NACVA and the CTI’s 2021 Business Valuation & Financial Litigation Hybrid & Virtual Super Conference Disruption, Opportunity & Flashing Red Lights Cybersecurity & Data Privacy The Future of the Business Valuation Profession MARCH/APRIL 2021The Authority in Matters of Value ® Join Us | www.NACVA.com/30Years The first business valuation credential for the accounting profession Certified Valuation Analyst ® (CVA ® ) Years of Firsts The first financial forensics credential for the accounting profession Master Analyst in Financial Forensics ® (MAFF ® ) ISO/IEC 17024 Personnel Certification Program #8937 The first and only dually accredited business valuation credential, the CVA National Commission for Certifying Agencies ® (NCCA ® ) and American National Standards Institute ® (ANSI ® ) The first organization to have certified over 10,000 business valuation professionals The first globalization of the profession through Global Association of Certified Valuators and Analysts ™ (GACVA ™ ) international chaptersA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES the value examiner MARCH | APRIL 2021 3 on the cover in this issue … 20 8 26 6 BOOK REVIEW The Collaboration Effect: Overcoming Your Conflicts Review by John E. Barrett, Jr., MBA, CPA, ABV, CVA, CBA The Collaboration Effect—by Michael A. Gregory, ASA, CVA, MBA, NSA—provides invaluable information and practical guidance for those involved in complex negotiations. Gregory draws from his considerable experience in achieving conflict resolution to assist the reader through a well thought out and practical process to achieve positive outcomes, even in the most difficult cases. Telling Your Story: Lessons from Expert Witness Boot Camp By Stephen D. Kirkland, CPA, CMC, CFF The Courtroom Boot Camp for Experts is an intensive three-day program designed to help professionals hone their skills as expert witnesses. The author shares some of the valuable insights he gleaned from this interactive program. Business Value in Use: Differentiating Value to the Owner from Value in Exchange By James A. Lisi, CVA, MBA, CPIM If practically all arm’s-length private business transactions follow a multiple-of-EBITDA rubric, why is the M&A method not the dominant approach to business valuation? The reason is that the M&A model focuses on whole-company sales; a complete transfer of ownership interests. On the other hand, when a partial interest (shares of equity) is acquired, owner and capital structure variables are locked in place, so the investor views valuation differently than a buyer. Getting Your Bearings in the New Normal: A Preview of NACVA and the CTI’s Hybrid and Virtual Super Conference With Brien Jones, Chief Operations Officer and Executive Vice President of Business Development for NACVA, and Dan Shiffrin, Editor, The Value Examiner As the pandemic fog lifts, a new world is coming into focus on the horizon. For BVFLS professionals, like most people, it may take some time to adjust to this “new normal.” The National Association of Certified Valuators and Analysts and the Consultant’s Training Institute’s 2021 Business Valuation and Financial Litigation Hybrid and Virtual Super Conference is designed to help you get your bearings in this new environment and chart a course for future success.A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 4 MARCH | APRIL 2021 the value examiner 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 Andrew M. Malec, PhD Judith H. O’Dell, CPA, CVA Michael D. Pakter, CPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV Danny A. Pannese, MST, CPA, ABV, CVA, CSEP Kevin A. Papa, CPA, CVA, ABV, CVGA 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 ® ) 1218 East 7800 South, Suite 302 Sandy, UT 84094 Tel: (801) 486-0600, Fax: (801) 486-7500 E-mail: NACVA1@NACVA.com NACVA members are automatically provided a subscription to The Value Examiner with membership. If you do not want to receive this publication, upon request, we will reduce your annual dues by $25. The Value Examiner ® departments SUBMISSION DATES Issue Submission Publish Dates Dates July/Aug. Apr. 26 Aug. 2, 2021 Sept./Oct. June 18 Oct. 1, 2021 Nov./Dec. Aug. 18 Dec. 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 visit: https:// www.nacva.com/tveauthors. By clicking on the "Submit via Scholastica" button, you can view detailed editorial and submission guidelines. If you have questions, please contact Dan Shiffrin, Editor, at DanS1@NACVA.com, or Lynne Johnson, Associate Editor, at LynneJ1@NACVA.com. 