VALUATION

Viewpoint

Summer/Fall 2021
Vol 26 No 1

New Legislation Allows Appraisers to Perform Evaluations
by Natalie Mandley and Christopher Stockness

The State of Minnesota recently passed legislation that

appraiser professionals (i.e., internal bank staff, financial

allows appraisers to provide evaluations in addition to the

analysts, accountants, brokers/salespersons, etc.) to obtain

appraisals they are already licensed to provide to the public.

real estate valuation information. This results in greater risk

What does this legislation mean and how does it impact you?

to the banking system and lost business for appraisers.”

What has changed?

Appraisers in the State of Minnesota may now provide

The Appraisal Institute provides this explanation of what
this legislation means: “In most states, a state-licensed or
state-certified real estate appraiser is required to comply
with USPAP [Uniform Standards of Professional Appraisal
Practice] when developing an opinion of the value of real
estate, as is required by the IAEG [Interagency Appraisal and
Evaluation Guidelines]. Many financial institutions do not
want a USPAP-compliant appraisal when they are permitted
to use non-USPAP compliant evaluations. Instead of using
the most competent and qualified professional to obtain a
market value opinion, financial institutions go to other non-

National Market Trends & Value Indicators
High Qual. Institut’l Grade

Non-appraisers, typically

financial professionals, could prepare evaluations, as the
development and presentation of the opinion of value in an
evaluation; however, until August 1, 2021, appraisers could
only prepare appraisals (opinions of value that comply with
USPAP). When providing an evaluation, an appraiser does
not have to comply with USPAP, but must disclose it is not
an appraisal when providing the evaluation to the client.
What is an evaluation?
Simply put, appraisals must comply with USPAP, while

3%

than $500,000 in value), or to opinions of value in certain

Industrial

27%

Apartment

12%

Health Care

7%

Lodging

24%

Manufactured Home Park

18%

Self-Storage

30%

Student Housing

16%
YoY Change

Consumer Confidence Index****

with this set of standards.

to properties below a particular value threshold (less

10%

U.S. Unemployment***

them from providing evaluations which do not comply

evaluations do not. In addition, evaluations are restricted

Strip Retail

by appraisers had to comply with USPAP, thus excluding

1%

Mall

Productivity**

Previously, all opinions of value prepared

Value D Over Past 12 Mo.

Office

New Housing Starts – Q2 Midwest*

evaluations.

31.9%

circumstances.

An evaluation is an opinion of value

that must follow Interagency Appraisal and Evaluation
Guidelines imposed by the federal government, but
does not have to comply with USPAP, which governs
the

opinion

of

value

presented

34.20%

Real Estate Indicators from Green Street Advisors CPPI Report,
*Source: St. Louis FRED, ** 2Q 2020/2Q 2021 – Source: Bureau of
LaborStatistics, *** Jul 2020/Jul 2021 – Source: Bureau of Labor Statistics,
**** Aug 2020/Aug 2021 – Source: The Conference Board

an

appraisal.

What is an appraisal?
Appraisals must comply with the Uniform Standards of
Professional Appraisal Practice and, in Minnesota, can only
continued on page 3

1.9%
-47%

in

More in this Issue: 
Controlling Interest Transactions…….2
Inflation Update…………………………….4
Real Estate Transaction…………………..6
Business Transaction………………………7

2

Valuation Viewpoint

Comparing Controlling Interest Transactions

Common Mistakes Valuation Analysts Make When Using the Controlling Interest
Transaction Method to Value a Business
by Cody Lindman

When valuing a business, valuation analysts consider three

understand and

approaches to value: the income approach, the market

question each of

approach, and the asset approach. Two of the most common

the comparable

valuation methods within the market approach are the

transactions. As

guideline public company method and the controlling

we

interest transaction method. When utilizing the controlling

previously,

interest transaction method, the most frequently used

determining

transaction database is DealStats. Below are some of the

the correct SIC

most common mistakes we see other valuation analysts

or NAICS code

make when utilizing a transaction database such as DealStats.

for a business

Searching the Incorrect Industry for Comparable
Transactions
When utilizing the controlling interest transaction method,
the first step is to search for comparable transactions. It
should be easy, right? All you have to do is search by the
subject company’s SIC or NAICS industry code. The process
should be easy given that companies list the NAICS code
most applicable to their business on their federal tax return,
right? Wrong. Although some valuation analysts may not
admit it, determining the correct SIC and NAICS code for a
business is a critical part of the valuation process and more
difficult to get right than you would think. One of the reasons
for the difficulty is the fact that most businesses do not fit
cleanly into a particular SIC or NAICS code. In these instances,
it is up to the appraiser to determine what they believe is
the most appropriate SIC or NAICS code. As for the NAICS
code listed on the subject company’s federal tax return, we
have found that the code listed is incorrect approximately
half of the time. When this occurs, the valuation analyst

is

discussed

difficult.

