The far-reaching impacts of COVID-19 continue to unfold. As the year draws to a close, we have not only seen the pandemic’s immediate effects on various sectors, but how these sectors will be changed even once the pandemic begins to subside.
We know that COVID-19 has left no industry untouched. We have written about how the pandemic has impacted REITs, sports franchise valuations, and M&A transactions, but this blog will focus on how COVID-19 has uprooted litigation activity and how the rebound time for the legal industry is projected to lag behind many other industries.
Cases Stalled Due to COVID-19
The most obvious impact of the global pandemic on the legal system is the government mandated shut down of non-essential business activity. Although the judicial system is largely considered essential, the only areas that truly remained open at full capacity were detention facilities.
Court records from available quarters in 2020 indicate no slow down or reduction of cases filed in local, state, and federal courts. While general filings remained at or near peak averages, the functionality of the Court was fairly stagnant in most areas. Some courts stubbornly refused to make concessions for legal professionals to prepare for litigation activity in light of social upheaval.
Litigation attempts continued to pour in, while administrative judges and court clerks had to reposition quickly to remain in control. Video conferences, written and recorded affidavits, and other virtual records have been admitted into evidence or Court record in an attempt to stay abreast of litigation activity during the pandemic.
Litigation Involving COVID-19
Another major impact of COVID-19 on litigation activity is the number of cases involving the virus itself. While most subcategories of litigation cases remained near par, the number of product liability nearly quadrupled in number.
While the large majority of these cases are still active, it is not too speculative to consider some causes of this drastic rise in litigation in the area of product liability. Personal protective equipment standards fluctuated greatly during the height of the pandemic. Frequent supply chain hiccups and government redirection of some items to healthcare facilities led to several product shortages.
Coupled with the lack of consistent and thorough oversight, these situations led to lawsuits in a number of different industries. Employees individually and en masse filed suit against employers for failing to provide required safety precautions in the workplace. Individuals and organizations across all fields filed suit against vendors, manufacturers, and even professional affiliations for various product violations.
Even civil suits increased as a result of COVID-19. As with any major health risk situation, the valid circumstances are largely contingent on personal perception. Individuals filed suit either for themselves, or on behalf of others, claiming to be carelessly and neglectfully placed at risk of exposure.
Not surprisingly, frivolous lawsuits are placing increased strain on the legal system. Most of these cases are speculative at best, but even moving forward to the point of dismissal requires a number of resources that are painfully thin in virtually every jurisdiction. Related wrongful death suits are already on the rise and will likely continue over the next several years.
What will 2021 bring with regard to litigation activity? Likely more of the same. Extended deadlines are now looming, but are in direct competition with newly filed cases. The number of active cases in some jurisdictions threatens to reach an all time high, with no viable relief in sight. However, one positive outcome could be the creation of at least contractual employment opportunities. There is almost certainly no reasonably effective way of clearing the current and mounting backlog utilizing only existing human and technological resources.
As litigation becomes more nuanced, it is important to work with experts who understand how to successfully navigate the sector as it is being transformed by the global pandemic. If you need litigation support in connection with a valuation dispute, contact our team at Appraisal Economics.
The commercial real estate market is one area that has consistently and continuously outpaced other investment vehicles. Virtually every city and even the most rural areas experience periodic construction booms.
New shopping centers, self-storage facilities, and mixed-use development areas are popping up everywhere. But the onset of COVID-19 brought countless proposed projects to a screeching halt. New construction and existing facilities, including many properties contained in REITs, have been heavily impacted.
Commercial Real Estate Investments
Real Estate Investment Trusts (REITs) have historically been attractive to investors as an interesting way to diversify their portfolios. Properties owned by the trust are effective investment vehicles for individual investors who would not otherwise have the opportunity to own or invest in commercial real estate. Managing a REIT requires a knowledgeable executive team and a hands-on approach to investing within specific communities. As demographic conditions change, investment opportunities could also be impacted.
COVID-19 Impacts Business and Investments
As the stock market teetered and plummeted due to pandemic conditions, economists began making predictions about businesses of all sizes across many industry sectors. Commercial property management companies took a hit as businesses were forced to close their doors.