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 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 2021. For more information please visit millspub.com. Cover designed by: Chris Peterson, Creative Director, Digital Paint Booth, digitalpaintbooth.com PRACTICE MANAGEMENT Practicing Solo: David Solis By Rod P. Burkert, CPA, CVA The author interviews sole practitioner David Solis, CVA, MAFF, from Mill Creek, Washington (greater Seattle area). 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. 28 34 HEALTHCARE INSIGHTS Valuation of Senior Healthcare (Part III 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 III examines the competitive environment in which these facilities operate and emerging technological trends in senior care services.UltimateSoftware Subscription #1 Best-Selling Business Valuation Software Software Subscription Includes PLUS FOUR Valuation Applications, One Low Annual or Monthly Price T he Ultimate Software Subscription gives you access to ALL of our valuation software products for ALL versions of Microsoft Office (2010–2020 and Office 365), includes ALL software updates, PLUS technical support. Both single and multi-user licenses are available. 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Professional business valuator readers voted ValuSource Pro, BVM Pro, and Express Business Valuation Voted #1 Valuation Software NACVA1@NACVA.com | www.NACVA.com/store_home.asp For more info call (800) 677-2009 UltimateSoftware Subscription PRICING Software is only available as part of the Ultimate Software Subscription. Single-User . . . . . . . . . . . . . . . . . . . . . . $995 / year . . . . . . . . . . . . . . . . . . . or $90 per month Visit website for more info and multi-user pricing. Business Valuation Manager Pro ValuSource Pro International Express Business Valuation Report Writer (works with all valuation products) TECHNICAL SUPPORT With the Unlimited Software Subscription, you get full technical support, including: support for technical issues like installation, program operation, database integration, as well as access to our team of certified valuators to help you use the software to complete specific valuation engagements. COMPLETE DATABASE INTEGRATION KeyValueData integrates directly into all the valuation software in the SUITE. 1 2 3 4A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 6 MARCH | APRIL 2021 the value examiner A s the pandemic fog lifts, a new world is coming into focus on the horizon. For BVFLS professionals, like most people, it may take some time to adjust to this “new normal.” The National Association of Certified Valuators and Analysts (NACVA) and the Consultant’s Training Institute’s (CTI’s) 2021 Business Valuation and Financial Litigation Hybrid and Virtual Super Conference is designed to help you get your bearings in this new environment and chart a course for success. The Value Examiner had the opportunity to discuss the conference—and the association’s direction—with Brien Jones, NACVA’s chief operations officer and executive vice president of business development. TVE: NACVA has broadcast its conferences for years, but last summer it shifted to an exclusively virtual format. Now that you have experience with several virtual conferences, what would you say are the pros and cons? Hybrid and virtual is what this year’s conference is affectionately termed, but the fact of the matter is we have been delivering our conference—the profession’s gold standard—and most of our certification and training programs in a hybrid and virtual format since 2007. We pioneered virtual broadcasts, webinars, online learning, and CPE-on-demand. 2020 was a landmark year in our history. With only 10 weeks’ lead time, we pivoted the in-person and virtual (hybrid) conference slated for Philadelphia to virtual-only. Not only did we master the production of the virtual June conference spectacularly, but we repeated it three more times—in August, November, and December—achieving record-breaking global attendance and successfully transitioning to fully digital methods for delivering training. During that first pandemic year, timely information was essential, and we delivered it in spades, providing more than 325 individual training programs. As to pros and cons, virtual programs have several advantages, including time and cost savings (attendees avoid the need to travel), increased attendance, access to an expanded alliance of knowledge experts, quick turnaround of CPE certificates through digitized fulfillment, and an enhanced user experience (e.g., individualized customer service; digital attendee account management; 24/7/365 access to video and audio lectures, curriculum, and training aids). Disadvantages include reduced interaction between presenters and attendees, “Zoom fatigue,” limited “virtual” networking