The person that we are seeking should have at least 10 years of public accounting or investment experience. We are also looking for a self starter and professionally motivated individual that is looking to move into a project management role within two years. All candidates must be licensed as a CPA and must be willing to obtain either Accredited in Business Valuation (ABV) or Certified Valuation Analyst (CVA) credentials.

See the full job description here: http://bit.ly/TMValAssoc

Contact Anne Meltzer is you are interested at anne@tuckerandmeltzer.com

The Washington, D.C. Estate Planning Council is a multidisciplinary organization serving the estate planning professionals of the Washington Metropolitan area. It is organized to help its members render the highest possible service to the public; to acquaint those in need of estate planning with the advantages it offers; to provide to the members a forum for the discussion of such topics; to foster intelligent understanding of the proper relationship each participating group bears to the others; and to promote acquaintance and cooperation among the participating groups; all to the end that the clients or customers of the members and the general public may better be served.

For more information, follow this link: http://www.associationsites.com/main-pub.cfm?usr=WDCEPC

The IRS issued final regulations (T.D. 9582) requiring that a provision in a trust, will, or local law that specifically indicates the source out of which amounts are to be paid, permanently set aside, or used for a charitable purpose must have an independent economic effect aside from income tax purposes if the allocation is to be respected for federal tax purposes. Read more–>

These built in gains typically occur when a C corporation converts to an S corporation. This article discusses the common issues facing corporations in this situation, and the need for a proper appraisal. A good resource for you and your clients.

Looking for more valuation resources? Please see our Library which is full of articles, cases and past newsletters.

Written by Jennifer Rosenberg

Are you looking for a business valuation expert? The expert you choose may be one of the most important steps you take. Keep in mind these important characteristics of a great expert:

• Curriculum Vitae – don’t forget to review the resume. Your experts need experience and expertise.
• Credentials– in the case of an expert, the letters mean something. Just like your attorney has a BA and your accountant a CPA, your expert should have credentials. Here are the top three:
  - ASA – Accredited Senior Appraiser , issued by the American Society of Appraisers
  - ABV – Accredited in Business Valuation, issued by the American Institute of Certified Public Accountants
  - CVA – Certified Valuation Analyst, issued by the National Association of Certified Valuators and Analysts
• Education and Training
• Experience
• Communications Skills

Remembering to hire the right person will save you time and aggravation down the line. Check out the Tucker & Meltzer experts!

Written by Anne R. Meltzer, CPA/ABV

Have you considered the ESOP Repurchase Obligation? This refers to the “put” right which obligates the company to purchase an employee’s shares. The majority of ESOP repurchases are due to employee terminations and retirements. Since both of these situations are fairly predictable, the repurchase obligation is also predictable and manageable.

The impact of the repurchase obligation on fair market value depends most strongly on the 1) percentage of stock owned by the ESOP, 2) distribution rules within the plan document and 3) the methods used to repurchase the shares. 

There are two primary repurchase obligation strategies or methods: the Recycling Compensatory Transaction Method and the Redemption Capital Transaction Method. These methods are very different and have a different impact on the valuation of the ESOP company.

Recycling Transaction:

1. The company makes tax deductible contributions to the ESOP.
2. The ESOP purchases shares from departing participants and “recycles” the shares.
3. Shares are reallocated to the remaining participants and remain outstanding.

This transaction perpetuates the ESOP and is a compensatory transaction that may affect fair market value of the company. The total number of shares does not change, but the company incurs compensation expense. The company’s value could be impacted if the repurchase obligation is large and negatively effects the company’s working capital position.

When valuing a company that uses the recycling method to fund its repurchase obligation, the valuation analyst must consider the continuous nature of the repurchase obligation over many years. The repurchase obligation can affect the share price and the share price affects the repurchase obligation. A repurchase obligation study will project the number of shares expected to be repurchased and the projected share price. The projected recycling contributions need to be treated as an operating expense. Finally, the valuer needs to consider the impact of a normalized level of employee benefit expense.

Redemption Transaction:

1. The ESOP distributes shares to the departing employees.
2. The company transacts with the departing participant in a “redemption” that is a non-deductible capital transaction.
3. The shares are then retired to the treasury and/or can be recontributed to the ESOP.

Redemption transactions reduce the number of shares outstanding to the ESOP and can often reduce the size of the repurchase obligation. The total enterprise value of the company may grow while the number of shares outstanding declines, thus increasing the per share value over time. Individual account balances will grow with increases in the enterprise value, as contributions to the ESOP are not usually made using this method.

The redemption method as a capital transaction does not generally affect fair market value to the extent that redemptions are manageable and within the projected cash flow of the company. A company which must borrow to fund its repurchase obligations generally will have a negative impact on value.

