International Association of Certified Valuation Specialists Valuation Updates

Valuation News Updates

Lisa Guo — Thu, 01 Feb 2024 04:56:22 GMT

AI-generated George Carlin triggers right of publicity lawsuit

A “comedy AI” tool has created an “impersonation” of George Carlin that has triggered a lawsuit by his estate, claiming violations of the late comedian’s right of publicity and copyright, reports Variety. BVWire watched the video on YouTube, but it has since been removed (the estate asked the court to order it removed).

Harmless impression? Speaking at the beginning of the video, the AI tool, called Dudesy, says: “I listened to all of George Carlin’s material and did my best to imitate his voice, cadence and attitude as well as the subject matter I think would have interested him today.” Dudesy makes it clear that what you hear is an impersonation that was developed “the exact same way a human impressionist would,” such as Andy Kaufman doing Elvis (or Rich Little doing everybody).

This lawsuit is among the first of what is likely to be many that will involve AI-generated images that are alleged to run afoul of copyrights or an individual’s right of publicity.

The right of publicity is a form of intellectual property that covers not only a person’s name and image, but also the signature, voice, and so on. It is an issue that often is overlooked because of a lack of awareness. The concept does not only apply to famous people—the average person has the right of publicity, and it has a value. Fundamental valuation techniques are used, but it requires the judgment and experience of someone who works with the right of publicity regularly.

Learn more: One of the foremost experts in this area is Mark Roesler (markroesler.com), who worked on the valuation of rights of publicity for the estates of Prince, Michael Jackson, and others. Roesler explained his methodology for the Jackson case (in Tax Court) during a BVR webinar (recording available). He also wrote a chapter on the topic in BVR’s Comprehensive Guide to Economic Damages, 7th edition (Chapter 28, “Damages and Right of Publicity Infringements”).

Court KO’s market comp analysis due to industry choice

What business is your subject company in? That’s a fundamental question, but it could be a major stumbling block in a valuation—as a new case shows.

New case: In an Illinois divorce case, the husband and wife were equal partners in a company, iTouch Biometrics, which offers live scan systems (inkless, digital fingerprinting for law enforcement, schools, etc.). The software is not sold separately but is part of an integrated package that includes hardware, installation, maintenance, etc. (a web search shows the company’s SIC and NAICS codes are for business services).

The wife’s valuation expert used an “investment method” based on his M&A experience with software-based companies and came up with $5.1 million. The husband’s expert used a capitalized cash-flow analysis (single period) to value the company at $1.2 million, using the factors in Revenue Ruling 59-60 to back up his opinion.

Wrong biz: The trial court found that the wife’s expert did not establish that the company was primarily a software company, so his market comps were not valid. The court rejected his analysis entirely and found that the husband’s expert provided the “only credible fair market value opinion presented to the court with proper foundation and basis.” The wife appealed but she did not prevail.

The case is In re Marriage of Bornhofen; 2023 Ill. App. Unpub. LEXIS 2062, and a case analysis and full opinion will be available on the BVLaw platform.

Survey results: Data collection tools

More than two-thirds (78%) of valuation experts use an online tool to collect documents and other information from clients, according to the first in a series of “Two-Minute Practice Builder” surveys. Practice management advisor Rod Burkert (Burkert Valuation Advisors), who initiated the survey, points to one respondent’s comment as to the reasons why valuation experts use a portal: “One reason is encryption and security. The other is professional branding, looking tech savvy. The third reason is to give clients confidence in the firm.”

The respondents’ tool of choice is ShareFile, used by over a third of respondents (36%), with SharePoint coming in at second place (see chart below). In the “Other” category are Smartsheet, Drake, Egnyte, DealRelations, FileInvite, and Client Axcess.

ShareFile	36%
SharePoint	20%
Dropbox	8%
Suralink	8%
OneDrive	8%
Other	20%

Of those who are not currently using a file-sharing tool for client information, over half (55%) say they are considering one. In addition to the reasons stated above, one commenter said: “Clients increasingly expect us to offer/use a portal for information sharing.” Of those who are kicking tires, half of them are looking at SharePoint and others are considering Dropbox or JetPack (or are not sure). But one commenter noted that Dropbox is a problem due to “confidentiality/integrity concerns.” Another respondent extolled the virtues of Suralink as a “fantastic platform for secure data exchange. It provides status of each outstanding request and comments can be swapped to cut down on back-and-forth emails. Highly recommend.”

Our thanks to all who participated—and we will have a new survey on another topic in the next issue.

USPAP Q&A addresses AI

AI tools are not a substitute for an appraiser’s judgment. That’s one of the main takeaways from a recent series of Q&As regarding the Uniform Standards of Professional Appraisal Practice (USPAP). Regardless of whether a valuation expert is required to comply with USPAP, it contains some useful information. In the new Q&As, this question was posed: “What is an appraiser’s USPAP obligations when using artificial intelligence (AI) in an appraisal assignment?”

Reliance: “When using a computer assisted valuation tool, an appraiser must not simply rely on the output of technology without an understanding that the output is credible,” says the response. This also goes for the use of a chatbot tool (which, as we’ve seen, can “hallucinate”).

Confidentiality: AI tools can also cause an appraiser to run afoul of USPAP’s confidentiality rules with respect to client information. “Although an AI chatbot is not a person, creating an inquiry with a chatbot that includes confidential information may allow the chatbot to capture that information for responses to inquiries by other human users, or the chatbot developers.”

Additional USPAP guidance on this issue can be found in Advisory Opinion 18, Use of an Automated Valuation Model (AVM), and Advisory Opinion 37, Computer Assisted Valuation Tools in the Guidance and Reference Manual (GRM). USPAP is administered by The Appraisal Foundation (TAF), which has a task force that examines automated valuation models and has issued two white papers on the subject.

Reminder: The 2024 Pepperdine private cost of capital survey is open

Each year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. For a direct link to the survey, click here. The results are used to produce the annual “Private Capital Markets Report,” which is free if you fill out the survey—plus, you’ll get it a week early. Reports from prior years are available if you click here.

To retain good BV people, give them a purpose, advises Borrowman

BVWire has heard from young BV professionals that they are sometimes in the dark about the work they are doing. It’s not that they don’t know their job; it’s that they don’t know how it fits into the bigger picture. They urge managers and supervisors to give them this context about the work they are doing.

Give a purpose: This underscores the good advice given by recruiter John Borrowman (Borrowman Baker LLC), who has been sourcing talent in the business valuation and litigation support areas for over 20 years. “Your team members naturally seek purpose in what they do,” Borrowman writes in in his latest newsletter. “They want to understand how their work contributes to your deliverable. They want to know where and how they fit in. They don’t have the bird’s-eye view that you have. It would help if you shared it with them. Purpose-driven employees are more likely to stay and do their best.”

In addition to giving them purpose, two other elements will help with retention: autonomy (trust their abilities) and mastery (encourage new challenges), which Borrowman explains further in his newsletter.

Valuation News Updates

Lisa Guo — Thu, 25 Jan 2024 04:54:15 GMT

Connelly case kicks off Heckerling conference

At the Heckerling Institute on Estate Planning in Orlando, Fla., earlier this month, the first session was a panel on key court cases of 2023, and “valuation was top of mind for many federal courts,” according to coverage in WealthManagement.com. Connelly v. United States was front and center—this is the case the U.S. Supreme Court will hear to resolve a circuit split. The question to be resolved is: How should corporate-owned life insurance (COLI) designed to fund the redemption of a deceased shareholder’s stock impact the fair market value of the subject company and the value of the decedent’s gross estate? A complete analysis of the valuation issues in the case by Roger Grabowski (Kroll) is in the January issue of Business Valuation Update.

The panel at Heckerling also discussed the Cecil case on tax affecting (a case that should be very familiar to valuation experts) and Schlapfer, a Tax Court case that was a “huge victory” for the taxpayer over the adequate disclosure issue.

Damodaran posts his second data update for 2024

Focusing on the equity markets in the U.S. and across the world, Professor Aswath Damodaran (New York University Stern School of Business) has posted his second data update of 2024. He notes that the “mood has shifted” in the past year and the 2024 outlook is “much sunnier, with the consensus shifting to a soft landing and inflation largely under control.” But he sees a “challenge for equity market investors” and concludes that stocks are “overvalued by about 9%, to start the year.” In his post he has links to two datasets:

Historical Returns on Stocks, Bonds, Gold, and Real Estate (1928-2023); and
Historical Implied Equity Risk Premiums and Expected Returns (1960-2023).

Also, he provides two spreadsheets:

Implied ERP calculator—Jan. 1, 2024; and
Valuation of the S&P 500 on Jan. 1, 2024.

You can read his post (and see his video) if you click here.

Court figures fair value of startup biotech for dissenters

In a dissenting shareholder case in a federal district court in Georgia, neither the Black-Scholes method nor the prior transactions method convinced a court of the value of a startup biotech company. The company, which never generated any revenue, notified shareholders of a sale of certain assets and a joint venture. The company offered shareholders 15 cents per share, but the dissenters asked for $1.25.

Unpersuaded: In court, the company’s valuation expert came up with 21.7 cents per share using a “novel application” of the Black-Scholes model. The dissenters’ expert estimated the fair value to be $1.19 per share based on two prior transactions of the stock. The court was not persuaded by either expert and came up with its own estimate of 56 cents per share based on what existing shareholders had paid in the past.

The case is Abeome Corp., Inc. v. Stevens, 2023 U.S. Dist. LEXIS 220302 (Dec. 11, 2023), and a case analysis and full opinion are available on the BVLaw platform.

2023 NACVA Porter Award recipient gives back in a big way

A few years ago at a conference, BVWire had the pleasure of chatting with J. Richard Claywell, a Houston practitioner who has been providing business valuation and forensic accounting services since 1985. He has a “few credentials,” namely the CPA, ABV, ASA, CBA, ICVS, CVA, MAFF, CFD, ABAR, CVGA, MBV, and ICVS-A. While we talked, we noticed a logo of a helicopter on his shirt, so we asked him about it. It was the logo of the Vietnam Dustoff Association. After being prompted, Claywell told us some incredible accounts of his time as a medic during the Vietnam War and flying in on helicopters to evacuate and treat wounded comrades while dodging enemy fire. He is on the board of the association, which organizes reunions and provides “a safe haven for emotional healing as may be necessary,” according to its website.

Claywell’s spirit of giving back applies to the valuation profession as well, which is one reason why he is the 2023 recipient of the Thomas R. Porter Lifetime Achievement Award. This award is given to a NACVA member who has demonstrated exemplary character, leadership, and professional achievements to NACVA and the industry. Always willing to help colleagues, Claywell has taught at various educational institutes and universities and has been published in several publications. Over the years, he has volunteered on boards and committees at NACVA, starting in its very early years. Michael Kaplan and Lari Masten talked with Claywell and presented him with the award, and you can watch the video if you click here.

Last call! Take a survey on data collection tools

Please take a two-minute survey about the use of portals to collect client data. We will publish the results in next week’s BVWire. To take the survey, click here. This survey—and others we’re planning—will augment BVR’s Business Valuation Firm Benchmarking Guide, which examines many practice management issues and allows firms to see what works for their peers. Our thanks to all of you who already participated!

One-on-one encounters make attending live conferences a unique experience

In today’s world, some people may automatically choose the “attend virtually” option when registering for a conference, or they may want to attend in person, but there’s not enough in the travel budget to allow for it. But attending in-person has unique benefits that can easily outweigh the cost.

Case in point: At the recent NACVA super conference in Fort Lauderdale, Fla., we were chatting with a young practitioner who was “ecstatic” over being able to talk shop with Dan Van Vleet (The Griffin Group), who co-presented a session on S corp valuations at the conference (with his colleague Bill McInerney). The Van Vleet model has prevailed in several recent cases about tax affecting S corps. They spent time together during one of the several networking opportunities over the two-day event. From the way the attendee talked, the chat the two had was the highlight of his conference experience—which cannot be replicated in a virtual environment.

Conference speakers are very generous with their time and advice, and they typically stay for the entire event, so there are many opportunities to interact. These events draw the very top thought leaders in the BV world, so it’s a rare chance to rub elbows with these esteemed professionals. Make it a resolution for the new year to attend at least one in-person event—you’ll be glad you did.

Global BV News

Webinar series explains IVS update

Next month, the International Valuation Standards Council (IVSC) will host a series of webinars exploring the latest and most significant updates to the International Valuation Standards (IVS), which are set to be released at the end of this month. During these webinars, you can interact directly with IVSC’s technical staff and standards board representatives. The first webinar will be on February 5, and you can register if you click here.

Valuation News Updates

Lisa Guo — Thu, 18 Jan 2024 04:48:25 GMT

Damodaran posts his first data update for 2024

At the beginning of each year, Professor Aswath Damodaran (New York University Stern School of Business) generously posts a great amount of data on his website that include risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. He does a series of posts on his blog based on these new data, which contain his thoughts on what the data are best suited for and some caveats for users. His first post explains some of these data and gives the background of his annual analysis and contains links to his data.

Implied ERP of 4.60%: For the ERP, Damodaran favors a forward-looking method known as the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP in the U.S. to be 4.60% as of Jan. 1, 2024 (trailing 12-month cash yield).

Extra: Damodaran’s data on implied ERPs as well historical ERPs are included in the BVR Cost of Capital Professional platform (his data are used with his permission; he has no formal role or connection with BVR).

Hitchner’s ‘myth busters’ tackle two more issues

Jim Hitchner (Financial Valuation Advisors) and his team of fellow AICPA BV Hall of Fame alumni have taken on two more BV myths in his December issue of Hardball With Hitchner. Myth No. 6 on their list is this: “There are supportable methods for determining the optimal capital structure of a business.” He goes through some common methods for doing this, such as taking an average of the capital structures of guideline public companies, and concludes that these methods “are not always valid or supportable.”

Can be done: BVWire points out that, while it is true that there is no way to calculate the capital structure precisely that will maximize firm value, firms routinely determine a target capital structure by looking at a variety of factors (too many to discuss here). Once they determine the approximate proportion of debt and equity that is best given their circumstances, investment decisions are made accordingly, i.e., investments are financed in roughly the same proportion. Using these same factors (Hitchner discusses a few of them), the analyst can provide some level of support for an estimate of an optimal capital structure.

On to Myth No. 7, which is this: “The Hamada formula is the correct method to unlever and relever betas to account for differences in capital structures.” The formula is commonly used when valuing a company using public-company betas, which must be adjusted to the capital structure of the subject company. He cites several sources and texts in busting this myth, but he points out that it “can still be used in many instances.”

The other members of the myth-busting group are: Harold Martin (Keiter), Ron Seigneur (Seigneur Gustafson LLP), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC), Ed Dupke (Dupke Consulting LLC), and Jim Alerding (Alerding Consulting LLC).

Hardball With Hitchner is a monthly publication. For subscription information, click here.

Kroll conducts survey of cost of capital inputs

In the last issue, we presented results of several surveys on the various resources practitioners use for estimating cost of capital. Another perspective comes from Kroll, which recently had a webinar during which it polled the audience of 706 participants on several topics (15% of the audience consisted of Kroll employees). One question was: “Which methods/data sources do you use as the equity (market) risk premium (ERP) input in your cost of equity estimates?” Here are the results (respondents could select all that applied):

Kroll U.S. Recommended ERP	58.5%
Long-term historical average, published by Kroll	35.7%
Professor Damodaran’s implied ERP	23.7%
Supply-side ERP, published by Kroll	22.0%
Other historical or implied ERP sources (e.g., Market-Risk-Premia.com)	14.7%
Other/not applicable	13.5%
BVR Cost of Capital Professional	9.0%
Professor Pablo Fernandez’s survey of ERPs	4.1%

Poll results on other topics include:

The percentage of survey participants who conducted valuations primarily based in North America was 78.4%;
The percentage of survey participants who anticipate a recession will occur in 2024 in their home country was 43.3%;
Thirty-eight percent of respondents are planning to start considering ESG factors in their valuations; and
More than half (50.8%) of the respondents incorporate country risk adjustments directly in their discount rate estimates.

For more details, Kroll put together a survey report of the findings, and it is available if you click here. The webinar was conducted by Carla Nunes, managing director of valuation advisory services, and Jim Harrington, director of valuation services, both with Kroll. A replay is available if you click here.

The 2024 Pepperdine private cost of capital survey is now open

It’s that time again! Each year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. For a direct link to the survey, click here. The results are used to produce the annual Private Capital Markets Report, which is free if you fill out the survey—plus, you’ll get it a week early. Reports from prior years are available if you click here.

Do you use a portal to collect client data?

We’d like to know—and so would your peers. Please take a two-minute survey about this topic, and we’ll present the results here when we get a good response rate. To take the survey, click here. This survey—and others we’re planning—will augment BVR’s Business Valuation Firm Benchmarking Guide, which examines many practice management issues and allows firms to see what works for their peers. Our thanks to all of you who already participated!

DealStats Hall of Fame members for 2023

Business brokers and other intermediaries generously contribute data to DealStats, making it the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2023 are:

Jim DeShayes, Colorado Business Exchange (Fort Collins, Colo.)
George Lanza, Plethora Businesses (Orange, Calif.);
Neil Gerritsen, Alberta Business Sales Inc. (Edmonton, Alberta, Canada);
Lance Schmidt, National Business Appraisers and Brokers (Mission Viejo, Calif.); and

Teija Heikkila, National Kennel Sales & Appraisals (Grand Junction, Colo.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Global BV News

The Winter 2023 edition of EVBM is now available

The European Association of Certified Valuators and Analysts (EACVA) and the International Valuation Standards Council (IVSC) have released the latest edition of the European Business Valuation Magazine (EBVM). The publication is free of charge and is intended to be a European platform to discuss practice issues in business valuation. The Winter 2023 issue features these articles:

“Analytics on the Structuring and Pricing of Preferred Shares” (Dr. Christoph Engel, CFA, CVA);

“Spanish Valuation Practice in a Nutshell” (Jesús Valero and Fernando Rojas);

“Industry Betas and Multiples (for Eurozone Companies)” (Martin H. Schmidt and Andreas Tschöpel);

“Transaction Multiples (Eastern Europe)” (Stefan O. Grbenic);

News from IVSC;

News from EACVA; and

Interview: Christian Luft (chair, IVSC Europe Committee).

You can download the issue and sign up for future issues if you click here.

Save the date: June 20-21 for CBV Connect 2024

CBV Connect 2024, hosted by the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, will be held at The Bonaventure in Montreal. This is always an excellent event, and BVWire attended last year—you can see some of our coverage here and here. Details on registration and the agenda will be forthcoming.

What’s in the February 2024 issue of Business Valuation Update

Here’s what you’ll see:

“AI Concerns, Experiments Highlight NACVA Confab” (BVR Editor). This is a recap of several interesting sessions at the December NACVA Business Valuation & Financial Litigation Super Conference in Fort Lauderdale, Fla. The sessions discussed ethics issues and presented some demonstrations of how to leverage AI in a valuation practice.

“What Valuers Should Do While SCOTUS Mulls Connelly” (BVR Editor). Regardless of how the U.S. Supreme Court rules in the Connelly case, there are some steps valuers can take to better help their client business owners, many of whom could be sitting on ticking time bombs. The issue before SCOTUS is how does corporate-owned life insurance designed to fund the redemption of a deceased shareholder’s stock impact the fair market value of the subject company and the value of the decedent’s gross estate.

“Two Ways to Treat the Vanishing Bonus Depreciation Tax Break” (BVR Editor). Michelle Gallagher and Nathan Olberding (both with Adamy Valuation) present a nice example of how to consider the sunsetting of the bonus depreciation rules in a valuation. The rules were enacted by the Tax Cuts and Jobs Act (TCJA).

“Quality Control Is Now the No. 1 Concern of BV Firms” (BVR Editor). What keeps business valuation firm managers up at night? Mostly, they worry about maintaining control over the quality of the work product, according to the Business Valuation Firm Benchmarking Guide. This article presents the other top concerns.

“‘Very Useful’ MPF Will Be Reissued in Revamped Form” (BVR Editor). Even if you do not practice in the area of fair value for financial reporting, valuers should take notice of a document that will be going out for public comment from the AICPA. The document is a revised version of the Mandatory Performance Framework, which was issued in connection with the Certified in Entity and Intangible Valuations (CEIV) credential, which was discontinued last year.

“A Wealth of Rules of Thumb in the 2024 Business Reference Guide” (BVR Editor). At a recent conference, an audience member asked top valuation thought leader Gary Trugman (Trugman Valuation): “Do you use rules of thumb in your valuations?” He replied: “Absolutely! But only as a sanity check.” A good source of rules of thumb is the Business Reference Guide, which has been updated for its 2024 edition.

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/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 with one case featured in a detailed analysis.

To stay current on business valuation, check out the February 2024 issue of Business Valuation Update.

Valuation News Updates

Lisa Guo — Thu, 11 Jan 2024 04:45:24 GMT

BVR survey reveals COE data sources of choice

While the Kroll Cost of Capital Navigator continues to be widely used and accepted for estimating cost of equity (COE), BVR’s Cost of Capital Professional has been gaining considerable steam since its launch in 2018, according to a BVR survey. Some other resources for estimating the cost of capital have also seen an uptick in usage.

Pecking order: A question in the Business Valuation Firm Benchmarking Guide, 2023 Edition, asked: “Which of the Following Resources Do You Use to Estimate the Cost of Capital? (check all that apply.)” Kroll’s Navigator topped the list, at 74%, and the Cost of Capital Professional followed, at 35% (see table). The survey was conducted during May 2023-July 2023 and had 192 respondents.

The 2018 BVR survey was done before the launch of the Cost of Capital Professional, but there have been other surveys since then. Jim Hitchner (Financial Valuation Advisors Inc.) has done regular surveys since 2019, finding that the Navigator has an 88% average usage rate versus 22% for the Cost of Capital Professional (click here for coverage). In the current BVR survey, the use of the Pepperdine studies and Damodaran’s data saw slight increases in usage, while the SBBI Yearbook showed a marked decline. Of course, all surveys have different sizes, demographics, and populations.

More steam? Given the recent hefty price increase for the Navigator, we would expect that the usage gap between the Navigator and the Cost of Capital Professional will continue to narrow. Also, more practitioners may look to the Pepperdine and Damodaran sources, which are free or of minimal cost. And, of course, this all depends on the level of price elasticity in the marketplace.

In any event, the Cost of Capital Professional has emerged as an effective lower-cost alternative for practitioners who do not need all the features the Navigator provides. Also, the two platforms (as well as the Pepperdine studies) produce “very close” results, according to tests Hitchner made. The question of “which source is best” is up to users to decide. The surveys show that some practitioners use several sources and compare the results, which is a welcome option for a process that is not perfect.

Valuation of business hit by COVID-19 in recent divorce case

If you haven’t done so already, sooner or later you will value a business affected by COVID-19. What do you do with several years of historical performance that the virus negatively impacted? Ignore those years? Assume the business will rebound? This was the issue in a recent divorce case in Arizona.

Typical scenario: The husband owned a construction company that had just one client: a company that owned and operated a number of hotels. During the height of COVID-19, the client sold off several of its hotels, putting a dent in the husband’s company’s revenue. Plus, the company stopped servicing several other of the client’s hotels (apparently due to the COVID-19-induced slowdown in travel).

In valuing the company, the husband’s valuation expert treated the prior years’ financials as outliers due to COVID-19 and used the current year for the numerator of a capitalized cash flow (CCF) analysis. The wife’s expert did not do that—he used an average of the past three years as his numerator for the CCF, three years that included pre-COVID-19 higher revenues. He justified this by saying that industry prospects “looked positive,” implying that the company could make up for the lost business. Of course, the two valuations were “wildly different.”

A court accepted the three-year look back and the wife’s expert’s higher valuation. The husband appealed, contending that those three years were impacted by COVID-19 and were not representative of future cash flows, which is what the numerator is supposed to represent. He argued that the numerator should be the current year’s cash flows, which represents the effects of the lost business going forward. But the appellate court affirmed the trial court’s decision, saying it did not “abuse its discretion.”

The case is Dawson v. Dawson, 2023 Ariz. App. Unpub. LEXIS 1003, and a case analysis and full court opinion will be on the BVLaw platform.

BVR kicks off ‘Two-Minute Practice Builder’ surveys

As any profession matures, the issue of practice management becomes more critical. Management and administrative issues that took a back seat when riding a growth wave must be dealt with when the landscape gets more competitive. BVR’s Business Valuation Firm Benchmarking Guide examines many practice management issues and allows firms to see what works for their peers. As a continuation of this project—and to delve deeper into certain areas—we’re kicking off a series of regular minisurveys with the help of Rod Burkert (Burkert Valuation Advisors), a former valuation practitioner who now devotes his time to helping others build their practices.

First one: Do you have a client “portal” to collect engagement information and documents? If so, what portal app or software are you using? Please answer these few questions by clicking here—it will take just two minutes. We’ll present the results here when we get a good response. Thanks for helping us help you!

AI studies top several McKinsey lists for 2023

Of interest to valuation experts are two works from McKinsey that examine artificial intelligence (AI). One is a report that we mentioned in an earlier issue that ended up as its No. 1 best-read report, “The Economic Potential of Generative AI: The Next Productivity Frontier,” which is available if you click here. A key takeaway of this report is that four areas of a company—customer operations, marketing and sales, software engineering, and research and development—could account for about 75% of the value that using generative AI could deliver.

The other is McKinsey’s survey, “The State of AI in 2023: Generative AI’s Breakout Year,” which ended up at No. 1 on its best-read survey list. The survey reveals the significant effects respondents expect on their industries and workforces. Some survey respondents reported that at least 20% of their EBIT in 2022 was attributable to AI use. Also, more than two-thirds of respondents say they will increase their investment in AI over the next three years. You can access the survey if you click here.

AI is a major trend that can impact a firm’s cash flow, growth, and risk, so analysts must consider it when valuing a company.

Global BV News

Kroll examines industry multiples in China

An analysis of the trading indices across various key industrial sectors in China as of Sept. 30, 2023, is contained in Kroll’s Industry Multiples in China 2023 report. Here are some highlights:

· Consumer discretionary.Trading multiples surged as the sector experienced a post-pandemic upswing. Profits more than doubled, and revenue and market capitalization recovered to prepandemic levels, indicating a robust recovery.

· Consumer staples.This sector witnessed a resurgence in net income, although trading multiples decreased year on year.

· Information technology.This vertical saw an increase in trading multiples due to a fall in net earnings. However, total revenues in the industry experienced a slight recovery, fostering optimism for a more competitive IT sector.

· Financial services. This sector demonstrated resilience despite distress in the property market, with trading multiples indicating confidence in its future prospects.

· Real estate.There are challenges in this sector, but the data suggest a slight recovery in net revenue. However, trading multiples reflected a decline in net earnings, influenced by high inflation and interest rates.

· Other sectors,such as materials, energy, and utilities, presented mixed signals, with varying performances and prospects.

To download the full report, click here.

Valuation News Updates

Lisa Guo — Thu, 14 Dec 2023 04:25:39 GMT

Delay in divorce decree does not change valuation date

In a Montana divorce case, the husband became an owner of a business right before marriage. When the couple divorced, the business was valued at $2.2 million, which the wife did not contest at trial. The court took three years to issue the final divorce decree. In the meantime, the business catapulted in value, and the husband got an offer to sell the business for $24.5 million.

Do over? The wife argued that the valuation date should be the date of the final decree, not the date of trial. Of course, this would give her a share of the huge increase in value of the husband’s business. But the appellate court disagreed, finding that “unique circumstances” call for the valuation date to be the date of trial. The wife had cleared out of the family home right after the trial and moved to California, and she had no involvement with the business. Also, the husband should not be penalized because of the court’s three-year delay in issuing the final decree.

The case is In re Marriage of Remitz, 2023 MT 212N; 2023 Mont. LEXIS 1105, and a case analysis and full court opinion will be on the BVLaw platform.

Update on guidance regarding the company-specific risk premium

Expect to see an exposure draft of guidance on the company-specific risk premium during the first half of 2024, reported Christopher Armstrong (KPMG), at the winter edition of the ASA’s Fair Value Conference last week. He is part of the group developing the guidance, and there will be a public comment period, he noted.

Preview: The group has issued a brief (click here) that provides a summary outline of certain key areas that will be explored in greater detail in the upcoming guidance, such as specific procedures for assessing discount rates and prospective financial information (PFI), as well as identifying and quantifying the elements of a CSRP. The guidance, which is voluntary, will be in the form of a Valuation in Financial Reporting (VFR) Advisory from The Appraisal Foundation (TAF).

Ray Rath (Baker Tilly US LLP) was the conference chair, and other topics included the future revision of the Mandatory Performance Framework (from the now-sunset CEIV credential), discount rates and volatility for contingent consideration, fair value audits, and the latest on the AICPA business combinations guide. Beside Armstrong, speakers included Marianna Todorova (Kroll), Mark Smith (AICPA), Mark Zyla (Zyla Valuation Advisors), Gary Roland (Kroll), Mark Edwards (Grant Thornton), Amanda Miller (EY), and Vincent Covrig (Crowe LLP). More coverage will be in a future issue of Business Valuation Update.

Practice opportunity: Buy-sell agreements

A “vast opportunity” for appraisers can be found in buy-sell agreements, according to Jeff Tarbell (Houlihan Lokey) and Riley Busenlener (Chaffe & Associates Inc.), who is also an attorney. They conducted a session on buy-sell agreements at the 2023 American Society of Appraisers International Conference recently in New Orleans.

Poorly drafted (if at all): Many closely held companies do not have these agreements in place, which allow for transfers of interests when an owner exits the business due to some triggering event, such as retirement, death, divorce, and the like. And when they are in place, they are typically poorly drafted when it comes to addressing the value of the firm at a triggering event and the selection process for the appraiser. Opportunities exist for appraisers to help draft the valuation provisions in the agreements and when a valuation is needed in the future.

The speakers gave some basic background info on these agreements and their impacts on valuation, one obviously being that they impact marketability discounts to some extent. It’s important to be very specific about certain things, such as triggering events, which can be tricky (e.g., what constitutes a “disability”). The panel mentioned that they rarely see anything in buy-sells that talk about the qualifications of the appraiser to be chosen or any specific standards that need to be followed for the valuation. One idea they felt was a good one was that the buy-sell can use the “qualified appraisal” definition in the tax law’s Section 170 concerning charitable contributions.

Coverage of more sessions at the conference is in the December issue of Business Valuation Update.

Need to value a stadium seat license?

Often overlooked by estate professionals or dismissed as having no value, sports stadium seat licenses have an active public market that can be used as a starting point for a valuation, according to Jackson Crispin (Willamette Management Associates) in a recent article. For example, STR Marketplace offers fans the ability to sell or transfer seat licenses, and these markets frequently report transaction data. Not all sports teams allow their seat licenses to be sold in these marketplaces, and, even when they do, there are other valuation considerations, such as the location of the seats, outliers in the data (e.g., for a major rivalry game), transfer restrictions the teams impose that can trigger a marketability discount, and more, Crispin points out. The article appears in the October 2023 issue of Willamette’s Perspectives, which you can read if you click here.

Kroll releases Valuation Insights Q4 2023

In the Q4 2023 edition of Valuation Insights, Kroll experts provide a recap of current global economic and financial market conditions and discuss the implications of a higher cost of capital on valuations, M&A, and IPO markets in the fourth quarter of 2023 and 2024. There is also a look at SPACS (1H23 highlights) and market multiples for North American and European industries. To access the full issue, click here.

Preorder deal on the 2024 Business Reference Guide

The 2024 print edition of the Business Reference Guide (BRG) by Tom West is now available for preorder at a 20% savings if you click here (valid through December 31). Now in its 34th year, it contains the latest industry-related information including “rules of thumb,” pricing tips, benchmarking information with comparison data, industry resources, and general industry data on nearly 700 types of businesses. There is also an online version with a fully searchable database, and it includes the print version of the guide. The print edition will be available in February 2024.

Global BV News

‘Landmark’ update to IVS approved

Two years in the making, the International Valuation Standards Council (IVSC) has unanimously approved the forthcoming edition of the International Valuation Standards (IVS), set for release in January 2024. The “landmark” update represents a “significant evolution in the IVS,” the organization said in a statement. Some sections, particularly IVS 500—Financial Instruments and IVS 104—Data and Inputs, have been extensively updated. Also, the 2024 edition will feature improved navigation and integrated digital tools, “making it the most accessible and intuitive IVS to date.” When the new version is released, the IVSC will host a series of complimentary webinars on the changes.

Valuation News Updates

Lisa Guo — Thu, 07 Dec 2023 04:23:24 GMT

Do-over case may need an active/passive appreciation analysis

In an Alaska divorce case, an appellate court remanded the case back to the state’s Superior Court because the findings on the husband’s business as marital property were not detailed enough to allow for appellate review.

Biz mash-up: Several businesses were involved, some started before the marriage and some after the marriage, and the lower court treated them all as one entity and classified them as marital property. The husband argued that his business was separate property and was started prior to the marriage and was simply expanded during the marriage by the other businesses. The appellate court agreed that the lower court erred in classifying one of the businesses as started during the marriage and sent the whole matter back to the lower court to do a more thorough analysis. For businesses started prior to marriage, an analysis may have to be done to separate active and passive appreciation in the business value during the time of the marriage.

The case is Lymburner v. Axhelm, 2023 Alas. LEXIS 106; 2023 WL 7017099, and a case analysis and full court opinion are on the BVLaw platform.

Extra: There is an online application that produces a passive appreciation factor on a national level for businesses in the retail sector. It was developed by Dr. Ashok Abbott (West Virginia University) and is available if you click here. Feedback on the app is welcome!

Even more takeaways from the AICPA FVS confab

In the last two issues, we presented some takeaways from the first two days of the AICPA & CIMA Forensic and Valuation Services (FVS) Conference in Las Vegas last month. There were over 60 sessions to choose from over the three days, and here are some things we learned on the third day:

For estate/gift tax valuations, to meet the adequate disclosure requirement, the IRS should be able to replicate your conclusion of value;

Over a third of attendees of a brand valuation session say they have the most success with the ktMINE royalty rate database;

As for R&D at software companies, it’s easier to treat it as capex than leaving it in as an operating expense;

A perfect storm of issues is looming over the cannabis industry: lack of reform and declining demand for the product on top of rising interest rates and inflation;

In a poll, two-thirds of attendees say their most common areas of practice are family law and gift and estate work;

Another attendee poll found that the most common error in valuation is a failure to normalize earnings properly; and

In misappropriation of trade secrets cases, reasonable royalty is the damages measurement used the least (prevailed in only four cases in recent years).

We will have expanded coverage of the conference starting in the January issue of Business Valuation Update. Next year’s FVS conference will be in Dallas at the Hyatt Regency, Oct. 28-30, 2024.

M&A buyers get over 50% of synergy value, per MARKABLES study

When one company buys another, it’s a 1 + 1 = 3 deal because of synergies. The target company is worth more than its market cap (or estimated fair market value) because of what the acquirer can do with it. Of course, sellers know this and try to hike the price up to capture as much of that differential as possible. Historically, it’s been about a two-thirds-one-third split, with the buyers forking over about a third of the value of the synergies to sellers. But this split is now about 50-50, and a new study from MARKABLES confirms this.

New study: A MARKABLES analysis of data from 605 public takeovers between 2010 and 2022 finds that the buyer gets between 56% and 58% of synergies, depending on the calculation method. This confirms findings in similar research done by the Boston Consulting Group. This is all discussed in an article, “Synergies in Accounting and Valuation,” by Christof Binder, co-founder of the MARKABLES database. The article is available if you click here.

This interesting article provides insights and empirical data on how synergies are viewed, quantified, and used today across different groups of stakeholders. It also discusses the current initiative of the International Accounting Standards Board (IASB) to improve disclosures about synergy.

Global BV News

Global ‘key players’ in valuing intangibles per QYResearch

QYResearch has published an updated research report on the global market for valuation services for intangible assets. According to the table of contents of the report, “Global Intangible Assets Valuation Service Market Research Report 2023,” it contains analyses of the size of the market, competition, segmentation, dynamics, and profiles of what it calls the world’s “key players” providing valuation services for intangible assets. It’s interesting to note that these profiles also include the revenue and gross margins these firms generate from valuing intangible assets. The report lists the sources of these data as “secondary sources, expert interviews and QYResearch, 2023.”

The report identifies the key players as: Ernst & Young, Deloitte, Duff & Phelps (now Kroll), EverEdge, KPMG, PwC, Roma Group, Valuation Services Inc., Management Planning Inc., IRE, Appraisal Economics, H&A, Cambridge Partners, MARKABLES, and Value Management & Options Corp.

Reminder: IVSC seeks board members

The International Valuation Standards Council (IVSC) is seeking applications for roles on three of its technical standards boards, with two openings on each of the Tangible Assets Board, Business Valuation Board, and Financial Instruments Board. The new board appointees will start their terms in the second quarter of 2024. Applications can be submitted online through the IVSC website, and the closing date for applications is December 18. For more information, click here.

IVSC chair Alistair Darling has died

Alistair Darling,chair of the International Valuation Standards Council Board of Trustees (IVSC), has passed away. “Today marks the loss of a remarkable leader and a good friend to myself and the valuation community,” said Nicholas Talbot, IVSC chief executive. “Alistair Darling’s wisdom and guidance as the Chair of the IVSC were invaluable. His advice, always given with generous spirit and deep dedication, has profoundly shaped our organization for the better. Alistair had a unique ability to lighten challenging moments with his humor and wit, reminding us of the joy in our work. His presence was not just professional but deeply personal to all who knew him. I am personally grateful for his good humor and mentorship and will miss him immensely. His legacy at the IVSC will endure and continue to inspire us all.”

Valuation News Updates

Lisa Guo — Thu, 30 Nov 2023 04:19:05 GMT

More takeaways from the Las Vegas AICPA FVS conference

In the last issue, we presented some takeaways from the first day of the AICPA & CIMA Forensic and Valuation Services (FVS) Conference in Las Vegas earlier this month. There were over 60 sessions to choose from over the three days, and here are some things we learned on the second day:

The keynote speaker, a “focusologist,” reported that 70% of the workforce is disconnected and disengaged (“the way we’re working is not working”)—one major fix is to give more feedback to staff;
The AICPA set up a university task force to raise awareness among students of the FVS profession;
There is no need to use a normalized risk-free rate (for now at least) because we are now back to more normal conditions;
For economic damages, the tricky part is segregating losses from the alleged bad act from losses resulting from other factors—a causation analysis is the key (the expert should never opine on causation, but it’s fine to discuss indicia of causation);
In a litigation matter, if you get documents dumped on you at the last minute, ask for more time, but, if you don’t get it, footnote it and reserve the right to do a supplement to your report; and
If a business owns its real estate, the cleanest way is to treat it as an excess asset with the business just renting at market prices.

We’ll have takeaways from the third day in the next issue, and there will be expanded coverage starting in the January issue of Business Valuation Update.

Next year’s FVS conference will be in Dallas at the Hyatt Regency, Oct. 28-30, 2024.

Noncertified occasional valuer is not a qualified appraiser, per Tax Court

For tax purposes, the most important requirement under the qualified appraisal rules is that the valuation be done by a qualified appraiser. The requirements are set out in Section 170 of the tax law and related regulations. A qualified appraiser is one who either has relevant credentials or enough experience. But how much experience is enough? A new case gives some guidance.

New case: In a Tax Court case involving a charitable contribution of shares in a closely held corporation, an investment banker did the valuation. He had no certifications from any professional appraiser organization and testified that had done valuations only “on a limited basis” just a year before the engagement. He also said that, at the time of the trial, he was performing business valuations for prospective clients “once or twice a year” (presumably gratis) to solicit their business. The court ruled that the investment banker was not a qualified appraiser, so the donors are not entitled to a charitable tax deduction.

There were other defects in the valuation report and other issues in the case, which is Hoensheid v. Comm’r (In re Estate of Hoensheid), T.C. Memo 2023-34, and a case digest and full opinion are available on the BVLaw platform.

Catch up on the ASA conference via recordings

We attended the ASA 2023 International Appraisers Conference in New Orleans but could not get to every session we wanted. Fortunately, the ASA makes recordings of the sessions available if you click here. Here are a few things we learned from listening to some of the recordings:

A new study shows that customer concentration does not automatically mean higher risk—it depends on the strength of the relationships with those customers;
When thinking about hypothetical buyers for a going-concern business, the likely buyers are those with the greatest expected synergies;
The tax break from identifying personal goodwill when a business is sold is so significant that the IRS automatically red flags transactions that make a personal goodwill election;
Don’t assume your business as a sole practitioner does not have value, even with nonrecurring revenue—and there are alternate payment arrangements that can be done with the buyer;
Buy-sell agreements represent a “vast opportunity” for appraisers to help draft certain provisions and to perform valuations when needed; and
How useful are ESG ratings in valuation? Anheuser-Busch would have received high ESG scores for embarking on its woke promotion for Bud Light, but look what happened (Kellogg’s Froot Loops is the latest brand to come under fire for its wokery).

Of course, being in-person at the conferences is the optimal experience (we learn a lot outside of the actual sessions), but the recordings are the next best thing. Next year’s ASA conference will be in Portland, Ore., Sept. 15-17, 2024.

New issue of Willamette’s Perspectives is released

The October 2023 issue of the quarterly digital publication Perspectives, from Willamette Management Associates, has been released, and you can access it if you click here. This publication replaced the firm’s Insights publication, and the articles in this latest issue are:

· “Preferred Equity in a Rising Interest Rate Environment” (Ben R. Duffy and Jacob L. Hudson);
· “Considerations for Valuing the Stadium Seat Licenses of Sports Teams for Estate Tax Purposes” (Jackson Crispin); and

“Convertible Bonds as a Component of a Company’s Capital Structure” (Keegan M. Pando and Weston C. Kirk). Kirk also served as editor for this issue.

December super conference in Florida from NACVA

The year 2023 will go out with a bang with the last major conference of the year: the NACVA Business Valuation & Financial Litigation Super Conference that runs from December 14 through December 16 virtually and in-person from Fort Lauderdale, Fla. There are over 40 sessions in four tracks, and you can attend the full conference or just one (or more) sessions with the á la carte option when you attend virtually, and each session you choose is $110 ($99 for NACVA members). Up to 30 CPE hours are available. You can find more information and how to register if you click here.

Global BV News

Here are the winners of the BV Challenge in Canada

The CBV Institute has announced the winners of its second Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. The competition saw 21 teams (69 students) test their business valuation skills, and here are the top three teams:

British Columbia Institute of Technology (BCIT): Paul De Blois, Maya Khera, Jin Wook Ryu, and Sangbeom Woo;
Concordia University: Andreana Moulinos and Paulina Moulinos; and
Toronto Metropolitan University: Billy Arseneault, Dennis Chen, George Chibukhchyan, and Vansh Saini.

The top three teams received cash awards, and the members of the first-place team will receive complimentary enrollment to Level 1 in the CBV Program of Studies.

“I would like to take this opportunity to congratulate the members of the first-place team from British Columbia Institute of Technology, along with those who placed second and third,” said Dr. Christine Sawchuk, president and CEO, CBV Institute. “With demand for CBVs at an all-time high, the BV Challenge is an excellent opportunity to introduce undergraduate business students to our rapidly expanding and evolving profession. We look forward to further growing this case competition in the coming years with the goal of exposing even more students to the dynamic and rewarding world of business valuation.”

More details on the competition are available if you click here.

Reminder: IVSC seeks board members

Valuation News Updates

Lisa Guo — Thu, 16 Nov 2023 04:15:26 GMT

Some golden nuggets from the AICPA FVS confab

It was great to see the turnout at the AICPA & CIMA Forensic and Valuation Services Conference in Las Vegas last week. The attendee list on the mobile app contained about 900 names (including staff, speakers, and exhibitors), and it was about a 50-50 mix of valuation and forensic practitioners. There were over 60 sessions to choose from over the three days, and here are some nuggets from the first day:

We’ve just “scratched the surface” with AI, which is poised to add several trillion dollars of value to companies;
The updated AICPA business combinations guide is expected to be published in Spring/Summer 2024—and the PE/VC guide is also being revised;
Young practitioners need the “why” as well as the “what,” especially when doing mundane tasks—tell them the reasons and what’s at stake;
Although the recent Cecil case was a win for tax affecting (even the IRS tax affected), it will not be a slam dunk going forward;
Professional liability claims against experts are more than just the amount of fees—triers of fact feel that’s too low, so a 2x-to-3x multiple of fees is the typical range;
If a client wants to fire the attorney on your engagement, the expert should stay out of that conversation—it’s a no-win;
The new amendments designed to put more teeth into Rule 702 go into effect December 1—but courts have already been citing them when deciding to exclude expert testimony; and
A practice opportunity exists for verifying ESG-related claims companies make—they are often not true.

In the Exhibit Hall, two vendors of AI-powered tools drew noticeable interest from attendees: Valid8, which helps examine data in financial documents (bank statements, check registers, ledger transactions, etc.), and Valutico, which does a full-company valuation including a qualitative analysis, comp selection, cost of capital—and even ESG adjustments.

We’ll have more takeaways in next week’s issue.

Next year’s FVS conference will be in Dallas at the Hyatt Regency Oct. 28-30, 2024.

Recovery of both lost profits and disgorgement not allowed in New York case

In a New York case, the issue of damages involved a Lego interpretation model of the Second Beit Hamikdash, or Second Holy Temple, and an alleged infringement of the copyright on this model (click here to see the model).

Daubert challenge: The court struck the plaintiff’s expert’s damages of a product related to the Temple Product but allowed testimony of damages on the Temple Product. The court also struck the plaintiff’s expert’s testimony that the plaintiff should be awarded lost profits on the Temple Product plus a disgorgement of the defendants’ profits. Both may not be awarded, the court ruled. The court also struck portions of the defendants’ rebuttal testimony and report.

The case is JBrick, LLC v. Chazak Kinder, Inc., 2023 U.S., Dist. LEXIS 174473 (Sept. 28, 2023), and a case analysis and full court opinion are on the BVLaw platform.

Don’t hold your breath over the DOL valuation regs, some say

While in Las Vegas, BVWire stopped in at the ESOP Association’s Employee Owned Conference, billed as the largest ESOP conference in the world. In the reception area and the Exhibit Hall, we ran into several providers of ESOP valuation services, who told us they are not very confident that the Department of Labor will issue its much-awaited proposed valuation regs by year-end as expected (see our prior coverage). They are also worried that the regs will reflect the DOL’s tough stance on valuation issues and that stakeholders may not get a sufficient chance to comment on the proposal. We pointed out that there is supposed to be a two-to-three-month public comment period before the regs are finalized. One individual wondered whether there would be a public hearing. We don’t know whether there will be or not, but the valuation profession would certainly welcome that. Stay tuned!

AI is high on the radar at the AICPA FVS section

One of the eagerly awaited issues for 2024 at the AICPA FVS section is the continued understanding of artificial intelligence and its implications for forensics and valuation practitioners. This point was made during the FVS Forum session at the AICPA & CIMA Forensic and Valuation Services Conference in Las Vegas last week. The session had a panel of FVS section leaders who discussed the section’s five-year strategic plan, which includes several main goals, including building a global FVS community, providing for enhanced education for the FVS professional, and increasing FVS brand awareness and reputation. Other developments the FVS leaders are looking forward to most in 2024 include increased outreach efforts to universities and the Emerging Professionals Project, which will determine the needs of young FVS professionals and how best to satisfy those needs.

More details on the FVS section’s plans will be in the January 2024 issue of Business Valuation Update.

BV firm benchmarking guide for 2023 just released

How does your valuation practice stack up against its peers? Data from over 190 business valuation firms and practices have been collected and distilled into a concise reference guide that focuses on different aspects of practice management and practice building. Sections include: “Practice Performance”; “Staff Hiring, Promotion, Partner Requirements and Compensation”; “Billing and Fees”; and more. BVR partnered with leading BVFLS practice management expert Rod Burkert (Burkert Valuation Advisors) to help ensure the survey and resulting guide will be of the most help to BV practices. You already have access to this guide if you are a subscriber to BVR’s BVResearch Pro platform. If you are not, you can purchase the guide on an a la carte basis if you click here.

