|Posted on July 3, 2014 at 8:50 PM||comments (0)|
The National Association of Certified Valuation Analysts (NACVA) and Consultants Training Institute (CTI) finished their annual meeting at the Wynn in Las Vegas. This was a good meeting since there are a number of significant practice changes occuring. Some of the name speakers included Dr. Pratt and Roger Grabowski of Duff & Phelps. It was good reconnecting with them and hearing them speak about the cost of capital and closely held companies.
Now, a grand total of two (2) WA members attended; me and another practitioner from Seattle, WA! That is ... low. I will be hosting the WA State NACVA and CTI meetings in October and November 2014. I have invited fellow WSBA sections and members to attend and ... I am waiting. It is a shame --I am speaking now as an attorney--that the different professions do not see the value or do not make time to learn from each other. earing my business valuation hat, I cannot tell you the number of times that an attorney could have learned something from the valuation or litigation support professional. Sorry client ,... I did not know (or bother to know). Now, I can reach to the WSBA ... but that is punishment in my opinion; I was hoping to get some attorneys to share the load and they could help securing the CLE for attorneys while I worked on the speakers and presentations. Likewise, it would be good for liigation consultants, expert witnesses and other pofessionals to hear from the WSBA; the new attorneys would learn an immense amount and even the others in attendance. Exit and Transition Planning, as well as valuation of IP and sart-ups are important for individuals, marriages, the co-founders, funding companies, banks, Angels, etc and knowing more enable sus to be more efficient. Enough of that. I am venting and few professionals are interested in venturing outside their silos; if they know so much, their is a chair and podium waiting for them to contribute.
What can I share about the conference, well, I liked the presentations by:
- Carl Sheeler of the Berkley Research Group (on succession planning and the skills professionals need to bring; the theme is that if we sell our services and end up as a the lowest cost provider, we are effectively diminishing the value that valuation professionals bring to the client. A client that is bottom line oriented and buys pieces, misses out on the network and other services that can assist them transition. The imnportance of working with other professionals and getting them involved in exit planning resonated with me. It is about the client, not about "me" or losing the law firm or CPA client to an outsider or third party and the revenue stream. It is about the client and their family and charities.
- Tracy Coenen, CPA, CFF spoke about Lifestyle Analysis in Divorce Engagements and her practice tips (this is something that s arely used in WA)
- Stephanie Loomis of Winstead joined Peter Agrapides and Mel Abraham to discuss state and federal cases. The case that received the most attention was Estate of Richmond. They also spent a fair amount of time discussing best practices for attorneys and valuation professionals to use in connection with reports and Judge Laro's views on the premissible limits.
- ACO and healthcare practice vauations. My national healtcare competitors presented and did a good job outlining the challenges valuing ACOs and rural healthcare entities. This resonates now that I live and do business brokerage work in a rural area ... Central WA.
So, I am now back in WA full of ideas and bidding for some interesting work (from a Private Equity group to value the machinery and equipment at a high tech facility that just purchased an east coast lower middle market business, a Portland, OR M & E assignment that somehow ended up being referred to a NJ firm that contacted me to get the work done, an Estate Administration and a few businessowners that are thinking about selling their business. I can help all; I have the experience and training to get the jobs done and network to help them, if needed).
Until the next blog!
|Posted on June 13, 2014 at 11:55 PM||comments (1)|
My law practice website is finally up (about 2 months behind schedule), It is at www.rcastrolaw.com. Check it out!
What struck me as I set it up was that there are other Castro attorneys in the US that also have an R initial in their name and they did not set up a website or secure a domain name. Time will tell whether these other Castro's made a sound decision or fell asleep at the wheel. I will be making some additional changes to each website to accomodate for credit card payment and also add some videos outlining issues and services.
If you have any suggestions regarding content, let me know!
Herbert v Kohler US Tax Court Case - What is the Cost of the Valuation for Estate Tax Purposes?? Gift tax purposes?
|Posted on May 9, 2014 at 5:35 PM||comments (0)|
I am in the process of bidding for a project with an SBA 7a lender. That is not an estate or gift valuation. Furthermore, there is a significant difference between a calculation and a valuation; the fomer involves abbreviated procedures ad costs far less!!!
With the SBA 7a program, the lenders will call asking for the project now, not in 2 weeks. They want the project now. Now is not always possible; there are "honey-do" jobs and other family obligations that may impede undertaking a vauation. SBA SOP's require a valuation, not a calculation! Further, the people preparing the valuation mut be accredited by one of three accrediting orgs; I have a CVA (Certified Valuation Analust) designation and the experience needed to bid for this type of work.
