Urge to merge? Look beyond the numbers

For some BV firms to grow, it’s a matter of acquire or be acquired. A deal may come along that looks good on paper, but you need to go beyond the numbers before you actually take the leap.

Recent example: Two large accounting firms recently called off their planned merger due to a “cultural mismatch,” according to Inside Public Accounting. The firms, Elliott Davis and Whitley Penn, had announced plans to merge this past June.

While this deal didn’t work out, it does illustrate the importance of cultural fit and of exploring opportunities for growth. Take the recent acquisition of Vantage Point Advisors, a boutique valuation and advisory firm with 30 professionals, by Stout, the global investment bank and advisory firm with 900 professionals. Stout’s private equity partner, Audax, which made an investment in Stout in late 2021, provided advice on how to build the firm’s valuation practice, which included an acquisition strategy. One of the important considerations in the acquisition was how the cultures of the two organizations would align.

What are the other attributes of the buyer and seller that make them attracted to each other? The January 2023 issue of Business Valuation Update has an article that includes interviews with some of the professionals at Stout and Vantage Point who made the deal happen.

Court’s value of law firm interest KO’d on appeal

No operating agreement and no buy-sell agreement can trigger dragged-out fighting when a member or owner leaves the firm. Such is the case with a law firm (an LLC) in Maryland, where one of the firm’s five members withdrew and the haggling started over the value of his 26.5% interest. Two years after withdrawing in 2017, the member sued the firm for his share—and the battle continues.

Court goofs: The trial court rejected the value the firm’s valuation expert put forth and did its own figuring. The member withdrew on Jan. 9, 2017, and, absent an operating agreement, the court looked to the state’s “bare bones” LLC statute, interpreting it as meaning that the member was entitled to his share of the firm’s profits through the end of 2017. The firm’s profit for 2017 was $319,594, so 26.5% of that was $84,692. The decision was appealed.

The appellate court ruled that the trial court misinterpreted the LLC statute and should not have considered the firm’s profits after the date of the member’s withdrawal. The case now goes back to the trial court to determine the member’s “fair value of assets, profits, losses, and distributions to which he was entitled on January 9, 2017.”

The case is Furrer v. Siegel & Rouhana, LLC, 2022 Md. App. LEXIS 745; 2022 WL 9834101, and the full court opinion and a case analysis are available on the BVLaw platform.

Restaurants and inflation: what’s the breaking point?

Restaurants have been raising prices more aggressively in recent months to offset rising food and labor costs, according to an update from the Vertical IQ industry research platform. Full-service restaurant prices rose 9% year over year in August 2022, according to the most recent federal data, while limited-service prices rose 7.2%, Restaurant Business reported.

Point of no return: But there comes a “breaking point” at which restaurant traffic plunges when price increases get too aggressive, concludes a study by the consulting firm Revenue Management Solutions (RMS). “When price increases went beyond 10% to 13%, traffic started to severely decline, negating some or all of the net sales benefits,” Scott Foxworth, director of consulting services at RMS, says. His firm analyzed in-store price increases in the second quarter for 25,000 locations to find the consumer breaking point. The consultancy also found that 45% of consumers said they are eating out less and that a rising percentage of consumers say they are ordering less expensive items or choosing less expensive restaurants.

Vertical IQ provides regular industry updates such as that cover 97% of the U.S. economy and Canada. The platform recently added role-based “Prep Sheets” to help prepare for a management interview or site visit. For information on the platform, click here.

New edition of Moro Visconti’s book on digital intangibles is out

The second edition of The Valuation of Digital Intangibles by Roberto Moro Visconti includes updates that address the metaverse, cloud storage, multisided digital platforms, ESG compliance, and more. The author is professor of corporate finance at the Catholic University of the Sacred Heart in Milan and is the owner of the Moro Visconti firm (chartered accountants). Moro Visconti has nearly 70 research papers on SSRN such as these recent titles: “From Physical Reality to the Internet and the Metaverse: A Multilayer Network Valuation,” “The Valuation of E-Health and Telemedicine Startups,” and “Digital Art Valuation.” These papers can be found at the Social Science Research Network. Click on the paper title to download the entire document.

Global BV News

Industry multiples down in Europe

EV/EBITDA multiples have generally decreased in Europe over the third quarter of 2022, according to the fourth edition of Kroll’s “Industry Multiples in Europe” quarterly report. The sector with the largest decrease in the third quarter of 2022 was information technology (2.5x decrease), heavily impacted by software companies. The report also notes that eurozone growth is expected to be 3.1% in 2022, reflecting a stronger-than-expected second quarter in most eurozone economies, led by growth in tourism-dependent economies. The full report is available if you click here.

Preview of the January 2023 issue of Business Valuation Update

Here’s what you’ll see:

• “BV Year in Review 2022: Ongoing Challenges” (BVR Editor). What did you miss in 2022? Catch up on the highlights in the business valuation profession through over 70 articles and hundreds of news items this newsletter covered in 2022.
• “An Inside Look at the Stout Acquisition of Vantage Point” (BVR Editor). Hear from the architects of this acquisition what makes a business valuation firm an attractive acquisition target—and what attributes of the buyer make it a good fit for the target.
• ·         “BVLaw Review: The Top Valuation Cases of 2022” (BVR Editor). Here is our pick of the most noteworthy valuation cases that emerged over the past year. They include state and federal court decisions covering many areas of law that enhanced our understanding of valuation issues as they arose in a litigation setting.
• ·         “How to Use the Latest DLOM Study for the Johnson/Park Empirical Method” (BVR Editor). An example of how to apply the Johnson/Park empirical method, which is based on the fundamental concept of risk and reward. The annual study serves as a basis to determine how much of an increase in the rate of return is required to compensate investors for the lack of marketability of a subject interest.
• “Recap of the Biggest BV Event of 2022—the AICPA FVS Conference” (BVR Editor). The AICPA’s plans for its forensics and valuation section, incredible frauds, an opportunity in bankruptcy, tips for determining goodwill, and the future of BV are discussed in this recap article—the first of several that will cover this biggest conference of the year.
• “BVR Survey Reveals Career Obstacles of Young BV Practitioners” (BVR Editor). What do today’s young BV practitioners see as holding them back in their careers? Managers need to know this or risk losing good people. Here are some valuable insights from a first-ever survey BVR and the BV recruiting firm Borrowman Baker conducted with the cooperation and support of the American Society of Appraisers (ASA).

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues.