Five Timely Insights From the NYSSCPA Business Valuation and Litigation Services Conference

The conference season is well underway, and Business Valuation Update has been on the virtual road, collecting the latest insights on a wide variety of topics. Here are some interesting takeaways from the New York State Society of CPAs (NYSSCPA) Business Valuation and Litigation Services Conference, held May 17. Topics included emerging issues (SPACs, cryptocurrency, Zoom as a practice-builder) and some new perspectives on evergreen topics (estate valuations, cannabis, distressed firms, and collaborations).

Mitchell Chosak (FSA LLC) greeted the online audience, and the committee chairpersons Harold Deiters III and Pasquale Rafanelli, who are both with Empire Valuation Consultants, gave opening remarks.

1. Collaboration

Michael Gregory (Michael Gregory), former IRS manager who was involved in the business valuations area at the agency, conducted the lead-off session. He is now in private practice and does a lot of work in the area of mediation. His session focused on developing the skills needed to develop a successful practice in exit and estate planning. Providing this type of valuation service typically involves a team of the client’s various experts, Gregory points out, so you need to hone your collaborative skills in terms of connecting relationships, listening actively, and educating judiciously. Gregory’s book, The Collaboration Effect, goes into this in great detail, but it all boils down to a matter of building trust.

2. Cannabis

Deiters and Rafanelli did a session on the operations and valuations in the cannabis industry. They noted that the industry is already a multibillion-dollar business and is poised to grow rapidly as new markets open and more states legalize both medical and recreational use. The most significant future “pivot” in this industry will be when cannabis becomes legal under federal law. Although legal in many states, under federal law, it has been classified as a Schedule I controlled substance, and, generally speaking, federal law preempts state law.

The valuation challenges are great for firms in this industry—here are just a few:

• Lack of historical data and market transactions;
• Huge rate of change in most segments of the industry;
• Continued regulatory disruptions on both the federal and state fronts;
• Extraordinary unsystematic risk profiles; and
• Crop-related risks.

The speakers spent time discussing four specific issues to focus on when valuing a cannabis firm: license rights, lease, location, and legislative environment.

The biggest problem, the speakers say, stems from the tax law’s Section 280e, which prohibits cannabis firms from taking tax deductions for normal business expenses because marijuana is illegal under federal law. In recent years, numerous cannabis businesses that are legal under state law have unsuccessfully challenged this to no avail. Just recently, the U.S. Tax Court ruled against a California medical cannabis dispensary to continue the no-deduction trend.

3. Selling via Zoom

A very interesting session by Rod Burkert (Burkert Valuation Advisors LLC) revealed how to sell your firm’s services using Zoom. Like it or not, selling via this type of technology has become a needed (maybe even required) skill, he says. While many of us have “Zoom fatigue,” Burkert’s particular circumstances continue to embrace this technology he started using in 2018 because he operates his practice full-time out of an RV—he has no permanent location—so, as a “remote guy,” he loves Zoom and similar apps. Here are some of his pointers:

• You cannot just sit in front of the screen and talk—you need to use visual models that convey the why, what, and how of the services to be provided;
• He likens selling via Zoom to a bullfight in terms of the choreography (he noted, though, that sometimes the bull wins);
• A simple technique that “no one else is using” that will give you an edge over your competition is this: During the call, draw a picture using your iPad—it cuts out the viewer’s distractions and draws them in (one client told him the drawing is what got him the engagement); and
• To seal a deal for tough-to-sell services (such as exit planning), use a “paradigm shift” model, that is, ask whether the client wants to be in the large group of business owners who have no idea what their firm is worth or the smaller “in the know” group (use a pie chart visual model to help get this point across).

Burkert went through a number of other models and techniques to use when trying to close a deal via Zoom.

4. Crypto assets 

The conference had two sessions devoted to investigating crypto assets. In their session, Mark DiMichael and Katerina Gaebel, both with Citrin Cooperman, went through a good overview of the basics and explained that crypto assets need to be traced in marital dissolution cases, bankruptcies, and in connection with criminal activities, such as money laundering and terrorist activities. Locating crypto assets is a long, slow, and complex process, they explained. The IRS said recently that there is no reporting if you just buy and hold it, so it will not show up on Forms 1040 or 8949. Tax reporting is triggered if you sell or trade in it—and just spending it to buy something constitutes a “sale” that is reportable.

Some interesting history: Bitcoin was developed around 2008 (the time of the financial crisis) when there was a lot of distrust in banks. It’s hard to say how much that distrust influenced the founders of Bitcoin, but DiMichael believes that was part of the reason for its development. Also, a lot of people were strong privacy advocates who did not like having the credit card companies know about everything they spent. There is nothing inherently illegal with wanting privacy or spending money privately, but a number of people use Bitcoin and/or cash in order to hide their transactions.

A separate session was conducted by Nicholas Himonidis (NGH Group Inc.), a Certified Cryptocurrency Forensic Investigator, of which there are very few. He reiterated the difficulty in locating these assets, saying: “If you think you’ve found it all, you probably have not.” He pointed out that not all Bitcoin transactions are recorded. Some are done on the dark web, a “very dangerous” place where conventional tracing tools do not work. The only way to detect it is using forensic data from the buyer’s devices and data.

He also made the point that Bitcoin is a “bearer instrument.” That means the “private key is everything” (a private key is a secret number that unlocks Bitcoin for spending) and, if it is lost or hacked, the Bitcoin is “gone forever.” This has important implications to the forensic investigator. Anybody with a significant investment in crypto who is not using a brokerage (i.e., dealing peer to peer) will have their private keys securely stored and backed up, probably in multiple places.

A question from the audience: “Is cryptocurrency more prevalent globally versus the U.S.?” It’s “huge everywhere,” says Himonidis, who points out that the UK had an early start in investigating these assets. For more reading on this topic, Himonidis recommends a book, Investigating Cryptocurrencies, by Nick Furneaux, which he says is his “go to” source (even though the book is a few years old).

5. Estate tax audits

When performing valuations for estate purposes, “write every valuation report as though it will end up in court,” advises Bruce Johnson (Munroe, Park & Johnson Inc.). He talked about two audits he was involved with, and he gave first-hand accounts of what he learned along the way. The audits involved IRS scrutiny of transactions of noncontrolling, nonmarketable interests in family limited partnerships (both turned out in favor of the taxpayer).

To defend against an IRS audit, use multiple approaches and methods to value a business interest. His advice is to use two approaches (income, market, or asset), two methods to determine rates of return (CAPM, buildup, etc.), and more than two methods for determining a discount for lack of marketability.

He also discussed two landmark tax cases in which he was the expert witness: Estate of Elsie J. Church and Estate of Emily Klauss. In addition to the above advice, Johnson adds these pieces of guidance based on these two cases:

• Verify the information being presented as factual;
• Cite authoritative texts and footnote all assumptions;
• Get outside help when appropriate;
• Work closely with legal counsel—understand rights of liquidation and control; and
• Tell the truth and be honest.

Johnson is the co-author of the Comprehensive Guide for the Valuation of Family Limited Partnerships and is the co-developer of the Johnson/Park empirical method to determine a discount for lack of marketability.

Conclusion

Much more was discussed at the conference than we can cover in this blog, but we look forward to next year’s event, which will be one of the over 30 conferences the NYSSCPA holds each year. Visit its conference web page at nysscpa.org/cpe/fae-conferences. And, to stay up-to-date with all of our conference coverage, be sure to check out our monthly Business Valuation Update newsletter, the voice of the profession since 1995.