This webinar is hosted by McKonly & Asbury Principal and Business Valuation Leader, Eric Blocher. The webinar will focus on the following; 1) the three different approaches to valuation, 2) the importance of the Standard of Value, Level of Value, and Premise of Value, 3) the Impact of the Tax Cuts and Jobs Act on business valuation, 4) trends in the valuation industry for accounting for the Act, and 5) new topics that are affecting the business valuation industry.

1. Business Valuation and the Impact
of the Tax Cuts and Jobs Act
Presented by:
T. Eric Blocher, CPA, ASA, CVA
Principal and Valuation Practice Leader
at McKonly & Asbury

2. WHO ARE WE?
▰ More than 20 years of business consulting experience including valuation and litigation
engagements.
▰ Valued hundreds of closely held businesses in various industries including: professional
services, real estate, manufacturing, construction, retail, and others.
▰ Public accounting for over 28 years. Conducted audits, reviews, and compilations for a wide
range of service providers.
▰ Qualified multiple times as an expert witness in the field of Business Valuations.
T. Eric Blocher, CPA, ASA, CVA
Principal & Director of Business Valuation Services at McKonly & Asbury

3. WHO ARE WE?
▰ Diverse background with experience in both private industry and public accounting offering
business and accounting solutions to our clients.
▰ Demonstrated history of providing Transaction Advisory and Business Valuation services.
▰ Serves as a Relationship Manager for a number of our key clients in industries such as
construction, manufacturing and distribution, and retail.
▰ Director of our Entrepreneurial Services Group which provides accounting and tax services
to entrepreneurs and small businesses.
David Blain, CPA, CVA
Partner & Director of Entrepreneurial Services at McKonly & Asbury

4. OBJECTIVES FOR TODAY
▰ To obtain a better understanding of the Business Valuation process and its underlying
principles.
▰ Review the Valuation impact of the Tax Cuts and Jobs Act.
▰ Learn how the Industry is accounting for the impact of The Act.
▰ Learn about new topics affecting the business valuation industry.
▰ Learn about issues with Buy-Sell and Operating agreements.
▰ Questions and comments are welcome!

5. Introduction to
Business Valuation (BV)

6. INTRODUCTION TO BUSINESS VALUATION (BV)
▰ There are 3 Approaches – Asset, Income, and Market.
▰ BV is NO different than any other investment decision.
▰ Three factors are considered in EVERY investment decision:
▻ The amount of Return (cash flow) you receive from the investment,
▻ The Risk of not getting that return (the discount rate or cost of capital), and
▻ The Time period over which you will receive your return.
▰ BV analyzes and addresses these 3 factors.
▰ Every BV is a FORWARD looking exercise (expectation of future returns).
▰ The Time Value of Money is always considered (present value).

7. INTRODUCTION TO BUSINESS VALUATION (BV)
▰ The Asset Approach considers the fair value of the assets (both tangible and intangible) and liabilities of a Company
and uses the difference between the two as the value. The Asset Approach typically values a controlling interest.
▰ The Income Approach considers the cash flow an investor will receive from ownership.
▻ The cash flow should be “normalized” future cash flow.
▻ Working capital needs, capital expenditures, debt service requirements and taxes must be considered.
▻ The discount rate (required rate of return) used to convert the cash flow to a value must consider the risks of the cash flow.
▰ The Market Approach uses the value of comparable companies from either a Public Market or recent transactions to
develop pricing multiples to apply to a subject business.
▰ Both the Income and Market Approach can be applied to a minority or controlling ownership interest.

8. The Importance of the
Standard of Value and
Level of Value

9. STANDARD OF VALUE AND LEVEL OF VALUE
▰ Standard of Value – should answer the question “value to whom” and under what conditions and
circumstances.
▰ Gives direction for the entire valuation and each one results in a different value.
▰ Different Standards of Value
▻ Fair Market Value – hypothetical willing buyer and seller and is typically used for all IRS related BV’s and
many litigation related BV’s and all appropriate discounts are considered (lack of marketability and lack of
control are the primary discounts).
▻ Investment Value – particular investor with unique motives and opportunities (synergies, financing, required
rates of return).
▻ Fair Value – standard of value for Financial Reporting and dissenting shareholder litigation and does NOT
typically consider discounts.

10. STANDARD OF VALUE AND LEVEL OF VALUE
Level of Value
▰ Depending on the valuation Method applied, a different Level of Value is produced.
▰ The Adjusted Net Asset Value Method assumes a controlling position.
▰ The Guideline Private Transaction Method produces a controlling value.

11. STANDARD OF VALUE AND LEVEL OF VALUE
Level of Value
The important fact to understand is that there is not
just one value for an entity….there are many. Each
level of value will have a different value. It is critical
that the appropriate level of value is used.