Social distancing guidelines, loss of revenue, and multiple unknown factors drove investors to make radical changes. REITs were among the many investments to face scrutiny and uncertainty. The valuation process for REITs is a vital component for any potential investor to understand. These funds are thoughtfully compiled and actively managed to ensure viability. Specialized valuation firms like Appraisal Economics can help you understand the most important factors of any Real Estate Investment Trust before you make the decision to invest.
Short vs. Long-Term Projections
Financial reporting requirements vary based on specific investments and the relevant regulatory agencies. Only specialized valuation firms can accurately assess the foundation and financial stability of a REIT. The underlying value of a REIT is based on a number of unique and variable factors. REIT executives need the support and expertise of valuation firms to help balance the potential for risk and return before choosing an investment. Professional, comprehensive reports clearly outline all options and pertinent information that is necessary for competent consideration.
There are opportunities for long term financial gain from REITs, and it is important to understand the true potential given the current COVID-19 impact. Closures and loss of consumer disposable income contribute to lower-income projections in the short-term reporting period. However, the possibility for long-term growth is also great due to unfortunate changes brought on by the pandemic. Construction for vital structures such as grocery chains, residential developments, and institutional mixed-use facilities continue even during the economic downturn. These projects are creating jobs in the immediate economy and promising huge lease revenue potential over the next several decades. Short and long-term goals and results must be weighed against the current financial condition of the potential investors.
There is no way to deny the sudden and ongoing impact that COVID-19 pummeled on the economy. Commercial real estate has not been exempt from the effects of the pandemic, but they still have great potential for lucrative earnings. The only way to know for sure is to implement the findings of a comprehensive valuation report.
With over 10,000 franchises and an internationally recognized brand, Hertz seemed impervious to bankruptcy. After more than a century in the transportation business, the international conglomerate was not able to effectively combat the effects of a global pandemic. Why did Hertz have to file for bankruptcy and seek Chapter 11 financial protection while their competitors are experiencing a return to normal revenues? Let us unpack this:
Travel restrictions left Hertz with approximately 700,000 rental vehicles sitting idle throughout the country. In addition to the unused rentals, Hertz was also facing nearly $20 billion in debt. In the midst of uncertainty and an unprecedented pandemic, the nation’s second largest car rental agency voluntarily filed for bankruptcy on May 22, 2020.
The shock caused by this decision stems from the disbelief that a trusted giant founded in 1918 could fall. Investors, customers, and the general public feared that a similar fate could befall other transportation rental agencies. Unfortunately, Hertz encountered a perfect storm of activity that led this otherwise financially stable company into bankruptcy.
The company underwent a successful rebranding just under ten years ago and continued to earmark funds for expansion. These worthwhile investments back into the company exposed a temporarily cash-poor Hertz. While their competitors had sufficient cash reserves to pull through the pandemic, Hertz was left with significant inventory and unpaid debt.
Over the years, Hertz has built relationships and created rental contracts with countless businesses and industries. Their major profit margin is from the high volume of business travel rentals. Like a handful of other rental companies, Hertz also derived substantial income from the turnover of their fleet in the form of used car sales. When business and personal travel came to a screeching halt, every industry related to traveler servicers took a major hit. The severely tightened economy virtually dried up the demand for used cars along with any other nonessential purchase.
Market reaction to the Hertz situation was unexpected and encouraging. Carl Icahn, the company’s largest shareholder, sold over 55 million shares less than a week after the bankruptcy announcement. Despite his decision to sell at a significant loss, Icahn expressed faith in the company and alluded to potential stabilization.
Markets typically rally behind news of major companies facing financial difficulties, and volatility is expected after such an announcement. Hertz shares swung from under .50 cents to nearly $6 per share over the two weeks following the bankruptcy proclamation. Such activity is precisely why appraisals are vital for any big organization considering bankruptcy or reorganization.
Hertz may be more successful with reorganization than other recent retail chains who have filed for bankruptcy in the past. Whether a company is seeking to liquidate or reorganize, a bankruptcy valuation helps dissect the possibilities. Successful reorganization is dependent on accurate assessments and effective communication with creditors. Shareholders respect the process, even if they are unlikely to see a return on investment.