BVPro adds new guide on valuing jewelry stores

BVR’s BVResearch Pro platform adds new content continually to its collection of over 20,000 articles, books, special reports, court case digests, webinar transcripts, and more. Just added is a 113-page guide, What It’s Worth: Valuing Jewelry Stores. The guide includes industry intelligence (from Vertical IQ), key benchmarks from DealStats, valuation expert insights, court cases, and rules of thumb from the Business Reference Guide. If you are not a subscriber to BVResearchPro, you can purchase the guide on an a la carte basis if you click here.

Global BV News

IVSC seeks board members

Valuation News Updates

Lisa Guo — Thu, 09 Nov 2023 04:10:09 GMT

Calculation report used in court but had no rival

Most valuation analysts will not use a calculation report in court. But what if the other side has nothing? In an Alaska divorce case, the husband did not engage a valuation expert for his steel fabricating business, but the wife did. Her expert did a calculation of value and came up with a range of values because of problems with the underlying data. The trial court took an average of the range to determine the value for purposes of the marital estate.

Affirmed: On appeal to the state’s Supreme Court, the husband did raise any issue with the calculation report, but he argued that the court should not have used an average, citing a case (Lundquist v. Lundquist) But that case “does not require a ‘bullseye figure,’ nor does it foreclose averaging valuations in every case,” so the average value was affirmed.

The husband also argued that the trial court improperly included goodwill in the business value without first determining whether the goodwill was marketable. But the Supreme Court did not entertain that argument because the husband did not bring that issue up during the regular trial.

The case is B.M. v. R.C., 2023 Alas. LEXIS 102, and a case analysis and full court opinion are on the BVLaw platform.

Hitchner goes after another BV myth

Does the concept of “known or knowable” live up to its name? No, says Jim Hitchner (Financial Valuation Advisors) in his November issue of Hardball With Hitchner. The concept is not as known or knowable as it should be, he says. Hitchner has taken on this concept as his latest myth-busting effort. He’s done several of these before, but, with this one, he’s enlisted a group of AICPA BV Hall of Famers (click here for our prior coverage).

The problem: To Hitchner’s “complete surprise,” the AICPA is the only business valuation group that deals directly with the “known or knowable” concept in its standards. “This is a problem that I believe should be rectified, as this can be an area of abuse in business valuation,” he writes. He goes on to “shed some light on this important concept” by examining what is said about it in IRS Rev. Rul. 59-60, the AICPA BV standards, the AICPA Subsequent Events Toolkit, and some dictionary definitions.

We point out that, in addition, all the main business valuation books (Pratt, Trugman, Hitchner) and others discuss the concept. Trugman’s book, Understanding Business Valuation, 6th edition, has a nice section on it and also has a listing of treatises and court cases. Also, we did a search on BVResearch Pro of the phrase “known and knowable” and got 253 hits, including articles, webinar transcripts, court cases, and more going all the way back to 1996. As you can see, there’s a lot of material about the “known or knowable” concept.

Hardball With Hitchner is a monthly publication. For subscription information, click here.

McKinsey examines value impact of generative AI

A recent McKinsey report shows the various areas of business operations and the expected value impact from the use of generative AI. Four of these areas—customer operations, marketing and sales, software engineering, and research and development—could account for about 75% of the value that using generative AI could deliver, the report says (see the chart below). The report is “The Economic Potential of Generative AI: The Next Productivity Frontier” and is available if you click here.

For business appraisers doing their due diligence on a subject entity, this chart (and the entire McKinsey report) can help assess the potential impacts on value (in terms of cash flow, risk, and growth) of efforts to deploy AI in various areas.

This report was mentioned at the ASA 2023 International Appraisers Conference during a session, Using Automated Valuation Models—If You Dare, that Rob Schlegel (Houlihan Valuation Advisers) and Byron Miller (BM Appraisals) co-presented.

Several industry reports of note

Some valuation firms and practices that have specialties in various sectors put out some interesting industry-specific reports, and they are free. Here are a few recent ones (click on the titles for the links):

“The Food Monitor,” published by B. Riley Advisory Services, a firm that has a specialty in working with and appraising large and well-known companies in the food service industries, provides information on most commodity food products, including industry trends, market pricing, and their relation to the valuation process;

“Value Focus: Auto Dealer Industry,” from Mercer Capital, has midyear 2023 data on sales, blue-sky multiples, and guideline public companies; and

“Global Software Sector Update—Fall 2023,” from Kroll, and a companion report with valuation data, examines M&A deal volume and data from public transactions in the software sector, including firms offering business intelligence and analytics, communications and collaboration, marketing, cybersecurity, and more.

Global BV News

CBV Institute adopts IVS

The Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO) and standard-setter, has announced that it will adopt International Valuation Standards (IVS). The decision to adopt IVS (which the International Valuation Standards Council developed and issued) comes after a multiyear stakeholder consultation process. Starting immediately, CBVs have the option of using either IVS or CBV Institute’s existing valuation practice standards for valuation engagements (Standards 110, 120, and 130). “The adoption of IVS is a significant milestone for CBV Institute,” said Dr. Christine Sawchuk, president and CEO, CBV Institute, in a statement. “It aligns with our commitment to uphold the highest standards in business valuation practice, both in Canada and internationally.”

The Fall 2023 edition of EVBM is now available

The European Association of Certified Valuators and Analysts (EACVA) and the International Valuation Standards Council (IVSC) have released the latest edition of the European Business Valuation Magazine (EBVM). The publication is free of charge and is intended to be a European platform to discuss practice issues in business valuation. The Fall 2023 issue features these articles:

“Dealing With Uncertainty in a Changing World” (Maud Bodin Veraldi, CCEF);

“Synergies in Accounting and Valuation” (Christof Binder, Ph.D., MBA);

“Dealing With Historical Capital Structure Volatility in Valuation” (Professor Dr. Matthias Meitner, CFA, and Prof. Dr. Kenneth Lee, CFA);

“Industry Betas and Multiples for Eurozone Companies” (Martin H. Schmidt and Andreas Tschöpel); and

“Transaction Multiples for Scandinavia and Britain” (Stefan O. Grbenic).

Click here to view the issue, and you can sign up for future issues.

Valuation News Updates

Lisa Guo — Thu, 02 Nov 2023 01:04:53 GMT

What’s the ‘Barbie buzz’ worth?

Having a product prominently displayed in a hit movie has value—but how much? In his pre-IPO valuation of footwear company Birkenstock, Professor Aswath Damodaran (New York University Stern School of Business) examined the firm’s intangibles, one of which was the “Barbie buzz”: having a pink version of the company’s sandals appear in the big blockbuster movie, which “hyper charged the demand for the company’s footwear.”

Revenue bump: All buzzes fade “but not before they create a revenue bump and perhaps even increase the customer base for the long term,” Damodaran writes. He estimates that it will push up the revenue growth rate from 15% to 25% over the next year before reverting to a compounded growth rate of 15% a year in the following four years.

The other main intangibles he valued were the brand name (which has the biggest effect on value), a celebrity customer base, and good management. You can read his full valuation if you click here.

Active depreciation charged to business owner in divorce

In a South Carolina divorce case, the business owner (husband) appealed the family court’s decision on the valuation of the family business. The valuation was done on the date of filing of the marital litigation, but the value apparently dropped during the litigation. The family court found that any change in value was attributable to the actions of the husband.

High bar: The appellate court noted that it will affirm “unless the appellant satisfies his burden of showing the preponderance of the evidence is against the family court’s findings.” The burden was not satisfied, so the appellate court affirmed the family court’s decision on the matter regarding the change in value. Other matters affirmed included accounting for personal goodwill and the court’s selection of a value within the range of evidence presented.

The case is Clampitt v. Clampitt, 2023 S.C. App. Unpub. LEXIS 381, and a case analysis and full court opinion will be on the BVLaw platform.

The No. 1 valuation issue that triggers an IRS audit

Discounts continue to be the No. 1 red flag that triggers an IRS audit, according to former IRS manager Michael Gregory (Michael Gregory Consulting LLC), speaking at the recent American Society of Appraisers (ASA) International Appraisers Conference in New Orleans. Gregory worked for the IRS for almost 30 years on valuation matters and continues to interact with the agency (he has over 70 contacts there). He is now in private practice, and he helps clients who have IRS disputes regarding business valuation issues as well as other matters.

Explain it: Make sure you have a clear and complete explanation that supports your discount estimates, whether they be for marketability or control, Gregory advises. We point out that we have heard the same remarks directly from IRS officials.

In addition to valuation issues, Gregory also specializes in mediation and conflict resolution, and he told the audience that his website offers some free e-books (click here).

Regulatory uncertainty regarding ESOP valuation is a major problem

The regulatory uncertainty around valuations for employee stock ownership plans (ESOPs) is a significant burden that creates undue risk and can “hamper employee-owned businesses,” says Alex Brill, a senior research fellow at the American Enterprise Institute, in a new paper. He’s referring to long-awaited rules on the fair market value of company shares to be bought by an ESOP—a key to the setup and ongoing operations of these vehicles. Without final rules, the DOL has resorted to regulating through litigation, winning many cases alleging that the ESOPs overvalued (and thus overpaid for) the stock of the sponsoring companies. Valuation experts say the DOL uses rules that are not consistent with accepted valuation standards.

New-law mandate: The paper points out that, while Congress recently directed the DOL to establish guidance on ESOP fair market valuation, the new legislation (contained in the SECURE 2.0 Act of 2022) does not provide a deadline for issuing the guidance. “It is critical that DOL issue guidance for ESOP valuation promptly through a formal notice-and-comment rulemaking that permits stakeholders to offer feedback on a proposed regulation,” Brill concludes.

You can read Brill’s paper if you click here.

We point out that, although there is no official deadline, a DOL official stated that regs will be issued by year-end, according to a blog post from the National Center for Employee Ownership (NCEO). Once the proposed regulations are issued, there will be a two-to-three-month public comment period before they are finalized.

Will the AICPA FVS conference be the biggest of the year?

It was the biggest business valuation conference of 2022, and this year’s version should also draw a huge crowd. The AICPA & CIMA Forensic and Valuation Services Conference will be three days, November 6-8, in Las Vegas live and online. There are almost 60 sessions on everything from emerging issues (artificial intelligence, cryptocurrency, and ESG) to specialized topics (portfolio valuations, complex structures, trade names, and cannabis firms) to perennial favorites (expert testimony, reasonable comp, goodwill impairments, and cost of capital). The AICPA also allows virtual attendees to pick and choose some sessions using a “select 7” option so you can focus on specific topics that match your needs. For more details on the conference, click here.

Global BV News

Cross-border M&A examined in new CBV Insights

For several reasons, the prevalence of cross-border transactions involving Canadian companies is expected to expand over the next several years. In the latest edition of CBV Insights, Stephanie Lau, CFA, CBV, advises Canadian sellers on a few strategies they can employ when engaging with a foreign buyer—and why they should not base their exit timing solely on the strength of the loonie (the Canadian one-dollar coin), the report says. To read the report, click here.

IVSC signs MOU with French accountants

During the recent annual general meeting of the International Valuation Standards Council (IVSC), a memorandum of understanding (MoU) was signed to commemorate the IVSC’s partnership with the two leading accountancy professional bodies in France, the CNCC and CNOEC. “This significant event underscores the importance of collaboration and the IVS within the French valuation community,” the IVSC said in a statement.

Extra: The “IVSC Annual Report” for 2022-2023 is now available (click here to view).

Valuation News Updates

Lisa Guo — Thu, 26 Oct 2023 01:02:50 GMT

Hitchner busts more BV myths

Does the fair market value standard assume a financial buyer, without synergistic benefits? “This is not true and is indeed a myth,” writes Jim Hitchner (Financial Valuation Advisors) in his September/October issue of Hardball With Hitchner. And his answer would be the same for a subject noncontrolling interest versus a controlling interest. In backing up his position, he examines the definitions of fair market value, investment value, and the key word “hypothetical.” Under certain circumstances, he notes, fair market value can apply to valuations involving both financial and strategic buyers and sellers, as well as a controlling or minority interest. He cautions analysts not to “mix strategic purchases with financial standalone transactions when preparing a transaction method.”

He also tackles another myth: that the levels of value the BV profession uses are a settled and static issue. “This is patently false,” he writes. He goes through the 30-year evolution of the levels of value chart from its first three-level version to the current four-level version (another control level of value was added). Some unsettled issues remain, he notes, such as the existence of empirical data for quantifying marketability discounts on controlling interests and the use of control premium studies. Hitchner advises analysts to make sure they are using the most current chart that reflects the latest views on levels of value.

Earlier this year, Hitchner busted two other BV myths: one that claims that the IRS only accepts USPAP standards for federal tax-related valuations and the other that you cannot rely on restricted stock studies for estimating a marketability discount for federal tax valuations (click here for our coverage).

Hardball With Hitchner is a monthly publication. For subscription information, click here.

More AI woes add to caution

Artificial intelligence is a much-talked-about topic around the business valuation conference circuit, and most of it is cautionary. One story going around is the one about the attorney who wrote a brief using AI, which cited cases that didn’t exist. In the news recently is a case of another attorney whose client is suing him for making a faulty closing argument that was written with help from a generative AI program. The case involves rapper Prakazrel “Pras” Michel, who was found guilty back in April on a number of charges, including conspiracy.

The American Bar Association does not yet have any guidelines on the use of AI in the legal profession, according to the article from Associated Press, though a new task force is studying the issue. AI usage at law firms is in its early stages, but 50% of lawyers expect to use it within the next year. The rapper’s trial is said to be the first time that generative AI was used in a federal trial. Click here to read the article.

What to do: If you plan on using anything that AI generated, check it first! You may also want to consider developing an internal policy that addresses matters such as some specifics as to how AI should be used, confidentiality of client information, and—as noted above—a careful review of the outputs.

Testimony of damages expert excluded due to no basis

In a Pennsylvania breach of contract case, the plaintiff’s damages expert was to testify as to lost profits. Opposing counsel filed a Daubert motion, claiming the expert’s pricing calculations (a key component to the lost profits analysis) could not be based on anything in the record.

In—for now: The court allowed the expert to testify, and it would be admissible at trial as “long as there is a basis for those assumptions in the record.” After the expert’s testimony but before the jury’s verdict was entered, the opposing side moved that the testimony be struck because the expert’s assumptions “had no factual basis in the trial evidence.” The court did not rule on the motion until after the trial. The jury found the defendant liable for the breach of contract and awarded $25 million in compensatory damages.

After entering the judgment, the court granted the motion excluding the expert’s testimony and asking for a new trial on damages only. The expert’s testimony was not based on the trial record. Specifically, without the expert’s testimony as to pricing calculation, the jury could not have reached the damages award it did reach, of $25 million. The plaintiff filed a motion for reconsideration, but it was denied.

The case is Paramount Fin. Commc’ns, Inc. v. Broadridge Inv’r Commc’n Sols., Inc., 2023 U.S. Dist. LEXIS 154020; 2023 WL 5635772, and a case analysis and full court opinion are on the BVLaw platform.

Any impact to multiples from Section 174 changes? Not in this industry

The tax code’s Section 174 requires research and experimentation (R&E) expenses to be capitalized and written off over time. This is a change the 2017 Tax Cuts and Jobs Act made that became effective starting with calendar year 2022. Capitalization versus expensing is not simply an accounting optic—it can trigger unplanned tax liabilities that could impact cash flow. Efforts are underway to eliminate this change in the tax law. In the meantime, has the change had an impact on valuations in the marketplace? Not for architectural and engineering (A/E) firms, according to industry experts Rusk O’Brien Gido + Partners. “Regarding the marketplace for A/E firms, we have yet to observe any material impact on valuation multiples of publicly traded firms or in private market transactions (mergers acquisitions) from this change in the tax code,” they wrote in a recent article. “This is likely due to remaining uncertainty over whether or not the tax code may be amended and the ability of many firms to mitigate the impact through various tax strategies.”

They advise appraisers to take this tax law change into account—especially for the technology, healthcare, manufacturing, and engineering industries. Many firms have already paid unexpectedly large tax bills, they point out, meaning a reduction in cash balances (or increased debt) could reduce equity value.

Extra: Rusk O’Brien Gido + Partners publishes a regular study of current trends in the transacted values of architecture, engineering, and environmental consulting firms. To order the latest version, click here.

BVR ASA booth buzz: Art of Valuation book sparks interest

At BVR’s exhibit hall booth at the 2023 American Society of Appraisers International Conference in New Orleans, one of the items that generated a lot of attention was a new book, The Art of Valuation. BVR does not offer the book, but we featured it at our booth because it’s an important work that deserves attention. The book is a wonderful collection of essays by top veteran experts from overlapping valuation disciplines who tell stories that go beyond the technical issues and get into the heart of appraisal. In essence, the stories inspire practitioners to always strive to improve their thinking about valuation to elevate their own work and the profession as a whole. The book is available from The Appraisal Foundation, and you can click here to order it.

AICPA lets you cherry-pick some FVS conference sessions

Almost 60 sessions are offered at the upcoming AICPA & CIMA Forensic and Valuation Services Conference November 6-8 in Las Vegas live and online. But not everybody needs to attend the entire slate of sessions, so the AICPA allows virtual attendees to pick and choose some sessions using a “select 7” option. This allows you to focus on specific topics that match your needs. With this option, you can choose any seven sessions from the main conference agenda. You will receive access, agenda creation, and material download instructions a few days before the conference starts. What’s more, you can adjust your agenda at any time. For more details, click here.

Global BV News

Check out the V20 conference October 27-29

Designed as the first truly global business valuation event, the V20 (Valuation 20) Conference will be held October 27-29 in New Delhi, India. Click here for the full agenda and details on how to register.

The Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC) co-host the event, which coincides with the annual G20 finance meeting in India The AaRVF is a Registered Valuers Organization the government of India recognizes. Many valuation groups have signed on as participating organizations. BVR is the media partner for the event.

The V20 Summit has several objectives, including raising awareness about the importance of valuation in the global economy and facilitating dialogue and the exchange of ideas among valuation professionals, policymakers, and other stakeholders. Another goal is identifying opportunities and strategies for leveraging valuation to achieve sustainable economic growth and development and advocating for policies and initiatives that support the development of the valuation profession and promote its role in driving economic and social progress.

Valuation News Updates

Lisa Guo — Thu, 19 Oct 2023 01:01:16 GMT

Damodaran values Birkenstock’s intangibles

He doesn’t care for its sandals, but Professor Aswath Damodaran (New York University Stern School of Business) has taken a great interest in valuing the intangibles of footwear company Birkenstock. Ahead of its recent IPO, Damodaran did a valuation of the company and examined what he views as the firm’s four main intangibles: brand name, strength of the management team, a celebrity customer base, and the Barbie Buzz (pink sandals appeared in the big blockbuster movie).

‘IT’ man: Damodaran hasn’t done much teaching or writing on valuing intangibles, so it’s interesting to see his thought process, which he grounds in his overall “IT” proposition, that is, for “it” to have an effect on value, it must have an impact to either cash flows, risk, or growth. He uses this proposition to assess everything from inflation to ESG. For example, he concludes that Birkenstock’s brand name has the biggest effect on value, resulting in an annual operating margin of 23% to 25% over the next five years. Without the brand name, he believes the operating margin would be 14.74%, which is the average for the entire apparel/footwear sector.

You can read his full valuation if you click here.

Postscript: Since its IPO debut, the stock has lost its footing, falling below what Damodaran considered to be the price at which he would be a buyer—although he still won’t buy its sandals.

No do-over for valuation of business hit by COVID-19

In a Wisconsin marital dissolution case, COVID-19 negatively impacted the husband’s hair salon business, which had to shut down for a while. This happened two months after the couple’s divorce was granted. In Wisconsin, assets are normally valued as of the date of divorce, but the court may deviate from the general rule due to special circumstances. The husband argued that the COVID-19 pandemic presented special circumstances for using an alternative date. The circuit court disagreed, saying, “There has to be some finality for all the parties in this.” The husband appealed, but the appellate court agreed that the circuit court’s reliance on finality was rational, noting that the divorce had been pending for two and a half years.

The case is In re Marriage of Gill, 2023 Wisc. App. LEXIS 917, and a case analysis and full court opinion are on the BVLaw platform.

BV-real estate gap regarding property rights can skew valuation

At BVR’s exhibit hall booth at the 2023 American Society of Appraisers International Conference in New Orleans, we had a conversation with Barry Cunningham (Property Tax Research LLC) about potential pitfalls when valuing real estate-centric entities (RECEs). A RECE is a business that owns its own real estate (e.g., a hotel, nursing home, golf course, etc.).

Cunningham feels that business appraisers need a better understanding of how real estate appraisers think about property rights, which can lead to understating or overstating intangible assets in these types of entities. The distinction between the terms “fee simple” and “leased fee estates” is important in understanding the potential for misstating intangible value. Also, above- and below-market rents need to be considered. Cunningham explains this in a recent article he wrote, “Property Rights and the Real Estate Appraiser,” which is in the Spring 2023 issue of the ASA’s Business Valuation Review. He intends the article to be a primer to foster more in-depth discussion within the appraisal community.

The article is available if you click here (free to subscribers of the BVResearch Pro platform, which has the full archive of Business Valuation Review).

New edition of Hitchner book in the wings

The fifth edition of Financial Valuation: Applications and Models will be out by the end of this year or early 2024, announced author Jim Hitchner (Financial Valuation Advisors Inc.) at the recent two-day Forensic and Valuation Conference hosted by the Virginia State Society of CPAs. This is a must-have book that is on the shelf of all top valuation experts. The book includes contributions from many nationally recognized names in the valuation industry with specialties in accounting, forensics, business valuation, and financial analysis. We especially like the practical “ValTips” scattered throughout the book.

Full agenda available for AICPA FVS Conference November 6-8

The full agenda for the AICPA & CIMA Forensic & Valuation Services Conference taking place November 6-8 in Las Vegas is now available. Click here to see the almost 60 sessions being offered on everything from emerging issues (artificial intelligence, cryptocurrency, and ESG) to specialized topics (portfolio valuations, complex structures, trade names, and cannabis firms) to perennial favorites (expert testimony, reasonable comp, goodwill impairments, and cost of capital). This agenda has something for everyone, and you can attend on-site or online.

Global BV News

Patel ‘intrigued’ by the V20, slated to speak

“Very intrigued,” responded PJ Patel (Valuation Research Corp.) about his reaction when he first heard of the V20 Valuation Summit to be held October 27-29 in New Delhi. During an interview with Ray Moran (FON Valuation Services Group), one interesting element Patel noted is that the summit coincides with the annual G20 finance meeting in India. Organizers planned the event that way, and future V20 events will follow suit (next year will be Brazil). Patel will be a panelist at the summit and so will several of his colleagues and associates, including Chris Mellen (VRC, U.S.); Peter Ott (Peter Ott & Assoc., Canada); and Rajeev Shah (RBSA Advisors, India). These are just a few of the panelists and speakers slated for the event. You can watch the full video interview if you click here. For more on the conference, click here.

BVIUK Summit October 26

BVR CEO David Foster will moderate the second round of the BVIUK’s Expert Debate, where some of the best BV experts in the world discuss the most topical issues in the industry, including inflation, startup valuations, expert testimony, bias, and subjectivity. Speakers include Carla Nunes, Josh Shilts, Andrew Strickland, Graham Antrobus, Hafiz Imtiaz, Mike Blake, Theresa Zeidler, Sandra Mossios, Nene Glenn Gianfala, Roger Loh, Jim Alerding, Dennis Webb, and others. For more information and to register, click here.

What’s in the November issue of Business Valuation Update

Here’s what you’ll see:

“New Research Finds That Industries Have Different Growth Rates” (BVR Editor). An update to ongoing research by Roger Grabowski (Kroll) and Dr. Ashok Abbott (West Virginia University) supports the use of different long-term growth rates for different industries and the use of the three-stage DCF.

“Key Points From the VSCPA Forensic and Valuation Conference” (BVR Editor). An economic update, a new IRS crackdown, goodwill, reasonable comp, healthcare insights, expert testimony, and options are among the topics recapped from the annual two-day Forensic and Valuation Conference hosted by the Virginia State Society of CPAs.

“Hitchner Updates the Risk/Return Spectrum for Cost of Capital” (BVR Editor). A good visual to use for checking the reasonableness of your cost of capital estimate is the spectrum of rates in the market. Jim Hitchner (Financial Valuation Advisors Inc.) has done an update to this spectrum, which can be used in valuation reports and in court.

“CPT® Codes Drive Compensation, Business Valuation, and Regulatory Compliance in Healthcare” (Mark O. Dietrich, CPA). “Know them or practice at your peril,” says the author, who maintains that you cannot understand Stark Law requirements without understanding the CPT® codes for the particular medical specialty you are engaged to value.

“The CEIV Is Gone But the MPF Will Endure—Here’s an Example” (BVR Editor). The Certified in Entity and Intangible Valuations (CEIV) credential has been discontinued, but the Mandatory Performance Framework (MPF) will continue to be used. In fact, a revision is expected to make it more streamlined. Here are its guidelines for documenting management projections, which are worthy of repurposing.

“Student Business Valuation Challenge May Be Resurrected” (BVR Editor). At the 2023 ASA International Conference in New Orleans, there were some preliminary discussions about bringing back the Business Valuation Challenge, a competition for college students.

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,” “Stout Restricted Stock Study and DLOM Calculator” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the November 2023 issue of Business Valuation Update.

Valuation News Updates

Lisa Guo — Thu, 12 Oct 2023 01:00:23 GMT

Lack of BV credential triggers a Daubert challenge

In a bankruptcy case in South Carolina, the defendants moved to exclude evidence of an expert, which included his exhibits and valuation report. Citing no education nor certification on business valuation nor membership in any BV organizations, the defendants asserted the expert was not qualified to give an expert opinion on business valuation under Rule 702 (the federal rule of evidence regarding expert witnesses).

The expert had been a CPA since 1985, and his license was in good standing. He also had a B.S. in accounting and was a member of the AICPA. His CV, which was provided to the defendants, “provides information regarding his educational history, professional experience (including over 400 business valuations), professional designation as a CPA, and presentations.”

Not excluded: “Courts have … agreed that any gaps in an expert’s knowledge generally go to the weight of the witness’s testimony, not its admissibility,” the court wrote. Based on evidence from the expert’s various disclosures about his background, the court determined that he was qualified as an expert witness by his skill, knowledge, experience, training, and/or education.

There were other issues in this case, where both sides sought to exclude each other’s valuation experts. Both motions were granted in part and denied in part. The case is Vieira v. Think Tank Logistics, LLC (In re Levesque), 2023 Bankr. LEXIS 2113; 653 B.R. 127, and a case analysis and full court opinion are on the BVLaw platform.

Watch out for ‘black box’ compensation apps

During his session on reasonable compensation at the Forensic and Valuation Conference hosted by the Virginia State Society of CPAs, Neil Beaton (Alvarez and Marsal) discussed the various compensation benchmarking surveys and subscription databases. Be careful, he cautioned, because some of these are “black boxes” that use algorithms to generate data that could be challenged (he had a case where that was an issue). ERI was one that was mentioned that does not give the recipe for its “secret sauce.” Therefore, make sure you know what’s underlying the data—and use multiple sources in case one gets disqualified. He also suggested examining proxy statements from public companies for compensation data.

Updates to two closed-end fund reports are available

Closed-end fund (CEF) data are commonly used to derive discounts for lack of control (DLOC) for closely held holding companies invested in marketable securities. Updated versions (to June 2023) of two sources of CEF data, prepared by Bruce A. Johnson and James R. Park (Partnership Profiles), are now available:

2023 Closed-End Fund Report: Fixed Income Securities. Use this report to compare privately held family limited partnerships (FLPs) and LLCs that hold money market funds, certificates of deposit, government bonds, municipal bonds, corporate bonds, or other fixed income investments; and
2023 Closed-End Fund Report: Stocks and Equity Investments. Use this report to compare privately held FLPs that hold common stock, preferred stock, mutual funds, REITs, or other corporate equity investments.

Price: $295 each.

Global BV News

Next edition of IVS expected January 2024

Alexander Aronsohn, technical director at the International Valuation Standards Council (IVSC) told the audience at the 2023 ASA International Conference that there were 116 responses (i.e., comment letters) to the exposure draft for the updates to the International Valuation Standards (IVS). The public comment period ended this past July 28, and an updated version of IVS is expected to be published in January 2024 with an effective date of July 2024. The exposure draft included IVS updates that address various factors, such as ongoing changes in global markets and valuation practices, increasing use of technology and data sources, growing demand for clarity in valuation processes, and the need to address new types of assets and liabilities, including environmental, social, and governance (ESG) factors.

Valuation News Updates

Lisa Guo — Thu, 05 Oct 2023 00:57:05 GMT

BV firms are thriving, per BVR’s benchmarking insights

The past few years may have been witness to the most demand, the best growth, and the highest profitability the business valuation profession has ever seen, according to the executive summary for the 2023 BVR Benchmarking Survey. All respondents to the survey will soon receive the full executive summary.

Business valuation, forensics, and litigation services (BVFLS) practice management expert Rod Burkert (Burkert Valuation Advisors) helped design the survey and is adding his insights to the final report on the survey. A few more observations:

About two-thirds of partners and owners saw their 2022 compensation increase over 2021;
Eighty-four percent of firms increased their billing rates from the prior year;
The average and median profit margin for all reporting firms was 50%;
With business surging, it’s not surprising that new client development is no longer the most pressing challenge—quality control is now the top concern; and
A hidden opportunity may exist in developing an industry niche—very few practitioners claim or rely on that expertise.

This is just scratching the surface in terms of data and metrics collected from the survey, which included responses from almost 200 business valuation firms and practices. Most of the respondents (60%) have business valuation as their primary business, while 23% say public accounting is their main business, with BV as a practice area. In terms of volume of engagements, there was a good mix of small and large practices, with about half of the respondents doing more than 50 engagements this past year and about a third doing one to 20 engagements.

Points to know from the VSCPA conference

The annual two-day Forensic and Valuation Conference hosted by the Virginia State Society of CPAs is one event we never miss. This year, we were happy to see some younger practitioners joining the veteran and well-known speakers in presenting the sessions. Conference chair Harold Martin (Keiter) acted as host and thanked a task force in putting the event together, which was also livestreamed to state CPA societies in New Jersey and Connecticut. Here are a few key points from all of the sessions. There will be a full recap in the November issue of Business Valuation Update.

A mild recession is still expected in the U.S. for 2024;
Valuations for estate and gift tax purposes may no longer be low risk due to fallout from an IRS crackdown on easement appraisers;
Estimating personal goodwill is all about jurisdiction—and having a documented framework of thinking that backs up your opinion;
Make sure you analyze CPT codes when valuing medical specialty practices—they drive several important aspects of a valuation;
The stakes can be high for estimating reasonable compensation—is the average appraiser really qualified?
On the witness stand, “redirect is your friend,” so don’t struggle to say all you need to say during cross-examination;
Rules of thumb should “absolutely” always be used—but only as a sanity check and because clients will always ask about them; and
When Monte Carlo is used to analyze financial projections, consider reducing the DCF discount rate due to shifting of risk analysis.

Lone dissenter of medical merger challenges share valuation

In a California case, a physician was a nonexclusive provider to a physician network and was one of 75 shareholders. The network was sold, and the buyer paid $18 million as part of the transaction. The physician agreed the transaction was fair, but he was the only shareholder who did not approve the merger and he had a problem with how the proceeds were doled out.

No remedy: The 75 shareholders would get $50,000 for each share, and the rest of the money would go to the network’s directors, certain officers, and some physicians as “transaction bonuses” using a “confidential formula.” The dissenting physician did not get a transaction bonus and felt the $50,000 was way below the value of his share. But the trial court ruled that, under Section 310, the merger transaction and the bonuses were “just and reasonable” and so was the value that the physician received for his share. An appellate court affirmed the decision.

The case is Ghaly v. Riverside Cmty. Healthplan Med. Grp., 2023 Cal. App. Unpub. LEXIS 4313; 2023 WL 4733006, and a case analysis and full court opinion are on the BVLaw platform.

Free updated guide to the Stout restricted stock study

The 2023 edition of the “Stout Restricted Stock Study Companion Guide” is now available, and it reflects updated tables and graphs that contain new transactions. The study is the most widely used restricted stock transaction database for providing empirical support for a discount for lack of marketability (DLOM), according to the BVR surveys. To download the new guide, which is free to everyone, click here.

AICPA offers free replay of portfolio valuation event

If you missed the live AICPA Portfolio Valuation Forum, a free replay is available if you click here (free account registration needed). This was the first in what will be a recurring event on this topic, and you can sign up to be notified of the next edition. The forum was about an hour and a half in duration, and the speakers were Sumeet Bhatnagar of KPMG, who also acted as moderator; Garrett Pittenger (Apollo Global Management); Michael Weinberg (First Republic Bank/Columbia Business School); Augie Wilkinson (Bessemer Venture Partners); Jennifer Young (BDT & MSD Partners); and Douglas Burrill (PIMCO).

Free webinar series from the IVSC and Kroll

Recordings are now available of the Kroll-sponsored series of webinars presented by the International Valuation Standards Council (IVSC) from June 7 through June 15. The 2023 Valuation Webinar Series presents four panel discussions from leading international experts on topics such as the global economic outlook, ESG, sovereign wealth funds, consistency and transparency issues, and more. To access the recordings, click here.

Valuation News Updates

Lisa Guo — Thu, 28 Sep 2023 00:54:50 GMT

New Rule 702 crackdown already impacting expert witnesses

Although they don’t officially go into effect until December 1, expert witnesses are already feeling the effects of the changes designed to strengthen Rule 702, which is the federal rule of evidence regarding testifying experts. Last year, we noted that the changes will result in more experts being excluded from testifying, and that is just what is happening—but earlier than we thought.

Early adoption: Courts have already been citing the pending changes when excluding expert testimony, points out a recent article by attorneys at the law firm Faegre Drinker Biddle & Reath. The article mentions several cases in different jurisdictions that have cited the pending changes, including one in which an appellate court reversed the district court’s decision to admit expert evidence.

Courts have a “gatekeeping” function under Daubert or similar standards to disqualify testifying experts who are not competent or who can’t offer helpful evidence. But the courts were not performing their gatekeeping function as rigorously as originally intended. The courts were going more to “weight than admissibility,” that is, just letting the experts testify and then the judge deciding on the weight to give that testimony or deferring that decision to the jury. The Rule 702 amendments “will not change the substance of the law as it was meant to be applied but that many courts have not been applying it correctly,” the article says.

Extra: Appraisers have the highest exclusion rate (38%) among financial experts under Daubert, per the most recent PwC study that examines exclusions.

Court has limited menu for steakhouse valuation

Without enough evidence, a court can only decide on a valuation with what it has to work with. In a Michigan case, two 50% owners of a Ponderosa steakhouse were locked in a battle over the Old West-themed eatery, with both owners engaging in oppressive conduct against the other. They left it up to the court to decide their fate, and it ordered one owner to buy out the other at fair value.

Dying breed: In Michigan, “fair value” can mean anything the court deems appropriate “under the totality of the circumstances.” Naturally, both parties were miles apart in their personal opinions of value. A business valuation was done, but the expert’s report was not entered into evidence nor did the expert testify. The owner being bought out said Ponderosa was a “dying breed” and the real value was in the real estate. An appraisal of the real estate was presented, and the expert testified that she did not include the value of the going concern nor the furniture, fixtures, or equipment. No competing evidence to her appraisal was offered.

With this scant evidence, the court concluded that the restaurant had a “fading popularity” and believed an asset approach was the most appropriate valuation method. It accepted the real estate valuation and made some adjustments, such as for equipment and both parties’ oppressive behavior.

More details can be found in the case, which is Herremans v. Fedo (In re Herremans), 2023 Bankr. LEXIS 1800; 2023 WL 4611429, and a case analysis and full court opinion are on the BVLaw platform.

New app for the Margrabe options approach to DLOM

Dr. Ashok Abbott (West Virginia University) is developing a calculator that uses the Margrabe options approach to estimating a discount for lack of marketability (DLOM). He would like feedback on the calculator, including suggestions for improvements, additional features desired, and possible extensions. You can access the calculator at dev.optionmodeldlom.com. Dr. Abbott’s contact information is on the calculator.

BIZCOMPS being upgraded with new platform

Users of BIZCOMPS will soon see a new look to the database of small private-company transactions. As of September 29, BIZCOMPS will be on a new platform that will provide new search capabilities, user-specific customization, and various export options. In fact, the platform is the same that is now used for DealStats, FactSet/BVR Control Premium Study, Guideline Public Company Comps Tool, and BVR’s Cost of Capital Professional. If you use any of those tools, you’ll already be familiar with the new BIZCOMPS platform, which will add helpful features and enhancements such as saved searches, deal alerts, and more. If not, you can watch a video that gives a preview of the updates if you click here.

VRC named M&A valuation firm of the year

Valuation Research Corp. (VRC) has been named Valuation Firm of the Year in M&A Advisor’s 14th Annual International M&A Awards. An independent judging panel of industry experts evaluated nominations representing over 250 individual companies from across the world. VRC won the award last year and has received the award a total of 11 times. For a full list of winners, click here.

Global BV News

CBV Institute opens registration for Student BV Challenge

The CBV Institute has opened registration for its Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. Student teams will compete with students from other universities in a test of their business valuation skills. Last year’s inaugural event was a “resounding success,” the organization reports, with 19 teams and 57 students from schools across Canada participating. CBV Institute will accept 25 teams into the competition, and a maximum of two teams per university can participate. The deadline to register is October 13, which is expected to fill up quickly, so it recommends that schools register their teams as soon as possible. More details are available if you click here. The actual event will take place virtually November 8-9.

Moran interviews IVSC Asia director Konialidis

The fastest growing part of the world for the valuation profession is the Asia-Pacific region, believes Ray Moran (FON Valuation Services), marketing director at the International Institute of Business Valuers (iiBV). He recently interviewed Nicolas Konialidis, the Asia director at the International Valuation Standards Council (IVSC). He is based in Singapore and noted that about a third of the IVSC’s member organizations are from the Asia-Pacific region. They also discussed the V20 (Valuation 20) Conference to be held October 27-29 in New Delhi. The Assessors and Registered Valuers Foundation (AaRVF) and the IVSC co-host the event. You can watch the video interview if you click here (the video includes links for more information on the conference). BVR is a media partner for the event.

What’s in the October issue of Business Valuation Update

Here’s what you’ll see:

“Practical Considerations in Normalizing the Risk-Free Rate” (Ronald D. DiMattia). Some valuation firms and practitioners have advocated that the risk-free rate of return (Rf) should be normalized when it is believed to be too low because of Federal Reserve Bank policies. Recent arguments for doing so have been based on technical economic analyses but have ignored practical aspects of normalizing Rf. This article is intended to address those practical considerations.

“Do Fairness Opinions Adequately Address Fairness to Shareholders?” (Gilbert E. Matthews). This article concludes that opinions that speak to fairness of an acquisition to a SPAC are inadequate when they do not consider the impact on unaffiliated shareholders.

“Heat Maps for Valuing Venture-Backed vs. Closely Held Firms” (BVR Editor). During a recent BVR webinar, Joe Orlando (Exit Strategies Group) and Eric Sundheim (Mercovus Valuations) presented some heat map charts that illustrate the differences between the due diligence, tools, and approaches to valuing a venture-backed firm versus a closely held company.

“Valuers Suggest Enhancements to AI-Powered PDF-to-Excel Tool” (BVR Editor). BVR recently partnered with Nambri Technologies to offer Nambri TaxXL, an advanced AI enterprise SaaS software application designed to convert PDF tax returns into Excel spreadsheets. During a recent demonstration webinar, valuation practitioners suggested some enhancements, which triggered some planned updates to allow for the application to handle additional tax forms.

“New Book Offers Template for Assessing ESG Impact on Firm Value” (BVR Editor). Based on some case studies, a new book includes a template that summarizes steps in assessing whether ESG factors are material enough to integrate into a valuation. The book is Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuation, edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters.

“Valuation Matters Highlighted in the Estate of Cecil” (Rajesh Khairajani and Kinjal Shah). A discussion and the valuation implications of several issues in this case: tax affecting an S corporation, applying an asset approach to value a going-concern business, reliance on a single comparable company, and discounts applied to arrive at per-share value.

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 with one case featured in a detailed analysis.

To stay current on business valuation, check out the October 2023 issue of Business Valuation Update.

Valuation News Updates

Lisa Guo — Thu, 21 Sep 2023 00:50:58 GMT

Firms with better ESG ratings yield somewhat higher returns, per Kroll study

Companies with better environmental, social, and governance (ESG) ratings generally outperformed those with lower ratings over the 2013-to-2021 period, according to Kroll’s new ESG and Global Investor Returns Study.

Fifty percent premium:Globally, “ESG leaders” earned an average annual return of 12.9%, compared to an average 8.6% annual return “laggard” companies earned؅—about a 50% premium in terms of relative performance by top-rated ESG companies, the study says. This holds true for the U.S., where the “ESG leaders” earned an average annual return of 20.3%, compared to a 13.9% average annual return earned by “laggard” companies.

The study analyzes the relationship between a company’s total stock returns (dividends plus capital appreciation) and its MSCI ESG ratings over the 2013-to-2021 period. The study examines over 13,000 publicly traded companies across a variety of geographies and industries and their ESG ratings to determine the correlation of ESG ratings to company performance. For more information and to download the study, click here.

Internal billings trigger M&A damages; GPCM prevails

A case in Delaware Chancery Court shows that the court will not award damages from an M&A transaction gone bad when the calculations are based on speculative lost synergies.

GAAP gap: NetApp Inc. sued the sellers of the company it acquired, Cloud Jumper, a private software firm, for breach of contract and fraud in connection with the sale. The court held that the defendant breached multiple representations in the merger agreement, including that the financial statements were GAAP-compliant and represented bona fide transactions. But the seller included internal billings in company revenue and projections that it did not disclose to the buyer, who relied on those numbers when valuing the firm for purchase.

The court awarded expectation damages but did not accept the plaintiff buyer’s calculation, which used a DCF and projected as well as synergistic cash flows. The court accepted the seller’s estimate of damages, which was the purchase price minus the valuation using the guideline public company method (GPCM).

There are much more details in the case, which is NetApp, Inc. v. Cinelli, 2023 Del. Ch. LEXIS 220; 2023 WL 4925910, and a case analysis and full court opinion are on the BVLaw platform.

New book of essays by prominent valuation experts

Top experts from overlapping valuation disciplines tell their stories that capture a flavor of the romance, intrigue, art—and heart—of business appraisal in a new book, The Art of Valuation.

The book starts with a history of the profession and then reveals the nuances, tips, tactics, and ways of thinking about business appraisal that can help elevate your work from good to great. Practitioners are encouraged to look beyond the technical issues and mechanics of analyses and spreadsheet modeling to the “essence of the big-picture thinking that produces a powerful, effective, credible work product.”

The book, edited by Sarah von Helfenstein (Value Analytics & Design LLC), is a magnificent tribute to the valuation profession! It is available from The Appraisal Foundation, and you can click here to order it.

Extra: Several contributors to the book (including the book’s editor) will be presenting sessions at the upcoming 2023 ASA International Conference in New Orleans October 1-3. Click here for details on the conference.

BVResearch Pro adds to its archive of the ASA’s BV Review

Among many other resources, the BVResearch Pro platform contains the full archive of the Business Valuation Review going back to 1982. This is the business valuation journal of the American Society of Appraisers. The Spring 2023 issue has been added to the platform, and it includes these articles:

“Business Valuation Cases in Brief”(Erin D. Hollis, ASA CDBV);
“Property Rights and the Real Estate Appraiser” (Barry J. Cunningham, Ph.D., ASA, MAI AI-GRS); and

“Implied Control Premiums Through Delaware Appraisal Decisions” (Joseph Thompson, ASA, CFA and Paul Skluzak).

If you are not a subscriber to the BVResearch Pro platform, you can do a stand-alone subscription to the ASA’s BVReview if you click here.

ISBA appraisal review workshop November 9-10

The International Society of Business Appraisers (ISBA) is offering a two-day workshop for its Business Certified Appraiser in Review (BCA-R) credential. The workshop will be November 9-10 in Fort Lauderdale, Fla. Certified business appraisers with two full years’ experience or more in developing and reporting on the valuation of businesses or the equivalent are eligible to qualify for the BCA-R. For additional requirements and information on the workshop, click here.

Extra: Shawn Hyde (Canyon Valuations) recently gave an interesting BVR webinar on appraisal review. To access a recording, click here (free to BVR Training Passport holders).

Global BV News

IVSC annual meeting in Paris October 9-11

The International Valuation Standards Council (IVSC) will hold its annual general meeting (AGM) at the Maison de la Chimie, Paris from October 9 to October 11. There will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. Some parts of the overall program are restricted to IVSC board members and sponsor/member organizations, but other sessions and all networking events are open to anyone with an interest in valuation and the work of the IVSC. You can check out the agenda and register if you click here.

Valuation News Updates

Lisa Guo — Thu, 14 Sep 2023 00:49:35 GMT

DOL ESOP valuation regs coming by year-end

The Department of Labor (DOL) will issue long-awaited guidance on ESOP valuations by the end of this year, according to a blog post from the National Center for Employee Ownership (NCEO). Once the proposed regulations are issued, there will be a two-to-three-month public comment period before they are finalized.

Tide is turning: The regulation will clearly define “adequate consideration” under Section 408(e) of the Employee Retirement Income Security Act of 1974 (ERISA). It has been four decades since such regulations were proposed but never finalized. Valuation experts have long maintained that the DOL has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. After a long winning streak, the courts rejected the DOL’s valuations in several recent and important cases, alleging that the ESOPs overvalued (and thus overpaid for) the stock of the sponsoring companies.

“Valuation regulations will have a profound impact on the creation and ongoing viability of ESOPs,” says Corey Rosen, NCEO founder and senior staff member, in the post. “The community must engage with the regulatory process to ensure they adequately accommodate the needs of ESOPs and ESOP participants, so the regulations do not discourage ESOPs.”

Valuation expert’s credibility takes several hits

In a New York fair value case, one of the 50% owners filed for dissolution and the other owner elected to buy him out. The valuation expert for the owner who would remain with the business relied solely on tax returns to base his valuation—even though his client controlled the books and records. The expert testified that he did not independently verify the financial information his client gave him. The court wrote: “It is troubling that an expert would purport to render a serious opinion on the Company’s value based only on its tax returns, knowing his client could easily have given him a more complete set of records.”

Plus, the expert concluded that the business had zero value, even though it was a going concern and his client would continue to operate it. “Indeed, that [the owner’s] expert could conclude based on the record evidence that the Company was worth $0 significantly undermines his credibility,” the court wrote. “The notion that the Company is worthless is belied by the significant value [the owner] continues to derive from it.”

In the end, the court relied mostly on the opinion of value from the departing owner’s expert but did make some adjustments, including to the growth rate, the multiple derived from the guideline transaction method, and the potential retirement of the remaining owner (for goodwill). There was no discussion of a discount for lack of marketability (New York does not take a consistent position with respect to this discount in fair value proceedings).

The case is Rosenthal v. Erber, 2023 N.Y. Misc. LEXIS 4035; 2023 NY Slip Op 32750(U), and a case analysis and full court opinion are on the BVLaw platform.

Private-company EBITDA multiples up in 2Q2023

After a downward slide in the fourth quarter of 2022 and the first quarter of 2023, the median selling price-to-EBITDA multiple has jumped to 4.0x in the second quarter of 2023 (see the graph below), according to the latest issue of the DealStats Value Index (DVI). In the period analyzed, EBITDA multiples across all industries were highest in the third quarter of 2018, at 5.0x, but then decreased until they bottomed out in the first half of 2022. Since then, EBITDA multiples have generally been trending upward.

The 30-page DealStats Value Index is a quarterly publication exclusively for DealStats subscribers. It provides trend information on valuation multiples and profit margins for transactions in DealStats, including multiples and margins by industry sector, interquartile range by sector and year, multiples and margins for private vs. public, and much more. If you are a subscriber to DealStats, you can download the current issue to see all the latest transaction trends if you click here.