In either case, the repurchase obligation must be considered and reviewed each year when valuing ESOP companies. Keep this in mind the next time you are reviewing an ESOP valuation, or if you are considering adopting an ESOP.

If you have any questions regarding this article or ESOPs in general, please direct your questions to Anne Meltzer.

A valuation rebuttal report is a report that is used for litigation purposes whereby a critique is made of the valuation report of the opposing expert, and then a revised valuation conclusion is provided. The goals to be achieved with a rebuttal report include:

• Reduce fees to the client because a detailed appraisal report is not prepared;

• Communicate to the reader, potentially a “Trier of Fact” (Judge or Jury) that these are the areas that both experts agree on, and these are the areas where they do not agree; and

• As a result of the areas of disagreement, a revised value conclusion is provided. 

The valuation standards that we, Tucker & Meltzer, as a Firm comply with include those established by the Statement on Standards for Valuation Services No.1 (SSVS) issued by the American Institute of Certified Public Accountants (AICPA) Consulting Services Executive Committee, the National Association of Certified Valuators and Analysts (NACVA), and the Uniform Standards of Professional Appraisal Practice (USPAP). All of these standards are generally divided between development standards and reporting standards. Where the engagement is for the purpose of litigation, the appraiser does not have to comply with the reporting standards. This allows the appraiser to work with the attorney from a legal strategic perspective in developing the means of communicating their conclusion of value. Hence, the acceptance of a rebuttal report. However, the appraiser still must comply with the development standards if they are issuing a conclusion or opinion of value. That basically means that the appraiser has performed enough work to support the conclusion or opinion of value that they are offering into evidence and testifying to.

This is extremely important, as evidenced by a question I was given by the opposing attorney on cross examination in a recent litigation case. The attorney, who was probably coached by the opposing expert, asked me: Did you perform enough work in accordance with standards to issue an opinion of value? He knew that my rebuttal report did not reflect all of the disclosures that would have documented my compliance with standards, and if I answered anything but the affirmative, the Judge would have had significant reason to discount my opinion of value, and rely more heavily on the opposing expert’s value conclusion. Obviously, that represents a position that no valuation expert wants to be in.

Another important thing to remember when critiquing an opposing expert’s report is to never gloss over a valuation method that is deemed a “sanity check” only. A sanity check is generally defined as a valuation method that is used and sometimes included in the valuation report, that is not intended to be relied on to develop a conclusion of value. Rather, it is used to support the values produced by other valuation methods. It is not intended to be the primary method of valuation because either the data used in the method is not sufficiently reliable, or the method itself is not an acceptable method to be relied on, in and of itself.

In two recent litigation cases where I issued a rebuttal report, the opposing experts included the market approach in their valuation reports and referred to the value produced by the market approach as a “sanity check”. In both cases, the value produced by this valuation approach did support values produced by other valuation methods. Since it was referred to as just a sanity check, I did not address it in detail in my rebuttal report. I realized to my surprise that when each of these experts described their sanity check to the Judge during their testimony at trial, it sounded as if the reliance placed on this valuation approach was much more than just a sanity check. I also realized that the Judge probably didn’t thoroughly understand the concept of a sanity check and placed more reliance on it than should have been placed. Fortunately, in each case, I was able to perform a more detailed analysis of the valuation approach the evening after they testified in preparation for my testimony the next day.

In the first case, I realized that the opposing expert had utilized the sales transaction database incorrectly, thereby producing a value that was in excess of $800,000 higher than if properly calculated. When calculated properly, the value produced by that approach was within $4,000 of my value conclusion. I was even able to direct the Judge to the website that had specific directions on how to correctly use the data.

In the second case, similar to the first case, the opposing expert also described the market approach as much more than a sanity check once he was on the witness stand. Four sales transactions were used to develop a value for the “sanity check”. Although never mentioned by the opposing expert in his testimony, in my testimony, I clarified to the Judge that two of the transactions were in excess of 10 years old, one was in excess of five years old, and the remaining transaction had revenues that were 88 times that of the company being valued. It was also located in Hawaii as compared to the company being valued being located in Maryland. In my opinion, this valuation method should have never been included in the valuation report in the first place for the above reasons.

In hindsight, in both cases, I would have preferred to have documented my criticisms of the opposing experts’ sanity checks in my rebuttal report. I did not realize how much of a difference in meaning a sanity check was when read in a report versus being explained, in a very liberal manner, on the witness stand.

In conclusion, if you are a valuation expert, remember that the issuance of a rebuttal report does not relieve you of complying with development standards. In addition, never gloss over valuation methods referred to as “sanity checks” by your opposing experts. If you are an attorney involved in litigation, and you have directed your valuation expert to prepare a rebuttal report, remember to confirm that they have complied with development standards. In addition, make sure that they don’t gloss over valuation methods referred to as “sanity checks” by your opposing experts in their report.

For more information on this topic, contact Mark Norris.