Protecting your company from unfair trustee appraisals or court rulings can mean the difference between liquidating and reemerging. Eager creditors often utilize aggressive tactics to resolve debts during bankruptcy proceedings. An expert valuation provides sound and supportable conclusions of value that are crucial during the debt negotiation phase. Trust Appraisal Economics to provide a full and accurate assessment of every aspect of physical and potential collateral before pursuing bankruptcy.
Public and private non-for-profit corporations undergo valuations on a regular basis to establish new lines of credit and help facilitate M&A negotiations.
As is the case for many valuations, accuracy is only possible when working with an independent appraisal firm that specializes in nonprofit entities. Below are some considerations that will help you understand the importance of these non-for-profit valuations.
There are times when a nonprofit organization has grown significantly or their mission evolves or has changed direction. At this juncture, it might make sense for a nonprofit to merge with another not-for-profit organization or even a private corporation.
Before this transaction can take place, the nonprofit merging into or being absorbed by another entity must be thoroughly evaluated. This nonprofit valuation process protects all parties and ensures none are left with an unexpected tax liability.
General Asset Reporting
The Internal Revenue Service (IRS) has very strict guidelines surrounding nonprofit organizations. In order to keep their classification, nonprofits must report transactions in a timely and specific manner. While virtually every transaction gets recorded somewhere, these transactions may require a valuation overview before or after IRS reporting:
- Cash donations exceeding $10,000
- Non-cash donations exceeding $5,000
- Estate, trust, and legacy donations
- Privately owned stock and option donations
It is not uncommon for a nonprofit to divest itself of a department or chapter. The section being removed from the organization may be moving on to join a national or international division of the same charity. Other times, one sector simply grows too large for the organization or chooses to pursue and develop a new offshoot of the originating nonprofit.
Whatever the reason for the reorganization, a nonprofit valuation is required. This data collection will help both organizations properly market themselves and keep their financial affairs in order for tax reporting purposes as well as general financial transparency.
Importance of Nonprofit Valuations
Understanding when a nonprofit valuation is useful is not the same as understanding the importance of obtaining an expert nonprofit appraisal before a qualifying event. In the spirit of fairness and due diligence, the valuation protects both parties from future litigation should any concerns arise after the transaction. The independent valuation also provides crucial feedback about the current state of financial affairs.
Depending on the circumstances and the type of nonprofit, the valuation process will focus on a specific need or pain point. The specific approach to the valuation helps orchestrate an objective outcome, whether it be a cash flow evaluation or a general market value determination.
Nonprofits are under constant scrutiny by a number of different groups, often with competing interests. The benefits of conducting valuations when appropriate for nonprofits are obvious. Moreover, the consequences for not procuring a valuation can be disastrous. The IRS can be rather unforgiving over the smallest oversight or omission. There is no reason to take a chance of unnecessary conflict with this intimidating agency.
The current global pandemic has changed not only how people conduct business, but also how they spend their leisure time. Closures of public venues and social distancing restrictions severely limit access to many popular activities. Virtually every franchise and sporting event has been impacted — from the NFL to Preakness. Players and fans have certainly been affected, but how about franchise valuations?
Traditionally, sports franchise operations depended on various different streams of revenue to maintain profitability. They can prove to be great investments because there are multiple opportunities to secure income. These options provide stability and act as both passive income as well as an ongoing marketing strategy.
Buyers must consider not only the current state of the economy, but also the overall profitability of the franchise itself. Most sports franchise valuations consider the profitability of these contingencies:
- Human Capital
Fans, coaches, and the public in general take a serious interest in the lives and habits of professional athletes. The processes of scouting, recruiting, and drafting players are a lucrative undertaking in the world of sports. As much of the world remains on lockdown due to COVID-19, most live sporting events have been cancelled or postponed. Arenas, stadiums, and even fields that host games are either temporarily closed or are operating at a fraction of their normal capacity.