Global BV News

Worldwide support grows for the V20

The list of organizations that are supporting the V20 Valuation Summit and Conference October 27-29 in New Delhi is impressive—and growing. In a video, Saurabh Gupta, managing director of Assessors and Registered Valuers Foundation (AaRVF), explained that early support came from the International Valuation Standards Council (IVSC). Others followed, including the Insolvency and Bankruptcy Board of India (IBBI), International Institute of Business Valuers (iiBV), IACVS, Royal Institution of Chartered Surveyors, ASA, CBV Institute, and more.

Also, they are inviting other organizations and institutions to participate, including those from Singapore, the EU, Africa, and Asia. Gupta also mentioned support from several ministries within India and the G20 Secretariat. The V20 event coincides with the annual G20 finance meeting in India, and future V20 events will follow suit (next year will be Brazil).

Valuation News Updates

Lisa Guo — Thu, 31 Aug 2023 00:48:22 GMT

Another case of lopsided valuation experts

A Minnesota divorce case is an example of why judges can get the perception that valuation experts are hired guns. The wife’s expert valued the husband’s interest in an asset management company at $5,067,804, while the husband’s expert came up with $138,418. True, there can be legitimate reasons why two valuation experts come up with widely disparate values for the same entity, so there can be some middle ground. But, in this case, a district court gave the husband’s expert’s opinion “little evidentiary weight” and an appellate court affirmed the decision.

Way off: Among other disparities, the husband’s expert based the valuation on only one year—a year in which no performance fees were paid. The valuation ignored over $14 million in performance fees that were paid over the prior four years. Also, a 2% profit margin was used to compute income that was one-tenth of the operating income from the prior four years. It also did not account for why the husband’s dividend in the year of separation “was more than nine times greater than what he proposed the company was worth.” The husband also argued that he had personal goodwill, but he did not provide any indication of its value.

The case is Tennebaum v. Deshpande, 2023 Minn. App. Unpub. LEXIS 630, and a case analysis and full court opinion are on the BVLaw platform.

Don’t get stung by a bad review of your valuation report

Shawn Hyde (Canyon Valuation) has been reviewing the reports of other valuation experts for years. During a recent BVR webinar, he presented a seven-page review report (disguised, of course) that concluded that the valuation was likely incorrect. Hyde’s review pointed out five major areas in the report where either material errors were made or underlying assumptions may have led to erroneous conclusions. The review was done at the request of an attorney who wanted to know whether a second valuation should be done.

Better timing: A question from the audience: Wouldn’t it be better for the report’s author to have gotten the review before submitting it to his client? An unfavorable review may give the client second thoughts about hiring that expert again. Hyde agreed that doing a review before submitting it would be optimal but pointed out that there often is not enough time to do that. How much time should you allow for a review? It could be just a few days if there’s someone at your practice who can do it. When using an outside reviewer, it depends on the workload of the reviewer, but about two weeks is a good estimate.

A recording of the webinar, Appraisal Review—Read Between the Lines, Too! is available if you click here (free to BVR Training Passport holders).

BV practice marketing budgets hold steady for 2023

Since most business valuation firms and practices are very busy, it’s not a great surprise that marketing budgets for 2023 are about the same as 2022 levels, according to the 2023 BVR Benchmarking Survey. More than half (58%) say the amounts they spend on marketing and practice development activities will not increase from 2022 levels, and another 28% say they will see just a “small increase.” Of the rest, only 10% say they plan a “significant increase” and 4% expect to spend less. Much more information was collected about marketing and many other aspects of operations from almost 200 business valuation firms and practices that responded to the survey. We are analyzing the results, which will be made available as soon as possible.

2023 Stout restricted stock study guide now available

Panel on trial testimony featured at VSCPA

How to survive expert testimony and cross-examination is one of the most popular topics at the annual two-day Forensic and Valuation Conference held by the Virginia Society of CPAs (VSCPA). This year’s event will be held September 26-27 in Glen Allen and will include a panel on trial testimony moderated by conference chair Harold Martin Jr. (Keiter). The panel members will include nationally known valuation experts Kristopher Boushie (NERA Economic Consulting), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC), Neil Beaton (Alvarez & Marsal Valuation Services LLC), Ron Seigneur (Seigneur Gustafson LLP), and attorney Martin Cunniff. For more details on the conference and to register, click here. This will be an on-site event with the option of attending virtually.

Global BV News

IVAS-IVSC conference October 3-4

The leading business valuation conference in Asia Pacific is the IVAS-IVSC Business Valuation Conference, and the next one will be October 3-4. The conference theme is “The Future of Business Valuation: Embracing Shifts and Innovation.” The agenda includes topics such as environmental, social, and governance (ESG) factors as well as intangible assets, generative AI and its impact on business value, and more. Professor Pablo Fernandez (IESE Business School, University of Navarra) will hold a two-and-a-half-hour master class, and Anton Colella, chief executive of Moore Global and an IVSC trustee, will give the keynote. The event is organized by the Institute of Valuers and Appraisers, Singapore (IVAS) in partnership with the International Valuation Standards Council (IVSC). For more information and to register, click here.

Elder talks about global themes at the V20

Ben Elder, global director of valuation at RICS, discussed the dynamic relationship between valuation and global themes of people, planet, prosperity, and principles during an interview with Ray Moran (FON Valuation Services). These themes are front and center at the V20 Valuation Summit and Conference October 27-29 in New Delhi, and they are challenging to valuers of every discipline, from real estate to intangibles to business entities, Elder remarked.

You can watch the video if you click here (the video includes links for more information on the conference).

Papers due August 31: There is a call for papers on several important themes, including technology, ESG, and more. Selected papers will have an opportunity to be published in peer-reviewed conference proceedings. Submissions of abstract papers are due August 31. For details on the call for papers, click here.

The event is co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). The Royal Institution of Chartered Surveyors (RICS) is one of the participating organizations for the conference. BVR is the event’s international media partner.

Valuation News Updates

Lisa Guo — Thu, 24 Aug 2023 00:45:57 GMT

BVR-supported research examines small-firm M&A valuations

Using the DealStats database, M&A advisor Ray Johnson (Exit Experts) conducted a study to examine how various financial factors influence acquisition valuations for small businesses. The study was for Johnson’s dissertation for his doctorate degree in business at the University of Florida. Congratulations, Ray!

New ground: The study uses a definition of small business not used in previous studies, namely the Small Business Administration’s size standards. The study was also able to examine the importance of adjusted EBITDA in small-firm valuation. Previously unavailable, data on adjusted EBITDA has been included in the DealStats database since May 2017. The findings also highlight the significance of certain other measures, such as net sales, gross profit margin, and growth. The paper also points to future research that can be done, using this study’s findings as the foundation.

In the paper’s acknowledgments, Johnson says he is “profoundly grateful” to BVR’s Adam Manson, chief data officer, for his support and assistance with the study. This is not the first time BVR has lent its support to scholarly research, and we are always happy to become involved in projects that will be of benefit to the profession. Maybe you have something in mind?

More details of the paper’s findings, as well as some commentary by Johnson, will be in a future issue of Business Valuation Update. Also, once the paper is publicly available, we will let you know.

Adjusting WACC for ESG: ±100 basis points proposed

When assessing environmental, social, and governance (ESG) factors on valuation, unless there is an impact to cash flow, risk, or growth, ESG has no effect on business value. But what if the analyst determines that there is an impact and it can’t be quantified in the numerator of the valuation equation? How much of an adjustment should be made to the subject company’s weighted average cost of capital (WACC)? A new book gives some guidance.

Proposed range: “We propose that the total WACC adjustment should not be adjusted beyond ±100 basis points (bp). Furthermore, the magnitude of the adjustment should be based on the importance of the ESG issue being considered. For example, a meaningful issue might warrant an adjustment of ±50 bp but a minor or distant one, only ±10 bp.” This quote is taken from a chapter written by Frédéric Le Meaux, senior European equity portfolio manager at Amundi, a leading European asset manager, in a new book, Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuation. The chapter gives some case study examples of integrating ESG into the valuation process.

The book was edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters. The book is available if you click here.

Dealing with market efficiency in appraisal hearings

Weary of dueling experts, the Delaware Court of Chancery has shifted its attention more toward using a stock’s market price as the best measure of fair value in statutory appraisal matters. This means that valuation experts who come up with a different value would, therefore, need to prove that the market is not efficient. What methodology can be used to prove—or disprove—market efficiency?

Look to fraud cases: Market efficiency is a key factor in federal securities fraud cases, so the methodology used in those cases can be used for appraisal cases, according to Steven P. Feinstein, Ph.D., CFA. He is an associate professor of finance at Babson College and founder and president of Crowninshield Financial Research and has been engaged in many securities fraud cases.

Feinstein gave a presentation at NACVA’s Business Valuation & Financial Litigation Super Conference in July based on research and a working paper by him and Jaime d’Almeida (d’Almeida Consulting LLC). In addition to giving background and context, he presented a framework for a market efficiency analysis based on factors from several precedential court cases, namely Cammer v. Bloom and Krogman v. Sterritt. In addition to these factors, direct empirical evidence is needed to demonstrate a cause-and-effect relationship between corporate disclosures and stock price movements (Feinstein used a Fisher exact test in his case study examples).

The September issue of Business Valuation Update has details of the framework, several case studies that demonstrate the analysis, and some suggested report language. And we look forward to their upcoming paper to which we will alert readers when it is available.

BV firms rank most effective marketing techniques

The one-on-one meeting with a prospect leads the pack of marketing techniques BV firms and practices find most effective. Twenty-seven percent of those who use this method deem it “very effective,” and another 29% say it’s moderately effective. This is according to the preliminary results of the 2023 BVR Benchmarking Survey. Other methods that rank high on the “very effective” list are cross-marketing to existing clients, public speaking, attending or sponsoring events with prospects, and the firm’s website. Almost 200 business valuation firms and practices responded to the survey, and we are analyzing the results, which will be made available as soon as possible.

Sustainability triggers in private credit valuation

“Sustainability-linked loans—where a loan’s economics are tied to the borrower’s achievements of certain environmental, social or governance key performance indicators—aren’t coming to the loan market. They’re already here,” writes John Czapla (VRC) in an article in Private Debt Investor. The article considers the issues surrounding the widespread use of sustainability-linked loans as pricing and valuation can be complex. Co-author Adrian Lowery, also with VRC, goes on to further discuss market activity in Europe where “the volume of leveraged loans containing an ESG-linked margin ratchet reached three-quarters of the total issuance in the fourth quarter of 2022,” and, in the U.S. market, where issuances were down, it still reached $206 billion in 2022.

Czapla and Lowery say that, as sustainability-linked loans continue to grow in prevalence, private-debt valuation teams will need to refine their approaches to assessing fair value for less liquid SLL loans. To access the article, click here (limited free access).

When pest control company owners want to bug out

What does the financial due diligence process look like for a pest control business? Listen to industry experts Ilka Krieger and Claire Williams, both with Alvarez & Marsal, as they talk about how investors look at a pest control company. They’ve done about 50 deals with these kinds of firms, and they give some interesting insights on “pest practices.” To watch the program, click here.

Global BV News

Video series explains the V20

“Let’s make the most glamorous show of valuation in the world!” exclaims Sandip Kumar Deb about the V20 Valuation Summit and Conference in the first of a series of videos that explain the event. Interviewed by Ray Moran (FON Valuation Services), Sandip noted that the event will be October 27-29 in New Delhi and is co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). Sandip is a member of one of the boards at the IVSC and has his own valuation firm in India. He also noted that the event coincides with the annual G20 finance meeting in India, and future V20 events will follow suit (next year will be Brazil). You can watch the video if you click here (the video includes links for more information on the conference).

Valuation News Updates

Lisa Guo — Thu, 17 Aug 2023 00:42:23 GMT

Are you up on the recent BV-related court cases?

One of the highlights of the BVR webinar schedule is the regular update on valuation-related court cases. This is a panel discussion with attorney Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP) and veteran valuation experts Jim Aerding (Alerding Consulting LLC) and Jim Ewart (James D. Ewart LLC). During the most recent installment, they gave their insights on the following cases (the quotes are from the panel members):

In re Marriage of Bainbridge,an Iowa case in which the wife engaged a valuation analyst to value the husband’s construction company, but the husband did not engage an expert (the court found the wife’s expert more persuasive). There were other issues in the case, including an “interesting definition of intrinsic value” and the choice of valuation date (“the availability of data may drive the valuation date”).

Griggs v. Griggs, a Vermont divorce case in which the wife’s expert told the court that valuation professionals tend to leave Paycheck Protection Program (PPP) income in cash flows because the intent of the PPP program was to replace lost income and encourage employers to keep employees on the payroll. This was the “first case where the PPP proceeds were included in cash flows and capitalized in the capitalization of earnings method.” The court sided with the wife’s expert.
Kwak v. Bozarth, another divorce case (this one in Massachusetts) where one side engaged a valuation expert, but the other side did not (“Judges like to have something to hang their hat on.”) A key issue was personal goodwill, and the MUM method was used.

Lamm v. Preston, a complex divorce case in Idaho that included several valuation issues, one of which was the personal-versus-enterprise-goodwill question. The state’s Supreme Court upheld the lower court’s ruling that a material amount of value of an entity that was formed as a result of a buyout transaction was personal goodwill and, thus, excluded from the marital estate. The entity was deemed a startup even though it was the result of the transaction. The husband, who was an owner of the firm that was bought, had a share of this new entity, with which he also had an employment contract and a noncompete agreement. “Be careful of agreeing to a sale during the pendency of a case, no matter the exigent circumstances; details of the transaction matter.”

Rothwell v. Rothwell, a Utah divorce case in which the estimate of personal goodwill was based on an understanding of how the company acquired contracts. But, at trial, the “husband’s testimony was challenged based on testimony of the controller, president, and vice president regarding the husband’s role in securing new contracts.” The court reduced the amount of personal goodwill by half, and it was affirmed on appeal.

Dentists Ins. Co. v. Yousefian, a damages case in federal court in Washington in which the plaintiff’s expert claimed to have waived work product protection due to certain disclosures to the defendant’s expert. “Both counsel and experts should be on guard for this issue and have a good communication between each other on what can and cannot be disclosed and to whom.”

EllDan Corp. v. Steele (In re EllDan Corp.),a bankruptcy case in Minnesota involving a hair care franchise in which the court ruled that, post-termination, noncompete covenants were enforceable. The plaintiffs breached the covenants and were ordered to close certain locations.

The panel noted that there is a proposal in Washington to ban noncompete agreements. “This could have an impact on many valuations.”

Complete analyses and full court opinions on all these cases are on the BVLaw platform. Also, a recording of the BVLaw Case Update webinar will soon be available if you click here (free to BVR Training Passport holders).

Most BV firms don’t ask for client feedback

When he was mayor of New York City, Ed Koch would roam the streets asking passersby “How’m I doin’?” The brash mayor often got some equally brash responses, but he knew that asking for customer feedback is important. However, most business valuation firms and practices do not do this. According to the BVR Benchmarking Survey, 82% of respondents do not ask clients or referral sources for feedback for quality control purposes.

Consider it: In prior surveys, respondents told us that a focus on quality control and the improvement of work product output were among the most successful new management practices they implemented. If your firm is not reaching out for customer feedback, we would urge you to consider it. At a valuation conference a few years ago, a presentation on quality control discussed several market research techniques and metrics, such as a net promoter score (NPS), one of the leading metrics that measures customer satisfaction and loyalty.

Almost 200 business valuation firms and practices responded to the survey, and we are analyzing the results, which will be made available as soon as possible.

Age-old idea still works for retaining good BV talent

What keeps you from jumping ship? That was a question posed to a panel of young valuation analysts at NACVA’s recent Business Valuation & Financial Litigation Super Conference.

Give thanks: Right off the bat, Ryan McKeon (Doeren Mayhew) mentioned “recognition.” As anyone who took Management 101 knows, recognition should be given to deserving employees. This was true many years ago, and it still holds true, so it should not be considered passé by any means. Recognition can be given, for example, for passing a certification exam or contributing to an article, McKeon points out. And there are all sorts of ways to give employees recognition (just Google it), from a simple thank-you lunch to naming an “employee of the month.”

Other retention strategies that work according to the next-gen panel include opportunities for career growth, exposure, and promoting a work-life balance. The panel also included Todd Kutcher (Reliant Business Valuation) and Coleton Benfatti (The Red Maple Group). Karen Kaseno (The Kaseno CPA Firm APC) served as moderator.

More details on this session are in the September issue of Business Valuation Update.

What keeps a bank CEO up at night?

Cybersecurity is the No. 1 concern of financial institutions, according to the “State of the Banking Industry Report” from Wipfli. Nearly 250 banks were surveyed for the report, which found that they are taking a “layered approach” to cybersecurity. Half of respondents have taken six actions or more to protect their network, including adding 24/7 monitoring services, tightening internal controls, and investing in network upgrades, the report says. Also, nearly 60% of financial institutions have conducted a cyber risk assessment and over half conducted security testing. In addition to cybersecurity, other top concerns include meeting customer needs, recruiting and retaining employees, and holding onto market share. For a copy of the report, click here.

Extra: Wipfli’s Kevin Janke and Paul Ouweneel recently gave a good overview of the bank valuation process during a BVR webinar. A recording will be available shortly if you click here (free to BVR Training Passport Pro holders).

Agenda available for VSCPA conference September 26-27

BVWire never misses the annual two-day conference held by the Virginia Society of CPAs (VSCPA). This year’s VSCPA Forensic and Valuation Conference will be held September 26-27 in Glen Allen. This will be an on-site event with the option of attending virtually. The agenda is now available, and speakers include Jim Hitchner on current issues in valuation , Kevin Yeanoplos and Ron Seigneur on goodwill in professional practices and the excess earnings method, Mark Dietrich revealing his trade secrets for valuing medical practice specialties, Neil Beaton on reasonable compensation, Gary Trugman on key issues all valuers face when valuing small businesses and professional practices, and more. Check out the full agenda by clicking here. Early-bird pricing is available through August 18.

Global BV News

Deadline extended to August 31 for V20 call for papers

In connection with the V20 (Valuation 20) conference October 27-29 in New Delhi, India, there is a call for researchers, practitioners, policymakers, and industry professionals to contribute their commentaries and research papers on several important themes, which are:

· Data transparency, availability, and their impact on global valuation practices;

· Impact of livelihood, land use, and habitat on valuation;

· ESG integration in the valuation process: Redefining value in a changing world;

· Strengthening professional capacity: Advancing global valuation competence;

· Advancement in technology to achieve effective valuations; and

· Challenges in valuation for safe, resilient, and sustainable settlements.

The conference is co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). Submissions of abstract papers (250 to 300 words) are due August 31 (extended from the original deadline of August 18). The author of the best paper will get the opportunity to speak and present his or her paper at the October conference. All the selected papers will be included and published as a V20 publication, which is planned for March 2024. For details on the call for papers, click here.

What’s in the September issue of Business Valuation Update

Here’s what you’ll see:

“How to Address Market Efficiency for Appraisal Hearings” (BVR Editor). In statutory appraisal matters in the Delaware Court of Chancery, the court has shifted its attention away from dueling experts and more toward using a stock’s market price as the best measure of fair value. Valuation experts who come up with a different value would, therefore, need to prove that the market is not efficient.
“Mercer Updates His State-of-the-BV Profession Analysis” (BVR Editor). Chris Mercer (Mercer Capital) did a “state of the profession” update as a keynote presentation at the recent Business Valuation and Financial Litigation Super Conference, hosted by the National Association of Certified Valuators and Analysts (NACVA). He addressed the current number of credentialed professionals, the aging of the profession, growth outlook, how the valuation professional organizations (VPOs) are adapting, and more.
“The 2023 Cannabis Reset: A Redux of 2019?” (Ron Seigneur and Ryan Cram). As we roll through 2023, getting well past what many are calling the post-COVID-19 pandemic era, the cannabis industry appears to be hitting a major reset button. Inflationary trends continue near a 40-year high with no sign of a quick retreat, legislative reforms for the industry have stalled, interest rates and the cost of capital continue to be significant challenges in the sector, and labor and supply-chain disruptions also continue in some jurisdictions.
“Determining Working Capital Adjustments Using a Bardahl Analysis” (BVR Editor). During a recent conference, the issue of adjusting for working capital came up and the audience seemed unfamiliar with the Bardahl analysis. Here is an excerpt from Gary Trugman’s Understanding Business Valuation, 6th edition, which gives some very practical advice on how to use this analysis.
“10 Short Takes From NACVA’s July Super Conference” (BVR Editor). There were top speakers, interesting sessions, and a good turnout (about 200) for the three-day NACVA Business Valuation & Financial Litigation Super Conference in person in Snowbird, Utah (and also online). Here are a few quick takeaways from some of the sessions we attended.
“Next-Gen BV Practitioners Reveal Ways to Keep Them on Board” (BVR Editor). Opportunities for career growth, exposure, work-life balance, and good old-fashioned recognition are some of the ways to keep today’s young valuation practitioners from jumping ship. The profession faces the issue of attracting and retaining young talent, so their insights are particularly helpful.

Valuation News Updates

Lisa Guo — Thu, 10 Aug 2023 00:11:51 GMT

Early results from BVR’s Benchmarking Survey

Almost 200 business valuation firms and practices responded to the BVR Benchmarking Survey, which closed last week. The survey, which has been conducted since 2007, achieved a 20% increase in responses over the prior version, so we thank everyone who participated!

Most of the respondents (60%) have business valuation as their primary business, while 23% say public accounting is their main business, with BV as a practice area. In terms of volume of engagements, there was a good mix of small and large practices, with about half of the respondents doing more than 50 engagements this past year and about a third doing one to 20 engagements. A few observations from the results:

· The fastest growing BV practice area over the past year was in the income, gift, and estate tax area, which 26% of respondents cited;
For 2023, the three most profitable practice areas will be income, gift, and estate tax; M&A/transactions; and litigation support;
Two-thirds of respondents say their BV revenue will increase in 2023 versus 2022;
Only a third of respondents have annual billable hour targets for staff;
Most respondents (83%) say they do not have any type of quality control metric for their practices;
Half of the respondents say they currently have no staff shortages, but finding and keeping good professional staff is a critical factor going forward;
LinkedIn is the social networking site of choice for 80% of respondents;
Seventy-four percent of respondents use Kroll’s Navigator for estimating cost of capital, followed by 35% who use BVR’s Cost of Capital Professional (some use both);
IBISWorld is the source for industry research for 60% of respondents, followed by RMA, at 52%;
Webinars are the most popular form of BV training, used by 80% of respondents; and
Very few (7%) use any type of third-party valuation report writing software.

This is just the tip of the iceberg in terms of data and metrics collected from the survey. We are analyzing the results to complete the full report, and we will let you know when that is available. Also, BVR has partnered with leading business valuation, forensics, and litigation services (BVFLS) practice management expert Rod Burkert (Burkert Valuation Advisors), who helped design the survey and will use the results to identify the best practices of top-performing BV firms based on the metrics that matter the most. The idea is to determine what makes a good firm great.

Low buyback value stings departing owners

Shareholder-employees should take a lesson from a recent case and take a fresh look at their buyout agreements—especially the part about the redemption value. In the case, which was in New York, a law firm shut down after merging into another law firm. Several partners terminated instead of joining the new firm and were asked to surrender their shares in the old firm in return for a check in the amount of $100 for each partner, which was the book value of their shares.

No case: The partners sued, alleging breaches of their employment agreement and fiduciary duty. The court dismissed their claims. The employment agreements allowed for termination (by either party), so they were at-will employees, meaning there was no breach. The shareholder agreement included a mandatory redemption provision with a buyback price set at $100 per share. This was done to avoid future arguments over fair value, and the departing shareholders were bound by that agreement.

The case is Laurilliard v. McNamee Lochner, P.C., 2023 N.Y. Misc. LEXIS 3296; 2023 NY Slip Op 50671(U), and a case analysis and full court opinion are on the BVLaw platform.

A tip of the hat to our friends at the law firm of Farrell Fritz in New York for alerting us to another very interesting court case dealing with minority shareholders. They have a great blog, New York Business Divorce, that covers dissolution and other disputes among co-owners of closely held companies.

Caution: Mixed M&A landscape for physician practices

A rapidly changing and mixed transaction volume for physician practices signals caution to valuation analysts looking to historical transactions for guidance and comparables, advises a recent post from Weaver, the assurance, tax, and advisory firm. M&A activity in many physician specialties has been slowing, but some specialties are displaying M&A trends in the opposite direction, the firm says. These trends “highlight the importance for the valuator of understanding certain factors. These include the micro-environment of each physician specialty, specific factors affecting M&A transaction activity and the resulting valuation implications,” the post says, which includes an analysis of physician practice transaction volume data by practice specialty.

Extra: Mark Dietrich’s new book, Engagement Guide to Understanding and Valuing Medical Practice Specialties, includes his trade secrets from over 45 years in the healthcare arena. You already have this book in your library if you are a subscriber to the BVResearch Pro platform.

New book on ESG and BV

Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuationis a new book edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters. The book has two target audiences: practitioners and students in finance, so there is some very basic information as well as methodologies, a case study, and research advances. The book is available if you click here.

Global BV News

CBV perspectives on litigation

Canadian valuation experts have done a new video in the Litigation Support Video Series from the CBV Institute, Canada’s valuation professional organization (VPO). This new installment covers navigating some of the documentation and information challenges CBVs face when preparing valuation or expert reports in the context of disputes. The 10-minute video features Mathieu Lapointe, Jason Boyer, and Esther Dumoulin, who are all with PwC. You can access the video if you click here.

Valuation News Updates

Lisa Guo — Thu, 27 Jul 2023 00:09:22 GMT

Young practitioners question traditional discount methodologies

“Outdated studies” and “emerging quantitative methods” are some reasons why young valuation practitioners are questioning the traditional methodologies for estimating discounts for lack of control and marketability (DLOC and DLOM). This was revealed during a Young Valuation Analysts Panel session at NACVA’s recent Business Valuation & Financial Litigation Super Conference. Challenging the status quo is one way the profession can evolve its thinking about methodology and practice.

The issue came up when a question was posed to the panel about the obstacles and challenges that they see in the profession over the next five years. In addition to examining new methods for estimating discounts, the panel mentioned M&A uncertainty amid difficult economic conditions and educating young professionals about the existence of business valuation as a profession. The panel included Todd Kutcher (Reliant Business Valuation), Coleton Benfatti (The Red Maple Group), and Ryan McKeon (Doeren Mayhew), and the moderator was Karen Kaseno (The Kaseno CPA Firm APC).

Current methods: Preliminary results from BVR’s Benchmarking Survey show that the FactSet Mergerstat/BVR Control Premium study is currently the most cited source for determining a DLOC, cited by 50% of respondents. As for DLOM, the traditional methodologies continue to be the most used, notably: restricted stock studies (53% use the Stout study and calculator, 34% use other historical studies); pre-IPO studies (26%); and Mandelbaum factors (66%). Thirty percent of survey respondents cited the use of option price modeling methods, which is up from 20% in the prior survey (2018).

Extra: In a separate session, Dr. Ashok Abbott discussed the Margrabe options approach to DLOM and offered attendees access to a new DLOM calculator he is developing that is in beta testing. You can access it at dev.optionmodeldlom.com. Dr. Abbott would like feedback on the calculator, including suggestions for improvements, additional features desired, and possible extensions. His contact info is on the calculator.

Damages waiver precludes lost profits claim

In an Illinois case, a contract for consulting services for an online platform was terminated and the terminating party was supposed to return the source code to the other party but did not, breaching the contract. The plaintiff (a startup company) sued for lost profits based on what it would have earned had it been able to monetize the platform. A jury awarded the plaintiff $18.3 million in lost profits damages. But the defendant then filed a motion for a judgment as a matter of law, and the court overturned the award.

The contract contained a provision that waived liability for “consequential” (indirect) lost profit damages, as opposed to “direct” damages, which would be recoverable. The difference between direct and consequential damages in breach of contract claims lies in the degree to which the damages are foreseeable and highly probable, the court noted.

Strict interpretation:Illinois precedent is that “damages waivers should be strictly construed against the benefitting party.” In this case, the lost profits damages were deemed consequential and indirect, which the contract precluded. The focus of the contract was for the plaintiff to provide consulting services as an independent contractor, and they were fully paid for those services. There was no “additional link in the causal chain” to connect the damages to the contract. Therefore, direct damages would have been a portion of the value of the source code that was not returned to the plaintiffs. But they did not put a value on that, nor did they seek that value as damages.

Also, Illinois law does not permit recovery of expected profits for a new commercial business. But, since the damages were considered consequential and barred by the contract, there was no need for the court to address that issue.

The case is Endless River Techs. LLC v. Trans Union LLC, 2023 U.S. Dist. LEXIS 725; 2023 WL 24101, and a case analysis and full court opinion will soon be on the BVLaw platform.

Deadline soon for BVR’s benchmarking survey

Our thanks to the over 170 business valuation firms and practices that have responded to the BVR Benchmarking Survey. But the survey will be open through July 31, and we welcome more responses. The direct link to it is bvresources.com/2023bvsurvey. The survey collects information on operations, financial metrics, staffing, compensation, billing practices, marketing, tools and resources used, and more. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

Private-sector companies optimistic, per McKinsey survey

Consulting firm McKinsey has some very useful economic and industry reports, research studies, and regular briefings. All of this material is free, and you can sign up for regular alerts on the McKinsey website. Its latest survey on company expectations shows that private-sector respondents report consistently positive views about their companies’ profit, demand, and workforce prospects. The survey has interactive graphs that show results by industry—click here to access it.

Second issue of Willamette’s Perspectives is released

The second issue of a new quarterly digital publication from Willamette Management Associates, Perspectives, has been released, and you can access it if you click here. This publication replaced the firm’s Insights publication. The articles in the second issue (July 2023) are:

· “Understanding the Implications of Cecil v. Commissioner” (Grant Crum);

· “How to Properly Use Asset Transactions in the Guideline Merged and Acquired Company Method” (Tia R. Hutton and Lisa H. Tran); and

· “Getting the Most Out of Every Engagement” (Timothy J. Meinhart and Marc D. Bello).

Meinhart also served as editor for this issue.

Global BV News

Kroll reports on industry multiples

Two reports from Kroll have insights into trading multiples for various key industries as of March 21, 2023.

The Industry Multiples in Europe quarterly report (click here to download) is now in its sixth edition. One highlight: In terms of EV/EBITDA, multiples have generally remained relatively stable during the first quarter of 2023, with a few industries presenting significant variations. For example, the median EV/EBITDA multiple of semiconductors and semiconductor equipment increased to 15x (from 10x in the fourth quarter of 2022).

The Industry Multiples in Latin America quarterly report is in its fourth edition (click here to download). One highlight: During the first quarter of 2023, while median EV/EBITDA multiples have not changed significantly for many industries, some of them experienced notable decreases. For instance, in the energy sector, the median EV/EBITDA decreased 1.4x in the first quarter of 2023 in relation to the fourth quarter of 2022.

Call for papers for Valuation 20 in India October 27-29

There is a call for researchers, practitioners, policymakers, and industry professionals to contribute their commentaries and research papers on several important themes, including technology, ESG, and more. This is in connection with the V20 (Valuation 20) conference October 27-29 in New Delhi, India, co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). Submissions of abstract papers are due August 18, and, if accepted, the final papers will be due October 1. For details on the call for papers, click here.

Valuation News Update

Lisa Guo — Thu, 20 Jul 2023 00:06:02 GMT

Takeaways from NACVA’s Super Conference

There were top speakers, interesting sessions, and a good turnout (about 200) for the three-day NACVA Business Valuation & Financial Litigation Super Conference in person in Snowbird, Utah (and also online). BVWire was there, and here are just a few of the takeaways from the sessions:

Gray divorces are becoming more prevalent, and, when they happen at retirement age, a perfect storm ensues, which triggers increased opportunities for valuers/advisors;
BV firms will get caught up in the wave of CPA firm consolidations—good margins and repetitive business make a very attractive M&A target;
When developing a discount rate for damages, match the rate to the time frame of the damages, with future years being more risky than early years;
More than ever, judges are focused on settling cases, which means more cases going to mediation;
Market efficiency has become a new issue in the Delaware Chancery Court in appraisal cases—analysts can use efficiency tests accepted in federal class action security fraud cases;
A veteran forensics expert set his analytic sights on the financial statements of the U.S. and concluded that the country is insolvent and getting worse;
When assessing AI and ESG impacts on valuation, look to the fundamentals—unless there is an impact to cash flow, risk, or growth, these acronyms have no effect on business value;
A new DLOM calculator using the Margrabe options approach was offered to attendees for beta testing; and
Young BV practitioners need to see definite growth opportunities to keep them from jumping ship, such as getting credentialed, exposure to clients, travel to conferences, and chances to write sections of the valuation report and articles.

There’s way too much more to include here, so we’ll have more details in the September issue of Business Valuation Update.

Why should BV experts care about court cases?

That was a question posed during a preconference session at NACVA’s Super Conference last week. Cases set a precedent in the jurisdiction you are working in, pointed out Steve Brunner (VG Valuation Group), who conducted the session, BV Case Law Update. In other sessions at the conference, veteran valuation experts stressed the importance of knowing your jurisdiction and how the courts typically handle valuation issues—and they tailor their reports and testimony accordingly. Brunner also mentioned that he uses cases as a marketing tool—he may send a case, or he may do an article on a case and send it to attorneys.

Every week, BVWire alerts you to valuation-related court cases that are added to the BVLaw platform, which includes full opinions and case analyses covering about 4,300 cases, and about 70 are added each year.

Pereira method used for marital interest in construction firm

In a Nevada divorce case, the court considered whether the valuation of the marital portion of a separate property business should be calculated under the Pereira or Van Camp approach. The husband started the business prior to marriage and was a key person in its success.

The Van Camp method generally applies when business value is due more to economic forces than to the efforts of the spouse. Under this method, “if the in-spouse [the husband in this case] working for the claimed separate property business during marriage receives compensation that is equal to or greater than what is fair or reasonable for the services provided, then the community may not have an interest in the business at the date of divorce.” The valuation expert opined that the compensation the husband received was “at least reasonable.” Therefore, the marital estate would have no community interest.

The Pereira method generally applies when business profits are the result of the spouse’s efforts. Under this method, “the value of the business at the date of marriage is allowed a reasonable rate of return/appreciation through the date of divorce. The excess, if any, of the business value at the date of divorce over the separate property value represents the potential value of the community interest.” Using this method, the community property interest value came to $510,000.

The district court ultimately decided that the husband’s company “would not have succeeded without [his] labor, skill and business relationship.” The husband appealed, but the appellate court affirmed, noting that there was “ample evidence in the record that support the district court’s decision to adopt Pereira. The district court did not abuse its discretion.”

The case is Mamone v. Mamone, 2023 Nev. App. Unpub. LEXIS 207; 2023 WL 3579949, and a case analysis and full court opinion are on the BVLaw platform.

Survey reveals extent of staff shortages at BV firms

It’s not a surprise that the BV profession is suffering from staff shortages, but now we can quantify this phenomenon to some degree. Just a little over half (52%) of BV firms say they are experiencing staff shortages, according to preliminary results of BVR’s Benchmarking Survey. Over a third (38%) of respondents say they are short senior-level appraiser staff, and 20% are short junior-level staff. Very few say they are short administrative and clerical staff.

The survey is collecting much more information on staffing as well as data on operations, financial metrics, compensation, billing practices, marketing, tools and resources used, and more.

Deadline extended: Over 160 business valuation firms and practices have responded to the BVR Benchmarking Survey so far—but, of course, more is better. So BVR has extended the deadline to participate in the survey until July 31. The direct link to it is bvresources.com/2023bvsurvey. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

Our thanks to those who have already participated—and to those who will take advantage of the extended deadline.

Replays available of free webinar series from the IVSC and Kroll

What’s in the August issue of Business Valuation Update

Here’s what you’ll see:

· “BV Firm Billing Rates Shot Up in 2022” (BVR Editor). The vast majority (83%) of business valuation firms increased their billing rates in 2022, according to preliminary results of BVR’s benchmarking survey. This is a much greater percentage than the last survey (2018) found, when 60% of respondents said they raised rates. Increases in 2022 ranged from 3% to 25%, with an average of 11%.

· “Valuation Implications of the Changing ESOP Litigation Landscape” (BVR Editor). The tide has started to turn with respect to litigation over ESOP valuations, speakers reported at the recent ASA ESOP Virtual Conference. There has been a major court victory and pressure from the ESOP and valuation profession, and now the DOL has committed to moving forward—hopefully— with long-awaited regulations on the valuation of company shares to be bought by an ESOP.

· “ASA Looks ‘Beyond’ Valuation to How to Build an Appraisal Career” (BVR Editor). A first-of-its-kind event in the valuation profession was the 2023 Beyond Valuation—Professional Development and Growth Conference hosted by the American Society of Appraisers (ASA) and sponsored by Empire Valuation Consultants. It focused on appraisal career development for those professionals who are just beyond the initial stages of their careers.

· “Specialization Is the Key to Appraisal Career Success” (BVR Editor). A recurring theme throughout the 2023 Beyond Valuation—Professional Development and Growth Conference was the advice to specialize. Here is a basic plan to follow to achieve specialization.

· “Takeaways From ASA’s ESOP Virtual Conference” (BVR Editor). ESOP valuation basics, sell-side transactions, issues with mature ESOPs, and common critiques with valuations in litigation were the topics of discussion at the ASA ESOP Virtual Conference.

· “Canada vs. U.S. Valuations: CBV Institute Conference Reveals Some Nuances” (BVR Editor). At the CBV Connect 2023 annual conference of the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, it was interesting to note some of the differences between the standards and practices of valuations in Canada and the U.S.

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

· BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the August 2023 issue of Business Valuation Update.

Valuation News Updates

Lisa Guo — Thu, 13 Jul 2023 00:01:01 GMT

Value-based billing gains steam at BV firms

Value-based billing is becoming more prevalent at business valuation firms, according to preliminary results of BVR’s Benchmarking Survey. Fifty-seven percent of respondents use this method to some degree versus 35% of respondents who used it in the 2018 survey. Some respondents (13%) reported using value-based billing as their primary method. Other firms bill using either fixed-fee or hourly billing as their primary method.

The survey is collecting much more information on billing practices as well as data on operations, financial metrics, compensation, staffing, marketing, tools and resources used, and more.

Deadline extended: Over 150 business valuation firms and practices have responded to the BVR Benchmarking Survey so far—but, of course, more is better. So BVR has extended the deadline to participate in the survey to July 31. The direct link to it is bvresources.com/2023bvsurvey. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

Our thanks to those who have already participated—and to those who will take advantage of the extended deadline.

‘Fawning terms’ help sink valuation

In an Iowa divorce case, the appellate court affirmed the trial court’s decision to reject the valuation of the husband’s expert for one of his three businesses. The court questioned the expert’s reliability given the phrasing used in the valuation report, which the court described as “fawning terms,” when describing the subject businesses. The court also pointed out that the expert used two valuation methodologies without explaining why one was more reliable than the other. The court accepted the valuation the wife’s expert did, which was much higher.

Other valuation matters in the case include the treatment of intercompany loans and whether a business started prior to marriage should be included in the marital estate. The case is In re Marriage of Marasco, 2023 Iowa App. LEXIS 472; 2023 WL 3862591, and a case analysis and full court opinion are on the BVLaw platform.

Private-company EBITDA multiples down again in 1Q2023

After a rebound in the third quarter of 2022, EBITDA multiples continue to drop. From a median of 3.8x in the third quarter of 2022, the median selling price/EBITDA dropped to 3.5x in the fourth quarter of 2022 and then to 3.0x in first quarter of 2023 (see graph below). This is according to the latest issue of the DealStats Value Index (DVI). In the period analyzed, EBITDA multiples across all industries were highest in the third quarter of 2018, at 5.0x, but then decreased until they bottomed out in the first half of 2022.

Tips on portfolio valuation policies from inaugural AICPA forum

BVWire attended the AICPA’s late afternoon forum on portfolio valuations on June 28, hosted by KPMG in its offices in New York City (it was also virtual). This was the first in what will be a recurring event on this topic.

In responding to a question from the audience, the panel gave some advice on written policies for portfolio valuations. The SEC will look at the policy, so make sure it aligns with what is being done. Also, the policy should be as asset-class agnostic as possible and as broad as possible. A policy that is too specific will be easy to deviate from and will have to be frequently revised.

Sumeet Bhatnagar of KPMG acted as moderator of the panel, which included Garrett Pittenger (Apollo Global Management), Michael Weinberg (First Republic Bank/Columbia Business School), Augie Wilkinson (Bessemer Venture Partners), Jennifer Young (BDT & MSD Partners), and Douglas Burrill (PIMCO).

Global BV News

New IVSC Perspective Paper on technology

“Deciphering Technology” is the title of a new paper in a series of Perspective Papers from the IVSC. Written by Nicolas Konialidis, IVSC Asia Director, the paper gives a high-level view of technology valuation. The paper defines technology as it pertains to valuation, discusses Apple’s launch of the iPhone to contrast firm value and value of technology, and addresses other topics. This is the fourth paper in the current series. To download it, click here.

Valuation News Updates

Lisa Guo — Wed, 14 Jun 2023 23:57:20 GMT

Solid advice on BV career development

A common thread that wove its way through last week’s ASA conference on appraisal career development was the advice to specialize. Speakers in all of the sessions at the 2023 Beyond Valuation—Professional Development and Growth Conference urged attendees to specialize in some area of appraisal—whether it be an industry, type, or purpose of a valuation. The June 8 event was hosted by the American Society of Appraisers (ASA) and sponsored by Empire Valuation Consultants.

Natural progression: As a profession grows larger and more complex, practitioners move toward specialization to survive and grow. Good examples are the law, medical, and technology professions. While the BV profession has recognized the trend to specialize, it appears that many valuers are still in the generalist category. During a 2021 BVR webinar, the audience was asked: Do you specialize within a particular industry? Three-quarters of respondents said that they are generalists and have little or no industry specialization. Unless there has been some seismic shift, the profession still has a good share of generalists.

The conference covered many more of the soft skills young valuation professionals need to take their careers to the next level. Of course, managers also need to be aware of these skills to develop their staff. Full coverage of the event—including advice on how to specialize—will be in the July issue of Business Valuation Update.

Hitchner comments on new Pepperdine report

The 2023 Private Capital Markets Report has a “plethora of good information,” says Jim Hitchner (Financial Valuation Advisors) in the May issue of Hardball With Hitchner. The report, from Pepperdine University, is the latest edition based on an annual survey of expected rates of return with respect to private companies. Respondents include lenders, private equity, venture capital firms, private-company owners, business brokers, business appraisers, and more. According to very early results in BVR’s Benchmarking Survey, 27% of respondents say they use the report for estimating small private-company cost of capital.

His caveat:While Hitchner goes into detail about the “positive pointers” of the report, he cautions users that some of the sample sizes are small and the sizes of the businesses also tend to be small. He advises analysts not to use the report as their sole valuation method.

Last year, the project needed to charge a fee for the report, but this year it is free (thanks to a new sponsor). To get a copy of the current and all prior reports, click here.

Faulty information slices personal goodwill in two

In a Utah divorce case, both the joint valuation expert and the expert the husband engaged agreed to the amount of personal goodwill in the husband’s consulting business. In Utah, personal goodwill is not subject to distribution in divorce.

Bad data:The estimate was based on an understanding of how the company acquired contracts. But, at trial, it was determined that the husband provided faulty information about this, and the court reduced the amount of personal goodwill by half. The husband appealed, but the appellate court affirmed.

There were other valuation issues, including the choice of valuation date and built-in capital gains taxes. The case is Rothwell v. Rothwell, 2023 UT App 50; 2023 Utah App. LEXIS 51; 2023 WL 3360879, and a case analysis and full court opinion are on the BVLaw platform.

New AICPA event on portfolio valuations

On June 28, the AICPA will debut the first in what will be a recurring event: the Portfolio Valuation Forum. This will be an in-person event (at KPMG in New York City) and via Zoom from 4:30 p.m. to 6:15 p.m. EDT. This is designed as an educational and networking event that brings together industry experts and participants in an interactive forum where participants can have real-time discussions on portfolio valuation-related topics, trends, and issues. Confirmed presenters include:

Garrett Pittenger, Apollo Global Management Inc.;

Michael Oliver Weinberg, First Republic Bank/Columbia Business School;

Augie Wilkinson, Bessemer Venture Partners; and

Jennifer Young, BDT & MSD Partners.

The moderator will be Sumeet Bhatnagar of KPMG.

BVWire will be there—will you? For details and to register, click here.

Deadline looms for BVR’s benchmarking effort

June 30 is the deadline to participate in BVR’s 15-year effort to help understand what makes a good BV practice a great one. If you have not already done so, please take the BVR Benchmarking Survey that collects data on operations, financial metrics, compensation, staffing, marketing, billing, tools and resources used, and more. The direct link to the survey is bvresources.com/2023bvsurvey. Our thanks to those of you who have already participated!

Global BV News

Calculation reports are very popular in Canada

BVWire attended last week’s CBV Connect conference, and one session discussed the three levels of valuation reports Canadian valuation standards identified: comprehensive, estimate, and calculation. The calculation report is the lowest level and is based on minimal review and analysis and little or no corroboration of information given by management. According to practice inspection declarations for 2022, more calculation reports were issued from 2018 to 2021 than the other types. There were 633 calculation reports issued and 547 estimate valuation reports (the midlevel report)—only 158 comprehensive valuation reports were issued in that time frame. What’s more, more than half (60%) of conference attendees said they would most likely not use a comprehensive report for litigation purposes. Full coverage of the conference will be in the August issue of Business Valuation Update.

Free webinar series from the IVSC and Kroll continues through June 15

Kroll is sponsoring a series of webinars presented by the International Valuation Standards Council (IVSC), and the last one will be tomorrow, June 15 (past recordings available). The 2023 Valuation Webinar Series consists of four panel discussions from leading international experts on topics such as the global economic outlook, ESG, sovereign wealth funds, consistency and transparency issues, and more.

Speakers include Alistair Darling, IVSC chair and former UK Chancellor of the Exchequer; Megan Greene, Kroll chief economist and Bank of England Monetary Policy Committee (MPC) member; Mary Barth, professor of accounting, emerita at Stanford University; Marcelo Barbosa, former president of the Brazilian SEC; Doug McPhee, senior director and head of valuations for the Saudi Public Investment Fund; Louis Kujis, chief Asia economist, S&P Global Ratings; and Carla Nunes, MD, Office of Professional Practice, Kroll. For details and to register, click here (you can also view past webinars).

Valuation News Updates

Lisa Guo — Wed, 07 Jun 2023 23:55:35 GMT

Why are valuers changing their Excel models?

In a world of economic turmoil and market volatility, valuation experts say they are spending a lot more time on business valuations. What’s more, they have had to retool their Excel models.

Here’s why:Valuers report that they are finding that costs are not moving with revenue as they did in the past. Inflation is having an uneven impact, so it is now necessary to dig down into the expense line items. As a result, they are seeing more adjustments to more line items in forecasts. Where before you would see a few adjustments, now there can be 10 or more. Excel models are being changed so that expense lines can be projected separately—instead of simply tying them to a ratio.

This was revealed during the Global Town Hall: State of the Global Markets and Their Effect on Business Valuation on May 16, an event that was a collaboration of various valuation professional organizations (VPOs).

Valuation experts also report other phenomena amid today’s turbulent environment. A recap of the event will be in the July issue of Business Valuation Update.

Husband vs. valuation expert, court splits the difference

In an Iowa divorce case, the wife engaged a CPA and valuation analyst to value the husband’s construction company, and he concluded a value of $1,020,597. The husband did not engage an expert, and his do-it-yourself valuation came in at $480,000. The court, not surprisingly, found the wife’s expert more persuasive—but still adjusted the valuation down to $800,000 based on “outstanding receivables and [the company’s] uneven history of success.” The husband appealed, but the appellate court affirmed the $800,000 valuation. There were other issues in the case, including the choice of valuation date and incomplete information.

The case is In re Marriage of Bainbridge, 2023 Iowa App. LEXIS 310; 2023 WL 2908648, and a case analysis and full court opinion are on the BVLaw platform.