Therefore,

it

should not be
a surprise that
the
who

people
categorize

the comparable transactions sometimes make mistakes
and mis-characterize the industry in which a business
operates.

Additionally, some of the transactions may

involve businesses that are significantly smaller or larger
than the subject company.

Lastly, each transaction is

subject to different terms, such as how the transactions
will be financed, what is transferred, etc. It is up to the
valuation analyst to look at the financial metrics, read the
description of the acquired business, and understand
the terms of the transaction to determine whether
the transaction should be included as a comparable.
Failing to Account for the Differences in Asset and Stock
Transactions

must research the subject business, examine the

One of the most important things to note when analyzing a

possible NAICS codes, and select the most accurate one.

transaction pulled from DealStats is whether the transaction

Including Transactions Involving Companies Dissimilar
to the Subject Company
After some difficulty, the valuation analyst has now
determined the subject company’s SIC and NAICS code.
After searching by either the subject’s SIC or NAICS code, the
valuation analyst now has a list of comparable transactions.
Now all they need to do is multiply one of the subject
company’s financial metrics by the analogous median
multiple of the comparable transactions to determine
the value of the subject company, right? Wrong. The
most important and often overlooked step in utilizing the
controlling interest transaction method is to attempt to fully

is characterized as either an “asset sale” or a “stock sale.” In
a typical asset sale, the transaction is structured whereby
the buyer acquires the inventory, furniture, fixtures,
and equipment (FF&E), and intangible assets while the
seller retains the company’s cash and receivables and
pays off the company’s debt. A stock sale is considerably
more straightforward; a buyer purchases all of the target
company’s shares that are issued and outstanding.
Although both types of transactions can be used to value
a business, valuation analysts should be aware of the
differences between the two structures. One way to handle
the differences is to separate asset sales and stock sales
into two different groups and then apply the corresponding

Valuation Viewpoint

3

Comparing Controlling Interest Transactions
continued from page 2

multiples separately. However, this can be challenging if

not double count it). Converting a stock sale to an asset sale

there are only a few asset sales or stock sales. Alternatively,

equivalent can be more difficult, as the process requires that

a valuation analyst can restate the selling price of asset

a purchase price allocation (PPA) was performed. If specific

sales to convert them into a stock sale equivalent or vice-

allocation information is not available, it may be impossible

versa. This is normally the approach that valuation analysts

to convert a stock sale to an asset sale equivalent, potentially

at Shenehon undertake because it allows us to consider

making it necessary to eliminate that particular transaction.

all of the comparable transactions on an apples-to-apples

The general process for converting a stock sale to an asset

basis. To convert an asset sale to a stock sale equivalent, a

sale equivalent is to determine the total asset value of the

valuation analyst would add net working capital to the asset

acquired business and then subtract the value of all assets

sale price (however, if inventory changed hands in the asset

acquired except for inventory, FF&E, and intangibles. The

sale, it should be subtracted from net working capital so as to

resulting value is an asset sale equivalent value.

New Legislation
continued from page 1

be provided by licensed appraisers. Appraisals generally

the trust of clients and the public. Furthermore, in arenas

are more thorough and in-depth than evaluations and are

such as the court of law or the Internal Revenue Service,

required in most situations involving commercial real estate.

appraisals remain as the accepted form of valuation.

When can an evaluation be used?

Although this legislation allows appraisers the opportunity

For commercial real estate, which is our focus, evaluations
are typically allowed if 1) the transaction value is less
than $500,000; 2) an appraisal is not required by federal
law.

Additionally, one may use an evaluation when a

recent appraisal has been done and 1) related market
conditions have not changed in the interim; and 2) the
purpose is refinancing only, with no new funds being
loaned.