- Branded Merchandise
Brand recognition is a huge part of every vital industry, and sports franchises are among the most profitable in this area. Branded apparel, promotional items, and team memberships account for millions in annual sales numbers. Sports franchise valuations encompass all forms of active, passive, and residual income. Contracts involving franchise merchandise and other marketing efforts have remained largely unaffected by the pandemic.
- Media Outlets
Televised sporting events offer income opportunities for franchises and advertisers. Partnerships between sports franchises and sponsors create residual income benefits for both parties. Live television and radio broadcasts attract robust audiences who welcome ways to engage in the franchise. Online streaming events and replay parties are increasing in popularity and the rise in social media marketing has provided rich returns for sports franchises.
Recent transactions, like the sale of the North Carolina Panthers in 2018, have some investors wondering about the validity of sports franchise valuations. How will economic slowdown impact these purchases? If history is any indication, NFL and MLB ownership will outpace economic downturns and inflation. The Miami Dolphins franchise was scooped up by Stephen Ross in 2008, at the peak of a monumental recession. Fans prove to be loyal to the franchise as well as their respective teams.
Despite historical data and the stability of sports franchise operations, leaders in the sports industry should procure expert advice when it comes to valuations. Based on decades of experience, our valuation experts at Appraisal can help with fairness opinions, purchase price allocations, and so much more.
The arenas of corporate law and valuation disputes are unpredictable. Many companies are not even aware that they need legal support until it is too late.
Valuation disputes are one of the most common services requested when preparing for a legal battle. If you or your executive team is facing a valuation dispute or other litigation issue, here is what you need to know in advance.
Determining the worth of a specific item or event requires complex analytical thought and extensive research. Whether in a corporate or familial circumstance, these processes are difficult and both skill and tact are required to successfully resolve a dispute. Regardless of which side of the dispute your company is representing, you must have the confident ability to protect your stance and solidify your valuation claims.
Mergers and Acquisitions
Mutually beneficial mergers and acquisitions occur virtually every day. Oftentimes, a floundering company is absorbed by a larger company. This effort saves a customer base, provides income, and supplies viable leads to the purchasing company. Post-closing valuation disputes are not uncommon in buyout situations. Remorse can stem from either the buyer or the seller and cause a disagreement. Understated or overstated earnings and other missed expectations can quickly lead to litigation. Expert and swift valuation assessments are required to protect your stance and remove objectivity from the discussion.
Despite the close regulation of the financial industry, shareholder disputes are on the rise. A minority shareholder dispute could become a class action suit if not properly addressed. Publicly traded companies are at risk of litigation from external and internal shareholders. Corporate entities are judged by the return they provide for investors as well as how they perform as a whole. Earnings statements and reports are heavily weighted against stockholder interests.
Prepare for the best outcome by having an independent appraisal report ready for public viewing. Any number of regulatory agencies and governing bodies could take part in a shareholder valuation dispute.
In the unfortunate case of corporate restructuring or bankruptcy, the Courts demand a high level of research and reporting. The sometimes conflicting goals of company executives versus trustees and the U.S. Court must be amicably resolved. Independent analysis will protect your business interests and introduce an acceptable fair market evaluation. This valuation report will be used not only to determine the overall assets of a business, but also provide options for suitable recovery.
These situations represent only a small portion of any number of potential valuation dispute cases. Large corporations and small businesses alike must have an adequate litigation support team on standby. Appraisal Economics has provided expert witness testimony in many of these scenarios, including: federal tax cases, determining damages, and bankruptcy cases. Individuals involved in martial or even custody disputes must have litigation support to prevent unnecessary losses. Otherwise, the results could be devastating.
Untold financial losses, and even criminal proceedings, could result if the executive staff is unprepared for a routine audit or an unexpected lawsuit. Make certain that your reputation and assets are protected before a valuation dispute or other litigious circumstance arises.
The ongoing pandemic has stalled economies across the world for months now. We have seen how it has impacted both individuals and businesses, but only so far as rising unemployment rates and business bankruptcy cases are concerned.
Yet, how does the pandemic affect the operations of companies that are still active? Beyond remote work or heavily updated safety protocols, practically every facet of a business has been changed since the COVID-19 crisis, including mergers and acquisitions.