First-ever conference on soft skills for valuers June 8

This past fall, BVR and the BV recruiting firm Borrowman Baker conducted a survey of American Society of Appraisers (ASA) members under the age of 40 whose primary discipline is business valuation. The results revealed some of the obstacles they see as hindering their career development. We are happy to see that the ASA has put together a half-day conference to help young professionals overcome these obstacles by developing the soft skills needed to take their careers to the next level. The event, 2023 Beyond Valuation—Professional Development and Growth Conference, was put together with the collaboration of Empire Valuation Consultants. Empire’s Bill Johnston is the conference chair. This is a virtual event that starts at 1:00 p.m. EDT on June 8 (recordings will be made available post-event). The agenda has some great topics and speakers. For more details and to register, click here (up to 4.8 hours of ASA CE and CPE credit are offered).

CMS talks Stark FMV June 27

In a rare chance to hear directly from a regulator, a Centers for Medicare & Medicaid Services (CMS) official will discuss the new definitions of fair market value (FMV) under the updated regulations for the Stark Law (the federal physician self-referral law) on a free June 27 podcast. To register, click here. The official, Lisa Ohrin Wilson, senior technical advisor, CMS, will be joined on the podcast by Alex Krouse, associate general counsel, Parkview Health, and healthcare valuation expert Tim Smith (TS Healthcare Consulting). Smith is the author/editor of The Complete Guide to Fair Market Value Under the Stark Regulations. The American Association of Provider Compensation Professionals (AAPCP) is producing the podcast. The updated regs represent a game-changer in determining FMV of physician compensation—don’t miss this podcast!

First recipient of the Kolodny Award

The National Family Law Trial Institute in Houston is an organization devoted to training family lawyers for trial. The students range from fledging lawyers to seasoned professionals. A faculty that includes top family law litigators, jurists, forensic, and business valuation experts from across the country does the training. A co-founder of the Institute was attorney Stephen Kolodny, who passed away in 2020. The Institute has initiated the annual Kolodny Award, to be given to an individual for unparalleled dedication and commitment to improving the trial skills of family law attorneys. The first Kolodny Award has been bestowed upon veteran valuation expert Jay E. Fishman, managing director at Financial Research Associates. Fishman has been on the Institute’s faculty for 32 years. “The award is special to me as Stephen Kolodny was the moving force behind the Institute,” Fishman tells BVWire. “To me, he was a mentor and a friend. I am humbled to have been chosen for such an award.”

For more information on the Institute, click here.

New edition of cannabis valuation book now in BVResearch Pro

The second edition of The Cannabis Industry Accounting and Appraisal Guide is now available to subscribers of the BVResearch Pro platform. The book provides useful information for appraisers and accountants about the unique financial aspects and intricacies related to businesses operating in this area. A notable highlight of the book is a sample risk assessment framework and appraisal report tailored to the unique demands of the cannabis industry. The book’s authors are Ron Seigneur, Stacey Udell, and Brenda Clarke, and there are a number of contributors. If you are not a subscriber to BVResearch Pro, you can purchase the book if you click here.

Global BV News

IVSC’s Darling talks about IVS update

Everyone interested in valuation should take the opportunity to participate in shaping the future of International Valuation Standards to ensure that they continue to reflect best practices globally, says IVSC Chair Alistair Darling in an article. These standards, developed through international cooperation, affect a broad spectrum of financial activities, from financial reporting and corporate finance to investment analysis and public policy decisions. Darling extends a “warm invitation” to contribute your voice to the process by offering feedback on the latest exposure draft outlining proposed updates to the IVS. To download the draft, click here. The public comment period will end July 28.

Valuation News Updates

Lisa Guo — Wed, 24 May 2023 23:53:06 GMT

Notable takeaways from the NYSSCPA BV conference

BVWire attended last week’s annual New York State Society of CPAs’ Business Valuation and Litigation Services Conference, and—as usual—some very interesting and useful information was presented. Here is some of what we heard:

Rule-makers have started to think about the value of internally generated intangibles on company balance sheets;
Unless valuers can substantiate distinct impacts of ESG on cash flow, risk, or growth, they’re just “blowing smoke”;
Fair value standard-setters did such a good job with the Mandatory Performance Framework, the CEIV credential became unnecessary (the credential will be discontinued);
New York continues to be out of step with most other jurisdictions regarding DLOMs in statutory fair value cases;
“Litigation funding” has emerged to bring more cases to trial that would otherwise be too expensive to pursue;
Seized crypto assets are now being disposed of via exchanges versus auctions to maximize value;
A large forensics practice uses QLUE to investigate and trace the use of nonfungible tokens;
ESG fraud could be a new practice opportunity for accountants and valuation experts;
PE funds are eyeing more smaller targets than ever before;
For matrimonial cases in New York, the valuation date can be very hard to pin down—there is no clear precedent; and
ESG human capital disclosures are increasing, but investors want more quantitative measures, such as “regretted attrition.”

More detailed coverage of the conference will be in the July issue of Business Valuation Update.

Important podcast: CMS talks Stark FMV

BVWire has learned that a CMS official will discuss the new definitions of fair market value under the updated regulations for the Stark Law (the federal physician self-referral law) on an upcoming podcast. The official, Lisa Ohrin Wilson, senior technical advisor, Centers for Medicare & Medicaid Services, will be joined on the podcast by Alex Krouse, associate general counsel, Parkview Health, and healthcare valuation expert Tim Smith (TS Healthcare Consulting). Smith is the author/editor of The Complete Guide to Fair Market Value Under the Stark Regulations. The American Association of Provider Compensation Professionals (AAPCP) is producing the podcast The updated regs represent a game changer in determining FMV of physician compensation, and this is a rare chance to hear directly from the regulator—don’t miss it! Stay tuned for the broadcast date and registration link.

Attorney gets Daubert challenge over ESOP employment agreements

In a federal court in Georgia, an employee benefits lawyer prepared a report and was deposed regarding the process by which employment agreements were negotiated as part of a transaction involving an ESOP. The lawyer concluded that the process “was not consistent with the standards expected of a fiduciary in conducting such process.” The defendants filed a motion to exclude the lawyer’s testimony and report, arguing that he had no formal ESOP training, had given tax advice, and had not written any publications on executive compensation or valuation. But the court denied the motion, finding that the expert was qualified to issue his opinions and to testify. Among other comments the court made, it noted that the expert need not be the most qualified authority on a subject to be admitted.

The case is Gamache v. Hogue, 2023 U.S. Dist. LEXIS 54492; 2023 WL 2658033, and a case analysis and full court opinion are on the BVLaw platform.

A small thing can ruin a job interview big time

Competition for BV talent is fierce, so the last thing you want to do is let a good candidate get away—and the slightest thing could do it. In his latest newsletter, John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years, points out a matter that may seem small but could make a big difference. If you bring in a candidate for an interview or a series of meet-and-greets, make sure you are there to bid him or her goodbye when he or she leaves. Sometimes, the end of the process can get awkward, and, if you’re not there to bookend the visit, the candidate could leave with a bad impression. If you can’t be there, Borrowman offers some tips on how to handle that. It’s almost certain that candidates are interviewing elsewhere, and, if “that employer handled this detail when you didn’t, you could lose,” he says.

Help us help the BV profession

Every business valuation firm or practice should want to know how to improve its operations, processes, and output. That’s why you should join BVR’s 15-year effort to help understand what makes a good BV practice a great one. The BVR Benchmarking Survey collects data on operations, financial metrics, compensation, staffing, marketing, billing, tools and resources used, and more. The survey is open until June 30, and the direct link is bvresources.com/2023bvsurvey. We thank those of you who have already participated!

BVWire continues on the BV conference circuit

June is busting out with two events that BVWire is looking forward to attending. First up is the CBV Connect 2023 June 8-10 in Toronto, hosted by the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter. Some of the topics of note include valuation in the metaverse, automated valuation models, the role of financial experts in ESG litigation, a “ladies of litigation” panel on damages, and much more. The event will be in-person and livestreamed. For details, click here.

Then we’ll be at the ASA’s ESOP Virtual Conference on June 20 sponsored by Empire Valuation Consultants. The agenda starts with ESOP basics then moves onto the sell-side process, addresses issues with mature ESOPs (redemption/releveraging), and finishes up with a session on litigation (“has the tide turned?”). For more details, click here.

Global BV News

Free webinar series from the IVSC and Kroll June 7-15

Kroll is sponsoring a series of webinars presented by the International Valuation Standards Council (IVSC) from June 7 through June 15. The 2023 Valuation Webinar Series will present four panel discussions from leading international experts on topics such as the global economic outlook, ESG, sovereign wealth funds, consistency and transparency issues, and more.

Speakers include Alistair Darling, IVSC chair and former UK Chancellor of the Exchequer; Megan Greene, Kroll chief economist and Bank of England Monetary Policy Committee (MPC) member; Mary Barth, professor of accounting, emerita at Stanford University; Marcelo Barbosa, former president of the Brazilian SEC; Doug McPhee, senior director and head of valuations for the Saudi Public Investment Fund; Louis Kujis, chief Asia economist, S&P Global Ratings; and Carla Nunes, MD, Office of Professional Practice, Kroll. For details and to register, click here.

Valuation News Updates

Lisa Guo — Wed, 17 May 2023 23:50:37 GMT

Reasonable comp at center of dental practice dispute

In a Massachusetts divorce case, the wife argued that the normalization adjustments to her salary from her dental practice were based on unreliable data. The husband’s valuation expert used data from Salary.com and Indeed.com and adjusted her salary downward for the three past years he used for the valuation (the capitalized cash flow method). The court did not find those sources to be totally unreliable and accepted the adjustments for two of the three years in the analysis. However, the adjustment for the most recent year was rejected because the data did not delineate between a regular dentist and a prosthodontist, which became relevant to the practice during that year. Also, the wife did not offer the opinion of a qualified business valuation expert.

The wife appealed, but the appellate court affirmed the lower court’s decision. It also affirmed a 21% goodwill discount the husband’s valuation expert applied, reflecting the estimated loss of clients that would occur if the wife left the practice.

The case is Kwak v. Bosarth, 2023 Mass. App. Unpub. LEXIS 179; 102 Mass. App. Ct. 1116; 2023 WL 2817904, and a case analysis and full court opinion are on the BVLaw platform.

Big Four eye return-to-office mandate

Last week, we gave you some takeaways from the ASA Fair Value Spring Conference in New York City. During a panel of Big Four leaders, a question was asked that had nothing to do with fair value but was an interesting one: Will you require employees to come into the office? The panel members all noted that they were considering a mandate of two to three days in the office. And they remarked that, to make that work, managers would have to do the same to set the example. Also, they are considering some type of in-office activities that would give a reason for staffers to come in.

Recent study: Myron Marcinkowski (Kroll), who acted as moderator for the panel, mentioned an interesting recent study, “The Power of Proximity,” which reveals some of the potential pitfalls of remote work, especially for young professionals, women, and people of color. The study found that these groups are missing out on crucial feedback from their managers and colleagues—and they are more likely to quit. Remote work has not been able to replicate the in-office experience in this regard, which we would imagine is even more crucial for recent hires going through training.

The panel members included Josh Putnam (Ernst & Young), Manish Choudhary (Deloitte), Martin Mazin (KPMG), and Adam Smith (PricewaterhouseCoopers).

A more detailed recap of the conference is in the June issue of Business Valuation Update.

Reminder: BVR Benchmarking Survey is now live

We’re happy to see a good response so far from BVR’s latest version of its benchmarking survey, which will allow BV practices to see how they stack up against their peers. If you have not taken the survey, the direct link is bvresources.com/2023bvsurvey. The deadline for participating is June 30. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks. The survey collects the most comprehensive data on operations, financial metrics, compensation, staffing, marketing, billing, tools and resources used, and more.

2022 Thomas Burrage Award recipient named

The late Thomas Burrage was highly respected for his expertise in litigation, forensic accounting, business valuation, and taxation, but he is remembered most as a kind and generous man who gave back to the profession. In that spirit, the 2022 Burrage Award for compassion, collegiality, and character has been bestowed upon Ron Seigneur (Seigneur Gustafson LLP), a veteran practitioner who has given back to the profession through his volunteering on committees, writing books and articles, speaking at conferences, and much more. The award was given by the Expert Resource Connection, co-founded by Burrage, which is a group of business valuation and forensic accounting professionals who share resources and collaborate on engagements.

As part of the award, a scholarship of $2,000 has been presented to an accounting student at the University of New Mexico (UNM). Burrage was also known for giving his support and guidance to young people in the profession, and UNM was his alma mater. If anyone is interested in making a tax-deductible donation to the Burrage Scholarship Fund, please send a check payable to:

The Thomas F. Burrage Scholarship Fund

Attn: Pam Marion, Seigneur Gustafson LLP

940 Wadsworth Blvd., Suite 200

Lakewood, CO 80214

NACVA to publish a new BV book

The National Association of Certified Valuators and Analysts (NACVA) will publish Business Valuation: Practitioner’s Guide to Valuing Privately Held Businesses later this year through Wiley. The book has an impressive list of co-authors who are also NACVA faculty, instructors, board members, and advisors (the list is included in the COO’s 1Q23 report, which is available here).

Global BV News

Valuing breweries in Canada

In a video,Spencer Gunning, CBV, with Big Rock Brewery in Canada, talks about the latest trends and insights in the brewery industry with Catalina Miranda of the CBV Institute. Gunning also wrote an article on the topic, the latest in a series of “CBV Insights,” which you can read if you click here. Valuers in this sector need to assess how the subject brewery is adapting to recent trends, including a “growing demand for craft beverages, a significant shift in market share towards ready-to-drink (RTD) and low-alcohol and non-alcoholic options, and an increased focus on sustainable brewing and packaging practices,” Gunning writes.

Reminder: Comments due on exposure draft for updated IVS

The International Valuation Standards Council (IVSC) has published an exposure draft outlining proposed updates to the International Valuation Standards (IVS). To download the draft, click here. The public comment period will last for three months and will end July 28. An updated version of IVS is expected to be published in January 2024 with an effective date of July 2024. During the comment period, interested parties can submit comments through the IVSC’s online consultation platform or via email to the IVSC technical director, Alexander Aronsohn (aaronsohn@ivsc.org). The exposure draft includes IVS updates that address various factors, such as ongoing changes in global markets and valuation practices, increasing use of technology and data sources, growing demand for clarity in valuation processes, and the need to address new types of assets and liabilities, including environmental, social, and governance (ESG) factors.

What’s in the June issue of Business Valuation Update

Here’s what you’ll see:

“Damages Guide Editors Offer Insights and Advice to Valuers” (BVR Editor). Business Valuation Update had the pleasure of sitting down with the editors of the recently published 7th edition of BVR’s Comprehensive Guide to Economic Damages. They gave some insights into recent developments and some advice for experts who practice—or are thinking of practicing—in this area.

“BVR to Identify Top-Performing BV Firms and Practices” (BVR Editor). Since 2007, Business Valuation Resources has been surveying BV firms and practices, collecting the most comprehensive data on operations, financial metrics, compensation, staffing, marketing, billing, resources used, and more. BVR is launching the latest version of this survey—with a new twist.

“Takeaways From the Record-Breaking ASA New York Fair Value Conference” (BVR Editor). In-person capacity was sold out, and virtual attendance brought the total to about 300—a new attendance record—for the ASA Spring Fair Value Conference in New York City May 4. Topics included inflation impacts on valuation, audit targets, the new AICPA business combinations guide, ESG, PE valuations, and more.

“Damodaran Continues His Explosive Remarks About ESG” (BVR Editor). At the ASA Spring Fair Value Conference in New York City on May 4, we did not expect to hear any glowing words about the environmental, social, and governance (ESG) movement from Professor Aswath Damodaran (New York University Stern School of Business). In his blog, he has been very vocal in his strong criticisms of ESG as a “weapon of mass distraction” and a “gravy train” for consultants, investment managers, scoring/ratings providers, and those pushing for more disclosures.

“New Valuation Credential Set to Launch for Healthcare Compensation Experts” (BVR Editor). The American Association of Provider Compensation Professionals (AAPCP) is set to unveil the Certified in Provider Compensation Valuation (CPCV) credential this summer. The news was announced at the AAPCP’s annual conference in Nashville April 26-28. A number of valuation professionals have already signed up for the training courses.

“Valuers Run the Risk of Mismatching Inflation Assumptions” (BVR Editor). During a presentation in the United Kingdom, Nick Forrest (UK Economics Leader for PwC) made some observations that should resonate with business valuers worldwide. In the UK, the Bank of England established its target inflation rate of 2%, but inflation varies hugely from this target, even during noninflationary periods, depending on which factor an analyst uses.

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 with one case featured in a detailed analysis.

To stay current on business valuation, check out the June 2023 issue of Business Valuation Update.

Valuation News Updates

Lisa Guo — Wed, 10 May 2023 23:47:13 GMT

Latest BVR benchmarking survey is now live

Hundreds of business valuation practices and firms have participated in BVR’s ongoing benchmarking survey since it was first launched in 2007. The survey collects the most comprehensive data on operations, financial metrics, compensation, staffing, marketing, billing, tools and resources used, and more. Valuation experts use it to see how they and their firms compare with their counterparts and to pick up some ideas on how to improve their practices.

Survey link:The 2023 version of the survey is now live, and a direct link to it is surveymonkey.com/r/RVYDLRB. The deadline for participating is June 30. The length of the survey has been reduced, so it will not take as much time as previous versions.

All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

What’s more, BVR has partnered with leading BVFLS practice management expert Rod Burkert (Burkert Valuation Advisors) to help ensure the survey and resulting study will be of the most help to BV practices.

Thank you in advance for participating!

Fair value credential to be sunset, conference speakers say

The news that the Certified in Entity and Intangible Valuations (CEIV) credential was being discontinued stunned some attendees at the ASA Fair Value Spring Conference in New York City on May 4. The CEIV credential was a joint effort of the AICPA, ASA, and RICS that began in 2014 and was launched in 2017.

Valuation practices, including the Big Four, embraced the program, and many practitioners went through the training, but some firms stopped short of requiring their people to be credentialed. During the credential’s development, there were concerns over such issues as quality control and client confidentiality, BVWire reported at the time.

MPF will endure.At the conference, speakers reported that the Mandatory Performance Framework (MPF) will continue to be used. In fact, a revision is in the works to make it more streamlined and some credentialing groups will incorporate it into certification training. The MPF was designed to make sure that the valuation expert adequately documents his or her work and thought processes. Better documentation helps make auditors more comfortable with valuation estimates, especially for intangibles, and it eases the concerns of the SEC and PCAOB.

At this point, the credentialing organizations are working through details of the sunsetting process, and more information will be forthcoming.

More news from the ASA Fair Value Conference

In addition to the news that the CEIV credential was being discontinued (see previous item in this issue), here are some other takeaways from the ASA Fair Value Spring Conference in New York City on May 4:

The current economic picture is seen as transitory, and there have been no major changes to long-term growth rates being used (a range of 2% to 2.5% was mentioned);
The Big Four are eyeing AI (“you can’t fight machines”), and they are learning how to harness it—they don’t see its use in business valuation rising to the level that it has with real estate appraisals;
Aswath Damodaran (New York University Stern School of Business) continued his strong criticism of the environmental, social, and governance (ESG) movement;
For fund valuations, experts are focusing more on the annual operating plan, taking a more forward-looking approach;
Fair value concepts do not pay enough attention to the legal boundaries of protection with respect to technology and intellectual property assets, which have a “huge” impact on value; and
A final version of the AICPA’s business combinations guide is expected to be issued in Spring 2024.

A more detailed recap of the conference will be in the June issue of Business Valuation Update.

Financial expert guide added to BVResearch Pro

The Financial Expert Guide for Family Law Judges and Attorneys, National Edition, is now on your digital bookshelf if you are a subscriber to the BVResearch Pro platform. The book, written by attorney John Tatlock and valuation experts Kevin Yeanoplos and Ron Seigneur, shows judges and attorneys the fundamental building blocks of the valuation analysis for a business. It begins with the discussion of the essential standards and premises of value that must apply in every valuation engagement, followed by the analysis of the business owners’ reasonable compensation and the specific recognized approaches and methods for conducting and reporting the results of a valuation analysis. There is also a full-blown Conclusion of Value report judges and attorneys should expect to see from experts.

If you are not a BVResearch Pro subscriber, you can purchase the book if you click here.

New BV workflow tool makes PDF tax document conversion a breeze—free webinar!

When we talk with practitioners about their engagement workflows, the laborious process of converting client tax documents from PDF to Excel regularly tops the list of steps that take far too much time—and usually requires manual data entry. The new TaxXL tool—now offered by BVR—is a welcome game changer! Developed for business valuation professionals by Nambri, TaxXL converts PDF tax forms to Excel spreadsheets quickly and accurately.

The BVR team was duly impressed—you can see it in action during a free webinar on Tuesday, May 16, at 1 p.m. EST. Register for the free webinar here, and learn more about TaxXL here.

Next stops on the BV conference circuit

Global BV News

New study of inflation and valuation in German firms raises concerns

A new paper finds that company-specific inflation rates assumed for the steady state are lower than the expected general inflation rates. This should not be the case regularly or on average, respectively, the authors argue. They examined 263 valuation reports for Germany-listed firms with a valuation date between 2000 and 2021, mostly for the purpose of determining the price per share to compensate minority shareholders during a squeeze-out. The results of the analysis are from a time when expected inflation was much lower than recently. “Inflation-induced value effects will increase, if a company’s specific inflation rate is not adjusted to higher expectations about future inflation,” the authors write. They also point out that a company-specific inflation rate can fluctuate based on differing inflation expectations in the markets in which the company is operating. “This challenges the usual assumption that the company specific inflation rate is constant, thereby also challenging the use of the perpetuity formula after a detailed cash flow forecast for a few years.”

The paper is “Inflation and Valuation Practice: German Evidence” by Andreas Schüler and Sebastian Wünsche and is available if you click here. The paper is published in the Schmalenbach Journal of Business Research.

Valuation News Updates

Lisa Guo — Wed, 03 May 2023 23:45:52 GMT

Court OKs including PPP loan in cash flows for CCF

In a Vermont divorce case, the valuation expert for the husband valued his business by excluding proceeds from a Paycheck Protection Program (PPP) loan as a one-time windfall for purposes of a capitalized cash flow (CCF) analysis. The wife’s valuation expert also did a CCF analysis but included the loan proceeds in the cash flows, which resulted in a higher valuation.

Current practice? The wife’s expert told the court that, currently, valuation professionals tend to leave PPP income in cash flows because the intent of the PPP program was to replace lost income and encourage employers to keep employees on the payroll. The husband’s expert noted that “reasonable experts could differ” on the matter.

The court found the wife’s expert’s testimony more convincing and adopted that expert’s higher valuation, and the state’s Supreme Court affirmed.

The case is Griggs v. Griggs, 2023 Vt. Unpub. LEXIS 18; 2023 WL 2473542, and a case analysis and full court opinion are on the BVLaw platform.

More on Hitchner’s myth-busting regarding restricted stock

A few weeks ago, we covered the start of Jim Hitchner’s list of BV myths he is out to bust. One of them is that restricted stock studies and data cannot be relied upon (either solely or along with other methods) to determine a discount for lack of marketability (DLOM) for federal tax business valuations. This is “patently false,” he writes in the April issue of Hardball With Hitchner.

IRS view: From the IRS’ perspective, it appears that nothing has materially changed from its established stance that the use of restricted stock studies for estimating DLOM is an acceptable method. As of this past October, the IRS had no plans to update its DLOM Job Aid the agency issued in 2009, according to a blog post by Mike Gregory (Michael Gregory Consulting), former IRS manager, who worked on the Job Aid. Gregory’s post also includes a list of different types of entities and the various DLOM methods he believes the “IRS may consider more positively in general,” and restricted stock studies are prominently included.

Also in the April Hardball issue, Gregory affirmed that the IRS “continued to accept the benchmark restricted stock studies using the Mandelbaum factors and Stout restricted stock database to determine DLOMs.” He also recommended that valuers should not rely on a single method but should consider multiple approaches.

New app estimates ESG adjustment to SME cost of capital

In March, we reported that Valutico, a web-based valuation platform, would be adding new features, including integrating environmental, social, and governance (ESG) factors into a valuation. That feature is now available, and it is named ValutECO, released in an alpha version, meaning feedback is being solicited for further development. Interestingly, Valutico is using this add-on for its own ESG efforts—100% of the user fee will be donated to the World Land Trust Charity.

ROT adjustment: The add-on is designed for private small and medium-sized enterprises (SMEs) and will, as a general rule of thumb (ROT), apply an approximate 0.08% discount to the cost of equity and about a 0.09% discount to the cost of debt for every 10-point improvement in a company’s ESG score. The score is developed using a 29-question assessment and is “broadly consistent” with the S&P Capital IQ ESG scoring mechanism. The score is fed into a proprietary algorithm to come up with the adjustments.

Of course, valuation experts should have many questions about this app and its inner workings. Research on ESG and valuation so far finds a weak link between ESG and profitability but a stronger link to cost of capital. The app’s developers warn against double counting if ESG impacts are reflected in cash-flow forecasts. They also point out that currently there are no universally accepted standards for ESG scoring or for ESG valuation analysis. For some FAQs on the new app, click here.

Valutico, launched in 2017, has a team of 60 employees based in Vienna with subsidiaries in the U.S. and UK. The company says it currently has around 600 clients in over 85 countries.

BVR set to launch latest benchmarking survey

Since 2007, BVR has been surveying BV firms and practices, collecting the most comprehensive data on operations, financial metrics, compensation, staffing, marketing, billing, resources used, and more. BVR is putting the finishing touches on the latest version of the survey—and this time we’re kicking it up a notch.

New twist: We will be using the information to identify best practices of top-performing BV firms based on the metrics that matter the most. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Also, we’ve trimmed the survey down a little, so it is not as long as previous versions, making it easier to participate.

Keep an eye out for the survey, and more details will be forthcoming!

Cost of Capital Navigator now has a company-level beta module

Kroll has added a new module to its Cost of Capital Navigator that allows users to estimate their own industry CAPM betas by providing levered, unlevered, and relevered individual company betas. Users can select multiple companies using Kroll’s company lookup tool to calculate five different beta estimates and perform sensitivity analysis using different currencies, stock return frequencies, lookback periods, and market indices. The module will be enhanced later in 2023 with such features as the ability to archive beta estimates for future use, beta trends over time, sensitivity analysis by adding/removing different beta types, and more. For more information, click here.

First issue of Willamette’s Perspectives is released

A new digital publication, Perspectives, which will be a quarterly, has replaced Willamette Management Associates’ Insights publication. The first issue is out now, and you can access it if you click here. The articles in the premier issue are:

“Incorporating ESG Performance in Equity Valuations” (Nathan M. Hesch);
“Key Considerations Regarding the Valuation of ‘Small’ Businesses” (John Sanders Jr. and Dakota Ask); and
The Tax Benefits and Challenges of Allocating Total Business Goodwill to Personal Goodwill in a Transaction (Lisa Tran).

The editors for this issue are Charles Wilhoite andScott Miller.

Global BV News

IVSC issues exposure draft for updated IVS

The International Valuation Standards Council (IVSC) has published an exposure draft outlining proposed updates to the International Valuation Standards (IVS). To download the draft, click here. The public comment period will last for three months and will end July 28. In the meantime, the IVSC will conduct a series of webinars on the exposure draft. The first webinar will be on May 9. An updated version of IVS is expected to be published in January 2024 with an effective date of July 2024. During the comment period, interested parties can submit comments through the IVSC’s online consultation platform or via email to IVSC technical director, Alexander Aronsohn (aaronsohn@ivsc.org).

The exposure draft includes IVS updates that address various factors, such as ongoing changes in global markets and valuation practices, increasing use of technology and data sources, growing demand for clarity in valuation processes, and the need to address new types of assets and liabilities, including environmental, social, and governance (ESG) factors.

Valuation News Updates

Lisa Guo — Wed, 26 Apr 2023 23:41:10 GMT

Dietrich reveals tips ‘only a retired expert would share’

Nationally known healthcare valuation expert Mark Dietrich recently retired from active practice—but he is very active in sharing the knowledge he amassed over 45 years in the field. During a recent BVR webinar on valuing specialty medical practices, he gave a few sage pieces of advice he said “only a retired expert would share,” although, in the past, he’s been very generous in this regard:

A revenue analysis by Current Procedural Terminology (CPT) code is crucial for the valuation of any physician practice. CPT codes are an industry standard for coding medical procedures and services. If the practice is not forthcoming with these data, Medicare claims data for every physician in the country are located on the CMS website if you click here. These data can be sorted by physician specialty, state, locality, etc. or any combination thereof.
For practices that make significant use of the codes for office visits (evaluation and management (E&M) codes), income can be manipulated in anticipation of the physician’s divorce or an M&A deal (yes, it happens). This type of scheme puts added importance on a multiyear coding analysis. Of course, this upcoding or downcoding could be inadvertent, but it still should be examined.
Dietrich uses an Excel VLOOKUP function to summarize the services by major category using the Professional Edition of the AMA’s CPT Guide (a “must have” guide), and he assigns individual CPT codes to these categories by using a SUMIF function.
His extensive research debunks the use of surveys for determining reasonable compensation in favor of a relative value unit (RVU) analysis. A free RVU calculator is available if you click here.
The practice expenses RVU (peRVU) values must be modified to reflect site of service (a procedure done in the office versus a hospital or ambulatory surgery center). If not, your compensation calculation will be wrong.

These pieces of advice are just the tip of the iceberg—much more is included in Dietrich’s new book, Engagement Guide to Understanding and Valuing Medical Practice Specialties. You already have this book in your library if you are a subscriber to the BVResearch Pro platform.

Damages experts point to areas of practice growth

Damages related to cannabis firms, cryptocurrency, and intellectual property are on the rise, according to the editors of the recently released 7th edition of BVR’s Comprehensive Guide to Economic Damages. The guide includes new as well as revised chapters on these topics, co-written by damages experts and attorneys to give added perspective.

Valuation and damages experts Jimmy Pappas (Marcum) and Bill Scally (Marcum) along with attorney Steve Veenema (Murphy & King) continued in their role as editors, corralling over 70 financial experts and attorneys for the two-volume guide’s 50 chapters. While the task was extremely challenging, it was also stimulating and insightful, the editors tell BVWire. Working on a project such as this exposes you to the latest thinking by top experts in their fields of specialty.

Breaking in:Valuation for damages purposes is not that much different than for other purposes. Experts wanting to break in should specialize in some specific area of damages and/or industry sector. Attorneys will hire a damages expert who has never testified before if they bring some special knowledge to the table.

The guide is now available from BVR, but, if you have the BVResearch Pro platform, the new edition is already in your library at no extra cost.

Be cautious with AI, advises Alerding

While artificial intelligence is not quite ready for prime time, it can impact valuations not only in the process of performing a valuation, but also on the value of a subject business, says veteran valuation expert Jim Alerding (Alerding Consulting). During a recent BVR webinar, he discussed a few examples of putting ChatGPT through its paces with some basic business valuation questions.

ChatGPT was asked this question: “What information do you need to write a business valuation engagement letter?” The response was incomplete, and some of it was plain wrong. In another “conversation,” ChatGPT was asked about BVR’s DealStats database. At first, it didn’t recognize the DealStats name, but, when prompted using the database’s prior name, Pratt’s Stats, it corrected itself and then told us all about the database. It was actually impressive the way the app corrected itself (and it also apologized).

Key point:It’s important to note that the content AI generates comes from public domain material, which can be questionable in the first place and not very useful for professional purposes. The application cannot reach behind paywalls nor access other materials that are generally not available to the public. Its use of language is generally good, but it can still appear awkward and stilted. Also, it can demonstrate biases that it picks up on its own or is led to them by the users or generators.

In summary, Alerding sees ChatGPT as just the beginning of the AI era—a sensation much like Atari was back in the 1970s, with everyone wanting to jump on the bandwagon. Users need to be very cautious before using any information this application generates.

More details of Alerding’s insights into AI are in an article in the May issue of Business Valuation Update.

Have you used AI in a BV context? Tell us about it at info@bvresources.com.

May kicks off BV conference season!

Flowers bloom in May and so do business valuation conferences—and most of them have a virtual option. Here is the lineup we’re eyeing for the month (click on the conference title for links):

May 4: ASA Spring Fair Value Conference (New York City and virtual). Damodaran on ESG, Big Four panel, PE valuations, tech obsolescence, more.

May 9: MICPA Forensic Accounting & Valuation Services Conference (Troy, Mich., and virtual). Keynote on crypto, M&A valuations, buy-sells, judges panel, more.

May 11: ASA Houston Energy Valuation Conference (Houston and virtual). Energy economics 2023, energy infrastructure in a carbon-neutral market, upstream valuations, panel on Inflation Reduction Act, more.

May 12: MACPA 2023 Forensic Valuation Conference (Columbia, Md.). Hitchner keynote, Dietrich on medical specialty practices, data analytics, market approach, more.

May 15: NYSSCPA Business Valuation/Litigation Services Conference (New York City and virtual). Mercer on statutory fair value and DLOM, Zyla on a fair value update, digital assets, ESG human capital disclosures, more.

We will cover as many of these events as possible here in BVWire and in more detail in Business Valuation Update.

Correction: Link to ASA conference schedule

Last week’s issue had an incorrect link to the schedule-at-a-glance for the ASA International Appraisers Conference to be held October 1-3 in New Orleans. For the correct link, click here.

We apologize for any inconvenience.

Global BV News

In China, the ‘G’ in ESG impacts COE the most

For Chinese-listed companies, there is a significant negative correlation between the environmental, social, and governance (ESG) score and the firm’s cost of equity (COE), a new paper finds. What’s more, the analysis examines each component of the ESG score and finds that the “G” score component has the greatest influence on the company’s COE. The researcher also examined manufacturing versus nonmanufacturing companies as well as state-owned enterprises and non-state-owned enterprises separately and found that, for all of them, higher ESG scores reduced COE. The paper is “The Relationship Between ESG Rating and the Cost of Equity Capital: Evidence From China,” by Sunhan Rao (Wenzhou-Kean University, Zhejiang, China), in the March 2023 journal, BCP Business and Management. The paper was presented at the 2022 International Conference on Economics, Mathematical Finance and Risk Management (EMFRM 2022) in Dubai.

What’s in the May issue of Business Valuation Update

Here’s what you’ll see:

· “Kick-Starting a CPT Revenue Analysis for a Physician Practice” (Mark O. Dietrich). An example of how to get started on a Current Procedural Terminology (CPT) revenue analysis for an orthopaedic practice, including detailed background data on this type of practice.

· “Alerding Gives Some Insights Into AI and BV” (BVR Editor). Be cautious when using artificial intelligence for business valuation work, advises BVLaw editor Jim Alerding (Alerding Consulting). A few examples show that this tool is not yet ready for prime time.

· “Industry Updates for Firms Most Impacted by the Labor Shortage” (BVR Editor). The accommodation and food service sectors are especially feeling the pain of the current labor shortage, which can cause ripple effects on a valuation. Here are some recent updates for various firms in these sectors, courtesy of the Vertical IQ industry research platform.

· “One of My Favorite Court Cases Reveals What Makes a Guideline Company—It’s a Classic” (Gary Trugman). The very essence of the market approach is summed up in this court case that has stood the test of time.

· “How One BV Practice Helps Train Its Young Professionals” (BVR Editor). A BVR survey reveals that many valuation practices need to improve their training programs. Here’s an idea that one practice uses to continually develop its young practitioners.

· “It’s About Time: Webb on Fractional Interests in Real Estate” (BVR Editor). After more than 25 years of valuing nonmarketable interests in real estate, Dennis Webb (Primus Valuations) says that the single most important thing in this type of valuation is “time.”

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 with one case featured in a detailed analysis.

To stay current on business valuation, check out the May 2023 issue of Business Valuation Update.

Valuation News Updates

Lisa Guo — Wed, 19 Apr 2023 23:38:23 GMT

DOL—finally—agrees to provide regs on ESOP valuations

At long last, the door has been opened for the Department of Labor (DOL) and the valuation profession to work together to develop guidance on ESOP valuations.

Crossroads: The DOL has just committed to move forward with long-awaited rule making with stakeholder input on the valuation of company shares to be bought by an ESOP, according to a release from The ESOP Association (TEA). The regulation will clearly define “adequate consideration” under Section 408(e) of the Employee Retirement Income Security Act of 1974 (ERISA). It’s been four decades since such regulations were proposed but never finalized.

Valuation experts have long maintained that the DOL has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. After a long winning streak, the courts rejected the DOL’s valuations in several recent and important cases alleging that the ESOPs overvalued (and thus overpaid for) the stock of the sponsoring companies.

Déjà vu? In the past, the DOL has indicated that it would finish up the rules, but the agency never followed through. Hopefully, this time will be different. “There is not much trust between ESOPs and the DOL, so we hope this isn’t a case of ‘fool me twice,’” said James Bonham, TEA president, in the release.

Damodaran posts 2023 edition of ERP paper

The “dean of valuation,” Professor Aswath Damodaran (New York University Stern School of Business) has posted “Equity Risk Premiums (ERP): Determinants, Estimation and Implications—The 2023 Edition.” The 143-page paper is the 14th update of this work, which provides a detailed picture of ERPs as well as a great deal of data, which are all free. In general, there are two approaches to estimating ERP: the ex post approach (using historical information) and the ex ante approach, which is forward-looking. Damodaran is a strong proponent of the use of the ex ante approach, or “implied” ERPs, which are forward-looking estimates that are extracted by examining stock prices today and expected cash flows in the future. Damodaran’s implied ERPs are one of the options available in BVR’s Cost of Capital Professional online platform for estimating the cost of equity.

Appellate court Knocks Out ‘laughable’ purchase offer

An offer to purchase a business can sometimes be evidence of value, but a recent divorce case in Indiana illustrates when it is not. The wife was the sole owner of a warehousing and logistics firm, NX Enterprises (the couple’s name was Nix). The opposing valuation experts appraised the business at $470,000 (the wife’s expert) and $992,100 (the husband’s expert). The Nix’s daughter testified that she offered to buy the business for $4.25 million, and her mother “laughed at her.” Nevertheless, the trial court valued the business at $4.25 million “due to the offer to purchase at or near the date of filing.” The wife appealed.

Nix nixed: The appellate court reversed the decision and remanded the case back to the trial court. The appellate court went through the faults of the agreement from the trial evidence and also noted that the daughter “did not sign the purchase agreement and, thus, could not be bound by it.”

The case is Nix v. Nix, 2023 Ind. App. Unpub. LEXIS 183; 2023 WL 2148720, and a case analysis and full court opinion are on the BVLaw platform.

Dietrich talks tomorrow about valuing medical specialty practices

Having just finished writing his new book, Engagement Guide to Understanding and Valuing Medical Practice Specialties, Mark Dietrich will share his insights over a 45-year career in the healthcare arena during a webinar tomorrow, April 20 (10 a.m.-11:40 a.m. PT, 1 p.m.-2:40 p.m. ET). Dietrich recently retired from active practice but will continue to—very generously—conduct research, write, and give presentations drawing on his experience and insights into the healthcare industry. Don’t miss this one! To register, click here (no charge for subscribers to BVR’s Training Passport and Training Passport Pro).

Global BV News

Early-bird ends April 30 for CBV Connect 2023

The early bird discount deadline is April 30 for the two-day CBV Connect 2023 conference in Toronto, hosted by the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter. Some of the topics of note include valuation in the metaverse, automated valuation models, the role of financial experts in ESG litigation, a “ladies of litigation” panel on damages, and much more. The event will be in-person and livestreamed. For details and to register, click here. BVWire will be there—will you?

Spring 2023 issue of EBVM released

The latest issue (Spring 2023) of the new European Valuation Business Valuation Magazine (EBVM) is now available if you click here. The current edition features these articles:

· “Business Valuation With Irregular Capital Expenditures” (Hanna Murina);

· “ESG Integration—Current and Future in Business Valuation” (Wiley Pun, Allison Pan, and Beryl Lin);

· “Restructuring Valuation—Towards a Framework of Principles to Mitigate Multi-Party Valuation Fights in Workouts” (Marc Broekema and Jan Adriaanse);

· “Industry Betas and Multiples in Europe” (Martin H. Schmidt and Andreas Tschöpel); and

· “Transaction Multiples in Europe” (Stefan O. Grbenic).

There are also some news items and a profile of IVSC member Compagnie Nationale des Commissaires aux Comptes (CNCC).

The magazine is a joint effort of the European Association of Certified Valuators and Analysts (EACVA) and the International Valuation Standards Council (IVSC). The publication is free of charge and is intended to be a European platform to discuss practice issues in business valuation. EACVA, founded in 2005, is based in Frankfurt, Germany, and supports the Certified Valuation Analyst (CVA) certification for European business valuers.

BV movers . . .

Firms:Kroll has opened a new office in Johannesburg, South Africa, located in the city’s Sandton financial district and forms part of Kroll’s wider effort to expand its services across Africa; Stefan Smyth, Kroll’s managing director of restructuring, will lead the office.

Valuation News Updates

Lisa Guo — Wed, 12 Apr 2023 23:36:01 GMT

Hitchner launches a BV myth-busting effort

Some notions have recently been kicking around in the valuation profession that have prompted Jim Hitchner (Financial Valuation Advisors) to speak out. “There are a few myths that need debunking. Well, more than a few,” he writes in the April issue of Hardball With Hitchner. He’s up to two now, with more to come.

Myth 1: The Internal Revenue Service (IRS) only accepts the Uniform Standards of Professional Appraisal Practice (USPAP) in tax-related business valuations. In his March issue, he deals with this belief and quotes Business Valuation Update and its coverage of a conference where this notion was dispelled. After a review of IRS material and the various sets of valuation standards, Hitchner writes: “The bottom line is that USPAP is not required in a federal tax engagement.”

Myth 2: Restricted stock studies and data cannot be relied upon to determine a DLOM in federal tax business valuations, whether solely or in conjunction with other methods. “This is patently false,” he writes in the April issue. While these studies have their faults, so do all the other DLOM methods, he notes. Therefore, most analysts use multiple methods when estimating a DLOM (most use two to three methods, according to a BVR survey). “As such, restricted stock studies and data can indeed be used in the determination of a DLOM, particularly along with other methods,” he writes. Hitchner also examines the criticism that the use of restricted stock studies violates USPAP and, therefore, is not accepted by the IRS. “This is incorrect,” he writes and goes on to examine the USPAP sections that support his assertion.

Stay tuned for more myth-busting! Hardball With Hitchner is a monthly publication. For subscription information, click here.

Fernandez releases survey of 2023 risk premiums and risk-free rates

The results of Professor Pablo Fernandez’s latest survey of the market risk premiums and risk-free rates used in 80 countries in 2023 are now available. Many business valuers refer to this long-standing survey in their cost of capital analyses. Based on U.S.-only responses, Fernandez found an average market risk premium of 5.7% and a median of 5.5%. Not surprisingly, countries such as Ukraine, Argentina, and Venezuela lead all nations, with rates between 23% and 30%. The paper also contains the links to all previous surveys, 2008 to 2022. To download the paper, click here.

Co-authors of the survey are Diego García and Javier F. Acin, all with the IESE Business School in Spain. Fernandez is a professor of finance at the school and has over 200 papers published on SSRN, many of them related to valuation. He currently ranks as No. 1 in all-time downloads on the site.

New case involves dispute over company-specific risk

In a Minnesota shareholder buyout matter, the two opposing valuation experts disagreed over the risk associated with customer concentration. One expert did not include any extra risk, while the other expert assigned a 4% risk, noting that two customers account for almost 50% of company revenue. The court was not persuaded that there was higher risk relative to competitors, noting that the expert provided no information about how concentrated the customers are for similarly situated private companies. The case includes many more valuation issues, including the income and market approaches versus an asset approach.

The case is Koch v. Koch, 2022 WL 1467980, and a case analysis and full court opinion are on the BVLaw platform.

Extra: A recent article in Business Valuation Update examines research that helps in supporting an estimate of the extra risk of customer concentration.

Celebrity poses and gestures as protected trademarks

Celebrities are famous for being poseurs, but can their body movements be protected as a trademark, subject to damages for infringement? A recent article explores this and points to recent examples of gestures that celebrities have—or tried to have—protected. Back in 2017, Gene Simmons of KISS fame applied to register the sign of the horns (aka the devil’s horn hand gesture) that he claimed to have been using since 1974. He withdrew the application after criticism from the music industry because the gesture is now ubiquitous. This past August, athlete Usain Bolt applied to register his “lightning pose/Bolting” in the U.S, which is pending (it’s already registered in the European Union). Jay-Z registered the diamond hand signal in the U.S. in 2019. There are several obstacles and challenges to registering these types of trademarks, points out the article, “Celebrity Rights: Body Movements and Signature Poses as Trade Marks,” which is available if you click here.

Watch a free webinar on an Excel add-in for GPC analysis

Are you paying an arm and a leg for financial data when doing a guideline public company (GPC) analysis? If so, watch a free recording of a webinar on the Value Analytics Excel Add-In BVR now offers. Adam Luke andDerek Zweig, both with Value Analytics, talk about the low-cost platform they developed that provides preprocessed public-company financial statement and equity data, as well as customizable data analysis tools. The Excel Add-In tool provides direct access to financial, equity, and company profile data for all U.S. exchange-traded companies available in the Value Analytics database. The user gets unlimited access to data through the Excel plug-in, which also allows for integration into the user’s proprietary models. To watch the free recording, click here.

Global BV News

New pecking order in celebrity brand value in India

Ranveer Singh has leapfrogged over Virat Kohli to sit at the top of list of most powerful celebrity brands in India, according to Kroll’s “Celebrity Brand Valuation Study 2022: ‘Beyond the Mainstream.’” The report is a deep analysis of how endorsements affect the brand value of celebrities alongside other factors such as age, fees charged per endorsement, social media presence, and the like. It also examines the impact of the pandemic on both brand value rankings and the celebrity endorsement space. Rounding out the top five on the list are Akshay Kumar, Alia Bhatt, and Deepika Padukone.

Valuation News Updates

Lisa Guo — Wed, 05 Apr 2023 23:33:57 GMT

Big IRS red flag in fractional interest valuations

A discussion of who the partners are and what they are likely to do in the future is an essential part of a valuation of a fractional interest in real estate, advises Dennis Webb (Primus Valuations). For over 25 years, Webb has been specializing in valuing fractional interests and asset holding companies, and he spoke during a recent BVR webinar. The IRS will challenge a valuation that does not address the partners, which is a “huge issue” in these types of entities, he noted. The IRS will not be satisfied if the valuation merely assumes a generic situation that does not examine the other partners and their intentions. He recalled consulting with an IRS examiner about a valuation (not Webb’s valuation or client) that did not have this discussion in the report, and it ended up costing the client.

Webb is the author of Valuing Fractional Interests in Real Estate 2.0, and he also offers an online software application (a free trial is available).

Husband alleges wife foiled vet practice valuation

In a Kentucky divorce matter, the wife worked for the husband’s veterinary practice that he had purchased prior to their marriage. She admitted that, when they separated, she took a suitcase full of jewelry that was acquired during the marriage. Plus, she admitted that she did not fully comply with the court’s order to return all the jewelry so it could be accounted for and valued. The husband also alleged that she took business records that would establish the value of the practice at the time of their marriage. In its ruling, the court did not require the wife to account for the missing jewelry and it did not consider the date of marriage when valuing the veterinary practice. The husband sold the practice after the couple separated for $298,887, which was mostly goodwill (which the court found to be enterprise goodwill), and, thus, the court ruled that the sales proceeds were marital property.

The husband appealed and prevailed on the jewelry but not the practice valuation. The appellate court set aside the lower court’s judgment on the jewelry, so the wife has the burden to prove the disposition and value of the jewelry she did not return. But the court affirmed the lower court’s valuation of the practice and that the sales proceeds were marital property.

The case is Cummings v. Cummings, 2023 Ky. App. Unpub. LEXIS 116; 2023 WL 2052272, and a case analysis and full court opinion are on the BVLaw platform.

Technology is undervalued in M&A deals, per new survey

While technology is key in many companies’ operations, it “remains one of the most undervalued aspects in M&A transactions,” finds a new survey from Chief Executive, conducted in partnership with Elliott Davis, the tax, assurance, and consulting firm. The acquisition of technology assets ranked at the bottom of the list of factors influencing M&A decisions, behind top-line growth, revenue or operational synergies, accessing new markets, and the acquisition of skills/talent. True, top-line growth should be a primary motivator for any M&A, “but technology is a factor that can also turn a seemingly good ‘revenue deal into a failed transaction.’” The firm’s white paper gives an example of a seemingly good deal gone bad due to a lack of IT due diligence. The paper also includes key questions and actions to consider early in the M&A process to strengthen the understanding of the technology being acquired. The Elliott Davis white paper, “Maximizing M&A Value: A Guide to Evaluating IT’s Underlying Risks and Assets,” is available for download if you click here.