That said, historically, the banks and SBA 7a lenders have contracted with the lowest priced service providers. These services providers are (in my opinion) valuation mills. Invariably, they do not conduct a site visit, interview management, key employees, look at contracts, assess the competitors (local, regional or national) and their competitors' strength, weaknesses, and assess the subject company's owner's and employees ability to respond to change or new competition. In 99% of the mill reports, there are some gapping holes. The SBA 7a lender buys the "valuation" project for $2,300 to $3,000.
While the "mills" (these are national firms) are staffed by accredited professionals, that fact provides little solace to the buyer that may over pay or the bank that will be left with a business. Sometimes, the valuation leads to a lower price. That is the valuation missed important points that are important and set the firm in question apart. Ultimately, it is bank that hires the valuation expert and makes a judgment call. In law, that is the equivalent of hiring a newly minted attorney to handle a complex tax or matrimonial matter. Good luck.
One case worth reading, because in the area of tax, estate and gift and M &A, the courts are beginning to understand that valuation professionals are not all the same (just like, there is a difference amongs attorneys), is Herbert v Kohler. The critique helps explain the risks of cutting corners. http/ustaxcourt.gov/InOpHistoric/kohler.TCM.WPD.pdf. The case does not get into understatement penalties and other risks that are very real. In a recent case, aggressive valuation and appraisal professionals were called on their judgment and ... have been banned from ever appearing before the US Tax Court. These professionals are now (possibly/very likely) going to loose their professional licenses. If they loose their licenses ... they had it coming! (Sorry for being harsh)
Going for the lowest cost providers is an option and there are risks that may end up costing alot. Central Washington Appraisal, Economic & Forensics, LLC is a new firm in Central Washington. We compete on value and are reasonably priced. We also provide USPAP machinery and equipment appraisals. We bring experience but ... as a start up in Central Washington, we want to build a business and establish relationships. Call us and let's visit if pricing is an issue in our bid. Thank you!
|Posted on May 2, 2014 at 10:35 AM||comments (0)|
I will be attending NACVA's Conference in Las Vegas in June 2014. This post is for the WA and OR attorneys I am beginning to network with; most do not know what is discussed and how it relates to them; as a side note, NACVA just exhibited at the ABA Conference to market the body of knowledge and market the membership base to M & A, litigation, estate and gift, and business attorneys. The word is that this was news to many of them. That is a little alarming since law firms should be using accredited and qualified professionals to assist their clients in the various engagements. Anyway, enough pontificating.
Here is the link to see what is covered in a Litigaton and BV Conference (it includes succession planning and M & A too):
If you have any questions, e-mail me at [email protected] to inquire about appraisal services, lit support, RE financial modeling, or economics and forensic services.
|Posted on May 2, 2014 at 12:20 AM||comments (0)|
In the spirit of full disclosure ... I am a business broker with Murphy Business & Financial Corporation, Pacific Northwest Region covering Central Washington. The office just opened and the strategy is to use my prior transactional, valuation and legal experience in the assessment and transactional process. If I am handling a transaction, I am the business broker and not the seller or buyer's attorney. That said, let's talk briefly about ESOPs as an alternative to an outright sale and discuss the current thought regarding what company is appropriate for an ESOP.
First, an ESOP is tax-qualified retirement plan that is funded through employer contributions and not staff salary deferrals. It is intended to invest primarily in the sponsoring employer's stock. Sorry, it does not work for LLC's; I recently presented on this issue at a NACVA/IBA webinar in April 2014 and talked about a recent U.S. Tax Court case called K.H. Company, LLC v Commissioner, T.C. Memo. 2014-31. If you want to read more about ESOPs and how tricky these are to administer, there is another new case worth reading. This ESOP case involves the disqualification and nonallocation year problems that can arise ad help explain, in part, why it costs $$ to keep the plan updated and in compliance. Read Law Office of John Eggertsen, P.C. v Commissioner, 142 T.C. No. 4 (2014) (excise tax imposed on law firm).
There is no question that there are some significant tax incentives and benefits for companies that adopt ESOPs and C- and S-corp owners. A significant benefit of the ESOP is that the ESOP can borrow money for the purchase of the stock and the firm can pay back the borrowed funds with tax-deductible contributions to the plan. C-corp owners that sell 30 percent or more to the ESOP can defer the capital gains if the money is reinvested in qualified securities. (Beware, on January 1, 2014 the QSB percentage changed to 50%!!) S corp shareholders also benefit. While there are some real tax benefits, as the cases cited above go to show, there are some compliance costs and risks. Most small business will not be able to afford these expenses and as a result the tax benefits (realistically speaking) are not available to them. In short, a tax will be paid and the purchase price allocation and terms will determine how these are reported. (Another plug for my firm, we can assisit with the Purchase Price Allocation; we are one of the few Certified Machinery & Equipment Appraisers in Central Washington ... which also means we can assist with estate and gift tax returns since a qualified appraiser is needed as well as a report showing the qualification; the tax basis does not work in the later instances!)