Some companies have had to cancel their transaction plans, while other companies have had to completely modify their deal terms. Here is a look into how the pandemic has transformed middle market M&A:
Potential Takeover Bids
The U.S. stock market is bearing the brunt of economic losses and business disruption that has resulted from the coronavirus. With stocks reaching all-time lows, many public companies now come as easy targets for potential hostile takeovers. The sharp depression in stock price is also leaving these companies open to activist agendas, wherein shareholders try to sway control through pressuring the company’s board of directors. A takeover attempt, however, will require mobilization of a lot of key people.
A company that is targeted for acquisition will need immediate legal and strategic assistance from a host of professionals, including legal and financial advisors, investment banks, and PR firms, among others. In addition, the company must prepare a response plan that entails each board of directors’ member’s roles and responsibilities during the transaction as well as a communications plan that details prepared responses for different scenarios.
Unpredictable Future Events
It is not clear how long the pandemic will last or what the extent of its damage will be to economies, so future events remain highly uncertain. From a transaction point of view, this makes it incredibly difficult to predict future performance and value of both the acquiring company and the company being targeted for acquisition. Both companies must factor in the loss or gain in value and performance in both a non-pandemic and pandemic situation. This brings to light certain parts of the acquisition agreement, such as the Material Adverse Effect Causes and Valuation Issues.
As for the latter, an unbiased third-party valuation firm should be hired to perform fairness opinion and purchase price allocation. There are several strategies that companies involved in a transaction use to fill valuation gaps, including earnouts, buyer stock, and purchase price adjustments.
Earnouts are used to account for downside risk while enabling the acquired company to obtain complete value if they are able to hit all performance metric targets. Buyer stock, on the other hand, may be used in lieu of cash by the acquired company while day-to-day operations remain volatile. Lastly, purchase price adjustments are designed to compensate either party if predetermined financial measures behave abnormally as the transaction closes.
While broad economic outlook remains bleak, financial markets will have to stabilize at some point. Companies will gain a better understanding of the residual effects of the pandemic and the resulting opportunities that COVID-19 brings.
If you are considering or are in the midst of a transaction, contact us today. Our team will walk you through the process and ensure you have everything you need for a successful merger or acquisition.
The Rural Energy for America Program (REAP) offers unprecedented benefits for the U.S. economy. Farm, ranch, and small business owners are eligible to apply for grant funding to support renewable energy upgrades.
These initiatives are designed to ultimately increase domestic sustainability and reduce dependency on foreign energy, specifically oil. Below are details that will better help you understand REAP’s benefits and how to apply for the resources it provides.
Funding Availability Through REAP
In total, the REAP outlines provisions for over $400 million in federal funding. Many small businesses and some corporations may be eligible for grant awards under the program. Rural energy for America resources are not limited to those in rural professions. However, stipulations within the program limit the specific projects that are covered by federal grant funding.
Qualifying Renewable Energy Projects
Opportunities under the REAP guidelines cover options across virtually every industry. In general, projects that increase energy efficiency or reduce the carbon footprint of a company or region are likely to be eligible for a grant award. The program, which has undergone many transformations before the final version was approved in 2017, was developed to improve the quality of life in rural America.
The larger picture is that these relatively small improvements will ultimately benefit the entire nation in a variety of tangible ways. The Interagency Task Force on Agriculture and Rural Prosperity was designed in an effort to determine how to best utilize resources to create the most impact.
Corporate recipients such as major hoteliers have been awarded funding for the installation of solar panels. Solar panels not only reduce electricity costs over time, but they also reduce the strain on local power grid systems.
Restaurants and agricultural landowners have also received funding for improvements such as anaerobic digesters, insulation, and HVAC systems that decrease waste and loss of energy through inefficient ventilation. Other projects that focus on a switch to renewable energy sources such as wind and solar power may also be covered.
Grant awards may cover a project in its entirety or offset a portion of the total cost. Renewable energy projects are reviewed on a case by case basis by a qualified agent familiar with the program.