Global BV News

Emerging markets ramping up ESG efforts, per BCG

Although they had a slow start getting on the ESG bandwagon, emerging markets are catching up big time. And they are finding that sustainability efforts are a “powerful source of competitive advantage,” according to a new Boston Consulting Group (BCG) report. “Recent BCG research has found a strong correlation between emerging market companies’ scores in environmental, social, and governance (ESG) indexes as well as key financial and valuation metrics,” the report says.

BCG put together a list of 50 global firms it identifies as “climate pioneers” that have “generated total shareholder returns for investors that, cumulatively, were nearly 35% higher than the S&P 500 Index and 105% higher than the MSCI Emerging Markets Index from 2017 through 2022.” Valuation experts should also take note that firms are leveraging their high ESG scores into securing low-cost capital. The report is “The Sustainability Imperative in Emerging Markets,” which can be downloaded if you click here.

Global BV News: 2022 industry multiples down in Latin America

In terms of EV/EBITDA, multiples in Latin America have generally decreased in 2022 due to a pessimistic outlook and deteriorating market conditions, according to the third edition of Kroll’s “Industry Multiples in Latin America” (LATAM) quarterly report. All industries, with the exception of energy and utilities, finished 2022 with lower EV/EBITDA multiples when compared to December 2021. The full report, available if you click here, contains a detailed overview of EV/revenues, EV/EBITDA, P/E and P/B multiples of publicly traded companies in Latin America covering nonfinancial industries and market capitalization/revenues, P/TBV, and P/E and P/B multiples covering financial industries for which such data are available.

IVSC has a striking new logo

The first thing to notice about the new logo of the International Valuation Standards Council (IVSC) is the letter “V” and its distinctive design (see below). This reflects the prominence of valuation in overall business and investment decision-making, according to Richard Stokes, the IVSC’s director of communications and external affairs. “Our new logo puts a spotlight on valuation, and you will see our branding utilize and champion the valuation profession with this ‘V’ component used stylistically in isolation across some outputs,” he tells BVWire. He also pointed out that the break in the “V” creates a check or tick mark to emphasize that “valuation matters, and reliable, comparable and consistent valuation is vital,” he added. “The IVSC is focused on building trust in valuation and the standards can be seen as a reflection of global best practice; a sign of credibility and confidence.” The new logo is part of the IVSC’s refreshed branding, which is the first such effort since it was formed in 1981

Valuation News Updates

Lisa Guo — Wed, 22 Mar 2023 11:44:07 GMT

Damodaran to give critical perspective of ESG

Never one to mince words, Aswath Damodaran (New York University Stern School of Business) called it “the most overhyped, oversold concept in the history of business.” That was back in 2020, and he was talking about environmental, social, and governance (ESG) factors. After mulling it over for a year, he reaffirmed his position and added a few more choice words, saying, “It’s become a gravy train for all the people who make money on ESG.” Fast-forward two years later to today: Has he changed his tune? Find out at the ASA Spring Fair Value Conference in New York City on May 4 where he will do a session, ESG and Valuation—A Critical Perspective. The full agenda for the conference is available if you click here. Don’t miss it!

Court do-over to figure passive appreciation for divorce

In an Ohio divorce case, the trial court made an award to the wife based on the full fair market value of the husband’s business. But the business was started prior to the marriage, and, in Ohio, only the active appreciation of a business during the marriage is marital property. Any passive appreciation goes to the business owner. The husband appealed, and the appellate court remanded the case back to the trial court. The experts for each side will have to value the business as of the date of marriage and also as of the date of divorce. The increase in value then must be broken down into active and passive components, recognizing the contribution of each to the business.

The case is Fordeley v. Fordeley, 2023-Ohio-261; 2023 Ohio App. LEXIS 240; 2023 WL 1097726, and a case analysis and full court opinion are on the BVLaw platform.

Passive calculator: Dr. Ashok Abbott (West Virginia University) has developed an online application that produces a passive appreciation factor on a national level for businesses in the retail sector. Just choose the type of retail business and enter the beginning and end dates for the valuation. The application is live and available for testing purposes if you click here. The application embodies Dr. Abbott’s methodology from his peer-reviewed paper (click here). Feedback is welcome!

New edition of BVR’s guide to economic damages is available

The Comprehensive Guide to Economic Damages, already the profession’s leading guide of its type, is now even more wide-ranging in its new 7th edition, which has just been released. Existing chapters were revised as needed, and new chapters were added, including:

• Chapter 29, “Lost Profits Analysis in Cannabis Establishments” (Ryan Cram and Ron Seigneur);

• Chapter 30, “Economic Damages in Cryptocurrency” (Nicholas Oldack); and

• Chapter 35, “Commercial Success” (Richard F. Bero and Shane A. Brunner).

This new edition, edited by Jimmy Pappas, Bill Scally, and Steve Veenema, features 50 chapters drawing on the expertise of nearly 70 financial experts and attorneys. It is available now in the BVR bookstore if you click here. For those of you who have the BVResearch Pro platform, the book is included at no extra charge and is automatically added to your library.

Stout updates its restricted stock study companion guide

The 2022 edition of the “Stout Restricted Stock Study Companion Guide” is now available, and it reflects updated tables and graphs that contain new transactions. The study is the most widely used restricted stock transaction database for providing empirical support for a discount for lack of marketability (DLOM). The study is updated quarterly and contains over 770 screened transactions with up to 60 data fields. The database includes the Stout Calculator, which makes it easy to use Stout’s methodology and determine a DLOM driven by the financial characteristics of your subject company, as well as the volatility of the market. This is the preferred analysis as opposed to a simple listing of all the studies and their average discounts and then estimating a DLOM from these benchmark averages. To download the new “Stout Restricted Stock Study Companion Guide,” which is free to everyone, click here.

Free e-book: home care medical director compensatio

Based on national market data from several independent third-party surveys, the median hourly rate for home care and hospice medical direction ranges from $115 to $150, according to a free e-book from Buckhead FMV. The resource, Compensation Philosophies as Compliance Tools for Contracted Medical Directors, includes tips on implementing compensation philosophies as compliance tools, compensation philosophy examples, advice for selecting compensation benchmarks, and instructions for converting annual compensation data into hourly rates

Global BV News

CFA Institute issues Kroll’s global cost of capital 2022 summary edition

The CFA Institute Research Foundation has put out the “Valuation Handbook—International Guide to Cost of Capital 2022 Summary Edition” from Kroll. This 179-page work provides interpretive analyses and insights through June 30, 2022, and is an abridged version of the research and data that are available through the Kroll Cost of Capital Navigator. The publication examines the important difference in risk characteristics of investing in various countries and has the following seven chapters:

“International Cost of Capital Overview”;
“Strengths and Weaknesses of Commonly Used Models”;
“International Equity Risk Premia”;
“Country Yield Spread Model”;
“Relative Volatility Model”;
“Erb-Harvey-Viskanta Country Credit Rating Mode”; and
“Firm Size and the Cost of Equity Capital in Europe.”

The publication is free of charge, and you can download it if you click here.

BV movers . . .

Firms: In Canada, Calgary, Alberta-based MNP is adding Edmonton, Alberta-based SVS Group LLP, effective June 1; SVS has six partners and 40 team members who provide a range of professional services, including accounting and taxation services, to organizations throughout Edmonton and Northern Alberta.

Valuation News Updates

Lisa Guo — Wed, 15 Mar 2023 11:39:54 GMT

Reilly examines key Tax Court case on reasonable comp (A big lesson for BV experts - IACVS

Nationally known valuation expert Robert Reilly (Willamette Management Associates) has done a comprehensive 17-page article on the Hood case—a Tax Court case with some important and practical guidance on determining reasonable compensation. While the case involved a federal tax matter, the guidance may also be helpful in other contexts, Reilly notes. The case involved a private company, Clary Hood Inc. (CHI), a C corporation in the construction industry. The outcome was “generally favorable” to the IRS, with the company paying back taxes and penalties for taking tax deductions for an unreasonable amount of compensation.

Multifactor approach: Of particular importance, Reilly points out, is the court’s thorough analysis of “the multifactor approach” to assessing the reasonableness of executive compensation. This approach takes into consideration certain factors, such as the employee’s qualifications; the nature, extent, and scope of the employee’s work; the size and complexities of the business; and others. The court’s assessment of these factors was largely in favor of the company, except that it noted that the company never declared or paid a cash dividend even though it was profitable, an indication that some of the compensation paid was a disguised dividend.

Other jurisdictions use an “independent investor” test, which essentially asks whether an inactive, independent investor in the company would receive a reasonable return taking into account the compensation that was actually paid.

Experts stumble: Also important in this case, Reilly says, is the guidance it gives to experts who testify in reasonable comp matters. That’s where things really went wrong for the company, which presented two experts to testify as to how CHI’s compensation compared to similar companies. The first expert was not that familiar with the contents of the report that he co-wrote with a colleague (who was not called to testify). The court said that “perhaps most egregious” was the comparison of CHI, a private regional specialty construction firm, to the multinational conglomerate Caterpillar Inc., with “little attempt” at adjusting for the obvious and stark differences between the two. Also, the report focused on the independent investor test, not the multifactor test, which was controlling in that jurisdiction.

The second expert for the company had not written the report to which he was testifying although he reviewed and agreed with it. The court found the report lacked necessary supporting calculations and relied on unsound assumptions. For example, the report used data from much larger companies and discounted the data by 20%, a rate not supported by any empirical data. The court gave this expert’s testimony little or no weight.

On the other hand, the expert for the IRS prevailed, providing “the most credible and complete source of data, analyses, and conclusions in the record regarding what similar companies might be willing to pay” in terms of compensation, the court said. The amounts were significantly higher than the estimates provided in the IRS deficiency notice but were much less than the amounts the company originally deducted on its returns. Plus, the court found the company liable for a substantial understatement accuracy-related penalty for one of the years at issue.

Reilly discusses a number of other important issues in the article, which is available if you click here. The case is Clary Hood, Inc. v. Comm’r, T.C. Memo. 2022-15.

Size effect is hibernating, per new paper

The size premium is more significantly related to monetary policy than to firm quality or to business cycle troughs, according to a new paper. The authors conclude that monetary tightening eliminates the size premium and it re-emerges when that policy is eased whether or not one controls for quality. “Furthermore, the quality minus junk (QMJ) factor is insignificant in explaining the size premium in the 21st century,” they write. The paper is “The Resurrected Size Effect Still Sleeps in the (Monetary) Winter,” by Marc William Simpson (University of Toledo) and Axel Grossmann (Georgia Southern University). The paper is a preprint and not yet peer reviewed. To download it, click here.

Tell job candidates a story

The search for BV talent has never been more challenging, so anything that can help land a good candidate is very welcome. In his latest newsletter, John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years, advises interviewers to tell candidates a story about the kind of workplace they have. This is better than simply saying “we’re very entrepreneurial here.” Give an example. Get stories from your employees and use those to illustrate. “Bob was interested in exit planning, so we encouraged him to start a new service line—and he’s now leading that area of our practice.” Have the candidate talk to Bob at some point—and to other employees who can give their personal stories about the workplace. This is much more effective than spouting a bunch of self-serving assertations, notes Borrowman. To read more of his observations, click here

Low-cost alternative for public-company data

BVWirerecently met with Derek Zweig, a valuation practitioner who saw the need for a more affordable source of financial data when doing a guideline public company analysis. In 2021, he founded Value Analytics, a firm that has developed a low-cost platform that provides preprocessed public-company financial statement and equity data, as well as customizable data analysis tools. BVR now offers the Value Analytics Excel Add-In, which provides direct access to financial, equity, and company profile data for all U.S. exchange-traded companies available in the Value Analytics database. The user gets unlimited access to data through the Excel plug-in, which also allows for integration into the user’s proprietary models. Price: $495 per year. For more information, including an Excel template and a template for the guideline public company section of a valuation report, click here.

BVPro adds new guide on valuing fitness clubs

The BVResearch Pro platform adds new content continually to its collection of over 16,000 articles, books, special reports, court case digests, webinar transcripts, and more. Just added is a 146-page guide, What It’s Worth: Valuing Fitness Centers, Health Clubs, and Gyms. The guide includes industry intelligence (from Vertical IQ), key benchmarks from DealStats, and insights and rules of thumb from the Business Reference Guide. Plus, it includes a detailed case study from Gary Trugman based on one of his actual engagements (that ended up in litigation).

If you are not a subscriber to BVPro, you can purchase the guide on an a la carte basis if you click here.

Global BV News

IVSC and WIPO collaborate on IP and intangibles

The International Valuation Standards Council (IVSC) together with the World Intellectual Property Organization (WIPO) has signed a memorandum of understanding (MoU) with the goal of strengthening cooperation and collaboration on issues related to the valuation of intellectual property and other intangible assets. The MoU will facilitate the exchange of information and expertise between the two organizations and will include collaboration in research and development activities, training and capacity building, and the promotion of best practices in the valuation of intellectual property and other intangible assets. “Intellectual property is a rapidly growing asset class, and this MoU will help ensure that valuation professionals have the knowledge and skills they need to provide accurate and reliable valuations of these assets,” said Nick Talbot, IVSC chief executive, in a statement.

Preview of the April issue of Business Valuation Update

Here’s what you’ll see:

“New Damages Guide Examines Crypto Landscape”(BVR Editor). An understanding of the current issues and developments within the cryptocurrency industry, plus a look at some emerging case law, are crucial for damages experts in this area. This is an excerpt from the upcoming 7th edition of The Comprehensive Guide to Economic Damages.
“Feedback Wanted on New Model for Small Firm Risk”(BVR Editor). A variation of the multiattribute utility model (MUM) used along with Monte Carlo simulation forms the basis of a new model for estimating a company-specific risk premium (CSRP) for small, closely held businesses. Excel templates are available from the model’s developer, David Goodman (Jesson, Oslin & Associates), and feedback is welcome.
“What Would a Hypothetical Willing Seller Do? A Complicated Case—A Confounding Decision in Idaho” (Peter J. Butler). An inside look by one of the experts in a case that “had it all”: a high-tech startup, a recent historical transaction, the personal goodwill-versus-commercial goodwill debate, a covenant not to compete, a lot of money at stake, and the proverbial “battle of the experts.”
“Adjusting the P&L for a Cannabis Dispensary Valuation”(BVR Editor). A sample valuation report for a cannabis firm reveals an interesting technique to get inside, and otherwise unavailable, information to help adjust the income statement.
“A Look Back: Including ESG in Valuation Models”(BVR Editor). Quantifying the impact of environmental, social, and governance (ESG) factors and measuring their effects is not a new phenomenon. Thanks to the BVResearch Pro platform, here are two ways experts have done this before.
“New Country Risk Data Update Reminds Valuers of Factors to Consider”(BVR Editor). A data update from Aswath Damodaran (New York University Stern School of Business) helps valuation experts explain how they considered each of the risk factors in assessing value for business assets located outside of the U.S.

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the March 2023 issue of Business Valuation Update.

BV movers . . .

People:John-Henry Eversgerd, CFA, ASA, has launched a new boutique valuation firm, Hewlett & Murray, based in Sydney, Australia; the firm already has a team of six professionals specializing in business valuation, intellectual property valuation, economic loss quantification, and expert witness services; Eversgerd is the former co-leader of FTI Consulting’s Australian valuation practice.

Firms: The M&A Advisor’s 17th Annual Turnaround Awards named Valuation Research Corp. (VRC) the Valuation Firm of the Year … Pittsford, N.Y.-based The Bonadio Group has acquired forensic accounting firm Webber CPA of Rochester, N.Y. … San Francisco-based BPM LLP has acquired the RiMo Consulting Group team of Las Vegas, a firm that provides risk advisory services to clients across the U.S. … FORVIS (the new firm name for the merger of BKD and DHG) has opened an office in South Florida (Boca Raton), its third office in the state (the others are in Jacksonville and Tampa) … In Canada, Calgary-based MNP is adding Shawinigan, Québec -based Sylvain Béland CPA, a firm that provides a wide range of accounting and tax services to organizations throughout the Mauricie region of Québec … Los Angeles-based MGO expands its reach in Silicon Valley by adding Young Craig & Co. LLP of Mountain View, Calif. … St. Louis-based RubinBrown LLP is joining forces with Birmingham, Ala.-based KnowledgePath Consulting, a provider of technology

Valuation News Updates

Lisa Guo — Wed, 08 Mar 2023 12:36:06 GMT

Confounding incongruities’ in recent divorce case

A complex divorce case in Idaho included a number of valuation issues, one of which was the personal vs. enterprise goodwill question. The state’s Supreme Court upheld the lower court’s ruling that a material amount of value of an entity that was formed as a result of a buyout transaction was personal goodwill and thus excluded from the marital estate. The entity was deemed a start-up even though it was the result of the transaction. The husband, who was an owner of the firm that was bought, had a share of this new entity, with which he also had an employment contract and a non-compete agreement.

Far apart: The question became whether this was a case where there was a transaction and therefore there should not be any personal goodwill included. The Supreme Court clearly stated that, under Idaho case law, personal goodwill was not transferrable. “There was a transaction that can determine a value—maybe,” writes BVLaw editor Jim Alerding (Alerding Consulting), in a recent post in BVLaw News. “But the Supreme Court also said that the value of the transaction and the value for divorce purposes were two different dates, with the divorce value being the later date.” The court upheld the existence of personal goodwill and the valuation of the husband’s share at $163,373 versus the $1,147,500 the wife contended. The court also noted that awarding the wife a share of this new entity would fail to sufficiently “disentangle” the former couple.

“The result here was not unusual from the standpoint of divorce litigation,” Alerding writes. “Such litigation was often filled with confounding incongruities. This appeared to be one of those cases.”

Stay tuned: One of the valuation experts in the case gives an inside look in the April issue of Business Valuation Update.

The case is Lamm v. Preston, 2023 Ida. LEXIS 4 and a case analysis and full court opinion are on the BVLaw platform.

Dietrich reveals his trade secrets of healthcare valuations

Recently retired, nationally known healthcare valuation expert Mark Dietrich is devoting his time to passing on what he learned over his 45 years in the healthcare arena. Dietrich is putting the finishing touches to his new Engagement Guide to Understanding and Valuing Medical Practice Specialties, which will soon be released by BVR.

Zeroes in: The guide will have chapters devoted to dermatology, gastroenterology, internal medicine, OB/GYN, ophthalmology, orthopaedic surgery, pediatric, urology, and more. This guide will not go over valuation basics--other books already do that. Instead, it will zero in on the type of valuation analysis necessary for specific types of medical practices. Importantly, each chapter includes a comprehensive calculation of reasonable compensation for one or more providers using an RVU (relative value units) calculator. This methodology eliminates the debunked technique of using compensation surveys.

Each chapter is highlighted by “Author’s Insights,” “Research Tips,” and “Report Tips” drawn from actual engagements. There is also a special chapter on how to conduct the management interview, complete with detailed explanations for each interview item.

The guide will be available shortly from BVR. For those subscribers to the BVResearch Pro platform, the guide will automatically be added to your library.

Judicial appraisal needs reform per new paper

A recent paper addresses the problem of the “wide discretion” judges have in fashioning appraisal awards to dissenting shareholders based on opinions of valuation experts that are miles apart. “Judicial appraisal should not be a remedy for dissenting shareholders when a market exit or equivalent protection is otherwise available,” the authors write. Shareholders of publicly held companies often have an exit—they can sell easily. But shareholders of most closely held firms cannot do this. So, the authors explore “reinventing” the shareholders’ appraisal remedy. “While such reform would be costly to valuation litigation professionals, their loss would be more than offset by the benefit of such reforms to shareholders involved in future corporate transactions,” the authors say.

The paper is “The Exit Theory of Judicial Appraisal” and the authors are William J. Carney and Keith Sharfman, The paper appears in the Fordham Journal of Corporate & Financial Law.

Web-based valuation platform gets financing boost

Valutico, an all-in-one web-based valuation platform, closed its first financing round with outside investors that, along with existing investors, totals in the mid 7-figures, the company announced. It received investments from venture capital firms PUSH Ventures and AWS Gründerfonds. Also participating in the round is banking firm Erste Group, based in Vienna, which will partner with Valutico to deploy the platform through its organization.

This platform is not a simple calculator. A short video shows how it handles a private company valuation—performing a qualitative analysis, automatically selecting market comps, pulling suggested transactions, estimating cost of capital, and creating reports. The platform also does public company valuations. Future upgrades include impairment testing and integrating ESG factors into a valuation.

ASA discount: Members of the American Society of Appraisers can get a 15% subscription discount to Valutico, the organization just announced. ASA members get the discount when subscribing for 12 months plus an additional discount for multi-year subscriptions.

Valutico, launched in 2017, has a team of 60 employees based in Vienna with subsidiaries in the US and UK. The company says it currently has around 600 clients in over 85 countries.

Reminder: Take a survey on tax return data extraction

Is the historical financial information you get from client tax returns in usable form? Do you have to extract it by hand? Do you use an automated solution? BVR sees this as an area of some potential need, so if you haven’t already done so, please take a very short survey about how you collect and process these data. All responses are confidential, but we’ll announce the overall results in a future issue. Take the survey by clicking here. Thank you!

Still open: 2023 Pepperdine private cost of capital survey

At press time, the Pepperdine University annual survey of expected rates of return with respect to private companies is still open. If you haven’t yet taken it, input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is here. The survey results are used to produce annual Private Capital Markets Report (reports from prior years are available if you click here). The price for the annual report is normally $125, but it’s free if you fill out the survey—plus you’ll get it a week early.

Users inspire update to the Stout DLOM calculator

Estimating a discount for lack of marketability (DLOM) has just become more robust with a new update to the Stout DLOM calculator. Based on feedback from users, the tool now shows the quintile low/median/high values so that you have a better frame of reference for your subject company. Now, you will see if your subject company is on the low end, high end, or somewhere in between in terms of Size Characteristics, the Balance Sheet Risk Characteristics, Profitability Characteristics, and Market Risk Characteristics. The calculator is included with the Stout Restricted Stock Study^TM which is the most widely used database of its kind for providing empirical support for a DLOM.

Global BV News

Updated study of European capital markets released

The 11th edition of the “ValueTrust European Capital Market Study” provides an analysis of cost of capital parameters, returns (implied and historical) and trading multiples. The analysis focuses on the European capital market (in form of the STOXX Europe 600) and has been subdivided into ten sector indices by industry. Historical data have been compiled from Dec. 31, 2016, and Dec. 31, 2022.

Valuation News Update

Lisa Guo — Wed, 01 Mar 2023 10:55:16 GMT

SEC climate proposal is key topic during KPMG panel

At the recent Global Financial Reporting and Valuation Conference, a panel of KPMG leaders shared their knowledge and insights on the evolving landscape regarding environmental, social, and governance (ESG) factors. During this session, audience members were particularly interested in how the SEC climate proposal can impact private companies.

The panel discussed the proposed financial statement footnote and the complexities involved in measuring and recognizing climate-related risks (and opportunities) within the financial statements. Comment letters the SEC has received to date were also discussed. Some respondents have urged expanding safe-harbor provisions for certain forward-looking and third-party information used for Scope 3 GHG (greenhouse gas) reporting. The speakers urged finance and accounting leaders to monitor how the SEC responds in order to track the likely provisions of the final rule.

The proposal is part of new sustainability-related regulations that are emerging both domestically and internationally that are creating “seismic shifts” in corporate reporting for U.S. companies. These changes will significantly affect everything from financial reporting to tax compliance, to valuations during M&A deals.

A replay of the ESG session has just been posted and can be found if you click here. Also, KPMG has an ESG webpage that can alert you to various ESG insights, information, and events.

Extra: A recent academic paper finds that companies with higher ESG scores have a lower cost of capital.

Damages experts caught up in Irish bar fight

In a New York case, majority owners of an Irish soccer bar used the proceeds of a lease buyout to relocate the bar—and cut out the minority owners at the same time. The majority owners started a new corporation to operate the new bar. The minority owners said they knew nothing about all this and sued, claiming the majority owners misappropriated a “corporate opportunity.” Under the corporate opportunity doctrine, a fiduciary cannot “divert or exploit for his own benefit an opportunity that is an asset of his principal.” But, if the minority owners had known of the new venture and did not object, they would not be entitled to reap any benefits from the new bar. However, the court found that the majority owners deceived the minority owners, keeping them in the dark about the new bar, so they are indeed liable for the lost value of the opportunity, plus punitive damages. (By the way, the bar at issue is Smithfield Hall, located at 138 W. 25th St. in New York City.)

Our thanks to attorney Peter Mahler (Farrell Fritz) who alerted us to this case—check out his firm’s blog, “New York Business Divorce,” which offers valuable insights on cases of owner disputes at closely held businesses.

The case is O’Mahony v. Whiston, 2023 NY Slip Op 30482(U), Feb. 15, 2023, Supreme Court, New York County, and a case analysis and full court opinion will appear soon on the BVLaw platform.

Bickering BV thought leaders: What to think?

How often do we hear well-known, veteran valuation experts “vehemently” disagreeing with each other over various issues? Here are some examples:

“Use a normalized risk-free rate.” “No, use the spot rate.”
“Yes, there’s a size effect.” “The size effect is fiction.”
“Use the historical ERP.” “No, the implied ERP is better.”
“Restricted stock studies are a good proxy for DLOM.” “Those studies are useless.”

The list of debatable topics goes on and on. Yes, healthy debate is good, but what is the average practitioner supposed to think when even the top people in the profession can’t agree? This was a discussion point during a recent AICPA podcast on marketability discounts. Especially for practitioners just starting out, who do you listen to when they disagree strongly about how to do something? While you may go with the view of the expert who you feel is more credible, you need to evolve your thinking, the speakers said. The bottom line is to go with an approach that you are comfortable with and that you feel is more supportable given the particular situation. Practitioners invite trouble if they are resistant to change because thinking on valuation issues continues to evolve.

The podcast was hosted by David Consigli, who was joined by speakers Brian McIntyre (Withum) and Natalya Abdrasilova (BDM). There are other recent podcasts in the series with different hosts and speakers, including discussions about ESG, personal and enterprise goodwill, human capital, and more.

How do you extract tax return data?

BVR is always on the lookout for new offerings that will help practitioners. One area where we see some potential need is in extracting historical financial data from client tax returns. Do you do it by hand? Do you use an automated solution? Please take a very short survey about how you collect and process these data. All responses are confidential, but we’ll announce the overall results in a future issue. Take the survey by clicking here. Thank you in advance for participating!

Agenda set for NYSSCPA BV conference May 15

BVWire is starting to see plans coming together for this year’s conferences. The three major events (from the AICPA, ASA, and NACVA) are all later in the year, but some good events are blooming in the spring. One that we never miss is the annual New York State Society of CPAs’ Business Valuation and Litigation Services Conference, and registration is now open for this year’s event, which will be May 15 on-site in New York City and also online. Topics include a fair value measurement update, statutory fair value and the applicability of a DLOM, valuation issues in matrimonial litigation, litigation finance, cryptocurrency and NFT matters, the latest on private equity M&A, ESG human capital disclosures, and more. Speakers include Chris Mercer, Mark Zyla, Adam John Wolff, and more. Early bird pricing ends April 24. See you there!

Extra: One of the hallmarks of the Business Valuation Update newsletter is its coverage of BV conferences both large and small. If you’re not a subscriber, you can see last year’s conference coverage all in one chapter of the Business Valuation Update Yearbook, 2023 edition. (Note: You already have this edition if you are a subscriber to the BVResearch Pro platform.)

Global BV News

IVS exposure draft will address ESG

This April, the International Valuation Standards Council (IVSC) will publish an exposure draft outlining proposed updates to the International Valuation Standards (IVS). The draft will seek feedback on changes including new standards on “data and inputs” and explicit references to environmental, social, and governance (ESG) within the valuation process. The public comment period will last 12 weeks, during which time the IVSC will organize a series of webinars and roundtables to present details of the exposure draft. An updated version of IVS is expected to be published in 2024. For more information on the project, click here.

Valuation News Update

Lisa Guo — Wed, 22 Feb 2023 10:53:27 GMT

Damodaran examines impact of inflation on profitability

In his fifth data update for 2023, Professor Aswath Damodaran (New York University Stern School of Business) focuses on trends in company profitability in 2022, including the impacts of inflation. His analysis includes measures across global regions and industries.

Sector performance:Inflation can increase profits for some firms and lower them for others. Sectors with the highest operating margins include energy (reflecting higher oil prices), a few technology groups (software and semiconductors) and, interestingly, tobacco (a declining, but high-profit business). On the downside, those sectors with the lowest operating margins include four industry groups from the retail space (not surprising, given this sector’s history of low operating margins), the young online software sector, and two industries in “long-term trouble,” namely, airlines and hotel/gaming.

Excess returns:Cost of capital in the U.S. saw its greatest increase last year, from 5.6% at the beginning of 2022 to 9.63% at the start of 2023. In terms of returns, almost 70% of all listed companies across the globe earned returns that were lower than their costs of equity or capital. U.S. companies have the highest percentage of companies that earn more than the cost of capital but still fall short of 50%, his analysis shows. There are clear differences among industry sectors in terms of returns in excess of the cost of capital. Time for companies to revisit hurdle rates, Damodaran advises, and they should figure out how to make money instead of going for “growth, growth, and more growth.”

The post is also helpful in that Damodaran goes into some basics that are sometimes easy to forget. He worries about “insulting” some in the audience, but it’s always a good idea to keep an eye on fundamentals.

Extra: Damodaran’s framework for assessing the impacts of inflation on the value of a private company can be found in an article in Business Valuation Update.

In a damages case, one expert survives Daubert, another does not

In an ongoing damages case in Delaware, the plaintiff had a Daubert motion to exclude the opinions of the defendant’s rebuttal expert. But the court denied the motion, finding that the expert did not impermissibly exceed the scope of a rebuttal expert, her opinion was reliable, and she did not make a credibility determination of the plaintiff (i.e., an accusation that the plaintiff was untruthful). The defendant also filed a Daubert motion to exclude the opinions of the plaintiff’s expert, and it was granted in part. The court found that a portion of the expert’s report was unreliable as it was ipse dixit (an assertion made but not proved). Also, some of his opinions violated the law of the case, and he relied on the rejected “value creation” theory of damages.

The case is LCT Capital, LLC v. NGL Energy Partners LP, 2022 Del. Super. LEXIS 1448, and a case analysis and full court opinion are available on the BVLaw platform.

SaaS valuation multiples see dramatic decrease

While the software-as-a-service (SaaS) industry is poised for significant growth, revenue multiples are projected at a three-year low, averaging a prepandemic level of about 5.5%, according to a report from FirstPageSage. During the third quarter of 2021, valuations hit a record high of 9.8x, and the projections represent “such a dramatic decrease [that] is both a comment on the economic impact of global events (e.g., inflation or Russian invasion of Ukraine) as well as the volatile nature of SaaS and the tech sector as a whole.” The report provides SaaS valuation multiples for ranges of EBITDA, revenue, and seller’s discretionary earnings (SDE) and for various business types. The report points out that, while most companies often rely on EBITDA, the “vast growth potential and large sunk investments in growth for SaaS companies often means that SDE or revenue-based valuations are more valuable within this industry.”

New Deal Alert feature in DealStats

In response to user feedback, DealStats has added a Deal Alert feature that allows you to receive notifications when new transactions are added to DealStats, based on your specific saved search parameters. And you can specify how—and how often—you want to be notified of new transactions. You can see new deals when you log in, or you can be notified via email, or both. And you can specify the frequency: daily, weekly, or monthly—it’s your choice (you can modify your selections at any time). You can add a Deal Alert to your saved searches as well as to a new search. There is a video tutorial that shows how the new Deal Alert feature works. If you have any questions about it, please feel free to contact info@bvresources.com or 1-503-479-8200.

Dental practices take top spot in industry research on Vertical IQ

For 2022, the most popular industry profile on the Vertical IQ industry research platform was dental practices, based on number of user visits. Vertical IQ can’t quantify the reasons for the high level of interest, but it’s interesting to speculate. Did more dentists retire and sell their practices? Were more dental practices caught up in a divorce and needed valuing? These same questions can be asked about the rest of the top 10 most-visited industry profiles: full-service restaurants, HVAC and plumbing contractors, physician practices, law firms, trucking companies, lessors of residential buildings, residential brokers and property managers, management consulting services, and auto repair shops. These industries are just a small fraction of the platform’s profiles that cover more than 570 distinct industries, representing more than 97% of the U.S. economy.

Global BV News

First-ever Innovation Valuation Summit in Korea March 21-22

“Valuation of new assets, what’s the future?” is the theme for the premier Innovative Valuation Summit. Sessions will cover big data, cryptocurrency, NFTs, the metaverse, startups, intellectual property, artificial intelligence, ESG, and more. The event will be live on-site at the UST Auditorium in Daejeon, Korea March 20-21 and will also be livestreamed. The language will be Korean with simultaneous English translation. The conference brochure and agenda are available if you click here. A registration form is available if you click here. The event offers 16 CPD credits and is sponsored by the International Association of Certified Valuation Specialists (IACVS), Korea Valuation Association (KVA), and Korea Institute of Science and Technology Information (KiSti). If you have any questions, please e-mail info1@iacvs.org

Valuation News Update

Lisa Guo — Wed, 15 Feb 2023 10:52:13 GMT

Next-gen BVers warn about too much technology

Veteran valuation experts have raised red flags about relying too much on technology and automation. This advice is directed particularly to young BV practitioners who have grown up surrounded by automation. But their young colleagues are well aware of this issue and share their concerns.

Watch out:Young up-and-coming BV experts on a recent panel feel that technology will not totally replace the human element in the valuation process. They say there is “so much judgment” involved that technology cannot handle the entire process. There was even the comment that too much automation makes someone a “little nervous,” feeling that experts may lose some understanding of the underlying concepts. But one panel member points out that automated tools could actually enhance understanding by freeing up analysts’ time typically spent on number crunching so they could spend that time learning about what’s behind all the crunching.

If this panel is any indication of young practitioners as a whole, there’s no worry that professional judgment will take a back seat to computer models.

The panel also talked about how and why they chose valuation as a profession, what they need from their firms in order to develop, and other matters. Full coverage of the session is in the March 2023 issue of Business Valuation Update.

Panel members were Dalton Hopper (BMSS Advisors & CPAs), Amy Shaw (Soukup, Bush & Associates), and Nick Contey (DiGabriele, McNulty, Campanella & Co.). The moderator was Bob Lewis, president of the Visionary Group. The session was conducted at the December 2022 NACVA Business Valuation & Financial Litigation Super Conference.

Wife who foregoes expert can’t complain about the outcome

A marital dissolution case in Illinois is another instance of a party not offering a competing valuation and then appealing the outcome—to no avail. The husband engaged a business valuation expert to appraise an entity that held two real estate properties. The expert testified that, while he was a business valuation expert, he often valued equity in real estate partnerships, for which he relied on appraisals or other estimates of value. In this case, for one property, he relied on a broker opinion of value and a market analysis from a relevant expert. For the other property, which was newly built, he based the value on the construction costs. The wife did not engage a valuation expert to appraise the properties. The trial court accepted the valuation done by the husband’s expert and the wife appealed. But the appellate court upheld the trial court’s decision, noting that there was “sufficient foundation” for the expert’s determination of value. Plus, the court pointed out (citing a prior case), “where a party does not offer evidence of an asset’s value, the party cannot complain as to the disposition of that asset by the court.”

The case is In re Trapp, 2022 IL App (3d) 210291-U; 2022 Ill. App. Unpub. LEXIS 1914, and a case analysis and full court opinion are available on the BVLaw platform.

New case on damages in the metaverse

An artist is liable for trademark infringement after creating and selling a series of non-fungible tokens (NFTs) that depict fur-covered purses resembling the iconic Hermès Birkin bag. The series of NFTs were called “MetaBirkens” and were sold on the blockchain. They initially sold for about $450 each, but the NFTs from the artist’s limited collection were bought for as much as $46,000 just two weeks later, according to a report in Tatler. The jury reached a verdict of liability for trademark infringement, trademark dilution, and unlawful cybersquatting on the MetaBirkins.com domain name. They awarded Hermès the $110,000 of profits from the artist’s sale of the NFTs and $23,000 in damages for cybersquatting, according to a report in Lexology. The case is: Hermes Int’l v. Rothschild, No. 22-CV-384 (JSR), 2023 WL 1458126, at *1 (S.D.N.Y. Feb. 2, 2023).

BIZCOMPS now has over 15,000 transactions

A new infographic shows that BIZCOMPS, the database of sales transactions involving small “Main Street” private companies, now includes over 15,165 deals. The infographic also points out that the database covers transactions for over 500 industries and the transactions include 21 data fields. Search tip: When using BIZCOMPS, we recommend searching for transactions not only by SIC code, but also by business description. This will allow you to gather a more comprehensive selection of transactions because SIC codes are occasionally outdated or inaccurate.

BVR to webcast Energy Valuation Conference May 11

For the fifth year, BVR is pleased to partner with the Houston Chapter of the American Society of Appraisers (ASA) to present a live webcast of the Energy Valuation Conference on May 11. The conference will feature presentations from nationally recognized speakers who are profession leaders, covering a range of important topics in the industry. Details are forthcoming, but in the meantime, mark your calendars!

Global BV News

CBV Institute launches ED&I working group

The CBV Institute, Canada’s valuation professional organization (VPO) and standard setter will roll out a series of equity, diversity, and inclusion (ED&I) initiatives targeting the business valuation profession. The goals include (but are not limited to) increasing the number of women and other underrepresented groups to the profession. Recently, it founded an ED&I Working Group made up of CBV volunteers and industry experts that has a mandate to provide the VPO with input and advice on issues of ED&I with respect to the CBV profession, and the business valuation profession at large. To learn more, click here.

Preview of the March 2023 issue of Business Valuation Update

Here’s what you’ll see:

“A Model for Forecasting a Multiple-Location, Growing Business” (BVR Editor). Veteran valuation expert Gary Trugman (Trugman Valuation) had an engagement that involved a business that operated a franchise with multiple locations—and was required to open a lot more. This article shows in detail how he did the forecasting.

“More Insights From Young BVers About the Profession” (BVR Editor). The second of two panel discussions with young valuation and forensics experts reveal additional insights on their perspectives on the profession, including what attracted them to the profession and why they stay in it.

“Simple Idea to Help Business Sellers Get All They Deserve” (BVR Editor). A valuation expert had a client who wanted to sell his company but had an unrealistic idea about price. The expert used DealStats to create a compelling visual that saved the deal from falling apart.

“Considerations When Adding Litigation Services to a Valuation Practice” (BVR Editor). The 2022 AAML/BVR National Divorce Conference sparked some advice for moving your practice into litigation support services for marital dissolution or any other matters that are headed to court.

“Valuation Expert Gets Caught Up in a Plagiarism Nightmare” (BVR Editor). A valuation expert in a divorce case was discredited over some material in his report that was copied from outside sources without attribution. With the proliferation of data and research on the web, it is easy to inadvertently use something and then forget to add the attribution.

“NICE DLOM Method for FLPs Gets Peer Reviewed” (BVR Editor). A paper describing the theory and mechanics of the nonmarketable investment company evaluation (NICE) method for estimating a discount for lack of marketability (DLOM) has been published in the Business Valuation Review, the peer-reviewed journal of the American Society of Appraisers.

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,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

To stay current on business valuation, check out the March 2023 issue of Business Valuation Update.

Valuation News Update

Lisa Guo — Wed, 08 Feb 2023 10:49:48 GMT

Inflation appears to have peaked, per Kroll

The latest cost of capital infographic from Kroll says that inflation seems to have topped out toward the end of 2022. Inflation estimates over the long term rose from 2.0% in June 2020 to 2.9% in October 2022 but declined to 2.4% at the end of December 2022. Long-term inflation expectations are a key starting point to evaluate the long-term growth rate used in the terminal year for a DCF analysis.

Cost of capital inputs: The same infographic says that, as of Jan. 17, 2023, Kroll’s recommended U.S. equity risk premium (ERP) is 6.0% and the normalized risk-free rate is the higher of 3.5% or the spot 20-year U.S. Treasury yield as of the valuation date. This guidance is effective when developing USD-denominated discount rates as of June 15, 2022, and thereafter.

IRS hits taxpayer with gross valuation misstatement penalty

Easement cases before the Tax Court can offer some interesting insights and guidance to BV professionals. A recent case involved the valuation of a conservation easement donation for a charitable deduction. The deduction is figured by determining the fair market value of the property before the donation and subtracting the FMV after the donation. In this case, the donation involved an easement on undeveloped real estate. The opposing valuation experts agreed that the highest and best use for the property was as a residential subdivision and development. But the donors’ valuation expert came up with a value that was “incredible as a practical matter,” as the court put it. He mischaracterized the zoning according to the court and valued the property as fully developed. He also did not consider a prior transaction involving the property. The IRS expert concluded that the valuation should be based on the property being undeveloped. The two valuations were miles apart.

The court sided with the IRS expert, and, because the donors’ valuation was 200% or more of the correct valuation, they were hit with the 40% gross valuation misstatement penalty. Plus, the court disallowed the deduction because the donors failed to get proper substantiation of the donation—the easement deed alone was not sufficient.

The case is Brooks v. Comm’r, T.C. Memo 2022-122; 2022 Tax Ct. Memo LEXIS 122, and a case analysis and full court opinion are available on the BVLaw platform.

Year-end 2022 data now in the Cost of Capital Professional

Year-end 2022 data, including equity risk premia, CRSP decile size premia, and industry betas/IRPs, are now available in BVR’s Cost of Capital Professional platform. The platform is a simple, transparent, and cost-effective service for estimating the cost of capital and is designed to bring more professional judgment and common sense back into the process, which has become too much of a complex “black box” of applied mathematics. It supports the buildup method and CAPM calculations for any valuation date. It also gives you the flexibility to choose the start year for historical return data based on what segment of history you believe best offers a reasonable basis to make estimates of expected future returns. For a personalized demo of the platform, click here.

Extra: In a head-to-head test, all of the main cost of capital datasets, including Kroll’s Navigator, BVR’s Cost of Capital Professional, and Pepperdine, produced similar cost of equity estimates. See this article in the February 2023 issue of Business Valuation Update.

Report drills down on dental practice financials

PKF O’Connor Davies has released its 2022 edition of “Dental Practices by the Numbers,” which provides key financial benchmarks. This year’s edition contains more statistics and metrics than past reports. Average collection and expense amounts—including staff compensation, services costs, facilities costs, and administrative costs—organized by practice and by individual general dentist are reported. In addition, the report contains an average statement of collections and expenses for specialists, including pediatric dentists, oral surgeons, and periodontists. To download the free report, click here.

Final issue of Willamette’s Insights focuses on best practices

The Winter 2023 issue will be the final one for Insights from Willamette Management Associates. The firm will replace it with a new digital publication, Perspectives, which will be a quarterly. The first issue will be out in April, and you can sign up if you click here. The last issue of Insights is edited by Robert Reilly and has articles on best practices in such areas as S corps, damages, economic obsolescence, fair value measurements, executive compensation, and more. The issue is available if you click here.

Global BV News

IVSC’s Talbot gives his views for 2023

Several key trends are shaping the valuation profession, namely environmental, social, and governance (ESG) factors, technology, and the increasingly global nature of business, says IVSC chief executive Nick Talbot. Also, ongoing uncertainty throughout the world acts as a “double-edged sword,” making the “valuer’s role more complicated but also increases the demand for high quality valuation skills as investors look for additional advice in times of change.” He also identified several challenges for 2023 and beyond, including the growing complexity of the business world and the growing demand for transparency and accountability. “As the global economy continues to evolve, the demand for high-quality valuations will only increase, making it an exciting time to be a valuer,” he says. “Those who are able to adapt to the trends and challenges of the profession will be well-positioned to succeed in the years ahead.”

Valuation News Update

Lisa Guo — Wed, 01 Feb 2023 10:48:08 GMT

Bieber sells music rights; what are the value drivers?

Singer Justin Bieber has sold his music rights for around $200 million, according to various reports. One of the main drivers of value in a music catalog has been the emergence of streaming, which has triggered higher cash-flow growth expectations—and has proven to be resilient during COVID-19, according to this report. Also, music royalties are recurring and predictable (similar to what you would see in asset classes such as real estate). What’s more, spending on music has a low correlation to economic activity. A 2021 report by Shot Tower Capital explains that “music assets have generally experienced non-correlated growth throughout various market cycles.” Moreover, consumers continue to spend on music during recessions. In times of economic instability, music provides stable cash flow. Low interest rates also fueled high values, but rising rates have caused a “general cooling-off” of the catalog market, according to Variety.

For some insights into the valuation of a music catalog, David Dunn, managing partner at Shot Tower Capital, discussed the valuation of Michael Jackson’s music catalog during a 2021 BVR webinar.

Ipse dixit nixes some of expert’s opinion

In an economic damages case in Delaware, both sides filed a number of motions to exclude expert testimony, evidence, and arguments. In one instance, the court found that a portion of one expert’s report was unreliable because it was ipse dixit. Under Daubert and Rule 702, testimony based on nothing more than the expert’s “because I say so” (ipse dixit) is destined to be excluded. If an expert makes an assertion, it must be substantiated. In this case, the expert was “not permitted to testify to damages based on Plaintiff’s expectation interests in the agreement it purports to have reached with Defendants.” However, the expert was allowed to testify to the general proposition that the nature and extent of services justified higher compensation.

The case is LCT Capital, LLC v. NGL Energy Partners LP, 2022 Del. Super. LEXIS 1448, and a case analysis and full court opinion are available on the BVLaw platform.

Vertical IQ enhances its industry research platform

Eleven U.S. industry sector profiles have been added to the Vertical IQ industry research platform, including: accommodation and food services; agriculture, forestry, and fishing; educational services; information sector; real estate; and transportation and warehousing. The platform’s sector profiles offer a macro level look at the major segments of the U.S. economy, so they give a wider view. For a narrower view, the platform’s industry profiles cover more than 570 distinct industries, representing more than 97% of the U.S. economy.

More news:Also, the platform now incorporates data from Nexis Newsdesk™, a top provider of news and media content, to increase Vertical IQ subscribers’ access to industry news articles.

For some sample reports, click here.

What BV developments did you miss in 2022?

Now’s your chance to catch up on all things BV with the latest editions of two BVR yearbooks. New ideas on valuation approaches and techniques, takeaways from the leading conferences, key court decisions, and changes in regulations and standards are covered in over 70 articles and hundreds of news items in the Business Valuation Update Yearbook, 2023 edition. A companion guide, the Business Valuation Case Law Yearbook, 2023 edition, represents BVLaw’s analysis of the most noteworthy court decisions of the past year in the areas of business valuation and damages. It also contains the court opinions and a case listing by state/jurisdiction, court, and case name, followed by a short description of the key valuation issue of each case. These yearbooks are compilations of what appeared in the Business Valuation Update newsletter and the BVLaw platform during 2022.

Good news:You already have these two volumes if you are a subscriber to BVResearch Pro or BVR’s Digital Library.

BVResearch Pro adds another issue of the ASA’s BV Review

Among many other resources, the BVResearch Pro platform contains the full archive of the Business Valuation Review going back to 1982. This is the business valuation journal of the American Society of Appraisers. The Summer 2022 issue has been added to the platform, and it includes these articles:

“Double Backsolve Remains Unsupported” (Eric Sundheim, ASA; Ben Towne, CPA/ABV; and Jeff Faust, CVA);
“The NICE Method Theory and Application” (William H. Frazier, ASA); and
“Most States Reject Discounts in Appraisals and Oppression Cases—But There Are Important Exceptions” (Gilbert E. Matthews, MBA, CFA).

If you are not a subscriber to the BVResearch Pro platform, you can do a stand-alone subscription to the ASA’s BVReview if you click here.