opportunities, workplace/in-home distractions that pull focus from training, and potential technology glitches on the attendee side that are beyond our control. TVE: How will hybrid and virtual work and what are the advantages over a purely virtual format? “Hybrid and virtual” offers the best of both worlds. As vaccination rates increase and states “reopen,” many of our members and credential designees are Zoom-fatigued and eager to return to the normalcy of traveling to in- person meetings. We also recognize that not everyone is ready to do that. So, we’re providing six ways to attend the 2021 conference: (1) full hybrid conference, June 21–25, Park City, Utah, (2) full hybrid conference, June 21–25, Houston, Texas, (3) full hybrid conference, December 13– 17, Ft. Lauderdale, Florida, (4) full virtual-only conference, June 21–25, (5) full virtual-only conference, December 13–17, (6) virtual-only ala carte sessions, June 21–25 and December 13–17. Registration for the hybrid conferences will be on a first- come, first-served basis, subject to in-person occupancy limits dictated by applicable COVID-19 protocols. VALUATION /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Getting Your Bearings in the New Normal: A Preview of NACVA and the CTI’s Hybrid and Virtual Super Conference With Brien Jones, Chief Operations Officer and Executive Vice President of Business Development for NACVA, and Dan Shiffrin, Editor, The Value ExaminerA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES the value examiner MARCH | APRIL 2021 7 Registrants will be able to attend a combination of in-person sessions and virtual-only sessions (in viewing rooms provided by the conference venue). In-person luncheons, receptions, food and beverage breaks, and other networking opportunities will be provided for in-person registrants and broadcast to virtual-only attendees. Full conference registration includes up to 40 hours of CPE, whether registrants attend one of the hybrid conferences or virtual-only. TVE: It seems that “change” is an important theme. For example, Chris Mercer will discuss “The Future of the Business Valuation Profession” and the opening keynote is entitled “Disruption, Opportunity, and Flashing Red Lights to Pay Attention to in Professional Service Firms.” Can you give us a preview? Chris Mercer’s assessments of our profession have become conference standouts, starting with his 2018 keynote, “Our Profession is in Transition—Opportunities and Strategies for baby boomers, Gen Xers, and millennials” and continuing with last year’s “Vision 2020—The Future of Our Profession and Your Role In It.” This year, Chris will present the plenary session, “The Future of the Business Valuation Profession,” building on the themes covered in prior years. This is so important right now— looking at where we’ve been to better inform where we’re going. We’re honored to have Chris present the “state of the profession.” The keynote will complement Chris’s session, focusing on how the turbulent COVID-19 economy has been good for some businesses, while others held steady, and many others suffered. Dan Hood, editor-in-chief of Accounting Today, will provide perspectives on the daily news of the CPA profession. Michael Platt, co-founder of AccountingWEB.com and principal of the Platt Group (publisher of INSIDE Public Accounting), will provide insights into firm benchmarking and industry We asked the conference co-chairs to list their must-see sessions. Here’s what they had to say: Glenn Block, CPA, ABV, CVA, Allentown, Pennsylvania: I look forward to “Valuing Goodwill in Professional Practices and the Use and Misuse of the Excess Earnings Method,” presented by Ron Seigneur and John Tatlock. Separation of personal and enterprise goodwill can be very complicated, and I’m interested in hearing about techniques for dealing with this issue. I also look forward to Kathleen Lauster’s timely presentation, “Show Me the Money: Real World Valuations in a (Post) COVID-19 World.” Sarah Spelts Loebl, CVA, Denver, Colorado: I look forward to Jason Pierce’s presentation, “Profit Margin Adjustments: The Line Between an Opinion of Value and Withdrawing from the Engagement.” Jason’s framework for profit margin adjustments as an alternative to withdrawing from an engagement is thought- provoking and this session is one not to miss! I also highly recommend Lari Masten’s session, “Best Practices: Valuing Real Estate Development Companies.” Residential and commercial development is a vast industry relevant to many areas of BVFLS work. I never miss a presentation by Lari—not only is she an engaging speaker, but I always walk away with valuable and practical insights. Nick