Another major benefit of the Rural Energy for America Program is dedicated sustainability. Federal funding provided substantial funding for state and local resource centers. The Department of Agriculture’s Rural Development Office oversees regional REAP resource centers. The USDA rural development officers are responsible for overseeing and monitoring many factors affecting life in rural communities. These initiatives include but are not limited to reducing unemployment through job creation, encouraging business development, improving infrastructure, and providing adequate community resources.
These local offices are available in each state and provide assistance for applicants. Program specialists help prospects understand their eligibility, and provide status updates on existing applications as well. Field Accountants are available through regional offices and travel to meet with ranchers and farmers where applicable. Any of these REAP experts have information on a variety of funding options, including loans, that may benefit the applicant.
If you are applying for this grant to fund a renewable energy project, do not forget to get an appraisal so you understand the value of the project, as well as how it impacts your business’ overall value. Contact us today to get started.
In the United States, many companies rely heavily upon their intellectual property. As such, companies that build their operations on innovation and intangible assets are more likely to thrive. Your business will not only be more profitable, but it also gives you a competitive edge over other organizations in your industry.
However, you cannot take advantage of these benefits unless you know what your company’s intellectual property is worth. This also means that you cannot protect and capitalize on your assets. Despite its importance, a majority of business owners do not know how to calculate their IP, or at least do not do so accurately. This can have a drastic and damaging impact on a business’ bottom line.
Here is what you can do to begin understanding the worth of your intellectual property.
Conduct an IP Audit
The first step to consider is conducting a thorough intellectual property audit on your assets, risks, and opportunities. These audits help analyze, protect, and bolster your IP, while also correcting any mistakes that were made to your IP rights. An audit will also bring to light any red flags that one company’s products or services are infringing on another company’s intellectual property.
An IP audit takes a look at everything from trademarks, copyrights, patents, domain names, and trade secrets. Conducting an audit will help you understand how you can best utilize and manage your intellectual property for future profit. Since these rights are designed and enforced by the law, these audits are typically performed by a law firm or a specialized valuation firm.
Once you understand the IP you have, you should then get a valuation of your intellectual property.
Advantages of an IP Valuation
Registered and granted IP rights are critical because they prove your ownership over your intangible assets. It is this documentation that is necessary to prevent other people from using your assets for their own profit, which could take away from your own profitability.
Determining the value of your intellectual property is complex, but it is that value that helps you determine the appropriate royalty rates you can charge. An IP valuation does not only safeguard you from your competition, it also increases the overall value of your business. This increase could prove advantageous if you ever need to apply for a business loan. It also gives you leverage if another company wanted to purchase your business.
The coronavirus pandemic has drastically impacted global markets. It has not only disrupted supply chains, but it has also affected consumer buying behavior and restricted certain traveling and workforce capabilities. All of these factors have had adverse effects on the financial health of certain companies.
As a result, companies are having to reevaluate their financial reporting, which includes their right-of-use (ROU) assets, their property values, their intangible assets, and their goodwill. When a company’s carrying value on financial statements exceeds its fair value, it is considered to be impaired. Goodwill impairment should be something that companies are already testing for on an annual basis, but certain events, like the global pandemic, are cause for additional testing.
Other example triggering events include certain cost factors, management changes, bankruptcy, events that affect reporting units, and a deterioration of economic conditions or the environment that a certain company operates within. To determine if an impairment exists, fair value must be assessed. In some cases, so must recoverability that is based on undiscounted cash flows. Since COVID-19 has lowered the fair value of companies, goodwill impairment is likely to be an issue that will impact all businesses across a variety of markets.
If a business conducts a test which proves goodwill impairment, it is important that they hire a specialized valuation firm. Goodwill impairment is already a complex matter that considers a significant number of factors, but the coronavirus pandemic has had unprecedented and uncertain impacts that are outside of what a typical goodwill impairment might be. For example, companies will need to figure out if the pandemic’s effects will be temporary or more permanent, which will influence their future cash flows and impairment. They must also consider both the direct and indirect consequences of the pandemic.
Our team of professionals at Appraisal Economics have extensive experience in goodwill impairment analysis and the valuation of fair value. It is difficult for many companies to understand what this pandemic means for their business, but our experts are here to guide you through these unsettling times. If you have any COVID-related questions or need to address goodwill impairment, contact us today.