Global BV News

2022 was a record year for Swiss M&A, per KPMG

Despite the gloomy economy, the number of mergers and acquisitions with Swiss involvement hit a new record high in 2022, surpassing the numbers of the past 10 years, according to KPMG in its report “Clarity on Mergers & Acquisitions.” The report contains deal statistics from last year, highlights the most noteworthy transactions, and presents latest trends and drivers that are impacting deal activity. It also includes KPMG’s outlook by sector for 2023.

Valuation News Updates

Lisa Guo — Wed, 25 Jan 2023 10:46:35 GMT

More courts Knock Out DLOM when business won’t be sold

Keep an eye out for courts in more states deciding to eliminate a discount for lack of marketability (DLOM) depending on whether the business will be sold. During a recent webinar that discussed several recent valuation-related cases, the observation was that it appears that more states are applying this factor as an issue. This seems to be a modification of the fair market value standard, i.e., a hypothetical sale is ignored. In one divorce case discussed, Fair v. Fair in Louisiana, the expert applied a discount to the husband’s 100% interest. While there’s no consensus in the valuation profession that a discount should be taken on a 100% interest, there is supporting evidence for the discount, and many experts do apply it or at least consider it. But the court appeared to focus on the fact that the company was not to be sold, so it rejected the DLOM, and an appellate court affirmed. Will this apparent trend become more widespread regardless of jurisdiction? Stay tuned!

BVLaw editor Jim Alerding (Alerding Consulting LLC), veteran valuation expert Jim Ewart (James D. Ewart LLC), and attorney Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP) conducted the webinar, BVLaw Case Update.

High ESG scores lower the cost of capital, study finds

A recent paper says there is significant evidence that companies having a higher environmental, social, and governance (ESG) score have a lower cost of capital. While the “ESG score does not seem to have a significant impact on the cost of equity and the beta,” the paper says, the impact is on the cost of debt because “firms having a high ESG score can significantly obtain more leverage.” Researchers analyzed the relationship between the ESG score and the cost of capital of 600 large, mid- and small capitalization companies across 17 countries of the European region being a component of the EURO STOXX 600 Index. The paper is “The Impact of a Firm’s ESG Score on Its Cost of Capital: Can a High ESG Score Serve as a Substitute for a Weaker Legal Environment?” and the authors are Randy Priem (Financial Services and Markets Authority; Saint-Louis University, Brussels; KU Leuven; United Business Institutes) and Andrea Gabellone (United Business Institutes).

Valuation impacts of the Inflation Reduction Act (USA)

Expect to see increased scrutiny on business valuations for tax purposes as a result of the Inflation Reduction Act of 2022 (IRA). The new law provides additional funding for the Internal Revenue Service to beef up its enforcement efforts. Part of the agency’s new efforts is its search for 14 new business valuation experts to join its ranks. Of course, estate and gift valuations will get caught up in the agency’s widening net, but so will other tax-related valuations, such as stock-based compensation (409A “cheap stock”), valuations for deductions of worthless stock, intangible property valuations for intercompany transactions, and more. Also, the IRA has provisions that will impact certain industries, such as the energy, pharma, and biotech sectors. McKinsey has a nice summary of the IRA and its provisions.

Extra: Chris Campbell(Kroll) will conduct a two-hour webinar on February 2, The Inflation Reduction Act—What Valuation Professionals Need to Know.

Values of tech brands have nosedived, per new study

Shifting consumer demand patterns and inflation have taken their toll on the world’s most valuable brands, particularly in the tech sector. Apple dropped out of the No. 1 ranking after losing $57.6 billion in value, according to “Brand Finance Global 500 2023.” Taking its place at the top of the list is Amazon, despite losing $51 billion in value. Not all brands in the tech sector have plummeted: Instagram is up 42%, and LinkedIn saw a 49% gain in value, which the report attributes to “well-executed strategy to commercialize their services.” Other gains were seen by electric car manufacturers Tesla, which is up 44% (interesting, given Elon Musk’s recent woes), and BYD, up 57%, “as demand grows for electric cars as part of a broader transition to a low carbon economy,” says the report.

Reminder: The 2023 Pepperdine private cost of capital survey is now open

Every year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. A BVWire poll found that 40% of respondents use the survey results for estimating small private-company cost of capital. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is here.

The survey results are used to produce annual Private Capital Markets Report (reports from prior years are available if you click here). The price for the annual report is normally $125, but it’s free if you fill out the survey—plus you’ll get it a week early.

Global BV News

IPEV updates PE/VC valuation guidelines

International Private Equity and Venture Capital (IPEV), a trade group that sets valuation practices for private funds, has published the 2022 edition of its guidelines. The update takes developments on international standards into account and also incorporates the last two special issues of guidance from 2020 and 2022 (related to COVID-19 and the Ukraine war) and expands on the concept and impact on valuations on distressed markets.

New chair of the IVSC standards board

Susan DuRoss, executive director, global valuations, at Harvest Investments, has been appointed the new chair of the Standards Review Board (SRB) at the International Valuation Standards Council (IVSC). She will assume the role in March 2023 and takes over from Mark Zyla (Zyla Valuation Advisors), who has led the board since 2017, during which time the IVSC issued two editions of the International Valuation Standards, established and appointed international experts to the three technical standards boards, and formed several important collaborations, among other accomplishments.

Valuation News Update

Lisa Guo — Thu, 19 Jan 2023 02:05:49 GMT

Damodaran posts his data update for 2023

Implied ERP at 5.94%. For the ERP, Damodaran uses a forward-looking method known as the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP in the U.S. to be 5.94% as of Jan. 1, 2023. His spreadsheet of ERP and country risk premia is available if you click here.

Absent a goodwill analysis, the court does its own

In a Tennessee divorce case involving the husband’s plastic surgery practice, neither valuation expert did an analysis that separated enterprise and personal goodwill. The husband’s expert relied mostly (90%) on the adjusted net asset value (NAV) but also considered the capitalized cash flow value (CCF), giving it a 10% weight, arriving at a value of $110,000. The wife’s expert relied 100% on the CCF and came up with a value of $350,000. Both experts acknowledged that their valuations included goodwill, and the husband argued that the personal goodwill component needed to be backed out and excluded from the marital property. The court, finding that the wife’s expert was “more experienced,” adopted her expert’s valuation and backed out $95,000, coming up with $255,000 as the value of the practice. This value included an amount in excess of the NAV representing some level of enterprise goodwill. The husband appealed, but the appellate court affirmed the trial court’s valuation, noting that it adopted a valuation “within the range of the evidence submitted.” In the end, the court did its own “analysis” of enterprise and personal goodwill.

The case is Chase v. Chase, 2022 Tenn. App. LEXIS 478, and a case analysis and full court opinion are available on the BVLaw platform.

The 2023 Pepperdine private cost of capital survey is now open

Extra: Using the Pepperdine report produces very similar results for cost of equity as you get from other sources, including Kroll’s Navigator and BVR’s Cost of Capital Professional, according to an article in the February 2023 issue of Business Valuation Update, “COE Estimates From Leading Data Sets Are All ‘Very Close.’”

Accounting standards needed for crypto, urges paper

“We recommend that accounting regulators undertake standard-setting specifically for cryptocurrencies instead of allowing companies to choose which existing standard to apply and how to do so,” says a new paper, “Financial Reporting for Cryptocurrency.” Existing disparate practices by companies studied are causing “inconsistencies or distortions in their balance sheets, income statements, and statements of cash flow reporting.” The study analyzed the financial statements of 40 global companies that have exposure to cryptocurrencies and how they accounted for these assets. The paper appears in the journal Review of Accounting Studies, and the authors are Mei Luo and Shuangchen Yu, who are both at the School of Economics and Management, Tsinghua University, Beijing, China.

DealStats Hall of Fame members for 2022

Thanks to business brokers and other intermediaries who contribute data, DealStats is the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2022 are:

· Ryan Gipple, Berkshire Business Sales & Acquisitions (Chandler, Ariz.);

· Neal Isaacs, VR Business Brokers (Raleigh, N.C.);

· Stephen Goldberg,Sun Mergers & Acquisitions LLC (Hasbrouck Heights, N.J.);

· Jason Ward, TrueView Business Advisors (Houston); and

· Teija Heikkila,National Kennel Sales & Appraisals (Grand Junction, Colo.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Extra: DealStats has some enhancements planned for 2023—stay tuned for details!

Global BV News

CBV Institute issues exposure draft on adopting IVS

The CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, has issued an exposure draft that proposes the adoption and permitted (optional) use of the International Valuation Standards (IVS) as issued by the International Valuation Standards Council (IVSC). IVS would be adopted as an option alongside, rather than replacing, the CBV Institute’s existing standards. Comments are due by March 31, and the details are available if you click here.

What’s in the February 2023 issue of Business Valuation Update

Here’s what you’ll see:

“New Research Strengthens Support for the Three-Stage DCF” (BVR Editor). Unpublished research from Roger Grabowski and Ashok Abbott reveals data on firm growth over three stages: startup, stabilizing, and long term.
“COE Estimates From Leading Data Sets Are All ‘Very Close’” (BVR Editor). Jim Hitchner conducted a hypothetical engagement using Kroll’s Navigator, BVR’s Cost of Capital Professional, the Pepperdine study, and Damodaran’s data to estimate cost of equity (COE).
“The Walsh v. Preston ESOP Case—Is it a Victory or an Escape?” (Jim Alerding). Commentary from BVR’s legal editor on an important ESOP valuation case.
“Tom West’s Legacy to Appraisers: The Business Reference Guide” (BVR Editor). BVR was very saddened to learn of the passing of Tom West, co-founder of the International Business Brokers Association and founder of the Business Brokerage Press. Business valuers have him to thank for the Business Reference Guide, which contains pricing rules of thumb for almost 700 types of businesses.
“New ‘Court Cases Method’ for DLOM Points Up a Conundrum” (BVR Editor). A new study analyzes court cases to determine a more legally defensible discount for lack of marketability (DLOM). But should business valuers look to court cases for “good” valuations?
“The Valuation of Special Share Classes in the United Kingdom” (Andrew Strickland). A special analysis of a recent exposure draft concerning shares to employees in the United Kingdom (England and Wales, Scotland, and Northern Ireland).

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.

Valuation News Update

Lisa Guo — Fri, 13 Jan 2023 02:01:11 GMT

Contribute to the BV profession in 2023

During 2022, we saw many examples of BV practitioners giving back to the profession—from volunteering on a board to speaking at a conference to writing an article. The valuation professional organizations—the ASA, AICPA, IACVS and NACVA—are always in need of practitioners to help with education, guidance, or standards matters. The Appraisal Foundation often has opportunities to volunteer on boards and committees, and, on the global front, so does the International Valuation Standards Council (IVSC). In addition to helping the profession, the more you volunteer, write, teach, or speak, the more you learn about your profession. What’s more, you can be on the cutting edge of new guidance that your committee or work group is developing. So, if you haven’t yet contributed to the profession, think about doing so in 2023!

Lack of quantifiable damages dooms IP complaint

In a California case concerning intellectual property (IP), the defendant asked the court to dismiss the plaintiff’s complaint alleging violations of the state’s Unfair Competition Law (UCL) and asking for damages. To seek relief under the UCL, the plaintiff must show that there must be an “injury in fact and [that the plaintiff] has lost money or property as a result of the unfair competition,” the court wrote. “Although ‘the issue here is only the threshold matter of standing … [and] a specific measure of the amount of [the alleged] loss is not required,’ some detail as to the general value of the alleged injury is still necessary to allege damages under a UCL claim.” The plaintiff had not done this, and, therefore, the motion to dismiss was granted.

This case “should point out to attorneys and BV professionals alike that, even at the preliminary level, it is important that there be some clarity on at a minimum a range of damages or demonstration of a process that will determine that there are indeed damages,” writes BVLaw editor Jim Alerding (Alerding Consulting) in a case digest. “I have been involved in cases where the attorneys have come to me after the filing of a complaint and asked me to tell them whether there are quantifiable damages. In at least one case, there were not, and the complaint was withdrawn.”

The case is Zamfir v CasperLabs, LLC, 2022 U.S. Dist. LEXIS 194566; 2022 WL 14915618, and a case analysis and full court opinion are available on the BVLaw platform.

Recession tops Kroll’s 10 trends to watch in 2023

The new year “promises to be a tougher ride for most businesses, investors and consumers globally, but there is always opportunity in volatility,” according to the Kroll Institute in its latest report, “10 Trends to Watch Heading Into 2023.” These trends are:

Developed markets in recession. (Countercyclical businesses should see increased deal flow.)
Emerging markets: buoying global growth. (But there are risks to the outlook for China.)
Emerging markets face a sovereign debt crisis. (Could embroil some middle- and particularly low-income countries.)
Volatile financial markets and market dislocations. (Earnings pressure will likely persist into much of 2023, particularly for companies more vulnerable to interest rate rises or recession.)
Developing global trade tensions. (Between the U.S. and China, and maybe between the U.S. and Europe.)
Russia war on Ukraine persists. (Possible escalation scenarios cannot be ruled out for 2023.)
“Old” and “tropical” infectious disease outbreaks. (The virus lingers, and others may emerge.)
Growth of ESG regulation, transparency, and scrutiny. (This should improve measurement issues and reduce greenwashing.)
Heightened regulatory environment. (The SEC will focus on imposing new rules in such areas as cybersecurity, certain private fund practices, SPACs, and more.)
Increased cyber and social media risks. (But this will give a boost to the cybersecurity industry.)

“Rarely has the world faced this many interconnected crises but we expect that the outlook in 2024 will be less volatile, with most of the developed world coming out of a shallow recession, inflation abating, and the green transition having made significant progress, particularly in Europe,” the report says. For more on the Kroll Institute, click here.

Private-company EBITDA multiples rebounded in 3Q2022

After dropping to their lowest levels in recent years, EBITDA multiples rose to a median

of 3.7x in the third quarter of 2022, up from 2.8x in the second quarter (see graph below), according to the latest issue of the DealStats Value Index (DVI). In the period analyzed, EBITDA multiples across all industries were highest in the third quarter of 2018, at 5.0x, but then decreased until they bottomed out in the first half of 2022.

The 30-page DealStats Value Index is a quarterly publication exclusively for DealStats subscribers. It provides trend information on valuation multiples and profit margins for transactions in DealStats, including multiples and margins by industry sector, interquartile range by sector and year, multiples and margins for private vs. public, and much more. If you are a subscriber to DealStats, you can download the current issue to see all the latest transaction trends if you click here.

Data on preowned medical equipment prices

The “BuckheadFMV January 2023 Benchmark Report on Pre-Owned Medical Equipment Prices” is now available. Based on data BFMV staff collected for the 36 months preceding publication, the report provides price benchmarks for over 800 different models of preowned medical equipment. Benchmarks are sorted by category, manufacturer/brand, and model, and are reported at the 25th, 50th, 75th, and 90th percentiles, along with an average price reported for each item. The report is currently scheduled to be published in January and July of each year. Click here for more information.

Global BV News

IVSC will propose changes to IVS

This April, the International Valuation Standards Council (IVSC) will publish an exposure draft outlining proposed updates to the International Valuation Standards (IVS) as well as the asset-specific standards (covering tangible assets, business and intangibles, and financial instruments). There will be a public comment period of 12 weeks, during which the IVSC will organize a series of webinars and roundtables to present details of the exposure draft. An updated version of IVS will be published in January 2024. More details will be forthcoming in early 2023. For more information on the project, click here

Valuation News Update

Lisa Guo — Fri, 23 Dec 2022 03:22:58 GMT

Court sets fair value of 50% interest in realty firm

In Connecticut, a real estate firm had a shareholder agreement that allowed for an independent appraisal if one of the owners wanted out. The shareholders had a falling out and could not agree on a value, so, under the adage “four appraisers are better than one,” each side engaged a real estate appraiser and business valuation expert to do the valuation. Although state statute says the standard of value is fair value with no discounts, the defendant’s expert argued for both a discount for lack of control and discount for lack of marketability, citing extraordinary circumstances. But the court disagreed and did not allow either discount. Both appraisers used a net asset approach, which the court adjusted by adding other assets to the value of the real property and deducting liabilities.

The case is Buccieri v. New Hope Realty, Inc., 2022 Conn. Super. LEXIS 2230, and a case analysis and full court opinion are available on the BVLaw platform.

Two AICPA fair value guides being revised

At last week’s ASA Fair Value Virtual Conference, several sessions focused on some revised versions of guidance from the AICPA. A working draft of the accounting and valuation guide, Business Combinations, is still open for public comments, which are due Jan. 15, 2023. The document (available if you click here) explains how to submit comments. In their session, Gary Roland (Kroll) and Mark Edwards (Grant Thornton) noted that the final guide is expected to be published in the fall of 2023.

The other revised guidance in the works is an update to the AICPA guide, Valuation of Privately Held Equity Securities Issued as Compensation (aka the Cheap Stock Guide), that was released in 2013. That guide was an update from the original version from 2004. So why update it again? One of the co-chairs of the task force working on the revision, Amanda Miller (EY), noted that the main motivator for the update was that there was a substantial increase in secondary transactions since the last version of the guide. This created a concern that companies may not be placing adequate weight on these external common stock transactions, which may lead to valuations being significantly lower than the price of transactions actually taking place. Another reason for the update, she remarked, was to clarify concepts that were included in the 2019 guide, Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies (PE/VC Guide), that Miller also worked on.

Proposed USPAP Changes Focus on Bias

The Fourth Exposure Draft of proposed changes to USPAP is now available for review and comment (click here to access the draft). The proposed changes are to the ethics rule and would emphasize the prohibition against unethical and illegal discrimination or bias when developing an opinion of value. The changes are mostly directed to real estate appraisers, but they apply to all appraisers. The Appraisal Standards Board is now accepting all public comments until Feb. 3, 2023. To submit a comment, click here, and the ASB will review your feedback. Appraisal Standards Board chair Michelle Czekalski Bradley and vice president of appraisal issues Lisa Desmarais will host a webinar to discuss this exposure draft on Jan. 12, 2023, at 1:00 p.m. ET. Register here to attend the webinar.

Growth rates for software firms underestimated, says research paper

Both management and market analysts “systematically underestimate the annual growth rates of software companies,” according to researchers who examined these types of firms. Software firms are growing at 13.9% annually, and this growth is being underestimated by over a third. The paper also examines the importance of software to the economy and investigates whether market participants are adequately appreciating the dramatic technological shift that software is supporting and disrupting in the global economy (they’re not). The paper is: “The Value of Software,” by Collin Dursteler, Roberto Gomez Cram, and Alastair Lawrence, all from the London Business School.

Valuation News Update

Lisa Guo — Thu, 15 Dec 2022 03:19:39 GMT

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.

Valuation News Update

Lisa Guo — Thu, 08 Dec 2022 03:16:11 GMT

Court affirms calculation report in divorce case

A calculation of value is not the “gold standard,” but it is not unacceptable, an Arizona appellate court ruled in a divorce case.

No challenge: The husband and wife were owners of a law firm and the wife’s valuation expert used information she provided as well as an analysis of comparable businesses. The husband refused to provide any financial information to the expert in a timely manner. During the trial, the husband’s attorney did not challenge the methodologies and conclusion of the valuation expert. What’s more, the husband did not offer an opposing valuation. The trial court accepted the wife’s expert’s valuation, and the husband appealed, arguing that the expert’s opinion was deficient because it was a calculation of value report rather than “an opinion of value report.”

The appellate court noted that the fact-finder need not discount an expert’s opinion just because he did not consider every process and procedure that would be included had he conducted a more complete valuation. Plus, the husband’s counsel had ample opportunity to challenge the valuation and offer a competing opinion, but he did not.

The case is Mikalacki v. Rubezic, 2022 Ariz. App. Unpub. LEXIS 836; 2022 WL 10219850, and the full court opinion and a case analysis are available on the BVLaw platform.

Investment banks’ COE estimates are higher for management buyouts

Researchers have examined investment bank incentives in M&A by analyzing management buyouts, as these deals are “particularly rife in conflicts of interest,” they say in a recent paper. The banks “use significantly higher COE [cost of equity] values in management buyout deals, which potentially underestimates target value to make the proposed bid more attractive for target shareholder approval,” the paper says. They also found that investment banks do not look to CAPM or the Fama-French models to estimate COE but use several proxies for risk, including industry effects, beta, size, and illiquidity as well as past returns, financial distress, and volatility. The paper is “The Cost of Equity: Evidence From Investment Banking Valuations,” by Gregory W. Eaton (Oklahoma State University), Feng Guo, Tingting Liu, and Danni Tu (Iowa State University), and is available if you click here.

Young practitioners to air views at next week’s NACVA conference

One of the sessions we’re looking forward to at the NACVA “super” conference next week is a panel of young practitioners who will share their perspectives on the profession. At NACVA’s spring conference, we covered a similar session (with different panel members). One interesting remark that the panel made was that they tend to question the status quo (which is a good thing) and they need senior firm members to explain to them why things are done the way they’re done. This goes not only for firm procedures, but for valuation approaches and methods as well. This should not be taken as being confrontational, but rather because of just sometimes being in the dark. Management should welcome these questions because they will help get buy-in from the younger generation. But, also, these questions may trigger some second thoughts about why some methods have perpetuated—possibly because it’s the way everyone else has always done it.

The conference will be Dec. 14-16 in-person from two locations: Park City, Utah, and Fort Lauderdale, Fla. You can find more information and how to register if you click here.

GDP up in 3Q22, reports BVR’s EOU

The U.S. economy—as indicated by gross domestic product—increased at an annual rate of 2.6% in the third quarter of 2022 after declining at a rate of 0.6% in the second quarter, according to the latest quarterly issue of Economic Outlook Update (EOU), published by Business Valuation Resources (BVR). The 55-page report also has consensus forecasts for real GDP and inflation, which form the basis for long-term growth rates used in business valuations. The report is a compilation of research from leading authoritative resources, which you can use in your valuation reports as long as you give proper attribution. To learn more, visit bvresources.com/eou.

Firm nimbleness as a measure of risk

Investors perceive firms with higher levels of inflexibility, such as not being able to scale operations or adapt to changes in profitability, as being riskier and have a higher implied cost of equity, researchers conclude in a new paper. This research confirms what some would say is common sense, that a firm with a better ability to adjust to market conditions will fare better than one that cannot. Examining a large sample of manufacturing firms over the period 1989 to 2018, the researchers’ conclusions are consistent with prior similar research. They also found that the impact of firm inflexibility on cost of equity capital is greater for small firms. The paper is “Firm Inflexibility and the Implied Cost of Equity,” by Sadok El Ghoul (University of Alberta), Zhengwei Fu (University of South Carolina), Omrane Guedhami (University of South Carolina), and Samir Saadi (University of Ottawa), is available if you click here.

Preorder deal on the 2023 Business Reference Guide

The 2023 print edition of the Business Reference Guide (BRG) by Tom West is now available for preorder at a 20% savings if you click here (valid through December 31). Now in its 33rd year, it contains the latest industry-related information including “rules of thumb,” pricing tips, benchmarking information with comparison data, industry resources, and general industry data on nearly 600 types of businesses. There is also an online version with a fully searchable database, and it includes the print version of the guide.

Global BV News

Industry multiples down in Latin America

In terms of EV/EBITDA, multiples in Latin America have generally decreased over the first three quarters of 2022 due to a pessimistic outlook and deteriorating market conditions, according to the second edition of Kroll’s “Industry Multiples in Latin America” (LATAM) quarterly report. However, in the third quarter of 2022, many industries present higher EV/EBITDA multiples when compared to the multiples in the second-quarter 2022 report. The full report, available if you click here, contains a detailed overview of EV/revenues, EV/EBITDA, P/E and P/B multiples of publicly traded companies in Latin America covering nonfinancial industries and market capitalization/revenues, P/TBV, and P/E and P/B multiples covering financial industries for which such data are available.

Valuation News Update

Lisa Guo — Thu, 01 Dec 2022 03:13:39 GMT

Valuing a minority interest with no information on the subject company

In a Maryland divorce case, neither valuation expert had any documents or financial information from the husband’s ambulatory surgical center (ASC) in which he owned a small interest. The wife’s expert based his valuation on a recent sale of a controlling interest in the ASC to get an equivalent value for the husband’s remaining share, which amounted to $332,000. The expert for the husband used his Form K-1 and a buy-sell agreement in the operating agreement and came up with a value of $45,000, after revising his opinion along the way. The trial court sided with the wife’s expert, saying his analysis was “more persuasive.” The husband appealed, but the appellate court affirmed the trial court’s ruling, saying that, as long as the court’s decision was “reasonable, logical and explained in detail,” the court was not “clearly erroneous” in choosing the wife’s expert over the husband’s expert.

The case is Goicochea v. Goicochea, 2022 Md. App. LEXIS 729; 2022 WL 5113852, and a case analysis and full opinion can be found on the BVLawplatform.

2022 Johnson/Park DLOM study is now available

The Johnson/Park empirical method to estimate a discount for lack of marketability (DLOM) is one of the most popular methods business appraisers use for this purpose, according to a BVR survey. The method highlights the relation of the DLOM to the return on the investment and quantitatively measures the impact of the rate of return as a function of the DLOM. This methodology has been used in several tax court cases, including the first family limited partnership (FLP) case to go to trial. The “2022 Discount for Lack of Marketability Study” provides objective rate-of-return measures to implement the Johnson/Park empirical method and includes a thorough explanation and example on how to apply these data.

Private firms pay a median $30,000 in board retainers

To support adjustments for reasonable compensation when doing private-company valuations, comparable data are necessary. One source for private-company board member compensation is the “Private Company Board Compensation and Governance Survey,” conducted by Compensation Advisory Partners (CAP) and Family Business and Private Company Director magazines. The new 2022 third edition of the survey contains over 1,200 responses, an increase of about 300 participants from the prior full version of the survey in 2020.

Board retainers are highly correlated with company size, the survey says, ranging from a median of $20,000 at firms with less than $10 million in revenue to $65,000 at firms with greater than $1 billion in revenue. In addition to retainers, other elements of cash compensation for private-company directors are annual travel reimbursements and in-person meeting fees, provided by about half of the respondents.

A summary of the survey is available if you click here. Full results are available only to survey participants.

Global BV News

Results of the first student BV Challenge in Canada

The CBV Institute has announced the winners of its inaugural Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. The competition saw 19 teams test their business valuation skills, and in first place was the team from Haskayne School of Business—University of Calgary (Katherine Borger, Lizelle Jansen Van Vuuren, Emily Chen, and Jerry Qin). In second place was the team from Rotman School of Management—University of Toronto (Andrew Koh and Jesse Wang), and in third place was the UBC Sauder School of Business (Tony Liaw, Ayush Malhorta, and Matthew Stuart). A total of 59 students participated. The top three teams received cash awards, and the members of the first-place team will receive complimentary enrollment to Level 1 in the CBV Program of Studies. “With demand for CBVs at an all-time high, the BV Challenge is an excellent opportunity to introduce undergraduate business students to our rapidly expanding and evolving profession,” said Dr. Christine Sawchuk, president and CEO of the CBV Institute. More details on the competition are available if you click here.

Valuations of German and European banks

The decline in market capitalizations coupled with a positive earnings outlook has led to record levels of the implied cost of equity of 14.8% for European banks and 17.8% for German banks, according to the latest edition of the Alvarez & Marsal’s “Germany Valuation Insights.” The high levels of return on equity have been driven by cost savings and moderate loan losses. Download the full November 2022 report by clicking here.

Valuation News Update

Lisa Guo — Sat, 19 Nov 2022 02:54:07 GMT

Inflation showcased in lead-off session at the AICPA FVS conference

As this issue rolls off the (virtual) presses, BVWire is attending the AICPA & CIMA Forensic and Valuation Services Conference. The kickoff session of the three-day event, which was presented by Carla Nunes and Jim Harrington, both with Kroll, discussed the cost of capital ramifications of the Russia-Ukraine War and global inflationary pressures.

Uncertainty and volatility: The raising of interest rates by the major central banks and the war have led to progressively weaker growth forecasts for the U.S. and other economies. “There will be a lot of pressure on earnings over the next couple of years,” said Nunes in a recent video. Revenue growth will depend on the ability to pass on increased costs to customers, but costs may outpace revenue growth and the price increases could weaken demand.

The increased uncertainty about economic growth and company earnings could result in a variability around expected cash flows, which makes equity risk higher. Recently, Kroll increased its recommended U.S. equity risk premium (ERP) from 5.5% to 6.0% when developing USD-denominated discount rates as of Oct. 18, 2022. This is matched with the higher of a normalized risk-free rate of 3.5% or the spot 20-year U.S. Treasury yield as of the valuation date if it is higher than 3.5%, Kroll said in a recent update.

Also, increased financing costs raise the cost of debt, so there may be less M&A activity, Nunes remarked, and you could see valuations going down.

Appellate court rules on valuation of inventory in Sears bankruptcy

Sears (the Amazon of its day) recently emerged from bankruptcy after four years and thousands of court filings. One of the many issues involved in the bankruptcy was the valuation of inventory.

Wide disparity: Second-lien holders, entitled to payment only after the debts of first-lien holders have been discharged, argued that the value of the collateral that secured their claims, as measured on the petition date, vastly exceeded what they had been paid and that they were accordingly entitled to priority payment of the difference. At trial, all parties put on evidence as to the value of the assets at the petition date. The differences varied widely. “The differences among these values turned primarily on how the experts calculated the revenue Debtors could expect to earn from selling their inventory.”

The appeal dealt primarily with this inventory issue and how it should be valued. The Bankruptcy Court, affirmed by the district court, used a net orderly liquidation value (NOLV) to determine the value at the petition date. The appellate court affirmed the judgments of the two lower courts.

The case is ESL Invs., L.P. v. Sears Holdings Corp. Debtor-Appellee (In re Sears Holdings Corp.), 2022 U.S. App. LEXIS 28584, and a case analysis and full opinion can be found on the BVLaw platform.

New FASB rules on crypto coming in first half of 2023

Under proposed accounting rules, fungible tokens will be measured at fair value as opposed to the cost (less impairment) model. The rules will be issued for public comment during the first half of 2023, said FASB chair Richard Jones at a recent conference, according to a report. Back in May 2022, the FASB added a project on digital assets to its technical agenda that would provide standards for crypto accounting. It was later announced that nonfungible tokens (NFTs) and certain stablecoins were to be excluded from the forthcoming guidance. Before the proposed guidance is released, the FASB will need to address certain issues, such as where changes in fair value should be presented (in earnings or in other comprehensive income), disclosure requirements, and whether the change in measurement attribute be recognized prospectively or retrospectively.

AICPA session reiterates request for comments on business combinations guide

A session at this week’s AICPA FVS conference discussed the recently released Draft Accounting and Valuation Guide, Business Combinations, which provides guidance and illustrations regarding the accounting and valuation considerations for business combination transactions. It addresses many accounting and valuation issues that have emerged over time and is designed to help preparers, auditors, and valuation specialists understand and comply with the requirements of FASB ASC 805, Business Combinations, and FASB ASC 820, Fair Value Measurement. The AICPA is seeking comments, which are due by Jan. 15, 2023 (see the document for how to submit comments). To download the working draft, click here.

Global BV News

KPMG releases cost of capital study

KPMG has published its “Cost of Capital Study 2022” that addresses the impact of high inflation on company valuations. This edition examines the influence of rising inflation rates on business models, corporate developments, and on long-term return expectations (cost of capital) based on sector-specific analyses. To download the study, click here.

OECD releases final fiscal valuation guidance for crypto-assets

The Organization for Economic Cooperation and Development (OECD) has published the final Crypto-Asset Reporting Framework (CARF), which provides for the automatic exchange of information between countries on crypto-assets. These are intended as global standards, though the U.S. likely will not adopt them, and it’s left to individual countries to apply them within their own jurisdictions.

The final CARF provides some guidance on hard-to-value assets. They allow analysts to rely on the second value of new resulting property if the hard-to-value asset is exchanged. In addition, if the relevant crypto-asset service provider does not maintain an applicable reference value, it may rely on, first, the internal accounting book values with respect to the relevant crypto-asset should be used. If a book value is not available, a value provided by third-party companies or websites that aggregate current prices of relevant crypto-assets must be used if the valuation method that third party used is reasonably expected to provide a reliable indicator of value. If neither of the above is available, the most recent valuation of the relevant crypto-asset must be used. If a value can still not be attributed, a reasonable estimate may be applied as a measure of last resort.

Prior to the release of the final rules, based on responses to the initial March 2022 draft, the OECD revised many provisions including the definition of covered assets, the treatment of decentralized finance (DeFi) platforms, and who would be required to report. The final rules include a new threshold of $US50,000 for retail transaction reporting.

Preview of the December 2022 issue of Business Valuation Update

Here’s what you’ll see:

“Good News in New BVR Survey of Young ASA BV Experts” (BVR Editor). Preliminary results of a first-ever survey designed to gain some insights and perspectives to help the profession better attract and develop the younger generation of BV practitioners. The survey was conducted by BVR and the BV recruiting firm Borrowman Baker with the support of the American Society of Appraisers and was sent to ASA members under 40 years old in the business valuation discipline.
“Hot Topics at the 2022 VSCPA Forensic and Valuation Conference” (BVR Editor). It was back to in-person attendance at the 22nd annual Forensic and Valuation Conference hosted by the Virginia State Society of CPAs. Topics included the income approach, effective recruiting, reasonable compensation, guideline transactions, surviving cross-examination, IRS developments, and a “Hardball With Hitchner” session that covered some front-burner issues.
“Appraisers Continue to Be Excluded Most Under Daubert, Per PwC Study” (BVR Editor). Under Daubert, appraisers were excluded more often in 2021 than any other type of financial expert witness, according to the latest edition of an annual PwC survey. Of the three most common financial experts (economists, accountants, and appraisers), appraisers had a 38% exclusion rate in 2021, followed by accountants (32%) and economists (27%). The article gives more insights into the survey and some ways to avoid a Daubert challenge.
“New Case Points Up Practice Opportunity in Reasonable Compensation” (BVR Editor). Opposing counsel attacked a valuation expert over his expertise in assessing reasonable compensation—and also criticized the data he used. The expert prevailed in this challenge, which illustrates that valuation experts can take on engagements in tax matters and shareholder disputes involving the fair market value of executive compensation.
“Pratt’s Document Request Checklist Stands the Test of Time” (BVR Editor). The new sixth edition of Shannon Pratt’s Valuing a Business does not only contain a great deal of valuation concepts, but also includes some very practical advice and tools. One such tool that has endured is a checklist for an initial request for documents. The list has some minor updates, but it is essentially the same as the one Pratt included in prior editions.
“Recap of the New Jersey CPA Society FVS Conference” (BVR Editor). Some excellent speakers covered litigation tips, malpractice, estate tax audits, statistics for lost profits, cryptocurrency, and divorce matters at the Forensic and Valuation Services Conference hosted by the New Jersey Society of Certified Public Accountants (NJCPA).

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

To stay current on business valuation, check out the December 2022 issue of Business Valuation Update.

BV movers . . .

People: David Mitchell has been appointed as managing director in the valuations practice of Interpath Advisory, formed two years ago as a management buyout from KPMG; he was previously head of the UK valuations team at BDO and has specific expertise in the specialized area of tax and restructuring valuations … Michael Koch, CVA, has been chosen to lead the valuations practice at Lancaster, Pa.-based RKL LLP; he has experience in valuation, financial modeling/projections, and litigation support and has performed engagements for gifting, estate planning, buying or selling a business, and other analysis and consulting for clients in a wide variety of industries … Rob King, CPA/ABV/CFF, associate director in the Hattiesburg, Miss., office at Postlethwaite & Netterville, was named chairman of the forensic, litigation, and valuation services committee for the Society of Louisiana CPAs.

Firms: Albuquerque, N.M.-based REDW LLC has added Edwards Largay Mihaylo & Co. PLC (ELMCO) of Phoenix, a firm that provides tax compliance, business and tax consulting, and accounting services to a wide range of clients … Los Angeles-based SingerLewak has combined with HBLA Certified Public Accountants of Irvine, Calif., which has 21 employees and provides accounting, audit, tax, estate planning, and bookkeeping services to privately held businesses including professional services firms such as engineering, architectural, law offices, and medical and veterinary practices … Parsippany, N.J.-based Sax LLP is adding Steven R. Press CPA PC of Mamaroneck, N.Y., a firm with a focus on employees and founders of tech and high-growth companies … Carmel, Ind.-based Blue & Co. LLC is adding Lee R. Ford & Associates of Carmel, Ind., which serves clients in the areas of construction, real estate, and privately owned businesses.

Valuation News Update

Lisa Guo — Sun, 13 Nov 2022 02:48:06 GMT

First-ever survey of young BVers gives rare insights

Preliminary results of a new survey confirm that most BV practitioners were not made aware of the profession in their early years. About two-thirds of respondents say they were not made aware of the profession in college, in either graduate or undergraduate studies. Until now, we’ve heard anecdotally that many young practitioners discover BV by accident, and this new survey backs that up.

The survey, conducted by BVR and the BV recruiting firm Borrowman Baker, was launched with the cooperation and support of the American Society of Appraisers (ASA). Respondents are ASA members under the age of 40 whose primary discipline is business valuation. The goal is to gain some insights and perspectives to help the profession better attract and develop the younger generation of practitioners.

Reach out. Once students hear about BV, it could change the course of their career plans. “I planned to go into audit, but I met someone who was a CPA and did valuation work,” one respondent said. “Hearing what valuation was made me pursue it instead of accounting work.” For its part, the ASA is urging its members to visit their alma maters and talk about the profession to students. This idea works. “I took a business valuation elective in business school and a partner at a BV/FLS shop did a guest lecture. That is how I learned about the BV profession.” This respondent now has several years of BV experience under his belt.

We know a number of firms that maintain a presence at local colleges and have success recruiting from those schools. But, clearly, more firms and valuation groups need to ramp up their efforts to increase awareness.

Other insights. Much can be learned from the young generation of BV practitioners. Other survey questions asked about such things as the quality of training they received, why they left their last firm, and whether they still see themselves doing valuation work five years from now.

BVR will post as a free download the full survey results once they have been compiled. In the meantime, more detailed results will be in the December issue of Business Valuation Update.

Most firms can’t forecast impacts of ESG

A new global survey highlights the difficulty in quantifying the financial impacts of environmental, social, and governance (ESG) factors. Over half the firms surveyed (54%) say they are unable to estimate the financial impacts of any ESG factors in their forecasting. Of the rest, 42% say they could partially estimate the impacts and 4% said they could fully estimate it. At this point, most firms don’t believe ESG has a very material impact on firm value, but the reason for this could be the difficulty in quantifying it.

The International Valuation Standards Council (IVSC) conducted the ESG survey, and the majority of responses came from firms based in Europe (67%). Other responses came from firms located in Asia (17%), North America (11%), and Africa (6%). Respondents were a mix of small and medium-sized firms and multinational organizations. The full results are available if you click here.

Extra: A new research paper from the CFA Institute proposes a performance evaluation and attribution framework for ESG investment strategies.

Competition keeps cost of capital platform prices down, experts believe

That’s the feeling of a panel of veteran valuation experts who presented at the recent Forensic and Valuation Conference hosted by the Virginia State Society of CPAs. One commenter felt that you’d be paying “double or triple” the current price if users had only one choice. For a long time, the only game in town was from Duff & Phelps (now Kroll), first with its Valuation Handbook series and then with its online Navigator, launched in early 2018. Feeling that the profession needed a simpler, less expensive alternative, BVR came out with its Cost of Capital Professional later that same year. When they go head-to-head, both platforms produce results that are not that different. A 2019 article in Business Valuation Update reported on the head-to-head demo. More recently, an article in the October 2022 issue of Hardball With Hitchner confirmed that the two platforms still produce similar results.

Survey reveals use of Excel add-ins for the GPCM

As part of BVR’s ongoing surveys related to data resources and methodologies, we recently ran a short survey on the use of Excel add-ins for the guideline public company method (GPCM). The survey generated about 50 respondents, and here’s what we found:
Almost half (45%) of the respondents use the GPC method in 50% of their valuations or more.
Only 15% said they never use the GPC method.
Of those who use the GPC method, 71% use an Excel add-in.
The most commonly used add-in was from Cap IQ, followed closely by Tagnifi.
Of those who use an add-in, 44% use it exclusively (no other resource besides the add-in). Of the 56% that use another resource in addition to the add-in, it was primarily EDGAR (SEC) for fundamentals and Yahoo Finance for stock prices—presumably to verify data from the add-in.
Of those currently not using an add-in, 100% said they would be interested in using one.
Our thanks to those of you who responded, and we’ll continue these surveys in the future.

Sessions we’re eyeing for next week’s AICPA FVS conference

BVWire will be at the AICPA & CIMA Forensic and Valuation Services Conference November 14-16, which will be live from the Wynn Las Vegas and Encore. There’s a lot to choose from in the almost 60 sessions on the agenda, but we’ve checked off a few so far that we plan to attend:
Cost of Capital Ramifications of the Russia-Ukraine War and Global Inflationary Pressures; Carla Nunes (Kroll) and James Harrington (Kroll);
Personal vs. Enterprise Goodwill: How the Analysis Lies Within the Facts; Audra Moncur (Wipfli) and Karolina Calhoun (Mercer Capital);
Forensic and Valuation Experts in a Shareholder Dispute: How Two Experts Look at the Same Data Differently; Brett Axelrod (Fox Rothschild) and Hubert Klein (Eisner Advisory Group);
Complex Business Asset Tracing—Separate or Marital PLUS Active or Passive; Stefanie Jedra (Marcum) and Josh Shilts (Shilts CPA);
When Valuation Experts Disagree (Panel); Harold Martin (Keiter), Bethany Hearn (CLA), Karolina Calhoun (Mercer Capital), and James Hitchner (Financial Valuation Advisors);
Moving on-Chain: Unwinding the Complexity of Crypto; Eric Forni (DLA Piper), Peter Altman (Akin Gump Strauss Hauer & Feld), and Kevin Madura (AlixPartners);
Valuation Hot Topics; Lisa Cribben (Wipfli), Stacy Collins (Financial Research Associates), Chris Mercer (Mercer Capital), and James Hitchner (Financial Valuation Advisors);
Business Combination Guide (recently released draft); Adam Smith (PwC), Mark Edwards (Grant Thornton), Gary Roland (Kroll), and Frederik Bort (KPMG);
The Forensic: How the CIA, a Brilliant Attorney and a Young CPA Brought Down Howard Hughes; Paul Regan (Hemming Morse, CPAs); and
Marketability Discount—Why Are There Such Varying Opinions?; Brian McIntyre (Withum Smith Brown) and Natalya Abdrasilova (Boyle, Deveny, & Meyer).

The conference will also be streamed online, and there’s a “select 7” option that allows you to focus on specific topics to match your needs. The event offers 12 to 20 CPE credits, and the agenda has something for everyone. You can get more details and see the full agenda on the conference site if you click here. Watch for our coverage in future issues!

Global BV News

Industry multiples in Europe decrease in 2Q22

Almost all sectors/industry groups presented in a recent Kroll report observed a decrease in their EV/EBITDA multiples during the second quarter of 2022. Semiconductors and semiconductor equipment was the industry group with the highest decrease (a change from 17.4x to 10.1x, or 7.3x lower compared to Q1 2022’s multiple). The report, “Industry Multiples in Europe—Q2 2022,” examines trading multiples for various key industries in Europe as of June 30, 2022. The analysis uses constituents of the STOXX® Europe Total Market Index (STOXX Europe TMI), which covers about 95% of the free float in Europe, the report says. The full report is available if you click here.

Valuation News Updates

Lisa Guo — Wed, 09 Nov 2022 02:20:26 GMT

Inflation, volatility trigger increase in ERP, per Kroll

Kroll has increased its recommended U.S. equity risk premium (ERP) from 5.5% to 6.0% when developing USD-denominated discount rates as of Oct. 18, 2022. This is matched with the higher of a normalized risk-free rate of 3.5% or the spot 20-year U.S. Treasury yield as of the valuation date if it is higher than 3.5%, Kroll says.

Big picture: “Starting in mid-January, as inflation continued to surprise with increasingly higher-than-expected readings reaching levels not seen in 30 to 40 years in some countries, global equity markets became more volatile,” says the firm in a recent update. “Investors have tried to ascertain the magnitude and speed at which central banks will raise interest rates, leading to a potential decrease in the value of companies in various industries due to an increase in discount rates.”

In the same update, Kroll issued its recommendations for Canada, the eurozone (from a German investor perspective), and the United Kingdom.

Court uses old transaction to value a dental practice

In a North Carolina divorce case, the wife’s stake in a dental practice was valued based on what she paid for it two years before she and her husband separated in 2015 (the valuation date). She had purchased a 50% share of a father-son practice from the father, who continued to work at the practice and was paid as an associate. She paid $1.2 million, which was based on an appraisal that included $1 million of goodwill. At the date of separation, she was still carrying the $1 million of goodwill on the books. The elder dentist was still working at the practice, which had a long history and excellent reputation in the community.

No experts retained: At trial, neither the husband nor wife offered up a current valuation of the practice, so the court examined the price paid for the wife’s stake two years before, concluding that it was an arm’s-length transaction. The court also investigated what happened to the practice in those intervening two years. It noted that the balance sheet still carried the $1 million of goodwill and that the elder dentist who had sold out was still working at the practice. “Persons looking at the practice would not see any change that might impact the goodwill,” the court wrote. Therefore, the court valued the business at essentially what was on the balance sheet (the $1.2 million purchase price less some small accounting adjustments).

The wife appealed, but the appellate court affirmed the trial court’s decision, noting that, although the valuation approach was “rudimentary,” it was “sufficiently reliable” considering both parties chose not to retain experts to prove otherwise.

The case is Logue v. Logue, 2022-NCCOA-625; 2022 N.C. App. LEXIS 644; 2022 WL 4350119, and a case analysis and full opinion can be found on the BVLaw platform.

Appraisers have highest exclusion rate under Daubert, per PwC study

Under Daubert, appraisers were excluded more often in 2021 than any other type of financial expert witness, according to the PwC survey, “Daubert Challenges to Financial Experts (2000-2021).” Of the three most common financial experts (economists, accountants, and appraisers), appraisers had a 38% exclusion rate in 2021, followed by accountants (32%) and economists (27%). Over the 22 years of the study, appraisers have the highest exclusion rate (44%) of the three. The exclusion rate includes full and partial exclusions.

The annual study analyzes challenges to financial expert witnesses (appraisers, accountants, economists, and others) under the Daubert standards from 2000 to 2021. These are the years following the U.S. Supreme Court’s Kumho Tire decision, which expanded Daubert’s reach to financial expert witnesses. For the full report, click here.

Customer relations is the top intangible, per Markables study

Customer relations is the most important of all intangible assets, accounting for 25% of enterprise value, according to a new study from MARKABLES. Next in line are software and technology, at 18% of enterprise value each, and last comes trademarks, at 8%. “Looking at the development during the last 15 years, customer relations showed the highest growth, while trademarks suffered badly, from a once leading position to last place,” says the study. The analysis was compiled from the MARKABLES database of almost 40,000 intangible assets acquired and valued globally in mergers between 2005 and 2021. The analysis reveals size, composition, and value drivers of different intangible assets.

AICPA FVS conference offers a ‘select 7’ option

Almost 60 sessions are offered at the upcoming AICPA & CIMA Forensic and Valuation Services Conference November 14-16 in Las Vegas live and online. For those virtual attendees who want to pick and choose some sessions, a “select 7” option is available so you can focus on specific topics that match your needs. With this option, you can choose any seven sessions from the main conference agenda. You will receive access, agenda creation, and material download instructions a few days before the conference starts. What’s more, you can adjust your agenda at any time. Check it out! For more details, click here.

Global BV News

New CBV Insight on damages published

A new paper examines two damages approaches generally used in a disputed matter: reliance damages and expectation damages. The paper (available if you click here) also reviews court decisions in Canada that provide guidance in the selection of the appropriate damages approach. The paper explains that, in the context of breach of contract disputes, the goal of expectation damages is to put the innocent party in the same position as if the contract had been performed. If it is not possible to calculate what the profits would have been if a contract had been performed, the reliance damages approach can be used. The premise of this approach is to put the plaintiff in the position he or she would have been in had the contract never been made. The paper’s authors are Ivy Tse and Eric Mah, who are both with Secretariat in Toronto. They both have the CBV designation from the CBV Institute, Canada’s valuation professional organization (VPO).

