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Quist July Newsletter

Hello , let’s jump right in to our second newsletter of the summer!

Valuations In COVID Times

The onset of COVID-19 has had a significant impact on capital markets, driving increased market volatility. There are many new considerations when applying the income and market approaches. Valuation is more complex today than before – depending greatly on rapidly changing market forces that can affect company value.

Click here to learn more about changes to valuation approaches and cost of capital.

Upcoming Webinar, August 13th

SAVE THE DATE:  Next Rocky Mountain EPI chapter event is August 13th
(on estate tax, philanthropy, & trust) from 7:30am-9am. We’ll update with a link for registration soon.

DEEN Event

Pivoting your strategy when the economy is not restarting the way you planned.

Tuesday, July 21, 2020 5:30 PM – 7:30 PM
Location: 6455 So Yosemite St Greenwood Village Co 80111 – 1st room to right of front entrance

Smart operators have pivot plans ready in advance.

Dave Johnson of C Squared Solutions will explain why you should have more than just one business plan in place, and be ready to quickly and easily change plans.
Most of us operate our businesses in very competitive markets where the business environment is constantly changing. The most successful companies can pivot their strategy quickly when it is not working. This requires a process to know when to pivot and have an alternate plan ready. That’s a Plan B or in some cases, Plan C and Plan D.

Register here today.

Click here if you’d like to book a conversation with our expert team about any of these topics, or have other questions for us.

We are often asked by clients, what valuation methodologies should be considered in the era of COVID-19? There is no silver bullet answer to this question. Given the significant impact on capital markets and increased market volatility, a business appraiser must think “outside the box” and rely on multiple points that can affect the value of the company.

Valuation Methods

Market Approach

Two methods under this approach include the Guideline Public Company (“GPC”) method and the Guideline Transaction (“GT”) method. When performing valuation analyses using the GPC method, it is important to understand and assess whether the stock price and reported earnings of the GPC reflect the impact of COVID-19. Adjustments to the analyses may be appropriate if the valuation date falls on or after February 24, 2020 (known/knowable date for the COVID-19 impact in the United States).
Similarly, in using the GT method, the appraiser needs to determine whether the purchase price and earnings of the acquired company reflect the impact of COVID-19 and make the appropriate adjustments.

Income Approach

When performing valuation analyses using an income approach, discussions with management should address how the company’s business has been affected by COVID-19 and the outlook for the company post COVID-19.
Examples of questions that could guide the appraiser in assessing the company’s financial and operational performance are as follows:

  1. Does your company operate in a cyclical industry that is also prone to economic downturns?
  2. Is the company sufficiently capitalized to withstand the pandemic?
  3. When do you expect the company to return to normal operations?
  4. What types of adjustments are appropriate and whether these adjustments are temporary or permanent (i.e. labor resources, overhead expenses, etc.)?
  5. Are the government loans and stimulus payments reflected in the company’s future cash flows?

In most scenarios financial projections prepared in 2019 did not reflect the impact of COVID-19 and should be revised.

Cost of Capital

The estimation of cost of capital can be tricky during market downturns. Closer attention should be paid to the cost of equity analyses driven by changes in Treasury yields that could imply that the company is worth more than it was before COVID-19. Debt balances and interest rates also require further analyses and fair conclusion that the book value of a company’s debt is consistent with its market value.
Likewise, beta calculations may be distorted and require an additional assessment of how COVID-19 affects the company and its industry and whether the beta is correlated with the current volatility environment.


The past three months have demonstrated that the counter-cyclical and recession-proof industries have a better chance to survive the global pandemic. Driven by many variable factors like lower consumer consumption and supply chain disruptions, many businesses must reassess what a new normal would look like and when they will be able to return to their usual course of business. Estimating the cash burn rate, modeling various scenarios, considering availability of the stimulus payments, analyzing potential short-term financing options, and projecting the timing and amount of near-term debt payments have been best practices with many companies.
The application of traditional valuation methods in COVID-19 environment may produce distorted values that are not consistent with how the market and investors see it. It is important to consider and analyze whether adjustments to the valuation methods are warranted.