Mears, MBA, CVA, MAFF, Lubbock, Texas: I highly recommend “Excelling in Litigation and Dispute-Related Valuations” for anyone looking to gain valuable insight into the litigation world. Bob Ranallo and Sean Saari bring a wealth of experience to help you navigate the complexities you may face against opposing parties and experts in a litigation setting. And “Introduction to Monte Carlo Simulation Using @RISK” is a multidisciplinary topic that most practitioners can benefit from. Kerrie Merrifield, CPA, ABV, CFF, MAFF, Laguna Niguel, California: I would highly recommend “Mitigating the Risk of Business E-mail Compromise,” presented by Dorothy Haraminac. It is important to stay on top of issues in technology; not only by having the most up-to-date software but also by staying on top of the most recent technology risks and exposures, and how to avoid them. I would also highly recommend “Business Valuation and COVID-19,” presented by Jim Alerding and Jim Ewart. This session will clarify some of the top issues we face in our business valuations as they relate to COVID-19. Tips from the Conference Co-Chairs Continued on page 41A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 8 MARCH | APRIL 2021 the value examiner VALUATION /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// Business Value in Use: Differentiating Value to the Owner from Value in Exchange By James A. Lisi, CVA, MBA, CPIM H undreds of thousands of small and medium size businesses (SMEs) 1 are sold every year. They may be marketed through business brokers and bought by competitors, private equity firms, or corporations. The vast majority of valuations for this purpose follow a simple formula: four to seven times earnings before interest, taxes, depreciation, and amortization (EBITDA), plus working capital. This formula has been the established valuation practice of merger and acquisition (M&A) professionals for well over thirty years. In making an offer for a business, and throughout its due diligence, the professional acquirer is laser focused on the EBITDA it acquires. So, if practically all arm’s-length private business transactions follow a multiple-of-EBITDA rubric, why is the M&A method not the dominant approach to business valuation? The reason is that the M&A model focuses on whole- company sales; a complete transfer of ownership interests. Discretionary choices for capital structure, entity type, and other variables are ignored, since the buyer gains absolute control and may change them. The EBITDA metric reflects a buyer’s assessment of transferable benefits. 1 SMEs are small and medium enterprises, where small means less than 50 employees and medium means 51–250 employees. On the other hand, when a partial interest (shares of equity) is acquired, owner and capital structure variables are locked in place, so the investor views valuation differently than a buyer. An investor acquires a portion of the transferable benefits, but also assumes the company’s entity form, ownership character, capital structure, agreements, and goals. Unlike buyers, investors are not free to configure the business as they see fit and move in any direction, so the bundle of rights transferred to an investor is smaller. These two aspects of business value are known as “value in exchange” and “value to the owner,” a duality rooted in the concept of economic utility. 2 Utility looks at user rights that a seller transfers to a buyer versus user rights that a seller provides to an investor. Different users lead to two values for the same set of assets, at the same time, in the same place. This dual utility is seen elsewhere. In finance, it is reflected in the distinction between “asset” and “equity.” Assets are resources that produce outputs, while equity receives the residual benefits of controlled assets. Table 1 shows this economic duality under accounting, valuation, and appraisal representations. 2 “Utility” represents the usefulness of a good. With asset, liability, and equity being different financial goods, the utility of an asset is a resource, a liability is an obligation, and equity is the residual value of resources and obligations. Table 1: Economic Utility Terms UTILITYCONCEPTFOCUS CONTRACT W/ OWNER ACCOUNTINGVALUATIONUSPAP ExchangePricePresentBuyerAssetValue-in-ExchangeMarket Value In-UseValueFutureInvestorEquityValue-to-the-OwnerInvestment Value ECONOMIC UTILITY Economic PrinciplesProfession TerminologyA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES the value examiner MARCH | APRIL 2021 9 An Economic Principle: Utility Utility explains the usefulness of a good. Four economic utilities are form, time, place, and possession. Depending on its