12. Premise of Value
There are two main Premises of Value which also need to be defined because they too
will result in different values. The premise specifies the highest and best use of the assets
of the business entity.
▰ Going Concern Premise - value of a Company as part of a going concern. It will
continue doing what it has done.
▰ Liquidation Value - value as part of an orderly or forced liquidation. The best use is to
sell the assets and liquidate.
STANDARD OF VALUE AND LEVEL OF VALUE

13. POLLING QUESTION #1
Have you had a business valuation performed previously?
A = Yes
B = No
C = What the heck is a business valuation?

14. The Tax Cuts and Jobs Act

15. THE TAX CUT AND JOBS ACT
▰ The Tax Cuts and Jobs Act (TCJA) was passed on December 22, 2017 and became effective
January 1, 2018 and impacts BOTH C corporations and pass-through entities (PTEs).
▰ Highlights include:
▻ A new C corporation 21% flat tax rate.
▻ Temporary changes in individual income tax rates (lower rates and changed income limits).
▻ New limitations on the deductibility of interest expense.
▻ One hundred percent expensing of certain capital expenditures.
▻ A 20% Pass-through income deduction for “qualified business income” (QBI) for certain PTEs.

16. NEW C CORPORATION 21% FLAT TAX RATE
▰ C Corporations are taxed twice…on net income and on dividends.
▰ This was a reason for so many PTEs…. avoiding double taxation…there is now a more level playing
field.
▰ All things being equal….lower tax rates result in more cash flow and a higher value.
▰ I believe we must question How Much value will increase.
▰ The TCJA was designed to help increase wages and prompt new hiring. Will the cash be used for that,
or as a return to the owners?
▰ Could the increased cash flow result in more capital expenditures?
▰ Is there a possibility that cash flow could remain the same as before the TCJA? Could it be less?

17. TEMPORARY CHANGES IN INDIVIDUAL INCOME
TAX RATES
▰ Both Individual and Married Filing Joint tax rates have been reduced and the thresholds for those
rates have been increased.
▰ This results in tax savings for owners of PTEs, and in general, an increase in value for PTEs.
▰ However, there are sunset provisions which must be considered. The reduction in Individual and
Married Filing Joint tax rates runs from 2018 to 2025.
▰ A sunset provision is a clause that provides that a provision of the law is automatically repealed on
a specific date, unless legislators reenact the law.
▰ What happens after 2025? Tax rates will go back to the previous levels.
▰ How do you account for this?........more later on this.

18. LIMITATIONS ON THE DEDUCTIBILITY OF
INTEREST EXPENSE
▰ The TCJA placed limitations on the deductibility of net business interest expense.
▰ Beginning in 2018, the net business interest expense deduction is limited to 30% of “adjusted
taxable income.”
▰ Generally, “adjusted taxable income” is equal to EBITDA (without any QBI deduction) through
2021, and EBIT (a lower number) in 2022 and beyond.
▰ This limitation can increase the tax liability and reduce cash flow and value of a business.
▰ The effective tax rate can be different than the new statutory rates.

19. 100% EXPENSING OF CERTAIN CAPITAL
EXPENDITURES
▰ The TCJA changed the “Bonus” depreciation percentage to 100% allowing full expensing for qualifying
assets purchased from September 30, 2017 through December 31, 2022.
▰ The percentage drops to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, and 0% thereafter.
▰ This “bonus” depreciation results in real tax $ savings.
▰ The advantaged expensing of capital expenditures reverses itself over time (less depreciation in later years)
so the present value of the tax savings (cost) each year needs to be calculated.
▰ We believe a Discounted Future Benefits approach is the best way to account for the value of the tax
savings.
▰ All things being equal………..this results in higher values.

20. 100% EXPENSING OF CERTAIN CAPITAL
EXPENDITURES
▰ However………..all things are rarely equal!
▰ What happens if you are an investor in a Company and miss out on a big year of Bonus
depreciation tax savings?
▰ You must consider not only the Bonus depreciation tax savings of future capital expenditures,
but also the book / tax depreciation differences of past expenditures (the reversing of the
impact from earlier years).
▰ The examples on the following pages help illustrate the possible impact.

21. 100% EXPENSING OF CERTAIN CAPITAL
EXPENDITURES

22. 100% EXPENSING OF CERTAIN CAPITAL
EXPENDITURES

23. 100% EXPENSING OF CERTAIN CAPITAL
EXPENDITURES

24. 100% EXPENSING OF CERTAIN CAPITAL
EXPENDITURES
▰ The 1st Example shows the impact of 2018 Capital Expenditures.
▰ The 2nd Example only shows the impact on value from future Capital Expenditures (2019 on).
▰ The 3rd Example shows the impact of future Capital Expenditures but also accounts for the
differences from previous Capital Expenditures.
▰ If you were an investor buying into the Company in 2019, which example do you think you
should consider?
▰ The impact of book / tax depreciation differences from past Capital Expenditures could be
material to the value.

