Small private companies 3,363145,766109,967$13,569$16,093 Public companies 63312,070,9288,876,536$133,711$1,272,781 1 “What Is Employee Ownership?,” National Center for Employee Ownership, 2 “Employee Ownership by the Numbers,” National Center for Employee Source: NCEOA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r SEPTEMBER | OCTOBER 2020 7 The Engagement The client is the trustee of the ESOP trust to be formed and the valuation analyst is engaged by the trustee.3 The company selects the ESOP trustee, who may be an outside professional trustee (either an institution or an individual) or may be one or more of the shareholders or employees acting as individuals or as a committee. The ESOP trustee is responsible for the selection of the valuation analyst. A best practice is for the trustee to ask the valuation analyst prior to engagement to complete a questionnaire that asks about such items as malpractice coverage, references, organizations whose valuation reporting standards are used (AICPA, ASA, USPAP, NACVA, etc.), ESOP experience, valuation procedures, and fee structure. The questionnaire or interview questions that the trustee may ask are the result of the Department of Labor’s (DOL) settlement agreement in the 2014 case of Perez v. GreatBanc Trust Co.4 The GreatBanc agreement created a template to be followed when the affected trustee does ESOP work. The terms of the GreatBanc settlement agreement are not regulations but provide guidelines on the standards to which the DOL likely will hold ESOP trustees in reviewing an ESOP transaction. The guidelines for hiring a valuation analyst are as follows and are used by many ESOP trustees. A. Selection and Use of Valuation Advisor— General. In all transactions involving the purchase or sale of employer securities that are not publicly traded, the trustee will hire a qualified valuation advisor, and will do the following: 1. Prudently investigate the valuation advisor’s qualifications; 2. Take reasonable steps to determine that the valuation advisor receives complete, accurate, and current information necessary to value the employer securities; and 3. Prudently determine that its reliance on the valuation advisor’s advice is reasonable 3 For the sake of simplicity, this article uses the singular term, “trustee,” although some ESOP trusts have multiple trustees. 4 Perez v. GreatBanc Trust Co., No. 5:12-cv-01648-R-DTB, Consent Order and Judgment (C.D. Cal., June 2, 2014), before entering into any transaction in reliance on the advice. B. Selection of Valuation Advisor—Conflicts of Interest. The trustee will not use a valuation advisor for a transaction that has previously performed work—including but not limited to a “preliminary valuation”—for or on behalf of the ESOP sponsor (as distinguished from the ESOP), any counterparty to the ESOP involved in the transaction, or any other entity that is structuring the transaction (such as an investment bank) for any party other than the ESOP or its trustee. The trustee will not use a valuation advisor for a transaction that has a familial or corporate relationship (such as a parent-subsidiary relationship) to any of the aforementioned persons or entities. The trustee will obtain written confirmation from the valuation advisor selected that none of the above-referenced relations exist. The valuation analyst should bear in mind throughout the engagement that the value derived will be used to establish the price to be paid for the shareholders’ stock, and that value will be subject to a “fairness opinion” rendered by an independent financial advisor engaged by the trustee. The fairness opinion is intended to analyze whether or not the ESOP is paying more than “adequate consideration” for the employer shares that it is purchasing. The Engagement Letter The engagement letter should be addressed to “Trustee of an ESOP to be Formed for XYZ Company.” It should cover those items required by professional standards and a statement that the analyst and his or her firm have no conflicts of interest with respect to the company that is the subject of the valuation. There is typically a lag between the report date and the closing date. The valuation analyst may be asked to prepare A best practice is for the trustee to ask the valuation analyst prior to engagement to complete a questionnaire.A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 8 SEPTEMBER | OCTOBER 2020 t h e v a l u e e x a m i n e r a “no material change” or “did not drop” letter to cover the gap period, discussed later in this article. If this is the case, consider including a provision for that in the engagement letter similar to the paragraph below. No Material Change Letter Since there will be a gap between the report date and closing of the ESOP transaction, ABC Valuation Analysts may be requested to prepare a “No Material Change” letter. This letter will cover the period X/X/2020 (the report date) to the closing date. We will request current financial statements and require a representation letter from management in connection with this letter. Our fees for this service will be $XXX. Performing the Valuation A site visit (which in the current pandemic may have to be limited to a virtual visit) and interviews with management are essential. In some ESOP transactions, the shareholder or shareholders will remain with the company for a period of time after the transaction, and in other cases, they will retire. The analyst’s comfort with the capability of the management team can be a consideration in the determination of the company-specific risk rate. Management inquiries should include off-balance-sheet liabilities, company guarantees of related-party debt, other related-party transactions, environmental liabilities, litigation, and cybersecurity risk. If the company has audited or reviewed GAAP financial statements, the disclosures are a starting point for a