purpose, an asset may retain substantially the same form, but have different values if possessed by different users or found in different places or times. Market value and in-use value differ by possession. Market value exists before introducing the owner, while in-use value emerges after the possessor makes choices that organize the company. The ownership role is different than day-to-day management. Ownership is strategic, imposing contractual rules and long-term direction and supplying needed resources. It is entity-related, reflecting a function shared and jointly used by the community of equity holders. Definitions The dual utility concept was introduced by economist Adam Smith in 1776, 3 and first applied to business appraisal by Eugene Grant in 1930. 4 While these two utilities have a presence in USPAP 5 and business valuation texts, the idea does not hold top technical consideration. In contrast, Morrison and Fishman 6 declare these two utilities to be overarching premises of value under legal property concepts. Morrison and Fishman define value in exchange as “converting a business immediately to cash” and value to the owner as “receiving future benefits from the business.” 7 Put simply, exchange value is value if sold and value to the owner is value if not sold. At the top level, these two premises cover the entire universe of options and are mutually exclusive. In other words, the appraisal objective is defined as one or the other, but never both. This article uses the terms market value and asset value for value in exchange (buyer) utility and uses the terms in-use value and equity value for value to the owner (investor) utility. Market value is price, based on immediate conversion of a property to the asset of cash. In-use value is worth, based on the economic principle of anticipation—that is, benefits provided through future distributions, return of capital, and 3 Adam Smith, “Of the Origin and Use of Money,” chap. 4 in An Inquiry into the Nature and Causes of the Wealth of Nations (London: W. Strahan and T. Cadell, 1776). 4 Eugene L. Grant., W. Grant Ireson, and Richard S. Leavenworth, Principles of Engineering Economy, 8th ed. (New York: John Wiley & Sons, 1990). 5 Uniform Standards of Professional Appraisal Practice (USPAP), effective January 1, 2020, through December 31, 2021. 6 Willam J. Morrison and Jay E. Fishman, The Business Valuation Bench Book (Portland, OR: Business Valuation Resources, 2017). 7 Ibid. monetization of appreciation. 8 Dependent and Independent Variables The disciplines of math, science, and engineering use scientific method to recognize the cause-and-effect relationship of variable dependencies. The ability to change a feature is said to determine the dependence versus independence of that variable. An independent variable must be present for any of its dependent variables to affect the outcome. Considering the definitions of market value and in-use value, the circumstances to assess for dependency are (1) selling a business versus (2) receiving future benefits from the business; or, said another way, a change of owner versus no change of owner. Following scientific method, a buyer’s options to reconfigure features immediately after taking possession of the business are the dependent variables. Features that cannot be changed immediately are independent variables. Illustration An example illustrates the distinction between market value and in-use value. Suppose the principle operating asset of a limited liability company (LLC) is an office building (referred to as commercial real estate [CRE]). With owner change as the test, we look at value based on whether the CRE is sold or not sold. Using CRE as the operating asset for the example, instead of a product or service, keeps the focus on the owners’ economic rights and cash flows. First, a CRE appraisal assesses the market value of the office building using the cost, market, and income approaches. That value is combined with the other assets to settle the asset side of the balance sheet at market value. Figure 1 compares the book value and market value of the LLC’s assets, using the CRE’s appraised value of $7 million, an equipment appraisal of the furniture at $57,000, and cash. It presents the company’s market value at $7,142,000. 8 The value of a property depends on the anticipated utility or income that will accrue to the property owner in the future. See Shannon P. Pratt, Robert F. Reilly, and Robert P. Schweihs, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 3rd ed. (Chicago: Irwin Professional Publishing, 1996), 548. Put simply, exchange value is value if sold and value to the owner is value if not sold.Next >