The latest EPI Rocky Mountain Chapter meeting on June 4th with Jim Carlisle from Bank of America’s Federal Government Relations team featured a bipartisan overview of what potential effects to expect from the upcoming November elections. “Political Environment and Outlook” covered the developments across the landscape to date, as well as predictions as to what the remainder of 2020 may look like.

The outcome of the election is not as certain as perhaps thought earlier in the year.

We joint-hosted this event, and we will be watching this closely as there are significant estate, tax, and valuation implications. Here are the key highlights:

As the election approaches, Congress is gridlocked and there remains little opportunity for bipartisan agreement. The last significant legislation passed by Congress was back in March when the CARES Act was passed, authorizing $660 billion PPP loans with $150 billion remaining in the program. The next CARES Act is scheduled for July and will be constructed through the prism of increased focus on the deficit. The deficit for 2020 is $3.7 trillion or 18% of GDP. For the period of 2008-2013 that covers the Great Recession, the deficit averaged around 7%. To overcome the deficit problem, the government will need to look at new streams of revenue, like VAT tax and consumption tax.

And as for the upcoming election … since 1912, 5 out 6 incumbent presidents who entered the race with a recession, lost the White House. If the Democrats do indeed win the White House, they will need to net 3 new seats in the Senate to control policy out of Washington. The current split is 53 Republicans and 47 Democrats and Independents. According to Jim Carlisle, the outlook for the Senate is on an “iced edge” and could flip either way; this compared to last year when most were giving an 80-90 percent probability that the Republicans would hold the Senate.

SOURCE: FiveThirtyEight Polling

Important to pay attention to is Joe Biden’s tax proposals, which include:

o An increase to the individual tax rate from 37.0% to 39.6% for people earning more than $400,000 (regardless of filing status);
o An Increase to the corporate tax rate from 21% to 28%;
o A cap on the value of itemized deductions at 28.0%;
o A tax on capital gains at the ordinary income tax rate of 39.6% (vs. 20.0% currently) for people with income over $1.0 million (including dividends);
o A repeal in the step-up in basis of assets at death and instead a tax on an asset’s unrealized appreciation at transfer;
o A reduction in the lifetime exemption amounts for paying gift and estate taxes that are in stark contrast to the current lifetime amount of $11.58 million per individual;
o Reimpose 12.4% social security tax on incremental income above $400,000;
o Some notion of a wealth tax on assets above $50 million

Of course, none of this is done without congressional approval, which makes the race in the Senate so vital to what happens going forward.

In conclusion, deficits will most likely force tax changes in the opposite direction of 2017 tax reform, and owners and partners should watch this landscape closely due to the implications stated above.

If you are interested to discuss how proposed changes in Joe Biden’s plan may affect a valuation of your personal assets or business, specifically when it comes to the elimination of the step-up in basis at death and the reduction in lifetime exemption amounts, we will be glad to discuss it with you.

Click here to book a consultation today.

This is the second of a two part series on Personal and Estate planning, emphasizing what’s important to consider right now. 

As you probably know, now is THE time to consider transferring assets out of the estate due to lower valuations.

As you work with business owners to plan a tax minimization strategy, it’s important that those owners also:

• Have a strategic business plan that considers each family member’s point of view
• Have a continuity plan for the smooth transition of successors
• Acknowledge how prepared successors are to run their business

50 percent of business owners want to exercise the option of passing along their business to the next generation – however, only about 30 percent actually do.

Leveraging a team of legacy experts, that have worked through an extensive range of market situations, will make all the difference in accurate and defensible valuations.

Valuation is complex work, and expertise is garnered by performing a disciplined set of processes on a regular basis. As a 35+ year legacy organization, we’ve seen a wide variety of ups & downs and significant market changes, and are well equipped to best handle your client’s valuation needs.

We are interested – how has COVID-19 affected your clients’ businesses? 

What do you see as the biggest strategy changes in their businesses in the next 24 months?

If you are looking for strategy and support for intergenerational ownership transitions in this environment, please contact us for a conversation. 

Please email us at culberson@quistvaluation.com