25. POLLING QUESTION #2
All three are in the freezer….which do you grab?
A = Hershey Bar
B = Snickers
C = Reese’s Peanut Butter Cup

26. QUALIFIED BUSINESS INCOME (QBI) DEDUCTION
▰ In order to level the playing field for PTEs with the C Corp tax rate reduction the TCJA
established a 20% QBI deduction.
▰ The calculation can be complex and there are flow charts to assist with the determination and
impact of the QBI deduction.
▰ The QBI deduction comes into play when calculating the appropriate tax rate to consider for
PTEs…..and ultimately…their $ flow.
▰ Certain service businesses (generally…accountants, appraisers, consultants, lawyers, and
doctors) with income over certain limits don’t get the 20% deduction….sorry…their lobbyists
didn’t do their Job!
▰ The QBI deduction will also Sunset on December 31, 2025.

27. HOW CAN WE HANDLE SUNSET PROVISIONS?
▰ To address issues arising from Sunset Provisions of bonus depreciation, interest expense limitations,
personal/individual tax rates, and Qualified Business Income (QBI) deductions, the profession is
focusing on modeling out the impact.
▰ The approach to modeling can vary based on the facts and circumstances specific to each engagement.
▰ We believe the easiest way to model the impact is through the use of the Discounted Future Benefits
method.
▰ This method is an Income Approach to valuation which can allow different assumptions to be made,
including ones addressing the Sunset Provisions included in the TCJA. The 3 Examples earlier show
how different assumptions can be modeled.

28. New Resource for Determining
the Cost of Capital

29. DETERMINING THE COST OF CAPITAL
▰ Within the Build-up Method of determining the Cost of Capital, valuators have traditionally used data
from 2 sources.
▰ Both of the these sources are now owned by Duff & Phelps (D&P). The 1st source follows the
formatting originally established by Ibbotson Associates and presents cost of capital data (based on
historical equity risk premiums from 1928 to present day) and size premiums broken into deciles.
▰ The 2nd source is the D&P Risk Premium report which presents cost of capital data broken out into 25
size “portfolios” based on eight different factors. Each of the 8 factors yields an equity risk premium
estimate (based on historical equity risk premiums from 1963 to present day).
▰ Both sources use Center for Research in Security Prices (CRSP) market return data from the University
of Chicago.

30. DETERMINING THE COST OF CAPITAL
▰ BVResources Cost of Capital Professional platform was introduced in late 2018. It develops equity risk premiums and
size premiums from the same CRSP data the as the other two sources.
▰ This platform gives the ability to control the beginning period from which you can develop the historical returns.
▰ Potential issues that should be addressed:
▻ Possible elimination the size premium depending on starting period selected. This is contrary to most valuators
application of the Build-up Method.
▻ Considers data sources other than CRSP which is not traditionally included in the Build-up Method.
▻ The method of calculating the historical equity risk premiums is different than the other two sources. Even using
the same starting point arrives at different estimates from the other two sources.

31. Pennsylvania LLC’s –
PA Act 170

32. LLC CONCERNS – PA ACT 170
Act 170 became effective in 2017.
▰ New LLC law requires “Default Rules” to govern the management of the LLC where the
Operating Agreement is silent on an issue.
▰ Default Rules under Section 8847(b)(2) provide that matters before the members will be
decided by reference to the number of members (per capita) and not by reference to the
governance interests (pro-rata) held by the members.

33. LLC CONCERNS – PA ACT 170 - EXAMPLE
▰ Assume that an Operating Agreement is silent on the voting percentage required to approve a
sale of Company assets.
▰ Assume that the Company has 3 owners, a 90% owner and two 5% owners.
▰ Under PA Act 170, the sale of the Company’s assets could be approved by the approval of the
two 5% owners and not the 90% majority owner.
▰ We recommend that all PA LLC’s review their Operating Agreements very carefully.

34. POLLING QUESTION #3
Which is correct? And there IS only one correct answer.
A. B.

35. Buy-Sell and Operating Agreements

36. ISSUES WITH BUY-SELL AGREEMENTS
▰ Agreements become dated.
▰ Valuation language is not clear…..ambiguity can result in litigation!
▰ Critical elements of the Agreement have been overlooked and left out.
▰ Change happens in every business…but Buy-Sell agreements rarely change.
▰ Ownership interests diverge over time, especially at “trigger events.”
▰ I can’t stress this enough…………..have all Buy-Sell agreements reviewed from a Valuation
perspective.
▰ I have reviewed hundreds of Buy-Sell Agreements in my career; I can probably count the ones
with no Valuation issues on one hand.

37. CRITICAL ELEMENTS OF VALUATION PROVISIONS MISSING
IN BUY-SELL AGREEMENTS
▰ Standard of Value
▰ Level of Value
▰ The “Effective” Date
▰ Qualifications of Appraiser
▰ Funding Mechanisms

38. QUESTIONS AND THANK YOU!
T. Eric Blocher, CPA, ASA, CVA
Principal & Director of Business Valuation Services
eblocher@macpas.com
(717) 972-5730
David Blain, CPA, CVA
Partner & Director of Entrepreneurial Services
dblain@macpas.com
(717) 972-5722