RCReports 

Welcome to a new regular feature in ValuSource Insider. Starting this month, we’ll explore the dozens of major valuation-related databases you can find on the BV Data University website. First up is RCReports, a robust database of comprehensible, defensible compensation data for closely held businesses — a source that was recognized in a recent state court of appeal ruling regarding a valuator’s report on reasonable compensation.

When Credibility Matters

RCReports launched in 2012, focused entirely on tax. One of the earliest users, though, was a valuation thought leader who needed to calculate reasonable compensation in the context of business valuation. “We worked with him to start collecting different data and more reports to develop products specifically for the valuation community,” says Paul Hamann, RCReports founder and president. Fourteen years later, the database boasts more than 100 million data points, including 70-80% that are proprietary. The company does a big push at the beginning of each year to update the data for the current year and also updates several times throughout the year.

Credibility is obviously paramount for valuators, especially when litigation is involved. To satisfy that need, RCReports initially turned to BLS data. “But, over the years, we keep moving farther and farther away from BLS in terms of both the quality and quantity of our data,” Hamann says.

“BLS does a good job of collecting information but not a great job of providing answers. It can provide wage information, but it doesn’t take IRS or court guidance into consideration. All of our methodologies are based on such guidance.”

That might be why, in the court of appeals ruling noted above, the court ultimately sided with the expert who relied on RCReports to determine reasonable compensation for someone running and managing an electrical company. “It’s the only database that was built for credibility and examination in court,” Hamann says. RCReports also offers a resource library where valuators can find all of the most prominent court cases dealing with reasonable compensation in a single location.

So what’s RCReports’s “secret sauce”? Well … that’s secret. Its compensation estimates are generated with a proprietary, statistically validated methodology. The underlying data sources and calculations are confidential, but Hamann says all results meet strict reliability and confidence standards.

Moreover, upon request, RCReports will provide a comprehensive “methodology report” that expert witnesses can submit. The report details the company’s analytical framework and supporting assumptions. The methodology has repeatedly stood up to scrutiny in litigation and IRS examinations.

Not Just for Comprehensive Reports

Of course, sometimes you don’t need a full report — you just need a working number without supporting documentation. In such circumstances, you can use RCReports’ Wage Lookup tool. It includes two databases.

The first drills down to about 7,000 specific occupations at a county or zip code level. “You could, for example, see what a rickshaw driver makes in Tulsa across five different proficiency levels,” Hamann says. This database is generally used for smaller, micro-sized companies where owners wear many hats.

The other database, for medium-sized companies, is industry-specific and focuses on managerial and executive positions. Valuators could, for example, find a wage for an individual who runs a concrete company in St. Louis with a handful of inputs that baseline the owner and company.

The Role of AI

Thanks to AI-powered statistical software that uses advanced machine learning and data mining capabilities — combined with expert human oversight — RCReports has been able to re-analyze its millions of data points, The result, Hamann says, is unprecedented granularity. For example, where an industry-specific database classified the industry with three tiers of specificity previously, it now can classify to six tiers. Previously, you could only get as specific as, say, a “specialty contractor” in Chicago. Today, you can go down as narrow as “concrete subcontractor” in Chicago.

According to Hamann, valuators use RCReports most often when dealing with divorce (both marital and business), accounting issues, and probate. “Any time a business is changing hands or compensation isn’t quite right in a business and needs to be normalized,” he says.

New Benchmarking Capability

RCReports recently began offering a benchmarking product. Rather than generating a report that’s specific to an individual, it looks at similar businesses to provide a range in which reasonable compensation should fall. Along with a suggested reasonable compensation figure.

“This can be done with only three inputs that almost everyone has on hand — zip code, NAICS, and number of employees,” Hamann says. “We still recommend running a report, but you can at least run a benchmark to confirm a number or theory. Nine times out of 10, a subsequent report comes in within the benchmark range.”

Stay Tuned

RCReports is just one of the numerous databases available through BVData University.