Valuation News Updates

Lisa Guo — Thu, 27 Oct 2022 00:51:12 GMT

The IRS to BV experts: We want you!

No, not for an audit. The agency is looking to hire experienced business appraisers for 14 open positions across the U.S., Gary Smith, IRS lead financial analyst, tells BVWire. The IRS uses the title financial analyst for its business valuation specialists. The salary range is from $94,373 to $150,703 per year, according to the job posting, which you can see if you click here.

Other side: “As can be expected, the position involves reviewing (and sometimes challenging) valuations of operating entities, holding entities, or intangible assets, prepared in a fair market value/tax context,” Smith says. Some travel may be required, and the positions are “telework eligible” after the probationary first year, which allows the analyst to work remotely approximately four days a week. Federal benefits including a pension and a “great” work-life balance, “along with the peace of mind that comes from knowing that you’re working for the right side of the table!” he quipped. Bet you didn’t know the IRS had a sense of humor!

For all of the details, including job description, experience requirements, locations offered, how to apply, and more, just click here. The job posting should answer all your questions, but if you have any other questions for Mr. Smith, you can email him at Gary.A.Smith2@irs.gov.

How long will high inflation last?

The U.S. economy will be returning to a more normal level of inflation by late 2023 and heading into 2024, according to published research presented during a recent BVR webinar conducted by William Harris (Trugman Valuations). In the short term, valuation analysts should examine their subject company’s industry to assess the impacts of inflation because not all industries have been impacted the same, Harris pointed out. At his firm, he has seen some companies struggling with supply-chain issues and rising input costs, while other companies have been able to pass through these costs successfully to end users. Therefore, a thorough understanding of how the current economic environment impacts the subject company is essential, he stresses.

Methodology: Because of the current economic picture and the events that have impacted the last few years of historical financials, the capitalized cash flow (CCF) model has given way to the discounted cash flow (DCF) model, Harris notes. He also advises that, with the market approach, an understanding about how the current inflationary environment impacts guideline public company multiples and transaction multiples is also essential. Historically, high levels of inflation have driven down publicly traded and M&A multiples and have eroded corporate earnings. Stock prices have tended to be lower as investors have increased their required rate of return expectations. With respect to the M&A market, deal volume has historically declined in high inflationary environments and multiples have tended to be lower. This is largely due to the increased financing costs since the Federal Reserve tends to fight inflation by raising interest rates, which makes financing transactions more expensive.

Harris wrote two articles in the October issue of Business Valuation Update explaining the valuation impacts of high inflation, which also includes a case study of an income forecast that takes high inflation into account.

Koltin’s eye-opening remarks at the NACVA conference

Allan Koltin (Koltin Consulting Group) has served as an adviser and broker on many of the biggest M&A deals in the accounting space. During his keynote address at a recent NACVA conference, he made some observations that some may find surprising, including a prediction that private equity will soon own more than half of the top 20 accounting firms. While much of what he said related to CPA firms, BV firms are facing similar issues. As for the M&A frenzy, part of the reason for it is the recognition that acquisitions are needed for larger firms to be able to grow at a reasonable rate (you can only bill out so many hours). He also noted that once PE firms acquire a large accounting firm as an “anchor tenant,” they will seek out smaller firms with between $15 million and $100 million in revenue for potential M&A deals. He made several other observations:

Offshoring is a model whose “time has come” because many practitioners have become so busy that they can’t devote enough time to managing their firms.
The “war for talent” is “tremendous” and will continue for the next five to 10 years. The number of accounting grads is down and so is the number of CPA exams being taken.
Staff costs have ballooned to 40% to 50% of overall firm costs (it used to be one-third each for overhead, staff/workforce, and partners’ profit).
Reliance on compliance work is changing and is shifting more to higher value-added and more profitable areas of advisory services.

Koltin also noted that the aging of the profession is creating a need for succession planning, including some creative alternatives to traditional strategies.

Extra: The next NACVA “super” conference will be December 14-16 in-person from two locations: Park City, Utah, and Fort Lauderdale, Fla. A virtual option is also available, and sessions can be ordered á la carte. Click here for details.

Prevailing expert comments on ‘moonshine’ case

In an earlier issue, we reported on an appellate court case involving the valuation of an owner’s one-third share in a Tennessee moonshine distillery (click here for the prior coverage). The court opinion said that the expert whose valuation the court accepted offered a modified report that eliminated the discount for lack of control (DLOC). But the expert who prevailed, Renee Harwell (Harwell Valuation Advisors), tells us: “Actually, the valuation wasn’t modified. My valuation report showed the lack of control and lack of marketability adjustments, as the entity was an LLC that filed as a sole proprietorship that represented itself as a partnership, so it was unknown what law to apply. The appellate court went with partnership.”

Harwell continues: “Why the appellate court remanded when they could have simply removed the lack of control adjustment is unknown. However, upon remand the same valuation report was used, and the adjustments pointed out to the court, which then declared the value at $35,000 without the DLOC.”

The case is Boesch v. Holeman (II), 2022 Tenn. App. LEXIS 335, and a case analysis and the full opinion can be found on the BVLaw platform.

Goodwill impairments YTD 2022 are up, per Kroll analysis

Risky financial markets and an uncertain economic environment add up to increased goodwill impairments. So far in 2022, the amount and frequency of goodwill impairments recorded by U.S.-based companies have increased. An analysis by Kroll finds that, compared to 2021, the top 10 impairments recognized thus far are triple the size of the top 10 for overall 2021 (see below). The data were compiled on Aug. 15, 2022.

Kroll notes that the spotlight is now on goodwill impairment assessment because many companies have annual goodwill impairment testing dates that fall in the second half of the year. What’s more, “significant changes in the economic environment increase the likelihood of having to perform a quantitative goodwill impairment test (rather than a qualitative assessment),” the firm says. You can read more of Kroll’s analysis if you click here.

BVWire to cover the AICPA FVS conference November 14-16

BVWire is looking forward to the AICPA & CIMA Forensic and Valuation Services Conference November 14-16, which will be live from the Wynn Las Vegas and Encore. It will also be streamed online, and there’s a “select 7” option that allows you to focus on specific topics to match your needs. The event offers 12 to 20 CPE credits, and the agenda has something for everyone. One session we are sure to attend will discuss the AICPA’s draft of its new accounting and valuation guide for business combinations. You can get more details and see the full agenda on the conference site if you click here. Watch for our coverage in future issues!

Reminder: Please take a survey on Excel add-ins for the GPCM

As part of BVR’s ongoing surveys related to data resources and methodologies, we’re exploring the use of Excel add-ins for the guideline public company method (GPCM). Are Excel add-ins prevalent? Which add-ins are used? What other data resources are used for the GPCM? Please take a very short two-minute survey, and we’ll present the results here in a future issue. Learn what your peers are doing! To go directly to the survey, click here. If you already took the survey, thank you!

Global BV News

IVSC issues new paper on brand value

The International Valuation Standards Council (IVSC) has released the third in a series of perspective papers on intangible assets. Parts 1 and 2 of the series examine the “Case for Realigning Reporting Standards With Modern Value Creation” and took a deep dive into human capital value creation and measurement. Part 3 takes a deeper dive into brands and reputation value creation by:

· Examining how brands generate value for organizations and the attributes of such value creation;

· Analyzing how investors assess the enterprise value creation attributable to brands; and

· Discussing the value measurement techniques and assumptions used to estimate the value of brands.

To download the new paper, click here.

Valuation News Updates

Lisa Guo — Thu, 20 Oct 2022 02:57:26 GMT

Dealing with stubborn inflation in your valuations

With the CPI numbers coming in higher than expected, valuation experts will continue to grapple with how to assess the impact of inflation on their subject companies. During a BVR webinar on this very topic, Aswath Damodaran (New York University Stern School of Business) noted that, “even if you don’t consider inflation directly, it is still affecting your margins and your growth. You have to dig through the layers of your businesses to see how the impact plays out.”

Margin impacts: Margins (current and target) depend on the company’s cost structure. If the company has high gross margins, the cost inputs are low and (if those inputs are not commodities) inflation might not affect the margins. For example, a software company has high margins that can be 40% or 45% steady state for a simple reason: The extra unit of software it sells costs nothing to make. But, if gross margins are low, typically many cost inputs are needed to produce a product or service. For example, an air carrier has many cost inputs that are commodity inputs (such as oil), so its margins will actually get squeezed if there is high and unexpected inflation. “Operating margins capture the profitability of your business model,” Damodaran observes.

Growth/investment efficiency: When inflation becomes high and unstable, individuals and companies do not like to invest long term because it will take longer to recoup that investment. As inflation gets higher and more unstable, long-term investment tends to drop off. Unexpectedly high inflation will hurt a manufacturing company a lot more than a service company, which makes much more short-term investments.

To capture how efficiently a company is delivering growth, Damodaran uses a ratio called sales to invested capital. (Many analysts use return on invested capital, but he thinks that metric is “vastly overrated.”) Sales to invested capital looks at revenues per dollar of invested capital. What does that measure? If you are a more efficient company, you should be able to generate more revenue per dollar of invested capital. Revenue growth margins and sales to invested capital capture the business model for a company. “I challenge you to find me any nonfinancial service company where I cannot capture the business model with those two inputs,” he says.

BVR is making available free of charge a recording of Damodaran’s 77-minute webinar, In Search of a Steady State: Inflation, Interest Rates, and Value; The (Inflation) Genie Escapes the Bottle! You can access it if you click here (login required).

Cryptocurrency under the radar

At the recent AAML/BVR National Divorce Conference, this question was asked: On your client intake forms, do you have any questions about cryptocurrency? Only a very few hands were raised. Questions that need to be asked include: Do you hold any cryptocurrency? Do you believe your spouse holds any? Often, the attorney or analyst will have to ferret out this asset, and the first place to look is tax records, says Dorothy Haraminac (GreenVets). The first page of the Form 1040 asks about it, but that’s just for the current year, so that’s just a starting point. Other forms that could reveal crypto are Form 8938 (foreign assets), Form 8949 (capital gains/losses), Form 8283 (Schedule A, contributions), and Form 1099 Misc (for payments and receipts).

Another place to look is the public blockchain, she advised. Cryptocurrencies are not completely anonymous, and anybody can access the information on the internet, which is the “authoritative source” for this. Cryptocurrencies are publicly reported on online blockchain ledgers that identify users solely by their cryptocurrency addresses, which look like long strings of numbers and letters. There is no personally identifying information, such as names and locations. Therefore, the question for the client is: What are your addresses?

Session co-presenter Ed Kainen (Kainen Law Group) asked whether traditional financial records can reveal cryptocurrency. Yes, absolutely, Haraminac responded. Old-fashioned statements from the bank, credit card issuers, and investment advisors can reveal crypto transactions. You also may find something in the client’s employment agreements, she noted. She also advised bringing in a crypto specialist, if necessary, as the techniques for investigation are still evolving.

Develop your young BV staffs’ interpersonal skills

How to communicate with clients effectively is one thing young BV professionals say they need more help with from their veteran colleagues. This was one of the interesting takeaways from a panel of young valuation experts giving their perspectives on the profession during a session at the Business Valuation & Financial Litigation Super Conference hosted by NACVA.

The young generation of valuers are very tech-savvy, but interpersonal skills are a different story. Interacting with clients effectively is an acquired skill that needs to be passed down to the new generation of valuers. This can be done through some explanation, but the best way is to teach by doing—experienced experts should include young colleagues in site visits, client meetings, copy them on correspondence, invite them to a client lunch, or anything else where they can observe how to build rapport. But don’t just have them sit there—preplan some questions for them to ask. These efforts will go a long way toward developing young talent, the panel noted.

A full article, “Young BV Practitioners Speak Out About the Profession,” is in the October issue of Business Valuation Update.

Please take a survey on Excel add-ins for the GPCM

As part of BVR’s ongoing surveys related to data resources and methodologies, we’re exploring the use of Excel add-ins for the guideline public company method (GPCM). Are Excel add-ins prevalent? Which add-ins are used? What other data resources are used for the GPCM? Please take a very short two-minute survey, and we’ll present the results here in a future issue. Learn what your peers are doing! To go directly to the survey, click here. Thank you in advance for participating.

Another issue of the ASA’s journal added to BVResearch Pro

Every month, subscribers to the BVResearch Pro platform get access to new articles, books, court cases, webinar transcripts, and more that are added to the almost 20,000 pieces of content. The full archive of the American Society of Appraisers’ Business Valuation Review™ is on the platform, and the Spring 2022 issue has just been added. In this issue, Aziz El-Tahach and his colleagues discuss the benefits of warrants in ESOP transactions. Joe Thompson addresses meme stocks and the risks they pose to business appraisers. Brad Cornell and Richard Gerger revisit the dividend growth model and provide their observations on its use in practice. The issue also includes a review by Gene A. Trevino, Ph.D., of Valuing a Business, 6th edition, and an update to the International Valuation Glossary—Business Valuation. If you’re not a subscriber to the BVResearch Pro platform, the journal is available on a stand-alone basis if you click here.

Global BV News

All markets unstable, per KPMG valuation pros

The Q3 2022 International Valuation Newsletter from KPMG Switzerland includes articles on valuation in times of geopolitical tension, macroeconomic shifts, and microeconomic challenges. “One thing we learned over the last two to three years is that all the shockwaves we have experienced have affected industries and sectors differently,” the authors write. “There is no one-size-fits-all answer to the question of a market-adequate valuation—because there are no stable markets these days.” The issue also includes capital market data, including stock market performance, multiples, risk-free rates, country risk premia, and inflation forecasts. To download the issue, click here.

Preview of the November 2022 issue of Business Valuation Update

Here’s what you’ll see:
“BVR Responds to Hitchner Article on DealStats” (Adam Manson, BVR director of valuation data). This is a response to an article by Jim Hitchner discussing the various transaction databases including BVR’s DealStats. It gives an additional perspective on the private buyer transactions in DealStats
“Recap of the AAML/BVR National Divorce Conference” (BVR editor). It was a happy marriage of divorce attorneys and financial experts who gathered together for the AAML/BVR National Divorce Conference in Las Vegas. The AAML is the American Academy of Matrimonial Lawyers. Here are some highlights from some of the sessions.
“New Pepperdine Report Creates Buzz at the NACVA Conference” (BVR editor). One of the more well-attended sessions at the Business Valuation & Financial Litigation Super Conference hosted by the National Association of Certified Valuators and Analysts (NACVA) was a session Dr. Craig R. Everett conducted. He is the project director of the Private Capital Markets Project from Pepperdine University, which does an ongoing survey of expected rates of return of providers in the private capital market.
“Ang Offers SSBV Members More Evidence of the Lack of a Size Effect” (BVR editor). Clifford Ang (Compass Lexecon), who offered an impassioned plea to a large group from the UK’s Society of Shares and Business Valuers (SSBV), has become one of the leading proponents of eliminating or minimizing the traditional size premia. Ang has written a number of articles on the size effect, and he has a new book, Applied Valuation, due out early next year.
“Estimating the Extra Risk of Customer Concentration” (BVR editor). Interesting comments were made by Roger Grabowski (Kroll), who conducted a session at the American Society of Appraisers International Conference. He discusses the research in this area and how to examine the customer concentration of guideline public companies.
“The Two Most Prevalent Methods for Solving the Goodwill Conundrum” (BVR editor). Remarks from a session at the AAML/BVR National Divorce Conference conducted by veteran valuers Jay Fishman (Financial Research Associates) and Ken Pia (Marcum) who were joined by attorney Thomas J. Sasser (Sasser, Cestero & Roy).

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,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

Valuation News Updates

Lisa Guo — Thu, 13 Oct 2022 02:55:58 GMT

Six things to know from the NJCPA BV conference

While we enjoy attending the major valuation conferences, we also look forward to attending local state CPA society conferences that focus on valuation. They represent “hidden gems” that offer excellent speakers and interesting topics. And, since the pandemic triggered more usage of streaming technology, these local events are now beamed all over the world. Such an event was the recent Forensic and Valuation Services Conference hosted by the New Jersey Society of Certified Public Accountants (NJCPA). Hosted by Roy Kvalo, director of litigation and valuation services at The Curchin Group (Red Bank, N.J.), the event was excellent—and here is some of what we picked up:
The easiest way to get sued for malpractice is by filing a collection lawsuit against a client—they will countersue and find an expert to say you fouled up;
More calculation reports are showing up in divorce courts—one side does it, so the other side follows suit, and the judges understand the need to save money;
If the IRS audits your valuation, check the agency’s math—one expert finds math errors 30% to 40% of the time, which can be used against them;
Using Excel and its regression add-on for lost profits analysis should be fine for court (the tools are widely used and accepted), but it’s how you use them that counts;
DeFi is the new source of crypto theft on the market—in 2021, it accounted for 76% of all thefts; and
Getting a lot of subpoenas to produce documents and bringing in your liability insurer does not raise your malpractice premium—your insurer is happy to handle them.
We’ll have detailed coverage in a future issue of Business Valuation Update.

Tennessee moonshine formula caught up in business divorce

A partner in a Tennessee distillery making flavored moonshine felt the other two partners improperly disaffiliated him. He had not contributed to the partnership financially, but he provided his expertise and formulas for the mountain dew. He claimed the other partners stole the formulas, so he wanted to be paid for them as well as for his time and effort.

DLOM but no DLOC: The court found that the partnership owned the formulas, but the ousted partner was entitled to his one-third share of the business as of the date he left, which was December 2015. His expert’s valuation used information from 2017 and then discounted it back to 2015 to get a value of $258,000. The defendants’ expert used information known as of December 2015 and then applied discounts for lack of marketability and control to come up with a value of $23,000 for the plaintiff’s share. The court sided with the defendants’ expert. On appeal, the court noted that state statute prohibits a discount for lack of control, so the defendants’ expert modified her valuation for a final value of $35,000.

The case is Boesch v. Holeman (II), 2022 Tenn. App. LEXIS 335, and a case analysis and the full opinion can be found on the BVLaw platform.

Another call to discard CAPM

“Unfortunately—and I write this with a heavy heart—the CAPM is not just imperfect; it is so badly wrong that it is best ignored,” writes Ivo Welch (UCLA Anderson Graduate School of Management) in an article “The Cost of Capital: If Not the CAPM, Then What?” (click here for a download).

Why is CAPM still so prominent? Why is it still taught and used in practice so much? Welch’s comments are similar to those of Pablo Fernandez (University of Navarra), another well-respected academic in his paper “CAPM: An Absurd Model.” He found that academics still teach CAPM because it takes up a lot of class hours and there’s nothing to replace it. Welch agrees, saying it’s “we academics who committed the original sin” and became so “enamored” by the model that they “simply ignored the evidence.” CAPM “provides one basic prediction: high-beta stocks should outperform low-beta stocks on average, because high-beta stocks are riskier. Unfortunately, the data say the opposite,” Welch writes. He does offer some recommendations as to how analysts and investors can do better than CAPM.

Willamette focuses on wealth transfer valuation

Estate and gift tax planning and valuation issues are the focus of the Autumn 2022 Insights from Willamette Management Associates. Some examples of the articles are:
“Disguised Dividends and Shareholder/Employee Compensation” (Eliza Jones and Lisa H. Tran);
“Valuation of Promissory Notes for Transfer Tax Purposes” (Timothy C. Ladd);
“Valuation Considerations for Preferred Equity Interests” (Ben R. Duffy and Aiden B. Gonen); and
“Noncompete Agreement Taxation and Valuation Considerations in Corporate Acquisitions” (Robert F. Reilly).

The editor for this issue is Weston C. Kirk. The issue is available if you click here.

CFOs ignoring cyber risk despite huge losses

A Kroll report finds that 82% of the executives in its survey said their companies suffered a loss of 5% or more in their valuations following their largest cyber security incident in the previous 18 months. At the same time, 87% of CFOs are either very or extremely confident in their organization’s cyberattack response, the report says. This is at odds with the level of visibility CFOs have into cyber risk issues, given only four out of 10 surveyed have regular briefings with their cyber teams. The report, “Cyber Risk and CFOs: Over-Confidence Is Costly,” is available if you click here.

Extra: A BVR briefing: “Cybersecurity in Business Valuation: Addressing the Impact of Data Breaches on Value,” discusses some emerging ideas and techniques that are helping to pave the way to understand and measure the impact of data security and cyber liability risks on the value of a business better. The briefing includes insights from appraiser Mike Blake (Brady Ware & Co.) and cybersecurity expert Charles Hoff (Data Security University).

Valuation News Updates

Lisa Guo — Thu, 06 Oct 2022 02:54:33 GMT

Some surprising takeaways from the VSCPA BV conference

The Virginia State Society of CPAs held its 22nd annual Forensic and Valuation Conference. Harold Martin (Keiter) chaired the two-day conference and acknowledged the help of a task force in putting the event together. The sessions and speakers were top-notch, and some of the takeaways from the first day’s sessions may surprise you.
There is “a ton” of BV work out there (“we’re turning business away”), but the trouble is finding talent—there’s a big shortage of qualified people, so firms need to ramp up recruiting;
In BV, you can “never be wrong” because different (and opposing) approaches can be supported—the key is what is “right for you”;
The “dirtiest little secret” in BV is that there is no real due diligence done on client-provided projections;
Small businesses will often have unreported income, but it may be too costly to uncover it, so consider a high-level lifestyle analysis;
The main sources of economic data (Mercer, BVR, Tagnify, and KeyValueData) all have “great information,” but they all need more endnotes and citations (and watch out for questions from opposing counsel on whether you have verified the data);
Eyes are on the Trump legal case regarding manipulation of asset valuations—practitioners want to know who valued the FLPs at issue;
There’s a certain amount of truth to the idea that, if enough people do something wrong, it becomes “generally accepted”;
Some courts will not like or understand your DCF analysis, so just convert it to a CCF using a “blended” growth rate (conceptually, the DCF and CCF should result in the same value); and
There’s a potential opportunity for valuation experts to specialize in reasonable compensation outside of business valuation (e.g., for tax cases).

There will be in-depth coverage in a future issue of Business Valuation Update.

Hitchner on citing BV books and cases

It’s fine to cite authoritative texts in your report—but court cases are another story, advises Jim Hitchner (Financial Valuation Advisors). He spoke at last week’s Forensic and Valuation Services Conference hosted by the New Jersey Society of Certified Public Accountants (NJCPA).

Big three: Hitchner pointed to the three main texts in the BV profession: Valuing a Business (by the late Shannon Pratt), Gary Trugman’s Understanding Business Valuation, and his own Financial Valuation Applications and Models. He has cited all of these resources in his reports when appropriate, pointing out that the Pratt book has just come out with its new sixth edition (done by a group of contributors). The Trugman book is “very different in style and tone” and is “full of good stuff,” he noted. Hitchner also said he is working on the fifth edition of his book, which is scheduled to come out in the first quarter of 2023. All of these books are available from BVR.

Cases: As for court cases, they should not be cited, he advised, but there are exceptions. If the attorney advises that the jurisdiction has an important case that is used as precedent for a certain valuation approach or methodology, citing that case may be appropriate. And, of course, the Mandelbaum case is fine to cite in your DLOM section.

The NJCPA conference, hosted by Roy Kvalo, director of litigation and valuation services at The Churchin Group (Red Bank, N.J.), was excellent, and we’ll have more coverage in future weeks.

Divorce courts getting flexible on valuation dates

One of the interesting points made at the recent AAML/BVR National Divorce Conference was that judges in marital dissolution cases now tend to want more current valuations, particularly when subsequent events may have impacted value. Of course, this can happen as a result of the pandemic. A trial could have started at the outset of the pandemic and then postponed. By the time the trial starts up again, the business could have been materially impacted, rendering the valuations too outdated in the eyes of the trier of fact. Therefore, some of them are abandoning the valuation dates set by precedent and asking for more current valuations.

If you missed the BVR/AAML conference, BVR will be offering recordings of all the sessions. We’ll let you know when they are available.

Moran adds to videos aimed at attracting young BV practitioners

Ray Moran (FON Valuation Services), the marketing director of the International Institute of Business Valuers (iiBV), continues to add to his series of interesting videos designed to spark interest in younger individuals and university students about a career in valuation. In a recent video, he interviews Mei Mahila about her career path from finance student in Albania to BV practitioner. Her corporate finance professor got her interested in valuation, and she entered the Valuation Olympiad, a competition in London sponsored by Global Banking Training. She’s now a manager with Deloitte and offers some valuable advice to the profession on how to attract young people to careers in valuation. One way is to reach out to students and show them personal stories such as hers to demonstrate what can be achieved in the profession. Also, stress the fact that people from all types and levels of educational backgrounds—not just finance and accounting—can be very successful in valuation, such as people with engineering, science, or math backgrounds. The iiBV’s YouTube channel is at youtube.com/channel/UC6CmU7fWmRk0OzF__mmuKOA.

RMA is the financial benchmarking data of choice, per BVR survey

Over three-quarters (78%) of valuation experts say they use RMA for financial benchmarking data, according to a recent survey by BVR. Coming in second is Bizminer, cited by 28% of respondents (see below). Just over 50 practitioners responded to this survey.

RMA	78%
Bizminer	28%
Integra (Microbilt)	8%
Internally developed data	4%
Other	24%

The “Other” category includes a number of resources, most of which just a single respondent cited, including IBISWorld, Cap IQ, S&P Global Intelligence, Business Reference Guide, Vertical IQ, and trade association data. Also, the majority (80%) only use one resource, and most of the respondents say they use these data weekly.

In a 2018 BVR survey (which had 160 respondents), IBISWorld was No. 1 (cited by 57%) and RMA was second (at 47%). We have heard that IBISWorld has had some reliability issues, so that may partly explain the drop in its use.

Global BV News

IVAS-IVSC conference this week: October 6-7

The leading business valuation conference in Asia Pacific has been the IVAS-IVSC Business Valuation Conference, and the next one will be October 6-7. Environment, social, and governance (ESG) factors as well as intangible assets are a major part of the agenda, and the conference theme is “Reframing Valuations: Intangibles, ESG, and Long-Term Value.” The event is organized by the Institute of Valuers and Appraisers, Singapore (IVAS) in partnership with the International Valuation Standards Council (IVSC). For more information and to register, click here

Valuation News Updates

Lisa Guo — Thu, 29 Sep 2022 02:52:51 GMT

Another big win for ESOP valuations vs. the DOL

Valuation experts have long maintained that the Department of Labor (DOL) has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. But a court has rejected the valuations the DOL did in a case alleging that an ESOP overvalued (and thus overpaid for) the stock of its sponsoring company. The case involved an ESOP set up in 2004 by TPP, an architectural firm in Atlanta. The DOL had a long winning streak in these cases, but that ended last year with the Bowers case, which was a major win for the ESOP community. With this new case, the tide continues to turn against the DOL.

Issue of control: The initial draft valuation done for the trustee included a 23% minority discount, but that was eliminated in the final valuation report when it was agreed that a number of “control mechanisms” were to be put in place. The DOL’s position has been that a minority discount must be applied unless the ESOP has “total and unfettered” control of the sponsoring company. In this case, the ESOP owned 51% of the sponsoring company’s stock, but a number of the other control mechanisms were never put in place. Therefore, the DOL expert’s valuation was prepared on an “as is” basis (so a minority discount was baked into the valuation)—plus he deducted an extra 10% for certain factors. But the court rejected the DOL’s valuation in favor of valuations done by an expert from Stout, who testified on behalf of the defendants.

The case is Walsh v. Robert N. Preston, et al., Case 1:14-CV-04122-ELR, U.S. Dist. Court, Northern District of Georgia, Atlanta Division, Filed 09/20/2022.

Stay tuned: This is a long case with other valuation issues (including the use of forecasts and company-specific risk), so watch for further commentary. Also, a full case digest and analysis as well as the court opinion will be available soon on the BVLaw platform.

Extra: In separate news, the ESOP Association has petitioned the DOL to (finally) “provide clear regulation and guidance as Congress directed.” The valuation community has been waiting (four decades) for the DOL to finalize regulations that were proposed way back in 1988.

Great turnout for the AAML/BVR National Divorce Conference

The AAML/BVR National Divorce Conference harkened back to prepandemic times as family law attorneys and valuation experts met in person in Las Vegas September 18-20. The AAML is the American Academy of Matrimonial Lawyers. There were hundreds of attendees on-site, a dozen exhibitors, networking dinners, and some excellent sessions co-presented by attorneys and valuation experts. Here are some quick takeaways:
Companies have three years to file for the Employee Retention Tax Credit—this could potentially be a tax asset hidden by the business owner spouse;
The first place to look for hidden cryptocurrency is tax records (the first page of the 1040 asks about it);
Attorneys should help the expert tailor his or her report and testimony to the learning style of the specific judge;
In divorce courts, comparability using the market approach is very narrowly defined, unlike in tax matters;
To estimate goodwill in some states, the excess earnings method is the “most used and abused method,” but “works great if done correctly”;
Judges like to do a side-by-side analysis of opposing experts’ valuations to help make their final decision (for an example, see “How Judges Compare Competing DCF Analyses,” in the July 2022 Business Valuation Update);
When doing valuations of hedge funds or private equity, examining audited financials is “critical”;
When testifying, watch your body language—it represents 55% of your total communication; and
Bring in a specialist if you need help with issues outside your wheelhouse, such as intellectual property, reasonable comp (vocational expert), businesses that own real estate, etc.

Detailed coverage of the conference will be in the November issue of Business Valuation Update.

Take a fresh look at your long-term growth rate, says Grabowski

Do you estimate a long-term growth rate by taking long-term real GDP growth plus expected inflation? If you do, you may want to reconsider, according to recent research by Roger Grabowski (Kroll) and Ashok Abbott (West Virginia University). Grabowski conducted an interesting session at the recent ASA 2022 International Conference in Tampa, Fla., and he says that common approach is wrong. Reason: GDP includes both existing firms and new firms, whose growth is driven by acquisition. GDP growth is being driven by firms such as Amazon and Apple—businesses that did not exist 20 years ago—so you can’t assume your subject company will grow at the rate of GDP, he says. Therefore, the expected long-term growth rate should reflect “organic” growth, so the effect of the acquisitions should be backed out.

Grabowski cites research that estimates real long-term growth in aggregate corporate earnings at 3%, with 2% attributable to new companies. Therefore, the long-term average real earnings for existing businesses (i.e., organic growth) is equal to 1%, or one-third. This means your subject company will, on average, grow at the rate of one-third of real GDP plus inflation.

Comments wanted on AICPA draft of business combinations guide

The AICPA seeks comments on its newly released Draft Accounting and Valuation Guide, Business Combinations. This guide provides guidance and illustrations regarding the accounting and valuation considerations for business combination transactions. It addresses many accounting and valuation issues that have emerged over time and will help preparers, auditors, and valuation specialists understand and comply with the requirements of FASB ASC 805, Business Combinations, and FASB ASC 820, Fair Value Measurement. Comments are due by Jan. 15, 2023 (see the document for how to submit comments). To download the working draft, click here.

Healthcare compensation and productivity data workshop October 4-6

The American Association of Provider Compensation Professionals (AAPCP) is a relatively new nonprofit group whose members advise and lead healthcare organizations on provider compensation, contracting, planning, recruitment, retention, strategy, and valuation. The group is having a three-day Provider Compensation and Productivity Data Workshop October 4-6, which will be virtual. While the event is targeted to teams that manage provider compensation for organizations, it includes topics of interest to healthcare valuation professionals. For details, click here.

Global BV News

EACVA and IVSC launch European BV magazine

The European Association of Certified Valuators and Analysts (EACVA) and the International Valuation Standards Council (IVSC) have released the first edition of the new European Valuation Business Valuation Magazine (EBVM). The publication is free of charge and is intended to be a European platform to discuss practice issues in business valuation. The first issue is Fall 2022 and features these articles: “Valuation Ambiguities Under the European Directive on Preventive Restructuring Frameworks” (Dr. Marc Broekema, Professor Jan Adriaanse), “Business Models, Use Cases and Analytical Approaches for Valuation of the Asset ‘Data’” (Dr. Matthias Meitner), and “Unlocking the Value of ESG” (Alexander Aronsohn). The issue is available if you click here, where you can sign up for future issues. EACVA, founded in 2005, is based in Frankfurt/Germany and supports the Certified Valuation Analyst (CVA) certification for European business valuers.

Valuation News Updates

Lisa Guo — Thu, 22 Sep 2022 02:51:48 GMT

AICPA releases draft of business combinations guide

The AICPA seeks comments on its newly released Draft Accounting and Valuation Guide, Business Combinations. This guide provides guidance and illustrations regarding the accounting and valuation considerations for business combination transactions. It addresses many accounting and valuation issues that have emerged over time and will help preparers, auditors, and valuation specialists understand and comply with the requirements of FASB ASC 805, Business Combinations, and FASB ASC 820, Fair Value Measurement. Comments are due by Jan. 15, 2023 (see the document for how to submit comments). To download the working draft, click here.

On-the-ground report from the ASA International Conference

Appraisers from all disciplines met in Tampa, Fla., and online for the ASA 2022 International Conference September 10-12. BVWire was there along with hundreds of attendees on site—somewhat of a return to prepandemic normalcy. At all the sessions we attended, speakers were live and on-site. Here are some big-picture highlights—more detailed coverage of the sessions will be in the November issue of Business Valuation Update.

Three pillars: Johnnie White, ASA’s CEO, welcomed the attendees and outlined the organization’s strategic plan built around three “pillars”: (1) membership; (2) education; and (3) branding. The ASA has been experiencing some challenges with respect to membership levels (partly because of the aging of the profession), so efforts are underway to attract and retain members better, particularly younger members. Also, educational content is being increased with the addition of more on-demand learning and specialty conferences (such as the recent inaugural ESOP conference). As for branding, a PR firm has been hired to help elevate the ASA brand in the appraisal profession (brand logos have been sent to all members).

Economy: The Fed “will not back off” and will keep raising rates until it sees “serious progress,” said keynote speaker LaVaughn M. Henry, former White House economic advisor and senior regional officer and vice president for the Federal Reserve Branch in Cincinnati. There will be slowing growth over the next six months but not necessarily a recession. Henry noted that Bank of America backed off on its prior forecasts of a recession this year, now saying “maybe” next year. (Note: Henry’s remarks were made before last week’s market plunge.)

Shannon Pratt Award: The recipient of the inaugural Shannon Pratt Award is Roger Grabowski (Kroll). Jay Fishman (Financial Research Associates) and Ken Pia (Marcum) presented him with the award. Recently, Grabowski spearheaded the effort to publish the sixth edition of Pratt’s Valuing a Business.

‘ESG Ratings: A Compass Without Direction’

That’s the title of a new paper out of the Stanford Graduate School of Business that examines the concerns over the reliability of the various ratings schemes for environmental, social, and governance (ESG) factors. ESG has become a “new” hot topic (although much of it has been around for years) in the investment world, and it, of course, has implications for valuation. But the various ratings that have emerged are (still) not ready for prime time. “We find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments,” the authors write.

The paper is available if you click here. The authors are David F. Larcker (Stanford University), Lukasz Pomorski (AQR Capital Management), Brian Tayan (Stanford University), and Edward M. Watts (Yale School of Management).

Extra: The IVSC has a perspective paper, “ESG and Business Valuation,” that represents an early step toward developing a systematic approach to the incorporation of ESG into business valuation practice and standards. To access the IVSC paper, click here.

A ‘field guide’ to BV just released

Based on all of the questions business owners have asked them over the years, appraisers Casey Karlsen and Seth Webber of BerryDunn have put together a helpful book, A Field Guide to Business Valuation. Written in an easy-to-understand style, the book uses a case study example that winds through the entire book to clearly illustrate the valuation concepts discussed clearly. This book is designed for owners and leaders of private businesses, but it will also help valuers give clear answers to questions from their clients that they are sure to get. To see the Table of Contents and Introduction, click here. A PDF version is available now, and the print version will ship by the end of September.

Reminder: Survey of young ASA BV practitioners

The American Society of Appraisers, together with Business Valuation Resources (BVR) and the recruiting firm Borrowman Baker, is conducting a survey of ASA members under the age of 40 whose primary discipline is business valuation. The goal is to gain some insights and perspectives to help the profession better attract and develop the younger generation of practitioners. If you are an ASA member under 40 in the BV discipline, you should have received a link to the survey. If you have not, send a note to info@bvresources.com and we will send you a link. Responses are strictly confidential and anonymous and will contribute to the continued advancement of the profession. The survey will be open until September 30. Thank you in advance for participating!

Global BV News

Student BV Challenge launched in Canada

The CBV Institute has launched its inaugural Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. Student teams will compete with students from other universities in a test of their business valuation skills. A case study has been developed by a team of Chartered Business Valuators (CBVs) and refined for a university audience. All participants will have the opportunity to attend a training session to learn the basics of business valuation that can be applied to the case study. The registration period is from September 13 to October 14, and the competition dates will be November 17-18. More details are available if you click here.

Valuation News Updates

Lisa Guo — Thu, 15 Sep 2022 02:50:20 GMT

Nath comments on Hitchner v. Damodaran

The author of a number of seminal articles on control premiums, minority interest valuation issues, and cost of capital, Eric Nath (Eric Nath & Associates) comments on a recent article in Business Valuation Update. The article covered a webinar Jim Hitchner (Valuation Products and Services) presented in which he challenged the views of Aswath Damodaran (New York University Stern School of Business) concerning the cost of capital.

“Your article ‘Hitchner Rebuts Damodaran’s Attacks on Cost of Capital Inputs’ might perhaps have been titled ‘Hitchner Attempts to Rebut Damodaran.’ My understanding is that probably 35% to 40% of appraisers (never mind academics) agree with Damodaran in whole or in part. Many of us never use historical data at all for ERP, size premiums or much of anything else. See the following article for detailed reasons why: The Big Myth. At this point the Pepperdine Survey is the best source of forward-looking required rates of return. Implied rates of return based on forecasts for some public companies is also a forward-looking approach, but it doesn’t really deal with lack of control or marketability/liquidity that impairs value for minority ownership positions in small private companies. It would be great to see the Pepperdine researchers figure out a way to get into the deeper, darker recesses of minority interests in smaller closely-held businesses, but at least for now the Survey’s venture capital and private equity segments get closer than anything else to what we need.” (signed) Eric Nath, ASA.

BVR surveys confirm Nath’s belief that over a third of appraisers look to Damodaran for estimating cost of capital. Also, BVR surveys have shown that about 30% of appraisers look to the Pepperdine Survey (the 2022 edition is now available if you click here).

Expert can’t testify regarding legal and state of mind opinions

In a case in Delaware Chancery Court concerning breach of fiduciary duty surrounding an acquisition, a well-known expert has had the court partially exclude his testimony. For example, one aspect of the report provided his opinions on facts omitted from the proxy statement. The court noted that this amounted to a legal opinion of materiality, which is an issue for the court, so he was precluded from testifying in that regard. Some other aspects of his report fell into a gray area, but it did not provide a meaningful basis for evaluation and was largely personal thinking and judgment, the court noted. The expert had testified in the high-profile Dell case presided by the same judge, Laster, who wrote: “His opinions on the sale process in this case thus differ from the helpful analysis he offered about the management-led buyout in Dell, which rested not only on his thinking and judgment, but also on a data set of management buyouts he collected.” The court ruled that the expert may not testify on certain subjects of his report.

The case is In re Columbia Pipeline Group, 2022 Del. Ch. LEXIS 180, and a case analysis and full opinion can be found on the BVLaw platform.

Survey regarding young ASA BV practitioners

The American Society of Appraisers, together with Business Valuation Resources (BVR) and the recruiting firm Borrowman Baker, is conducting a survey of ASA members under the age of 40 whose primary discipline is business valuation. The goal is to gain some insights and perspectives to help the profession better attract and develop the younger generation of practitioners. If you are an ASA member under 40 in the BV discipline, you should have received a link to the survey. If you have not, send a note to info@bvresources.com and we will send you a link. Responses are strictly confidential and anonymous and will contribute to the continued advancement of the profession. The survey will be open until September 30. Thank you in advance for participating!

Paper explores IPP investments in the US

An interesting paper examines the types of intellectual property products (IPP) capital employed by various sectors as measured in the National Income and Product Accounts (NIPAs) by the Bureau of Economic Analysis (BEA). The paper finds (not surprisingly) that investments in hard assets (e.g., plant and equipment) have decreased and have been replaced by investments in IPP. Also, there “still is a lot of heterogeneity in the types” of IP used among sectors, the paper says. For example, software capital is more prevalent in sectors such as information, finance and insurance, or management of companies than in sectors such as professional, scientific, and technical services, which continue to “invest heavily in the relatively more expensive R&D capital, as they had been doing since the 1980s,” the paper says. Consumer services and healthcare continue to be heavily invested in buildings (“expensive nonresidential structures”) but have also “increased their investments in a balanced mix of software and R&D capital but at much more modest levels compared to the rest of the capital-intensive sectors analyzed in this paper.”

The paper, “Understanding the Uneven Growth of Intellectual Property Products Investment in the U.S.,” is by Dennis Fixler and Eva de Francisco, U.S. Bureau of Economic Analysis, and can be accessed if you click here.

Global BV News

European BV conference in Vienna November 3-4

The 15th annual conference of the European Association of Certified Valuators and Analysts will be held in Vienna on November 3-4. More than 300 attendees are expected to hear from some of the most renowned speakers in the business valuation field while connecting and networking with other valuation professionals. Keynote speeches will be presented by Professor Dr. Dr. h.c. Ulrich Blum on Outright Economic Warfare: Can It Be Contained? and Bradford Cornell, Ph.D., on ESG and valuation. For more information and to register, click here.

What’s in the October 2022 issue of Business Valuation Update

Here’s what you’ll see:
“Young BV Practitioners Speak Out About the Profession” (BVR Editor). You may be surprised at the comments from a panel of young valuation experts who were asked to give their perspectives on the profession at the recent Business Valuation and Financial Litigation Super Conference hosted by NACVA in Salt Lake City.
“Valuation Considerations in High Inflationary Environments” (William Harris, ASA, CFA, Trugman Valuation). With inflation at its highest level since the Great Inflation, valuation analysts will have to consider macroeconomic factors that have not been present in the US economy in over 20 years.
“Accounting for Inflation in the Income Statement Forecast” (William Harris, ASA, CFA, Trugman Valuation). An example from an actual engagement that demonstrates the manner in which inflation can impact a valuation. This is a companion to the above article.
“Mercer Examines the State of the BV Profession” (BVR Editor). In a keynote address at the Business Valuation and Financial Litigation Super Conference hosted by the National Association of Certified Valuators and Analysts (NACVA), Chris Mercer (Mercer Capital) addressed the aging of the profession, consolidation, how the VPOs are adapting, and what the future might hold for valuation theory.
“Key Industry Updates for Various Types of Stores and Retailers” (BVR Editor). The economy, high inflation, the Russia-Ukraine war, and the pandemic continue to impact firms in all industries, so it’s important for valuation analysts to keep up with these developments. Here are some recent and very targeted updates for various retail stores from the Vertical IQ industry research platform.

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.

Business Valuation Updates

Lisa Guo — Thu, 01 Sep 2022 02:48:58 GMT

Expert’s testimony excluded regarding licensing tattoos to video games

In a copyright infringement case in federal court in Ohio, a tattoo artist sued a video game company for depicting NBA players adorned with his copyrighted tattoos. The defendants argued that their use of the tattoos fell under the “fair use” rules, but the court noted that one of the factors to be considered was the “effect of the use upon the potential market for or value of the copyrighted work.” There were currently no incidences of tattoo artists licensing their designs for video games. The plaintiff brought in an expert from a large global consulting firm who was to testify on various matters, including whether the defendants benefited financially from reproduction of the tattoo designs. The expert was also to testify as to the likelihood of new markets forming, but, in a Daubert challenge, the court ruled that he was outside his area of expertise when he opined about the inevitable potential market for the licensing of tattoos for video games. The court excluded any testimony by the expert in regard to that but allowed his testimony on other matters.

The case is Hayden v. 2k Games, Inc., 2022 U.S. Dist. LEXIS 139184, and a case analysis and full opinion are available on the BVLaw platform.

SME transaction values drop to 2.9x for 2Q2022

EBITDA multiples are at 2.9x for the second quarter of 2022, which is down from the 4.5x rate in the first quarter of 2022, according to the latest issue of the DealStats Value Index (DVI). The DVI calculates valuation multiples and profit margins from closely held companies each quarter, as shown in the chart below, which also highlights the median selling price/EBITDA with the trailing three-quarter average over a five-year period.

Car dealer blue-sky values remain at record levels, per Haig report

“Blue sky” values are 6% higher than at the end of 2021, and they are at the same level as they were at the end of the first quarter of 2022, according to the Q2 2022 Haig Report. Blue-sky value represents the intangible value of a car dealership. A blue-sky multiple is applied to normalized earnings, and then the tangible net assets are added in to get the fair market value of the entire enterprise.

Profitable road: Despite bad news in the economy and weak consumer sentiment, auto dealer profits remained high but growth in profits may be leveling off. M&A activity boomed in the first half of 2022, with 3% more dealerships sold compared to the record-setting pace of the first half of 2021. In these current conditions, a new risk has emerged: Car makers see a chance to restructure the relationship between consumers, retailers, and themselves. To stave this off, dealers will need to stress the value they bring to consumers and the car makers, says the report. To download the full report, click here.

Extra: Join Alan Haig and Nate Klebacha from Haig Partners for a BVR webinar, Auto Dealerships Are Running Hot: Key Valuation Metrics Unique to Auto Dealers, on September 14.

Global BV News

Demand for BV experts in Canada is at an all-time high

The awareness of the business valuation profession in Canada has grown, and demand for experts is at an all-time high, says Dr. Christine Sawchuk, the president and CEO of the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter. In an interview with Ray Moran (iiBV), she discussed some growing trends, including the increased complexity of valuation work, more demand for transparency and disclosure, emerging valuation metrics (such as for data and ESG), and the increased use of automated valuation models. She also discussed the many doors that the CBV designation opens for young professionals and university students. You can watch the full interview if you click here.

Business Valuation Updates

Lisa Guo — Thu, 25 Aug 2022 02:47:43 GMT

What young BVers need from veteran practitioners

An interesting session—the first we’ve seen anywhere—was a panel of young valuation experts giving their perspectives on the profession. The session was at last week’s Business Valuation & Financial Litigation Super Conference hosted by NACVA.

Soft skills needed: How to communicate with clients effectively is one thing the panel members all agreed they need more help with from their veteran colleagues. The young generation of valuers are very tech-savvy, but interpersonal skills are a different story. Interacting with clients effectively is an acquired skill that needs to be passed down to the new generation of valuers. This can be done through some explanation, but the best way is to teach by doing—experienced experts should include young colleagues in site visits, client meetings, copy them on correspondence, invite them to a client lunch, or anything else where they can observe how to build rapport. This will go a long way toward developing young talent, the panel noted.

Bob Lewis (Visionary Group) moderated the panel of up-and-comers: Ashley DeCress (Marcum), Kevin Foyteck (ABIP), Mary Fernandez (Bodine Perry), and Dalton Hopper (BMSS). The panel made some other interesting comments, and there will be a full recap of this session in the October issue of Business Valuation Update.

2022 Pepperdine report on private cost of capital released

A preview of the “2022 Private Capital Markets Report” was presented at the NACVA’s Business Valuation & Financial Litigation Super Conference last week. The report is the result of a project at the Pepperdine University Graziadio Business School that conducts an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers.

At the conference, Dr. Craig Everett, the project’s director, discussed the report and handed out the full 2022 report to attendees.

Latest ranges: Bank loans have the lowest average expected returns (a median return of 4.0% to 6.0% depending on loan size) while capital obtained from angels has the highest expected returns (ranging from a median of 33% for later-stage financing to 43% for seed money). The full report contains details on each type of funding and at various levels. The “money shot” is a grid chart showing the ranges of returns the various respondents expect at various levels.

The 2022 annual report is available for purchase if you click here.