For almost everything else in commercial real

estate – transactions with values over $500,000 for
which an appraisal has not been recently provided, or
where required by federal law – an appraisal is needed.
Although evaluations may be appropriate and cost effective
in certain situations, our experience is that most of the
valuation work completed at Shenehon Company would
not be considered a candidate for an evaluation. However,
in instances where an evaluation may be a permitted
option, it is our opinion that an appraisal that complies

to be engaged in assignments that may have otherwise been
completed by a less qualified evaluator, we believe there is
potential for confusion in the marketplace. For instance,
we anticipate there may be confusion about the difference
between an appraisal and an evaluation, particularly in
terms of the quality of analysis received. Appraisers that
choose to take on both evaluations and appraisals will
need to take extra care in educating their clients on the
differences and to make certain, particularly in performing
evaluations, that their role is clearly understood.
We will also be watching to see what role evaluations will
have in the marketplace in instances where a valuation is
not required by federal law. Valuation work for purposes
not regulated by federal law can comprise an extensive
amount of potential assignments and it will be interesting
to see how appraisal professionals will choose to determine
when an evaluation is appropriate rather than appraisal.

with USPAP is still the appropriate valuation service for

We will be monitoring how evaluations will be utilized

clients.

Estimating a reasonable and well-supported

by appraisers and the valuation industry as both adjust

opinion of value through an evaluation still requires a

to this change in legislation. A primary concern that we

level of analysis that is consistent with an appraisal and

have is that evaluations tend to be a way of providing

compliance with USPAP is not

a significant hinderance

valuation services at a low-cost point with the tradeoff

in the process but instead aids in providing consistent

being that the accuracy and quality of valuation may

valuation methodology, allowing appraisers to maintain

be sacrificed at the hands of time and money.

4

Valuation Viewpoint

Inflation Update
by Emma Niemela

Following the report of 5.4 percent inflation for the

faster than the economy; however, there are multiple

trailing twelve months ended June 2021, the Federal

triggers. Demand-pull inflation happens when an increase

Reserve is predicting elevated inflation to be a temporary

in the money supply creates demand for additional goods

phenomenon, normalizing after the “perfect storm

and services, the effect is accentuated when there is limited

of high demand and low supply” ceases. However,

supply of those goods and services.

multiple

and personal stimulus checks given during the COVID-19

chief

executives

have

differing

opinions.

According to the latest Bureau of Labor Statistics (BLS) update,
the seasonally adjusted Consumer Price Index (CPI) for all
urban consumers rose 0.9 percent in June, the largest one
month change since the 1.0 percent increase in June 2008.
Notable category increases in the month of June, included
used cars and trucks increasing 10.5 percent, food increasing
0.8 percent, energy increasing 1.5 percent, gasoline
increasing 2.5 percent, and the index for all items less food
and energy increasing 0.9 percent. These increases show
recovery from the price declines due to COVID last year. A
chart containing comprehensive BLS data is shown below.
Inflation reflects rising prices for goods and services and
often happens when a nation’s money supply is growing

Forgivable loans

Global Pandemic triggered this type of inflation, increasing
the money supply and creating demand while many supply
chains were experiencing disruption due to the Pandemic.
Cost-push inflation results from input price increases.
Increased cleaning costs and increased material prices
as a result of supply shortages have contributed to
increased overall costs for producing goods and services
during the Pandemic.

Supply shortages are expected

to alleviate as the impact of COVID-19 fades; in fact,
lumber

prices

are

reaching

pre-Pandemic

norms.

Lumber futures closed at $634 on July 23rd, down from
a high of $1,711 on May 10, 2021, as shown by data
from Yahoo Finance in the chart on the following page.
Built-in
is

inflation

driven

by

expectation

that

prices will continue
to increase in the
future. Companies
such as PepsiCo,
Conagra,

and

Fastenal

voiced

plans to increase
prices because of
expected inflation
at their most recent
earnings

calls.

Fastenal

already

raised prices in the
second quarter and
intends to continue
this trend, as the
initial

increases

were well received.
However,
reported

as
by

the

Wall Street Journal,

Valuation Viewpoint

5

Inflation Update
continued from page 4

add complexity to these goals, as it
can be hard to determine adequate
benchmarks.

The Fed has been

using pre-pandemic employment
levels

to

define

“maximum

employment,” but with automated
labor hedges making certain roles
smaller or obsolete and many
people re-evaluating their lifestyle
and leaving the workforce early,
it may be necessary to use a new
benchmark.