discussion with management.5 The analyst’s workpapers should include documentation of these matters. For some very small clients, the asset approach may need to be used if the subject company is asset-intensive. An example is a landscape contractor that owns several large pieces of construction equipment and has no debt. In some cases, the real estate leased by the company is owned by the shareholder or shareholders, and will be transferred to the company as part of the transaction. In both of these situations, appraisals of the equipment and real estate are needed for the valuation. If the real estate is to be transferred, the income statements should be normalized to remove rent 5 This article addresses the valuation of a company for an ESOP transaction. If a valuation is performed for a company that is already ESOP-owned, the analyst should also gain an understanding of the company’s stock repurchase obligation. expense and add depreciation and any operating expenses paid by the shareholder. The use of the market approach may be difficult due to the uncertainties in the current economic climate. If comparable company transactions can be found in the various databases, the market approach conclusions should be included in the report. They may serve as a sanity check against the value produced by the other approaches. For the income approach, I use Christopher Mercer’s EBITDA single-period income capitalization method,6 where appropriate. Trustees and financial consultants generally are familiar with EBITDA multiples, and this method is easier to explain since each element of the calculation is described in detail in the report. (Mr. Mercer has made numerous presentations on this method.) For some valuations, it may be necessary to use the discounted future cash flows method. If so, the valuation analyst should carefully review management’s forecast, especially if forecasted results are materially different from the historical. In the current environment of COVID-19, if the company has taken any Paycheck Protection Program, Economic Injury Disaster, or other SBA loans, provisions for repayment or forgiveness should be considered in the valuation. Also, the valuation analyst will want to assess the likely long- and short-term impact of any current or potential shutdown activity. The Valuation Report Valuation Objective and Summary My report format begins with an overview of the assignment objective, a brief company description, brief qualifications of the appraiser, the purpose of the valuation, the standard of value, the premise of value, scope of work, and a brief 6 Z. Christopher Mercer, “EBITDA Single Period Income Capitalization for Business Valuation,” Business Valuation Review 35, no. 3 (October 2016): 86-102, (download fee, $15). A site visit (which in the current pandemic may have to be limited to a virtual visit) and interviews with management are essential.A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r SEPTEMBER | OCTOBER 2020 9 description of valuation procedures performed. Under the scope of work section, I add the following paragraphs to alert the DOL that the report complies with its (withdrawn) requirements: Because this valuation may be used for tax purposes and compliance with Department of Labor (DOL) requirements, coupled with the fiduciary responsibilities of the Trustees of the ESOP, we have considered all factors detailed in the Internal Revenue Service Revenue Ruling 59-60 and in withdrawn regulations of the DOL. On February 1, 1995, in the Federal Register, the DOL withdrew its proposed regulations regarding valuation of an ESOP. The withdrawal was made without explanatory comment by the DOL. Nonetheless, many ESOP business valuation practitioners continue to consider the regulations that provided guidance in the valuation process. The DOL proposed regulations stipulated the fair market value of a security: (1) to be estimated as of the date of the transaction involving the asset; (2) to be estimated without considering transactions resulting from other than arm’s-length negotiations, such as distressed sales; (3) to reflect the application of “sound business principles of evaluation,” and (4) to be recorded in a document meeting the requirements of the proposed regulations. When the asset being valued is the stock of a closely held corporation, the DOL proposed regulations stated the written document must include an assessment of all relevant factors, plus an assessment of the following factors: the history of the business, economic outlook, financial condition of the business, earnings and dividend paying capacity, book value of the stock and the size of the block being valued, prior sales of the Company’s stock, goodwill and intangible value, and the market prices for publicly traded and privately held companies in the same or similar line of business. These factors are addressed in the following report. Our analysis considers those facts and circumstances present at the Company at the Valuation Date. Our conclusion would most likely be different if another Valuation Date were used. There were no restrictions or limitations in the scope of our work or in the data available for analysis, and no hypothetical assumptions were used. Company Background Section My reports contain a robust company background section that includes: •Company identification and nature and history of the company, including SIC and NAICS codes •Stock class and ownership (if the company has been recapitalized for the transaction, request a copy of the articles of incorporation) •Management team with brief bios • Product and service information •Facilities and current operations The Department of Labor withdrew its proposed regulations regarding valuation of an ESOP. Nonetheless, many ESOP business valuation practitioners continue to consider the regulations that provided guidance in the valuation process.Next >