CFAI Adds Principal & New Seattle Office Director

Columbia Financial Advisors, Inc.

is pleased to announce that Nic Staloch, ASA,
has joined the firm as Principal and Director
of its new Seattle office.

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Nic Staloch, ASA has been engaged in business appraisals and financial advisory services since 1999. He specializes in ESOP-related valuation and financial advisory services, estate and gift tax valuations, and appraisals for a variety of other purposes. ESOP-related financial advisory services include assessing strategic alternatives, feasibility, preliminary valuations, structuring and negotiating transactions, fairness and solvency opinions, annual valuations, buy-side and sell-side transactions, and ESOP terminations.

Prior to joining Columbia Financial Advisors, Inc., Mr. Staloch provided valuation and financial advisory services as founder and CEO of Sound Advisory Services, LLC in Seattle, Washington. Mr. Staloch began his valuation career at Chartwell Financial Advisory, LLC providing financial advisory, corporate finance, and valuation services to national middle market companies for over 15 years.

Mr. Staloch is an Accredited Senior Appraiser of the American Society of Appraisers designated in Business Valuation and passed FINRA Series 63 and Series 79 exams. Mr. Staloch earned his Bachelor of Arts in Finance from the University of St. Thomas in 1999. He is a member of The ESOP Association, The Northwest Chapter of The ESOP Association and the National Center for Employee Ownership. Mr. Staloch has presented on ESOP valuation and financial advisory matters at conferences and webinars sponsored by the National Center for Employee Ownership and The ESOP Association, as well as other groups on various appraisal topics.

Mr. Staloch may be reached at 206-963-2565 or nstaloch@cfai.com

500 Yale Avenue North | Seattle, WA 98109-5680

IRS Proposal May Affect Value of Gift and Estate Transfers in Family-Owned or Closely Held Businesses

On August 2, 2016, the IRS issued proposed regulations (REG-163113-02) that may affect the valuation of gift and estate transfers of interests in family-owned or closely held businesses, placing limitations on discounts to the overall value that reflect lack of control or marketability.

According to Bloomberg, the proposed regulations are meant to end certain tax planning conventions seen as abusive by the IRS. Many estate planning and valuation professionals have expressed concerns that the regulations overstep IRS authority, as well as established state and federal laws. Some also argue the proposal is an attempt to reverse Tax Court decisions unfavorable to the IRS. There have been previous similar proposals by the IRS, also aimed at such valuation discounts, with limited success.

As stated in the Bloomberg BNA article, “IRS Expected to Face Pushback Against New Estate Tax Rules”:

“Let’s say my family has a business and my dad gives me a 10 percent interest in the business. The issue is what is that worth relative to the underlying asset value?” Dyer [Stephen Dyer, partner at Baker Botts LLP] asked. “Usually you would say it’s worth less than the underlying asset value because you can’t get” the full value out of it and it isn't marketable, he told Bloomberg BNA Aug. 4.

The way the statute is written, if there is a restriction on the value of an interest in a family-owned entity—meaning it can't be liquidated—then the restriction has to be reducing the value for tax purposes but not the value in the transferee's hand, in order to be ignored, he said. In the example, both of those requirements are not being met because “I’m still stuck with a 10 percent interest,” he said. “So that’s an argument that suggests that the statutory authority doesn’t mean as much as the Treasury thinks it does,” Dyer said.

Robert Kovacev, a partner at Steptoe and Johnson LLP, states:

“If you talk to anyone in business valuation, like someone who appraises businesses for a living; anyone who appraises businesses with partnerships, they’ll tell you that you really should have some sort of discount” on the valuation of an asset in a closely-held business because of the restrictions and lack of marketability that make the interest harder to sell, Kovacev said. If members of industry submit comments to the IRS expressing these concerns, the agency will be pressured to respond or risk being out of compliance with the APA.”

The proposed regulations are currently in the public comment phase, with a hearing scheduled for December 1, 2016.

Source: Bloomberg BNA

Favorable Update Regarding “Appraiser-as-Fiduciary” Rule

Back in 2010, the Department of Labor (DOL) proposed regulations with a significant change to the definition of term “fiduciary” with regard to employee benefit plans. This change would have given appraisers the duties of plan fiduciaries when performing ESOP valuations. It is imperative for appraisers to remain independent and unbiased. As fiduciaries under the proposed regulations, appraisers would be placed in a tenuous position since they would have owed a special duty of care to one specific party in an ESOP transaction.

As stated in the American Society of Appraisers’ (ASA) Capital Action newsletter, this rule will be dropped:

“ASA has learned that when the Department of Labor (DOL) reproposes a broad set of rules affecting fiduciaries and prohibited transactions, that the reproposal will not include a proposal to classify appraisers as fiduciaries in connection with valuations of employee stock ownership plans (ESOPs).”