Employment

and

inflation go hand in hand, and so long
as the labor market is transitioning,
there will be an effect on inflation.
not all companies are following this pattern; FreshDirect is

Last August, the Federal Reserve

currently lowering prices on berries, salmon, and ground

communicated inflation expectations slightly above

beef. The online grocery delivery company is looking to

two percent following periods of inflation below

attract more customers by absorbing inflation for the time

two percent, resulting in a long-term average of

being. This varied approach is a good signal, as it shows

two percent.

not all companies are raising prices in expectation of future

above two percent, the Federal Reserve has stated

inflation, a move which would add fuel to the inflation cycle.

that is does not plan to raise interest rates in the

Wages are tied to built-in inflation, as employees demand
wages to maintain their cost of living.

As wages rise,

costs and prices of products and services also rise,
continuing the cycle. Many employers have raised wages
to attract employees as the labor market has become
more competitive. However, these
labor

cost

increases

motivate

investment in automation.

For

example, Applebee’s has recently
implemented tablets which allow
customers to pay at their table
without a waiter. John Peyton, CEO
of Applebee’s parent company,
Dine Brands Global, Inc., called
this move a hedge against labor
inflation in a recent earnings call.
The Federal Reserve’s dual mandate
is to aim for price stability and
maximum sustainable employment.
The recent developments in wages
and employment discussed above

Even though current inflation is well

short-term as it attributes current inflation to onetime price increases due to the re-opening of the
economy. So long as businesses and consumers are
not acting as if they altogether expect high inflation,
the Federal Reserve will maintain its stance.

6

Valuation Viewpoint

Market Transaction
Real Estate

Buyer:
Seller:
Property:

PID:
Sale Price:

Pentagon One LLC (Solhem Companies)
Pentagon North LLC (Hillcrest Development)
Two Office Buildings in the Pentagon Park Development
4660 West 77th Street, Edina, Minnesota
31-028-24-34-0007
$4,690,000 ($17.79 per square foot of land)

Sale of the Pentagon Park Land for Redevelopment
In July, two aging office buildings in Edina sold for

According to the City of Edina, Solhem received

$4,690,000, according to public records. These buildings

approval from the city on July 21, 2021, for the property

are located at 4660 West 77th Street, Edina, Minnesota

to be rezoned to its current zoning of PUD (Planned

and were part of the Pentagon Park development

Unit Development) from its prior zoning of MDD-6

which has been undergoing redevelopment over

(Mixed Development District). The zoning change will

recent years. Solhem Companies through Pentagon

allow necessary flexibility for Solhem to construct

One LLC purchased the property from Pentagon

apartments in place of the two office buildings they

North LLC acting for Hillcrest Development. Hillcrest

had purchased.

had acquired the property in 2012 for $2,665,000 and

documents Solhem filed with the city revealed

has been renovating neighboring properties in the

plans for a single multi-family residential building of

same development. Although this property sold with

400+ units, some of which can be expected to be

improvmenets – two office buildings, each three stories

affordable units in compliance with the new zoning.

and built in the 1960s – the property traded for its

The seven level building will also include two levels

underlying land value. Rather, Solhem purchased the

of parking above ground with a potential of one level

property to acquire the land and intends to demolish

of parking that is partially underground. It will also

the current improvements to make way for a 408-unit

include approximately 400 stalls for bikes and feature

residential project that should break ground in coming

landscaped connections to the adjacent Fred Richards

months and be finished sometime in 2023. The sale

Park to the north of the parcel. The rendering below

price for the land works out to approximately $19.79

was taken from the rezoning application submitted by

per square foot.

Solhem to the City of Edina.