Are all companies good candidates for an ESOP? NO! As mentioned, where there are some significant tax benefits and incentives there are risks and costs that realistically small companies cannot afford to take and as a result the owners cannot benefit. Larger companies are better candidates (but not all large firms are good ESOP candidates). If the company is worth, say $2M to $3M, is that a good candidate? According to Howard Levine, a partner at Drinker Biddle, based in Chicago, the answer is NO!. Mr. Levine in a recently published article in Entrepreneur, "Is Your Company a Good Fit for an Employee Stock Ownership Plan?", observes that "for a leveraged ESOP transaction, the costs typically run from $125,000 to $250,000, depending on the size of the transaction and type of financing. Keep in mind, however, that an outright sale of a company would also entail comparable costs." In actuality, the transaction costs for a small company are in the range of 10 to 15 percent, with some floors. The range cited by Mr. Levine is more appropriate for companies sold for $1,100,000 to 2,000,000. Investment banks that serve the middle market will charge a minimal fee--over $500,00--to cover the army of analysts and partners/managers that handle the process. These are high, but the returns on investment cover the expense. That said, the middle market investment bank is not chasing businesses worth less than $10M or offering their services (except in unusual circumstances) to raise less than $10M in capital.
So, is an ESOP a reealistic choice for small businesses (valued under $10M)? I do not think so. Is an ESOP a good tool for companies worth over $10M, yes, but then you have to decide amongst other options. The market is segmented and so are the options.
If you are considering selling your company, give us a call at 509-679-3668. To learn more about business brokerage services, visit www.murphybusiness.com/centralwashington.
|Posted on May 1, 2014 at 4:25 PM||comments (0)|
Greybull Stewardship, LP and Murphy Business announced today that they have (my words) "tied the knot". It is an Evergreen investment, which means this is a long term deal and that PE is interested in the deal flow (SASS, software, IT services companies coming through the Murphy pipeline are potential big winners). Wow! I am happy for Roger Murphy and the original founders, they stay on and get additional resources to remain at #1.
It was interesting to hear Greybull remark that hands down, in his opinion, Murphy offers the top-rate business brokerage services in the industry and that the willingnesss to co-broker, provide additional education to brokers, and HQ support were reasons for the investment. It is a two-way street and the benefits will flow to clients and to Greybull Stewardship, which has a long-term view and investment. Bravo!
If you are a small company in the software or IT industry, I think that Murphy is the place to go to! To learn more, contact [email protected] or call 509-679-3668 to learn more about this development and have us evaluate the company.
|Posted on April 23, 2014 at 10:45 AM||comments (0)|
Lake Chelan's year population is in the range of 4,200 to 5,000. In the summer months, the population grows to over 20,000. There is charm and culture. The Chelan Recreational and Community Center (RCCC) is a grass roots level effort to establish a recreational facility in the community. There is nothing close; the closest recreational facility is in Wenatchee, WA, which is 45 minutes south (assuming dry pavement and no road construction).
On April 23, 2014, RCCC hosted a seminar for local financial planners, CPAs, and attorneys. Joel Frank of Equilus and I co-presented.
There are a number of ways that these professionals can assist potential donors (whether in western WA or locally (in Chelan, WA)) address personal and family issues and also make provisions to improve the community. All can do well. Hopefully, the information shared provides another option not previously considered and that donors will consider making a lifetime or testamentary gift to RCCC and/or another worthy exempt organization.
By way of background, the latest IRS statistics indicates that for estates valued at less than $5M, stocks (publicly traded) and real estate account for somewhere between 26 to 28% of the estate value. These percentages change slightly for estates valued between $5M and $10M. The bulk of the estates are valued at less than $10M. These statistics are instructive.
The options discussed included outright gifts of residential real estate, retaining a life estate, establishing a GRAT, CRT, and a CLAT. Of course, the ILIT was also discussed. The presentation included some sample illustrations. The purpose of the ILIT was also discussed; it can provide liquidity to pay administration expenses and/or provide cash to benefciaries to make up for gifts made to charities, such as RCCC.
The presentation lasted some 30 minutes.