“ASA, working in conjunction with a group of leading valuation firms, worked tirelessly for over three years to encourage DOL to abandon the “appraiser-as-fiduciary” rule, and provided constructive alternatives to the proposal. We would like to thank Donna Walker, FASA, and Jeffrey Tarbell, ASA, for their contributions to this effort, and the Groom Law Group for their contributions as well.”

We at Columbia Financial Advisors, Inc. are proud to have contributed to this effort and excited to learn the outcome!

Source: www.appraisers.org

Does Your ESOP Appraisal Report Pass Muster?

For ESOP companies, whether internally or externally Trusteed, it is increasingly important to make sure that your appraisal report thoroughly documents the ESOP appraisal.

A recent DOL settlement includes specific “Process Requirements” impacting appraisal report content. On June 2, 2014 GreatBanc Trust Company and the Department of Labor (DOL) entered into a settlement agreement in the case of Perez v. GreatBanc Trust Company, United States District Court for the Central District of Columbia, 2014. As part of this settlement agreement, the DOL agreed to a set of process requirements that GreatBanc must follow in the future when engaged to purchase or sell employer securities that are not publicly traded.

 To be clear, the process requirements are not an amendment to the law or a DOL regulation, advisory opinion, or Field Assistance Bulletin. They are specific only to GreatBanc. However, in the short time since this settlement agreement was issued, we have already seen a number of independent ESOP Trustees and ESOP legal counsel take action so that the ESOP appraisal providers’ processes and work product adhere to these process requirements. This is because it is believed that the DOL will likely hold all ESOP Trustees to these process requirements in its enforcement activities, similar to what the DOL has done with its Proposed Regulations on Adequate Consideration which were never finalized.

“We have already seen ESOP Trustees step up

Appraisal report content requirements.”

Here is a sampling of some of the minimum appraisal report content likely to be required by Trustees for annual appraisals as a result of the GreatBanc Process Requirements[1]:

  • Reasonableness of any forecasts considered including a comparison to historical  performance and industry peer groups, as well as all material forecast assumptions
  • Calculation of a list of specific financial ratios
  • Explanation of financial statement adjustments
  • Weighting applied to valuation methods
  • Discounts and/or premiums applied (marketability, minority interest, control)
  • Analysis of the Company’s strengths and weaknesses
  • Discount rates chosen in the income approach
  • Consistency of economic and industry-specific narrative with the quantitative aspects of the appraisal report
  • Comparability of guideline companies used in the market approach
  • Support for selected multiples used in the guideline company method

[1] Additional requirements specific to ESOP transactions are also included in the Process Requirements but not discussed herein.

Appraisal Report Review: Integrating Industry and Forecasted Performance

The following article was written by Arlene Ashcraft  and Donny Springer of Columbia Financial Advisors, and was published in the September 2014 edition of the ESOP Report (monthly newsletter of the ESOP Association).

Appraisal Report Review: Integrating Industry Outlook and Forecasted Performance

     An annual ESOP appraisal report stands as a testament to the due diligence undertaken to assist the Trustee in its determination of the fair market value of securities owned by the ESOP. Sections of the report may seem to stand in isolation of one another, but should as a whole lend support to the fair market value determined and provide persuasive evidence for the concluded value. Though each company and its operations are unique, all companies still operate within certain economic and industry constraints. As a reviewer of an ESOP appraisal report, a key area of focus should be the industry outlook with respect to the company’s projected performance. A company’s future earnings provide a return for investors; thus projected performance is a key driver of share price. Therefore, a careful review of the industry outlook, in conjunction with review of the Company’s long-term projections is essential to a critical review of the ESOP appraisal report.
     The following are questions that can be helpful in analyzing a company’s projections in conjunction with the industry’s outlook:

Start at the top line --- revenue growth. What is the magnitude of revenue growth anticipated for the industry? What is the projected trend (strong short-term growth, slow steady growth, decline then strong recovery in later years)? Looking at long-term trends, is the industry mature or in a state of decline? Are there country or regional differences in growth outlook? Are there certain niche areas that are projected to grow faster or slower, or exhibit different trends than the overall industry? Are there certain client groups that are forecasted to have different growth rates or growth trends? Few if any companies in an industry will have revenues that exactly mirror the performance of the overall industry. Each company strives to find its niche and thus has variations on the overall theme exhibited by the industry. Nonetheless, a company still operates within the confines of its industry and adequate explanation of differences should be addressed. General industry trends should still be evident.

Now consider input costs and gross margins. What factors in the industry dictate the costs of raw materials or inputs? Are these costs rising, falling or volatile? If volatile, is there a general trend (decreasing, flat, or increasing) over the long-term? Are gross margins declining as the industry matures? How do the company’s historical gross margins compare to the industry and gross margins in the forecast?

Employee and administrative costs. To what extent can companies in the industry leverage employees? Are employees high- or low-skilled? Is technology changing, potentially mitigating some dependence on high cost employees or replacing lower skilled workers? Is it becoming more or less expensive to find quality employees (i.e., how competitive is the marketplace)? What are the major general and administrative costs in the industry and what is the trend in these costs?