The Rezoning Applicant submission

Valuation Viewpoint

7

M&A Market Insights
Business Valuation

by Jim Clancy, Managing Director, Hennepin Partners

Robust M&A Activity in Post-COVID Landscape

Sector Spotlight: Technology & Software

US M&A activity has witnessed a strong recovery in the first

While there is increased growth across all sectors in the US M&A

half of 2021, with both deal count and value in line to surpass

market, the Technology & Software sector continues to occupy

record highs. The first three quarters of 2020 saw significant

a large portion. In 2011, Technology & Software accounted for

declines in M&A activity as COVID-19 spread throughout the

only ~13% of deal count for the year, which has increased to

US. Numerous factors are driving increased M&A activity as

nearly 21% in Q2 of 2021. As compared to the broader M&A

the pandemic subsides throughout the fourth quarter of 2020

landscape, the Technology & Software sector has remained

and year-to-date 2021, including increasing vaccination rates

incredibly resilient throughout the pandemic as illustrated in the

and favorable economic policies from the US government.

chart below. The pace of deal volume has continued into 2021,

Additionally, the potential threat of an increased capital gains

largely driven by the demand for quality assets in the sector.

tax appears to be motivating business owners to sell this

Emerging as particular areas of focus, Internet of Things (IoT)

year – accelerating their previous plans by as much as one to

coupled with artificial intelligence (AI) are paradigms that enable

three years in hopes of closing before new rates apply. Strong

communication between internet linked devices and smart

momentum from the fourth quarter of 2020 through the

manufacturing learning. Hennepin recently advised Savigent,

second quarter of 2021 should drive continued M&A activity

an Industrial Internet of Things (IIoT) provider, on its sale to

throughout the remainder of 2021.

Symphony Industrial AI. As software applications become
omnipresent in our increasingly digitized world, competition

Quarterly M&A Deal Volume & Value

for tech acquisition targets should continue to increase, further

Source: PitchBook

$700
$600
$500
$400
$300
$200
$100
$0

5,000
4,000
3,000
2,000
1,000
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2019

2020

Estimated deal value ($B)

0

2021
Deal value ($B)

accelerating M&A volume and increased multiples.
Global Software & Tech M&A Activity
Source: PitchBook

$250

1,800

$200

1,500
1,200

$150

900

$100

600

$50
$0

Deal count

300
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2019

Hennepin Partners’ Recent Technology & Software Deals

Deal value ($B)

2020

Allocation of purchase price Gift tax evaluations Marriage dissolution Asset depreciation studies Going public or private Mortgage financing Bankruptcy proceedings Highest and best use studies Multifamily residential properties Charitable donations Industrial properties Municipal redevlopment studies Commercial properties Insurance indemnifications Potential sales and purchases Condemnation Intangible asset valuation Railroad right-of-ways Contamination impact studies Internal management decisions Special assessment appeals ESOP/ESOT Investment counseling Special purpose real estate Estate planning Land development cost studies Tax abatement proceedings Feasibility analyses Lease and rental analyses Tax increment financing General limited partnership interests Lost profit analyses

2021
Deal count

SaaS provider of an
intuitive in-browser
extension and mobile app
that blocks online ads and
activity trackers

Leading IIoT
provider of next
generation digital
manufacturing
software

Provides incident
command software
that includes tools and
guidance for on-scene
incident commanders

Leading provider of
technology consulting and
digital transformation
services

Powerful payment
processing software
solution serving the
professional services
vertical

SaaS-based provider of
time and billing
solutions to law firms

Hennepin Partners LLC is a boutique investment bank that provides M&A advisory services and strategic advice to entrepreneurs,
private equity firms, and corporations. Member FINRA/SIPC. For more information, visit www.hennepinpartners.com

88 South Tenth Street, Suite 400
Minneapolis, Minnesota 55403
612.333.6533
Fax: 612.344.1635
www.shenehon.com
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VALUATION VIEWPOINT NEWSLETTER INSIDE

SHENEHON COMPANY IS A REAL ESTATE AND BUSINESS VALUATION FIRM, serving both the private and public sectors
throughout the United States. Our unique combination of real estate and business valuation expertise allows us to provide a
wide range of services to offer innovative solutions to difficult valuation issues. Shenehon Company is commited to equipping
its clients with the tools necessary to make informed and knowledgable decisions regarding their capital investments.

Utility and communication easements

Contributors:
Robert Strachota, President
Jim Clancy, Managing Director, Hennepin Partners
Cody Lindman, Business Valuation Manager
Emma Niemela, Business Valuation Analyst
Natalie Mandley, Office Manager
Christopher Stockness, Senior Vice President
Copyright 2021. Valuation Viewpoint is prepared and published by Shenehon Company. Opinions regarding business
and real estate valuation issues have been carefully researched and considered by the authors. While we hope you find
the information relevant and useful, it is important to consult your own advisors before making business decisions.

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