If you are interested in seeing the presentation, let me know. Send me an e-mail.
|Posted on April 22, 2014 at 7:35 PM||comments (0)|
I was on a call this past week where a party with whom I network reported the 1st Quarter 2014 transactional activity. Specifically, he looked at the the number of transactions across a host of industries and reported the percentage of the businesses that sold. Here are some of the highlights of the survey data:
Industry % of Businesses Sold
Real Estate Rental & Leasing 16.5
Finance and Insurance 12.9
Retail Trade 9.8
Professional Services 9.1
The data changes from quarter to quarter; what sells now, may not sell tomorrow. In my experience, the range of percentages reported tends to be uniform. That is bad news ... for many small businesses ... especially if they are not proactive. There are things that can be done to improve these odds and it is critical to connect with a reputable business broker that has a process in place, understands how to prepare a "book", pre-qualify buyers, and manage the process so it closes. I like Murphy Business & Financial Corporation, www.murphybusiness.com.
As for how this translates to Central Washington business owners stumbling or referred to our website, Murphy's Central Washington's Regional Office--which I head--opened in late April 2014. They (and I) are committed to realistically pricing the business, marketing the business to a local, regional, state and U.S. buyer pool, being responsive, qualifying buyers, and executing. The business owner can focus on doing business, improving processes, and taking action to improve the sellability (and multiple the business may fetch).
From a valuation point of view, these figures confirm that the public maket multiples are not relevant to the small business market and discounts for lack of marketability are warranted (the size is a different issue not addressed here). Call us for valuation advisory services if you are thinking of executing a buy-sell (REALLY should have one), have a trust & estate issue, or want to know what steps to take to improve the sellability of the business. If you are ready to sell, visit www.murphybusiness.com/centralwashington to know more and give Murphy Business, Central Washington a call at 509-679-3668.
|Posted on April 19, 2014 at 1:40 PM||comments (0)|
I have taken a review course (1 hr) in April 2014 for machinery and equipment through NEBB Institute, which tests candidates before conferring the CMEA. In May 2014 I am taking a course. This will provide an overview of what one is exposed to and necessary to remain current (not all Machinery & Equipment professionals will take this course) (which is being offered through the ASA, a NEBB Institute competitor)
This course provides an overview of the Life-Cycle Process commonly used by economic life experts to objectively estimate the economic life of property, plant, and equipment. Additionally, the student will be exposed to the two life analysis techniques most commonly used by economic life analyst: Actuarial Analysis - (e.g. Iowa Survivor Curves) commonly used to quantify physical depreciation and ordinary obsolescence; and Technology Substitution Analysis - typically used to quantify the abnormal or excessive obsolescence brought about by rapid technological advancement, government mandates, evolving/changing consumer expectations, as well as many other obsolescence drivers we have seen in recent years.
"Survivor Curves and Equipment Life Expectancy", MTS Journal, Volume 24 - Issue 4, Volume 25 - Issue 1.
- Depreciation Tables and the Age/Life Concept
- How are they developed
- Average Life Development
- Introduction to Survivor Curves (a\k\a: Actuarial Analysis )
- Life-Cycle Analysis
- The Life-Cycle Curve
- How Life-Cycle Curves Define the Economic Life
- Introduction to Technology Substitution Analysis
- Combining multiple forces/drivers impacting the economic life
There you have it .... it appeals to one's quantitative inclinations.
Central Washington Appraisal, Economic & Forensics, LLC prepares USPAP reports for buyers, sellers, lenders, CPAs, and attorneys in connection also with estate and gift tax returns and Purchase Price Allocation. Using a depreciation schedule as the basis for the latter two is just wrong! We are generalists (which means we are not valuing Boeing aircraft or Power Plants ...); we are generalists valuing small business machinery and equipment, including physician practices and medical equipment, breweries, wineris, .... and when the need arises, we bring in others to assist us in the valuation of machinery and equipment.
Give us a call at 509-953-3668 and visit us at www.cwa-appraisal.com.
|Posted on April 18, 2014 at 7:45 PM||comments (0)|
This Wednesday (4/22/2014) afternoon I will make a presentation with Joel Frank of Equilus Group, a Wenatchee-based group. While the presentation is intended to focus on ways potential donors for the Chelan Rec Center may be approached and enticed to donate, there is a portion that is relevant to business owners thinking about succession planning .... I am referring to the CLT.
This is my first official presentation in Chelan, WA and I am looking forward to getting to know a cross-section of the professionals before launching (officially) the law practice.
If you attend the presentation, post a note in the Blog!