Evaluate other industry factors. What are the legal and regulatory risks that impact the industry? Do these risks impact the company in the same way as the overall industry? Is the company able to differentiate and maintain competitive advantage? Are there any potential substitute products or technologies that could impact the industry? Does significant customer or supplier concentration exist among industry participants?
     This exercise may reveal that a company’s projections are not in alignment with industry expectations. If this is the case, it is imperative that these differences are adequately explained in the report and understood. For example, a company may expect double digit annual revenue growth in a declining industry if it has a competitive advantage that allows it to gain significant market share. Alternatively, a company operating in a high growth industry may expect very little growth if it has an inability to expand facilities to meet incremental demand. Further, there may be legal and regulatory issues within an industry that are costly to some participants and beneficial to others. Though differences may be explainable, over the long-run, competition tends to make both under-performing and over-performing companies revert to the mean, or in this case the industry average.
     A well written industry outlook should effectively identify and summarize those external factors that impact cash flow expectations for participants in the industry. While it is easy to view the industry outlook in isolation from other report sections, it is often appropriate for the industry outlook to be discussed and referenced in the company description, financial statement analysis, and appraisal methodology and conclusion sections of the report. From the appraisal report in its entirety, a reader should be able to understand the major underlying drivers of the company’s forecast, the reasons for differences in expected performance from that of the average company in the industry, and the potential risks inherent to the company’s forecasted cash flows.

Reviewed by The ESOP Association’s Advisory Committee on Valuation Chair, Jeffrey S. Tarbell, ASA, CFA, Houlihan Lokey, San Francisco, California.

The Department of Labor Steps Up Its ESOP Enforcement Activity

It is no secret that the Department Of Labor (DOL) has stepped up its enforcement activities with ESOPs in the last few years. Numerous lawsuits have been filed, and many Trustees are looking to protect themselves from exposure. Our experience has shown that litigation can be avoided by making certain that the appraisal process, methodologies, procedures, and documentation are top notch. Being sure that the selection of the ESOP appraiser and management of the ESOP appraisal process is conducted by Trustees who have no conflicts of interest will go a long way to ensuring you obtain an independent and unbiased appraisal.

Having your ESOP appraisal reviewed by a nationally recognized appraisal firm that specializes in ESOPs will likely provide you with valuable information, either with assurance that your appraisal report will pass muster, or with suggestions as to how to make changes so that it does. Also, make sure your appraisal reports are fully documented and contain all factors noted in the Internal Revenue Services' Revenue Ruling 59-60 and the DOL's proposed regulations on adequate consideration. If your ESOP is contemplating a Transaction, these factors become even more critical, as the DOL is focusing its efforts in this area.

Consider the Benefits of Joint Appraisal in Divorce

We see an increase in the use of joint business appraisals in divorce proceedings. Joint appraisals lower costs eliminating the need to hire multiple appraisers. Joint appraisals are also viewed favorably by the courts.

The parties involved and their attorneys want to know how CFAI handles a joint project as opposed to being retained by one side or the other. In terms of valuation methodology, we treat the valuation assignment the same no matter how we are retained. Our valuation conclusion is not influenced by how or by whom we are retained.

From our perspective, the main difference between a single or joint appraisal is largely administrative. The engagement letter is a three party agreement between both parties and our firm. We are careful to include attorneys on both sides in all conversations and copy both attorneys on all correspondence and emails.  We make a point to interview both the active and inactive spouse about the company as part of our due diligence process. Our work product is sent to both parties at the same time and our files are open to inspection by either party. We recommend a written report in joint appraisals so that both sides can understand the information we relied upon, our methodology and underlying assumptions, and any adjustments made to the financial statements. Sometimes the attorneys involved hire another appraiser to review the joint appraisal; having a written report makes this process easier.  If a written report is not desired (in an effort to keep costs down), once our analysis is done, we recommend a joint meeting or phone call where we can talk both parties through our appraisal to provide the same level of understanding provided by a report. Finally, we stand ready to answer follow on questions about the appraisal, again with both parties present.

Consider Saving Your Clients Money with a Dual Date Gifting Appraisal

Compiling and transferring documents, making management accessible for interviews and questions, legal and accounting time—all can make the appraisal process for gifting purposes arduous and costly for clients. To minimize the cost and work, consider using a dual date gifting appraisal. For example, using a December 31st and January 1st dual valuation date can provide your clients with two appraisals for the price of one. By using two appraisal dates that are close in time, but in different calendar years, your client will be provided gifting opportunities in two different tax years, but minimizing the cost and other investment involved in the appraisal process. Columbia Financial Advisors, Inc. has provided this type of appraisal to many of our clients. Two full, formal appraisal reports are provided to you and your client. For a scheduled annual gifting plan, the appraisal can be performed every other year, but appropriately documented fair market value appraisals will be available each and every year a gift is made.