Divorce Highlight: Hitchner’s wrath continues regarding Damodaran’s attacks

Speaking at the NACVA’s Business Valuation & Financial Litigation Super Conference last week, Jim Hitchner (Valuation Products and Services) continued his strong rebuttal of some severe criticisms Aswath Damodaran (New York University Stern School of Business) made during a recent BVR webinar about certain inputs to the cost of capital (see prior coverage here). “He’s attacking our profession,” Hitchner noted, and he will continue to vent his anger at the upcoming AAML/BVR Divorce Conference in Las Vegas (September 18-20), so the fireworks will continue! Hitchner will co-present two sessions: How to Attack and Defend the Databases Valuation Analysts Use and Ethical Quandaries: An Interactive Session. The AAML is the American Academy of Matrimonial Lawyers. Conference attendance is expected to be half experts and half attorneys. To see the full agenda and to register, click here. Up to 20 CPE/CLE credits are available.

Reminder: Please take a short survey on financial benchmarking data

Our thanks to those of you who took our very short survey (four questions) on the sources valuation analysts use for financial benchmarking data. If you haven’t taken the survey, it will just take a few minutes and we would greatly appreciate it. All responses are anonymous and confidential. You can take the survey if you click here. Thank you!

Global BV News

Sustainable value is the focus at the IVAS-IVSC conference October 6-7

The leading business valuation conference in Asia Pacific has been the IVAS-IVSC Business Valuation Conference, and the next one will be October 6-7. The focus will be on new strategies to safeguard sustainability, such as environment, social, and governance (ESG) factors. The Institute of Valuers and Appraisers, Singapore (IVAS) organizes the event in partnership with the International Valuation Standards Council (IVSC). Sponsors and supporting partners include the Big Four and valuation professional organizations including RICS, AICPA, and the CBV Institute. For more information and to register, click here. Early bird pricing is available until Septem

Valuation News Updates

Lisa Guo — Thu, 18 Aug 2022 02:46:00 GMT

Financial advisor’s book of business is not a marital asset

In a Tennessee divorce case, an appellate court affirmed the judgment of the trial court that the husband’s book of business as a financial advisor for UBS is not a marital asset. The husband argued that that he did not own his book of business and that he had to provide future services to benefit from it. He did not engage a valuation expert nor present any value in court. The wife noted that the husband talked with another firm about joining it, which was evidence that the book of business had value. She engaged an expert who testified regarding two intangible assets: (1) any potential recruitment bonus the husband might receive from a new firm; and (2) the unvested retirement benefit he will receive if he retires from UBS or from another firm. The appellate court noted that the trial court did not abuse its discretion to accept or reject the testimony of a witness and it had a factual basis supported by the evidence. The opinion of the trial court that the book of business is not a marital asset is affirmed.

An analysis and full opinion of the case, Hollis v. Hollis, 2022 Tenn. App. LEXIS 250; 2022 WL 2348567, are available on the BVLaw platform.

Extra: For more on valuing this asset, see “Valuing a Financial Advisor’s Book of Business,” by Howard A. Buchler, J.D., in the December 2019 issue of Business Valuation Update.

Do fair value audit woes impact M&A…for publicly traded companies?

A new study suggests that firms avoid obtaining intangibles via acquisition because they don’t want to face scrutiny from the PCAOB over impairment matters. The alternative would be to invest internally in corporate innovation for the intangibles. The paper, “The Effect of PCAOB Inspections on Corporate Innovation: Evidence From Deficiencies About the Valuation of Intangibles,” examines the economic consequences on corporate innovation when PCAOB inspections cite auditors for insuﬃcient procedures in auditing the valuation of intangibles. The study found that audit deficiencies in fair value measurements trigger larger and timelier impairment of intangibles. But this dampens managers’ discretion to delay the recognition of losses. Of course, the timely recognition of impairments is the goal of the regulators, but managers may not want to admit that an acquisition fell short of expectations. But to think that accounting optics would materially alter overall corporate strategies may be a bit of a stretch by the study’s author. A “build or buy” option may not be feasible for certain intangibles, such as intellectual property.

Divorce Highlight: What’s in a judge’s mind?

In divorce matters, the most important audience is often the trier of fact, so anytime you can glean insights from them is time well spent. A panel of three judges will take questions from attorneys and testifying experts during a session at the AAML/BVR Divorce Conference—where valuation experts and attorneys will meet over three days at the Venetian in Las Vegas (September 18-20).

The judges, Alan D. Scheinkman, Kerry R. Bensinger, and Charles J. Hoskin, will provide guidance to attorneys and experts regarding expert testimony, including:
Supporting expert opinions;
Excluding expert testimony;
Analysis of competing expert opinions;
What is effective and persuasive testimony and cross-examination; and
Pitfalls—evidence of illegal activities including illegal financial activities (e.g., “perk” or fraud?), spoliation of evidence, etc.
The AAML is the American Academy of Matrimonial Lawyers. Conference attendance is expected to be half experts and half attorneys. To see the full agenda and to register, click here. Up to 20 CPE/CLE credits are available.

Mercer’s latest on restricted stock studies

Chris Mercer (Mercer Capital) has been writing a series of articles designed to provide a complete analysis of the historical restricted stock studies many business appraisers rely on for estimating a discount for lack of marketability (DLOM). Mercer’s latest article addresses an issue that is “rarely mentioned in the context of the studies—the impact of dividends on restricted stock discounts (RSDs).” He concludes that an analyst cannot use restricted stock studies to estimate a DLOM for a dividend-paying company. “Some level of dividends in an investment would mitigate the marketability discount for otherwise similar investments with no dividends,” he writes. “The expectation of larger future dividends relative to smaller future dividends would mitigate the marketability discount for the higher dividend-paying investment. This is just common sense.” To read his full article, click here.

Please take a short survey on financial benchmarking data

BVR is conducting a very short survey (four questions) on the sources valuation analysts use for financial benchmarking data. It will just take a few minutes, and we would greatly appreciate it. All responses are anonymous and confidential. You can take the survey if you click here. Thank you in advance!

Global BV News

Key consideration for global cost of capital

During the recent ASA New York Fair Value Conference, Mike N. Moskowitz and Tushar Shah, both with EY, discussed global valuations with an emphasis on the cost of capital. One important point they made concerns geography—that is, even though a company may be headquartered in a certain country, do not assume to use that country as the basis for your cost of capital estimates. You need to look at where the company does its business—where it operates and where it generates revenue—which can be in very different locations than the headquarters. They also discussed the source of data they use, application of country risk premiums, inflation differences, impact of currency exchange rates (forward rates versus spot rate), riskiness of the prospective financial information, and sovereign bond/yield considerations. A full recap of the conference is in the September issue of Business Valuation Update.

What’s in the September 2022 issue of Business Valuation Update

Here’s what you’ll see:
“Roundup of Recent and Planned Updates to Valuation Standards and Guidance” (BVR Editor). A recap for valuation experts, includes updated valuation standards charts, new planned guidance from the AICPA and Appraisal Foundation, SEC rules, FASB projects, lease accounting, Rule 702, proposed legislation, and more.
"Recap of the ASA New York Fair Value Conference" (BVR Editor). Important takeaways from the recent conference on these topics: global cost of capital, ASC 718 valuations, ESG impacts on value, discount rate for intangibles, hard-to-value securities, SPAC warrants, and more.
“Stark Law FMV: Precluded Reliance on Market Data From Business-Related Parties” (Timothy Smith, CPA/ABV). The precluded reliance doctrine has been explicitly affirmed in the new Stark regulations, requiring the industry to pay critical attention to this doctrine in establishing FMV for Stark compliance purposes.
“Hitchner v. Damodaran on Inputs to the Cost of Capital” (BVR Editor). Jim Hitchner (Valuation Products and Services) responds to some severe criticisms Aswath Damodaran (New York University Stern School of Business) made during a BVR webinar about certain inputs to the cost of capital. Hitchner also offers some best practices and a handy tool to use as a reasonableness check on your cost of capital estimate.
“Latest Inside Look at the ktMINE Royalty Rate Database” (BVR Editor). “Understand your data” is one of the main tenets of the valuation profession. Brett Schoell gives an up-to-date look at the ktMINE royalty rate database and answers some questions. He is the product lead for ktMINE’s suite of applications, and he supports ktMINE’s transfer pricing and valuation customers.
“Using Rule of Thumb Benchmark Data to Verify Financials” (BVR Editor). In addition to being used as a check to corroborate a value conclusion reached using other methods, rule of thumb data can be used to validate historical financials. This is particularly useful when valuing cash-intensive businesses. The article provides benchmark data for a dozen types of firms that do a lot of cash business.

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.

To stay current on business valuation, check out the September 2022 issue of Business Valuation Update

Valuation News Updates

Lisa Guo — Thu, 11 Aug 2022 02:44:41 GMT

Put ESG impact in numerator, not denominator

Currently, there is no empirical evidence to support including the impact of environment, social, and governance (ESG) factors in the cost of capital, so it should be reflected in the cash flows. This point was made during a Big Four panel discussion during the recent ASA New York Fair Value Conference. Studies are being done about the relationship between ESG and returns, but the results so far have been “mixed.”

The panel of Big Four leaders included Josh Putnam (Ernst & Young LLP), Manish Choudhary (Deloitte), Martin Mazin (KPMG), and Adam Smith (PricewaterhouseCoopers). Myron Marcinkowski (Kroll) acted as moderator.

A full recap of the conference is in the September issue of Business Valuation Update.

Delaware court cites studies of appraiser bias

Valuation experts who testify should not assume that the courts view them as independent parties who are advocates for their opinion rather than for the client. We’ve heard judges say they perceive testifying experts to be hired guns, but a recent case actually cites some studies that they believe back up their feelings. In the Cellular case (see below for citation), the court wrote: “As this court’s experience with appraisal cases demonstrates plainly, valuation professionals reach outcomes that are influenced by the interests of the party that retains them, even when ostensibly acting as disinterested experts. Scholars have reached the same conclusions.” The first sentence contained a footnote to the Dole Food case (In re Appraisal of Dole Food Co., Inc., 114 A.3d 541, 557 & n.10 (Del. Ch.2014)) that cited cases “recognizing the omnipresent ‘widely divergent, litigation-driven expert valuations’ this court sees in appraisal proceedings.” The second sentence footnoted two studies, “An Analysis of Private Versus Public Firm Valuations and the Contribution of Financial Experts,” and “On the Added Value of Firm Valuation by Financial Experts,” that the court says present evidence of bias in expert valuations.

Later in the Cellular opinion, another, more recent, study was cited: “Are Business Valuators Biased? A Psychological Perspective on the Causes of Valuation Disputes.” That study, the court writes, “found ‘clear evidence for the existence of … engagement bias’ in purportedly neutral valuation professionals who were assigned randomly to perform valuation tasks on behalf of a buyer or a seller.”

Unless these studies are refuted, they may keep showing up in future opinions. In the meantime, testifying experts may have to deal with the hired-gun perception a judge may have.

An analysis and full opinion of the case, In Re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56, are available on the BVLaw platform. Also, there is commentary on the case in two articles by Gil Matthews (Sutter Securities) and BVR legal editor Jim Alerding (Alerding Consulting) in the June 2022 issue of Business Valuation Update.

Divorce Highlight: Forging the attorney-expert relationship

“One of the things I suggest to younger family lawyers is to make relationships with experts,” says Jay Fishman (Financial Research Associates) in a recent interview with Family Lawyer Magazine. Attorneys need a stable of valuation experts who have expertise in different areas, he says, and they want experts who are not just competent technically, but ones who can effectively explain things, especially to a trier of fact.

Fishman will co-present a session, Untangling the Web of Complex and Startup Businesses, at the AAML/BVR Divorce Conference—where valuation experts and attorneys will meet up over three days in Las Vegas (Sept. 18-20). The AAML is the American Academy of Matrimonial Lawyers, so this is the perfect event to forge some relationships! Attendance is expected to be half experts and half attorneys. To see the full agenda and to register, click here.

Global BV News

Continued slowdown in global equity capital market activity, per S&P Global

S&P Capital IQ released its mid-2022 summary of major global capital investment activity, which includes IPOs, SPACs, reverse SPACs, and the other usual categories. These transactions are rarely helpful in business valuations (even for larger enterprises), but all market participants follow them as a proxy for general business conditions. The first half of the year has shown dramatic drops in capital flow in all sectors compared to 2021. S&P notes that the UK and US have largely dropped out of the IPO market. The largest global IPO in the first half was LG Energy, in South Korea. The UAE had three deals in the top 10, led by Dubai Electricity and Water Authority; China had two; and India, the US, and Indonesia had one

Valuation News Updates

Lisa Guo — Thu, 04 Aug 2022 02:43:49 GMT

Secret witnesses may appear in overvaluation case

In a New Jersey class action, plaintiff shareholders of publicly held Ascena Retail Group alleged that the company misrepresented the value of its goodwill and trade names to inflate the stock price artificially. Ascena, a clothing retailer, had acquired another clothing retailer (the parent company of Ann Taylor and LOFT) in 2015. In June 2017, the company announced a $1.3 billion impairment charge against the goodwill and trade names, causing its stock price to plummet. But the plaintiffs contend that the company should have taken the impairments earlier because there were multiple contemporaneous indicators that its assets were impaired. The company filed a motion to dismiss the complaint, and the court granted it but did so without prejudice. This allows the plaintiffs to amend their complaint and go back to court—and they say they have “confidential witnesses” that will show that the company knew the assets were impaired earlier.

There are many details in the case, which is In re Ascena Retail Grp., Inc. Sec. Litig., 2022 U.S. Dist. LEXIS 114434; 2022 WL 2314890, and a case analysis and full opinion are available on the BVLaw platform.

Corona is still the most valuable beer brand, per Brand Finance study

Corona has retained the No. 1 spot on the list of the world’s most valuable beer brands, according to “Beers 50 2022,” an annual report from Brand Finance. During the pandemic, the Corona brand hit some trouble because of the similarity of its name to coronavirus, which put off some consumers, especially in the United States. Despite that, Corona’s value jumped 21%, to $7 billion, in the wake of the entertainment economy reopening post-COVID-19. Not far behind Corona is Heineken in the No. 2 spot, with Budweiser, Bud Light, and Modelo Especial rounding out the top-five valuable brands. The fastest-growing beer brand is Desperados (up 57%, to $564 million), and new entrant Kronenbourg saw its brand value grow 40%, to $601 million. What’s become of some of the once-famous U.S. brands, such as Pabst, Schaefer, Schlitz, and Miller (the “Champagne of Beers”)? They’re still around but not on the Brand Finance Top 50 list.

New valuation credential planned for healthcare compensation

During a recent BVR webinar, Tim Smith (TS Healthcare Consulting LLC) told the audience that a new credential is in the works for valuing the compensation of healthcare providers (physicians, physician assistants, and nurse practitioners). The credential (including professional standards) will be offered by the American Association of Provider Compensation Professionals (AAPCP), a relatively new nonprofit group whose members advise and lead healthcare organizations on provider compensation, contracting, planning, recruitment, retention, strategy, and, yes, valuation. The fair market value of physician compensation and related arrangements is an area subject to increasing scrutiny and complex regulations. The determination of FMV is handled by staffers at healthcare systems as well as external valuation experts, and both these groups are among the ranks of AAPCP members.

Smith heads the credential committee at the AAPCP, and he is the author of the just-released Complete Guide to Fair Market Value Under the Stark Regulations.

What to do when job candidates take their sweet time

You’ve found a promising candidate to fill that vacant analyst spot and made an offer—but you can’t get an answer. The candidate gives you a date for an answer but then keeps delaying it. Consider an option that may not immediately come to mind, which is simply to retract the offer, advises John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years. “The wiser course, obviously, is to avoid putting yourself in that position,” he says. “As the employer, you control the process up until the moment you actually make an offer. At that point, power tips to the candidate. Your goal is to strengthen your control beyond the point where you might ordinarily give it up.” Tactics include sharing a hiring timeline with the candidate and stressing that a prompt response will be needed if an offer is made. Also, give candidates everything they need to make a decision (such as a benefits summary) and make sure they know they can ask questions. After all this, if the candidate keeps delaying an answer, you’re justified in retracting the offer, Borrowman says. “Someone who consistently makes and breaks commitments is not likely someone you want in your practice.”

In his latest newsletter, Borrowman also explores remote work arrangements, how to smarten up your hiring process, and trusting gut instincts.

Global BV News

Takeover premiums in Canada increased in the first half of 2022

The median takeover premium of Canadian public companies in the first half of 2022 was 40%, a 7% increase from the prior year, according to “Canadian M&A Insights” (Summer 2022) from Kroll. The Canadian M&A market had 925 completed transactions in the first half of 2022, down from 1,008 in in the first half of 2021, likely due to economic precariousness, the report says.

Valuation News Updates

Lisa Guo — Thu, 28 Jul 2022 02:42:20 GMT

Hitchner rebuts Damodaran’s attacks on cost of capital inputs

Just keep on doing what you’re doing with cost of capital, advises Jim Hitchner (Valuation Products and Services), despite what academics say. During a recent webinar, he responded to some severe criticisms Aswath Damodaran (New York University Stern School of Business) made during a recent BVR webinar about certain inputs to the cost of capital. Damodaran rejects some concepts that most valuation practitioners use, such as the historical ERP, the company-specific risk premium, and the size premium. Other academics have also questioned cost of capital models and inputs practitioners typically use.

The two-hour webinar was very comprehensive and went into great detail on how analysts can support their cost of capital estimates. Hitchner offered his list of best practices, and he conducted some polls of the large audience about the use of certain models and inputs. Yes, there are different opinions about many elements, but it’s a healthy dialogue. And it’s important to understand the framework you are using, whether it’s the Kroll Cost of Capital Navigator, BVR’s Cost of Capital Pro, or Damodaran’s data.

Be reasonable: Getting deep into the weeds of cost of capital can be mind-boggling, so, at the end of the day, you need to see whether your overall rate is reasonable. Hitchner advised that a good check on this is to show where your subject company falls in the spectrum of rates out in the market, starting with the U.S. 30-day T-bill (0.06% in 2021) all the way up to venture capital for first stage/early development (40% to 60%). Hitchner showed this as a listing of rates, but you can also depict it in some other form. We’ve seen it done as a gauge, like the gas gauge in your car, with a needle going from low risk to high risk.

During the BVR webinar, Damodaran had made some remarks about total beta that, when taken out of context, lead you to believe that he rejects that concept also. During the Hitchner webinar, he provided the full remarks made about total beta, a concept Damodaran does not criticize in the same vein as he does some of the other concepts. Damodaran publishes total betas and includes the concept in his teachings and writings.

A recording of the July 21 webinar will be made available on the VPS website. The title is: Cost of Capital Dispute: Damodaran vs. Kroll Cost of Capital Navigator vs. BVResources Cost of Capital Professional. What Is Right and What Is Wrong?

Healthcare whistleblower case regarding FMV can proceed

The CFO of a healthcare provider blew the whistle on his former employer, alleging it overpaid for a surgery center in order to induce it to refer future business. Paying for future referrals is in violation of the federal anti-kickback statutes, which prohibit healthcare providers from exchanging remuneration in return for referrals of federal healthcare program business. The overpayment issue hinges on the acquisition being at fair market value. The CFO had done a “high level” valuation of $8 million to $10 million for the center, but the acquisition price ended up being $25 million. The defendants moved for summary judgment, but it was denied. The court ruled that the CFO’s valuation was enough to create a “triable issue regarding the fair market value of the [center]. Summary judgment is not appropriate on this issue.”

The case is Kuzma v. N. Ariz. Healthcare Corp., 2022 U.S. Dist. LEXIS 106969, and a case analysis and full opinion are available on the BVLaw platform.

Extra: The federal physician self-referral law (the Stark Law) incorporates a similar principle by prohibiting certain physician referrals to entities with which physicians have compensation arrangements. FMV is a key matter in this context also, and the rules recently changed. See the soon-to-be-released Complete Guide to Fair Market Value Under the Stark Regulations.

Divorce spotlight: valuing a family business with complex ownership

When a family business caught up in divorce is not a simple 100% ownership, things can get complicated—from both a valuation and legal perspective. In a short video, family law attorney Kevin Segler (KoonsFuller Family Law) points out that dealing with complicated ownership structures is like peeling back an onion, with each layer revealing more issues for investigation.

Valuation expert Karolina Calhoun (Mercer Capital) notes that it’s important to understand complex entity structures and the flow through of that ownership—as well as the qualitative and quantitative characteristics of that ownership. Other issues to consider include multilayering with discounts, tracing marital versus separate asset ownership, and how related parties in the business impact ownership, valuation, and division of assets.

Calhoun and Segler will co-present a session on this very topic at the 2022 AAML/BVR National Conference, September 18-20, in Las Vegas. To see the full agenda and to register, click here.

Paper investigates patent valuation methods

A new paper investigates the underlying knowledge structure and the evolution of patent valuation methods under two main topics: quantitative and qualitative. The authors (all from Bahçeşehir University in Turkey) searched for peer-reviewed journals that resulted in a review of 129 documents between 1981 and 2021. The paper, “Qualitative and Quantitative Patent Valuation Methods: A Systematic Literature Review,” is in the June 2022 issue of the journal, World Patent Information. An abstract is available if you click here.

DealStats users spark enhancements to the database

BVR's Market Data Team recently surveyed DealStats users, and their suggestions have prompted some enhancements. For example, users indicated that it would be important to know whether the buyer in a transaction financed the cash purchase price through an SBA or bank loan. Now, the DealStats platform includes the following searchable fields:

“SBA/Bank Loan Included” (whether an SBA or bank loan was included in the transaction);

“SBA/Bank Loan Amount” (if a loan was included in the transaction, you can now see the exact amount);

“SBA/Bank Loan % of Amount Down” (exactly how much of the cash paid to the seller was financed through an SBA or bank loan); and

“Bank Name—If Available” (the name of the bank that provided the SBA loan or other financing).

More enhancements are in the works based on the feedback from users. BVR thanks all of those who participated in the survey.

Global BV News

IVSC launches Asia office in Singapore

The International Valuation Standards Council (IVSC) has selected Singapore as its first base outside Europe to drive its advocacy efforts in the adoption of International Valuation Standards (IVS) in Asia. “The launch of the IVSC Asia office comes at a time when demand for professional valuers is growing rapidly worldwide due to financial reporting and audit requirements; and new drivers of company value are rising such as IA, and Environmental, Governance and Sustainability (ESG) factors,” the IVSC said in a statement.

What’s in the August 2022 issue of Business Valuation Update

Here’s what you’ll see:

“Conference Recap: ESOP Valuations at a Crossroads” (BVR Editor). A key takeaway at the inaugural ESOP Virtual Conference hosted by the American Society of Appraisers was that we may be at a crossroads with regard to valuations of employee stock ownership plans (ESOPs). Topics covered included ESOP valuation basics, key issues from recent litigation, ESOP stock purchase transactions, and advanced topics (such as control premiums, repurchase obligations, and synthetic equity).

“Damodaran on How Inflation Plays Out in Company Valuations” (BVR Editor). Professor Aswath Damodaran (New York University Stern School of Business) presents a simple framework for assessing the impacts of inflation on the value of a private company. He also made some explosive remarks about certain inputs to the cost of capital.

“The 2022 Cannabis Reset: A Redux of 2019?” (Ron Seigneur and Ryan Cram, Seigneur Gustafson LLP). Comments on the impacts to the cannabis industry in the wake of COVID-19 and related economic stimuli and amid inflation, interest rate increases, legislative reforms, and labor and supply-chain disruptions.

“ASA Ramps Up Efforts to Attract and Retain Young BV Pros” (BVR Editor). Ray Moran (FON Valuation Services), marketing director with the iiBV, interviews Johnnie White, CEO of the American Society of Appraisers, who outlined the ASA’s efforts in dealing with the ripple effects of the great resignation in the valuation profession.

“Probing Questions Valuers Will Face About Their Guideline Transaction Analysis” (BVR Editor). Here are the questions a trier of fact (or other reviewer) will ask the analyst about his or her guideline transactions method. A worksheet judges use to compare the work of two opposing experts is included.

“Key Lesson to Be Learned From Valuing a Strip Club” (BVR Editor). A strip club may bare all, but not when it comes to every bit of information an analyst needs to do a valuation. The trick is knowing the right questions to ask to discover these hidden factors that may impact value, and that goes for other types of businesses as well.

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

Valuation News Updates

Lisa Guo — Thu, 21 Jul 2022 02:40:20 GMT

Hitchner responds to Damodaran’s criticisms of cost of capital inputs

BVWire will attend a webinar tomorrow (July 21) by Jim Hitchner (Valuation Products and Services) who will respond to some severe criticisms Aswath Damodaran (New York University Stern School of Business) made during a recent BVR webinar. The professor had some choice words for certain inputs to the cost of capital, namely the size effect, company-specific risk premium, and some others (see our coverage here).

Wrong impression: Damodaran also made some remarks about total beta, which, when taken out of context, lead you to believe that he rejects that concept also. Damodaran publishes updated total betas on his website, and he includes them in his teachings and writings. He has remarked that some analysts use total beta in ways never intended, but he did not put it in the same boat with the concepts he strongly criticized.

We hope this point will be cleared up during tomorrow’s webinar (click here to register)—we’ll be listening!

Extra: A free recording of the Damodaran webinar that triggered all the fuss is available if you click here (it also focuses on how to assess the impacts of inflation in private-company valuations).

Estate attorney sued over alleged undervaluation

The matriarch of a family business in Hawaii had four children, two of which were involved in the business. During her lifetime, she gifted her shares in the business to these two children and the IRS accepted the valuation that was done by her attorney who, it appears, had no training or credentials in business valuation. In her will, she provided for equalization payments to the other two children to make up for shares she gave to the others. The equalization payment was based on the valuation of the shares at the time they were gifted.

Too low: When the matriarch died, one of the beneficiary children who was earmarked for an equalization payment under the will claimed the attorney undervalued the gifted shares, thus making the equalization payment less than it should be. She asked the attorney (who was named the personal representative of the estate) to get a corrected valuation, but he denied her request. A special administrator the probate court appointed concluded that the appraisal was not up to applicable valuation standards, so it was unreliable. The beneficiary sued the attorney for malpractice, and the attorney moved for summary judgment, contending that he owed the beneficiary no duty of care as a nonclient.

The district court denied the motion for summary judgment, finding that there was at least a genuine issue of material fact as to whether the attorney owed the beneficiary a duty of care. By implication, this case contains valuation issues regarding potential conflict of interest, compliance with standards, and the valuation competency of the attorney who prepared the appraisals.

The case is Sullivan v. Loden, 2022 U.S. Dist. LEXIS 81293; 2022 WL 1409567, and a case analysis and full opinion are available on the BVLaw platform.

Valuing Nightclubs, Bars, and Adult Cabarets

That’s the title of the latest installment in BVR’s What It’s Worth series of industry-specific valuation guides. This one goes behind the glitz and into the unseen world of discos, saloons, and strip clubs, some of which operate right on the edge of the law. Not only will you see industry intelligence, benchmark financial data, and economic value drivers, but four valuation practitioners share their insights into issues you will not see in any other kind of business. The 198-page What It’s Worth: Valuing Nightclubs, Bars, and Adult Cabarets is one you don’t want to miss. (Note: Subscribers of the BVResearch Pro platform already have this guide in their library—along with all the other What It’s Worth titles.)

SME transaction values rise to 4.5x for 1Q2022

EBITDA multiples are at 4.5x for the first quarter of 2022, which is up from the 3.9x rate in the fourth quarter of 2021, according to the latest issue of the DealStats Value Index (DVI). The DVI calculates valuation multiples and profit margins from closely held companies each quarter, as shown in the chart below, which also highlights the median selling price/EBITDA with the trailing three-quarter average over a five-year period.

The 2Q 2022 DVI highlights the trend in the EBITDA multiple since 2015 and reports lower multiples than those available from private equity or investment banking sources, so they are far more reflective of fair market value calculations than synergistic or financial sector pricing. Download the current issue of DVI to see all of the new trends in private-company transactions.

Preorders open for unique guide to FMV under the new Stark regs

No other work can compare to a new guide to the new definitions of fair market value (FMV) under the recently updated regulations for the federal physician self-referral law—the Stark law.

In addition to an analysis of how the “game-changing” updated regulations impact accepted valuation principles and practices used to determine Stark FMV, the guide provides the actual text of the public comments the Center for Medicare & Medicaid Services (CMS) responded to in the preamble commentary to the final Stark regulations. This unique feature makes it easy for practitioners and attorneys to understand the full extent of all issues brought to CMS in response to the agency’s proposed regulations on FMV.

At almost 400 pages, The Complete Guide to Fair Market Value Under the Stark Regulations is edited and co-written by Timothy Smith (TS Healthcare Consulting), who had a front-row seat during the development of the updated regs. To preorder the guide, click here (the print version will be released in late August, and the PDF will be released in early August).

Extra: Smith will conduct the first in a series of webinars on this topic on July 26. Click here to register.

Global BV News

CBV Institute membership grew 4% in 2021

The Chartered Business Valuators Institute (CBV Institute) is Canada’s valuation professional organization (VPO) and standard-setter. During 2021, its membership grew 4%, to 2,215 members, according to its latest year in review. In addition, it has 1,197 students enrolled in educational programs. CBV Institute members have the Chartered Business Valuator (CBV) designation. In terms of age, 41% of CBVs are under 40 years of age.

Recording available of MAPPI webinar on IP valuation

Intellectual property valuation for financing was the topic of a July 7 webinar conducted by MAPPI (Masyarakat Profesi Penilai Indonesia; Indonesian Society of Appraisers). Speakers from Kroll, PwC, and others participated in the almost four-hour webinar, and a free recording is available if you click here. The webinar was subtitled “Road to the 24th AVA Congress,” a conference that will be held November 22-24 in Bali, Indonesia. For the conference agenda, click here.

Valuation News Updates

Lisa Guo — Fri, 08 Jul 2022 02:38:55 GMT

No discounts in New Jersey shareholder buyout case

New Jersey is one of several states that allow discounts for lack of control and marketability in fair value situations if it is proven that the discounts are fair and equitable, but, in a recent case, the trial court disallowed the discounts—and an appellate court agreed.

Not wrongful: The case is a shareholder dissent matter involving a New Jersey partnership that owns a shopping mall. The defendants argued that the discounts should be allowed based on the premise that the dissenting partners’ dissociation was wrongful (and damages were owed to the partnership), so the discounts are fair and equitable. But the trial court did not find that the dissociation was wrongful, and the appellate court came to the same conclusion. Therefore, there was no justification to apply either discount.

There are other issues in the case, which is Robertson v. Hyde Park, 2022 N.J. Super. Unpub. LEXIS 848, and a case analysis and full opinion are available on the BVLaw platform.

Extra: Tune in today, July 13, for the BVLaw Case Update webinar—attorney Drew Soshnick and valuation experts Jim Alerding (BVLaw editor) and Jim Ewart will give their insights on some of the most consequential recent valuation and financial litigation decisions.

Takeaways from the ASA’s first ESOP conference

The American Society of Appraisers hosted the inaugural ESOP Virtual Conference on June 21, and here are some notable bits of information we learned:
There is proposed legislation designed (among other things) to hold the DOL “to the fire” and finalize proposed regulations the valuation community has been waiting for—since 1988(!);
The landmark Bowers case could represent a turning point for ESOP valuations (see the last issue for more details);
While DOL litigation may have leveled off (although some do not have that perception), class action litigation by private plaintiffs has increased;
The No. 1 issue raised in ESOP litigation is the concern over projections;
Many ESOP transaction trustees now avoid valuations with control premium adjustments, but they also want to see some representative discount/haircut in the valuation to recognize the lack of full and unfettered control; and
· An ESOP stock purchase transaction typically requires five to six months to execute (less time if third-party debt is not needed).
A full recap with more details is in the August issue of Business Valuation Update.

Feedback wanted on ‘social value’

The Social Value Working Group at the International Valuation Standards Council has released its second paper in a series that examines whether “social value” can be a basis of value, the difference between social value and the social component of ESG, and whether the existing valuation principle of highest and best use can apply to social assets and social value. The group is also seeking feedback from valuers by posing a number of questions:
Do you think that the definition for highest and best use within a social value context needs to be expanded or reframed, and, if so, how would you revise the existing definition?
Should governments and charities be maintaining a social value balance sheet in addition to their traditional balance sheets?
Do you consider that the current discussions on ESG adequately addresses social value concepts in both a for-profit and not-for-profit world? If not, what would give this discussion more prominence and stimulus?
With the information that is presently available, is it possible in most situations to quantify and measure social value accurately? If yes, how, and, if not, what is missing?

You can take the survey if you click here.

Is the IRS Job Aid on reasonable comp still relevant?

Released in 2014, the “Reasonable Compensation Job Aid for IRS Valuation Professionals” is an internal IRS document designed to help review compensation reported on federal tax returns. Reasonable comp remains on the audit radar at the IRS, and, when it litigates cases on this issue, it usually wins. But is the document out of date?

Still good: In a blog post, former IRS manager Michael Gregory (Michael Gregory Consulting LLC) says: “Personally, I would encourage anyone working the issue to download both the IRS Reasonable Compensation Job Aid and the associated Appendix. Together they provide real insight into the issue and how the IRS approaches the issue.” Gregory, now in private practice, worked on the job aid while he was with the agency. In the blog, he also discusses other IRS papers on reasonable comp as well as some procedural issues that arise when the IRS conducts an examination.

The job aid is available as a free download from BVR (login required).

Global BV News

2022 market risk premium and risk-free rate indications from Pablo Fernandez

The results of Professor Pablo Fernandez’s latest survey of the market risk premium (MRP) and risk-free rate (RF) used in 95 countries in 2022 has been released. Many business valuers refer to this longstanding survey in their cost of capital analyses. For example, based on UK-only responses, Fernandez found a market risk premium of 6.1% (a median of 6.0%). As is typical, these rates are marginally higher than the averages for the US (at 5.6% and 5.5%, respectively). Also, not surprisingly, countries such as Ukraine, Argentina, and Venezuela lead all nations, with rates between 28% and 35%. The paper also contains the links to all previous surveys, 2008 to 2021. Fernandez is a professor of finance at the IESE Business School.

Valuation opportunities in the MENA region

The Middle East North Africa (MENA) region appears to be a high-growth area for the valuation profession, according to a recent panel discussion with TAQEEM, Kroll, and Deloitte. You can watch a free replay if you click here. The discussion focuses on drivers of valuations, types of services required, key industries, which countries in the region are high-growth opportunities, and nuances and issues when performing valuations in the region.

Valuation News Updates

Lisa Guo — Thu, 30 Jun 2022 02:38:06 GMT

ESOP valuations may be at a turning point

At last week’s inaugural ESOP Virtual Conference hosted by the American Society of Appraisers, the landmark Bowers case was discussed, which could represent a turning point for ESOP valuations.

Here’s the story: For over a decade, the Department of Labor has had a very aggressive enforcement stance and had not lost a major ESOP case on a valuation issue. But its winning streak ended with the Bowers case, which involved many key valuation issues that came up in prior cases as well. As in those cases, the DOL alleged that the ESOP paid more than fair market value for stock of the sponsor company. Valuation experts have long maintained that the DOL has been playing by its own valuation rules—rules that are not consistent with accepted valuation standards. But the DOL had a long track record of success using its own rules. In a stunning rebuke, the district court ruled against the DOL, stressing that the agency failed to follow standard valuation practices.

The case is “very good news” for the valuation profession, speakers at the ASA conference said, and it is “very helpful” to the ESOP community as well. The case could change the course of litigation, and it also may open the door for the DOL to finalize (at long last) regulations regarding ESOP valuations that were proposed back in 1988 (yes, 1988). Instead of finalizing the regs, the DOL has been “legislating through litigation” and through a series of settlements (process agreements) between the agency and ESOP trustees. Some of the more recent settlements have not been favorable to the DOL, speakers said, so they have not been made public.

The case is Walsh v. Bowers, 2021 U.S. Dist. LEXIS 177184 (Sept. 17, 2021), and a case analysis and the full opinion are available on the BVLaw platform.

Extra: The testifying valuation experts in the Bowers case discussed details in an article that appeared in Business Valuation Update.

Appeals court affirms modified liquidation value in shareholder dispute

In a Michigan shareholder deadlock case, a special master recommended that a sale of shares from one shareholder to the other would yield more value than if the company were dissolved. The special master used a “modified liquidation value,” which was close to the middle between the liquidation value and the fair market value of the shares. The valuation did not account for cash advance receivables, the value of noncompetition agreements, or a going-concern value. It also did not consider certain expenses that would have been incurred if the company were dissolved. The plaintiffs challenged the valuation, but the appeals court affirmed it, finding no clear error on the part of the trial court. Plus, the parties showed an initial willingness to sell their stock for the amount the valuation indicated.

The case is Pitsch v. Pitsch Holding Co., 2022 Mich. App. LEXIS 2730; 2022 WL 1508774, and a case analysis and full opinion are available on the BVLaw platform.

Butler comments on Damodaran’s ‘dynamite’ remarks regarding COE

Last weeks’ issue covered some very choice words (some of which we can’t print here) Aswath Damodaran (New York University Stern School of Business) made about various inputs some analysts use to determine the cost of equity (COE). His remarks triggered some comments from Peter J. Butler (Valtrend), who is the co-developer of the Butler Pinkerton Calculator, which offers empirical data for total cost of equity (TCOE) and company-specific risk premiums (CSRP).

“I listened to Professor Damodaran’s excellent presentation the other week titled, ‘In Search of a Steady State: Inflation, Interest Rates, and Value; The (Inflation) Genie Escapes the Bottle!’ And yes, as BVR indicates, the professor threw some dynamite on how some (but not all) appraisers develop a cost of equity for their privately held company, such as the use of:

“A ‘normalized’ risk-free rate—whatever that is;

“A stagnant and backward-looking historical risk premium; and

“The alleged and dubious size premium, which he calls fiction.”

Butler continues: “He also offered some choice words over the use of the company-specific risk premium (CSRP). For what it’s worth, I have never used a CSRP either (although I have previously been lazy and called what I am actually capturing—an unsystematic risk premium—a CSRP to match, generally speaking, the BV community’s faulty nomenclature).”

“For what it’s worth, I have never added a completely qualitative CSRP to my cost of equity—to make my valuations ‘make sense,’” he says. “I have never had a subject company that is just so unique—so company-specific—that no other company in the world has the same (or at least very similar) risk profile. Rather, I have added an unsystematic risk premium in many (but not all) of my valuations for the last 15-plus years to adjust for the less-than-perfect diversification of hypothetical willing buyers and willing sellers in the private marketplace. How do I do this? ‘Simply’ with the use of total beta, which explicitly captures total risk and, therefore, implicitly captures unsystematic (and systematic) risk. Thus, there is no need to build up the rate and potentially and easily double count risk.”

Butler concludes: “If appraisers use beta in their development of the cost of equity, which I believe we all do in one form or another, it is time to start getting the full benefit of publicly traded stock returns. The only way to do that is to also use total beta.”

Extra: A full recap of Damodaran’s remarks on how to assess inflation’s impact on company valuation will be in the August issue of Business Valuation Update.

The DCF is ‘untestable,’ per new paper

The discounted cash flow method works fine for bonds but not for businesses, projects, or stocks because it is untestable, claims a new paper. “While bonds can be viewed as examples of DCF pricing, this depends on their prices often being observable and their ‘expected’ cash flows typically being bounded above by their promised cash flows,” writes the paper’s author, J.B. Heaton (One Hat Research LLC). “For capital projects, businesses, and common stocks, there is simply no way to determine whether a DCF valuation is a good representation of the causal mechanisms behind market values.” The paper, “The DCF Valuation Methodology Is Untestable,” seems to relate price to value, which valuation analysts know are two different concepts.

Date change for webinar on new Stark FMV regs

Part 1 of a two-part BVR webinar series on the new Stark FMV regs, originally scheduled for June 28, will be held on July 26. The webinar, The New Stark FMV Is a Game-Changer: Foundational Concepts and Valuation Methodology, will be conducted by Timothy R. Smith (TS Healthcare Consulting), who will provide a critical and in-depth assessment of the new definitions of fair market value under the regulations for the federal physician self-referral law commonly known as the Stark Law. Smith is the author/editor of a new book, The Complete Guide to Fair Market Value Under the Stark Regulations, which will be available soon from BVR.

Global BV News

CBV Institute’s new board reflects commitment to diversity

Almost half of the 2022-23 board of directors of the CBV Institute are female, but the organization “will not stop here,” said Dr. Christine Sawchuk, the group’s president and CEO.

“Our efforts to achieve even broader diversity will remain an ongoing focus of our governance efforts.” The full slate of new board members can be found if you click here. The new board chair is Patrick Coady, a partner at KPMG (Ottawa, ON), who praised past board chair, Anish Chopra. “I know I speak for the entire board when I say Anish’s dedication to the Institute, along with his commitment to governance excellence and the Institute’s strategic direction, is greatly appreciated. It is safe to say he left his mark.” The CBV Institute is Canada’s valuation professional organization (VPO) and standard-setter.

IVSC annual meeting in Fort Lauderdale, Fla., September 14-16

After two years of virtual meetings, the International Valuation Standards Council (IVSC) will hold an in-person annual general meeting (AGM) at the Renaissance Marina Hotel in Fort Lauderdale, Fla., from September 14 to September 16. There will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. Some parts of the overall program are restricted to IVSC board members and sponsor/member organizations, but other sessions and all networking events are open to anyone with an interest in valuation and the work of the IVSC. The AGM 2022 sponsors are the American Society of Appraisers, The Appraisal Foundation, HypZert, and Taqeem (Saudi Authority for Accredited Valuers). You can check out the agenda and register if you click here.

Valuation News Updates

Lisa Guo — Thu, 23 Jun 2022 02:36:37 GMT

Damodaran tosses some dynamite during BVR webinar

Historical equity risk premium? “I don’t like a backward-looking and stagnant premium.” A “normalized” risk-free rate? “Don’t use it.” The size premium? “Fiction!” Company-specific risk premium? “[expletive deleted]!!” Never one to mince words, Aswath Damodaran (New York University Stern School of Business) aired his strong views in response to questions from the audience during a recent BVR webinar. His opinions are always thought-provoking, and he gave some solid advice on valuing companies amid inflation.

Inflation and valuation: The webinar title was “In Search of a Steady State: Inflation, Interest Rates, and Value; The (Inflation) Genie Escapes the Bottle!” He’s done a number of lectures on this, but we asked him to focus on the practical aspects of how valuation experts should assess the impacts of inflation when valuing a private company. Damodaran pointed out that there are disparate effects of inflation, and the value of some companies will be unaffected, others will be negatively affected (to varying degrees), and a few may actually benefit from inflation.

He advised experts to go “back to fundamentals” and examine six basic variables when determining how sensitive your subject company is to inflation. One variable is “pricing power,” which is the ability of companies to pass inflation on to customers. Of course, the more power a company has that enables it to pass price increases on to customers, the more protected it would be from inflation. The other variables are cost structure (margins), investment efficiency, cost of equity, cost of debt, and what he terms “failure risk,” which is a separate variable not reflected in cash flows nor the discount rate.

A full recap of the webinar will be in the August issue of Business Valuation Update.

FASB hits ‘pause’ on goodwill project

The big news at the 2022 ASA NY Fair Value Conference last week was that the FASB has dropped its project on goodwill, but it could be revisited in the future. “The goodwill project has been removed from the active agenda,” Joy Sy, a supervising project manager at the FASB, told conference attendees. That means it will not be seeking any more stakeholder feedback on the matter but will monitor developments on this matter, including a project on goodwill disclosures at the International Accounting Standards Board.

For the past four years, the FASB considered whether annual goodwill impairment tests should be done away with for public companies in favor of a new model that would include amortization. For the most part, the valuation community believed that, from a user perspective, the benefits of the transparency and information the current impairment model provides outweigh the costs. The cost-benefit issue was one of the factors that triggered the FASB to take on the project in the first place. Also, the CFA Institute (CFAI) expressed serious concerns about the possible reversion back to amortization.

May be back: But the FASB will not simply “throw it out,” said Richard Jones, FASB chair, during its June 15 meeting that decided the project’s fate. “To the extent that it becomes relevant in a future period, it is certainly something we can look at,” he said. During the meeting, FASB board members said they did not think the current impairment-only model is a good reflection of goodwill and they believe it needs improvement. This time around, there just wasn’t enough of a case made for the change, which would have been significant. But the project will not disappear, and “we may be able to bring it back again one day,” said Jones.

Also, there’s an ongoing intangibles project at the FASB that remains “active,” said Tanya Paul, a post-doctoral fellow at the FASB who gave an update on that project at the ASA conference. Under that project, potential improvements are being considered for items including accounting and disclosure of intangibles, including software costs, internally developed intangibles, and research and development.

We’ll have more takeaways from the ASA Fair Value Conference in next week’s BVWire.

Bankruptcy court “Knocks Out” transfers from ‘personal piggy bank’

In a bankruptcy case in Illinois, the three tests for insolvency came into play when a dispute arose as to whether transfers the debtor company made totaling $1.72 million were fraudulent. The key issue in matters of fraudulent transfers is whether the debtor was solvent when it made the transfer (or would remain solvent as a result of the transfer). The three solvency tests (under Section 548 of the Bankruptcy Code) are: (1) the balance sheet test (do assets exceed liabilities?); (2) the cash flow test (can the company pay off debts as they come due?); and (3) the capital adequacy test (does the company have enough capital to operate?). If the debtor fails any one of the tests, it is an indication of a fraudulent transfer.

In this case, while the debtor passed the balance sheet test, it failed the other tests, the court found. Also, the court concluded that the company “received no value in exchange” for the transfers, noting that they were made not to satisfy company debts, but rather for the benefit of the controlling shareholder, who used the company as his “personal piggy bank.” Therefore, the transfers are fraudulent and must be refunded to the bankruptcy estate.

The case is Stone v. Citizens Equity First Credit Union (In re Int’l Supply Co.), 2022 Bankr. LEXIS 865; 2022 WL 962296, and a case analysis and full opinion are available on the BVLaw platform.

Submitted for your approval: the BV Zone

The Business Valuation Zone is a new free customizable service that sifts through articles, research studies, and thought-leadership blogs from hundreds of leading business valuation sources. You can get a daily and/or weekly newsletter as well as information on webinars, e-books, and white papers. The service is produced by the American Society of Appraisers and Aggregage. You can check it out and sign up if you click here.

Global BV News

Recordings available of free webinar series from the IVSC

Kroll has been sponsoring a series of webinars presented by the International Valuation Standards Council (IVSC) that started June 2 and runs through June 27. Recordings are available for the past programs if you click here. The next program will be on June 27, The Evolution of ESG in Valuation. Past webinars in the series covered topics including the global economic outlook, the impact of inflation on valuation and the cost of capital, and the growing influence of digital assets in the investment world. Speakers include IVSC chair and former UK Chancellor of the Exchequer, Alistair Darling; Kroll chief economist and Financial Times columnist, Megan Greene; IMF Global Markets chief and former IOSCO deputy chair, Ranjit Singh; Corporate Reporting Users’ Forum (CRUF) chair, Jeremy Stuber; PwC global asset and wealth management leader, Olwyn Alexander; UCLA emeritus professor of finance, Bradford Cornell; and many others.

Preview of the July 2022 issue of Business Valuation Update

Here’s what you’ll see:
“An Actual Brand Valuation Report a Court Rejected as ‘Speculative’” (BVR Editor). Text (redacted) of a valuation report for the brand name of a local hotel and resort used in a dissenting shareholder case. Can you spot why the court rejected the valuation as being too speculative?
“Highlights From the 2022 NYSSCPA BVLS Conference” (BVR Editor). Money laundering, earnouts, valuing debt, and SPAC enforcement are a few of the topics presented at the Business Valuation and Litigation Services (BVLS) conference hosted by the New York State Society of CPAs. Here are some key takeaways.
“How Judges Compare Competing DCF Analyses” (BVR Editor). Two valuation experts are far apart in their opinion of value using the income approach. What does the judge focus on when comparing the two analyses?
“Appraisers Have the Highest Exclusion Rate Under Daubert, Per PwC Study” (BVR Editor). A look at the latest study from PwC that analyzes challenges to financial expert witnesses (appraisers, accountants, economists, and others) under the Daubert standards from 2000 to 2020. Also, some classic advice on how to survive a Daubert challenge.
“Misusing the Market Prices of High-Vote Shares When Estimating a Discount for Lack of Voting Rights” (Gilbert E. Matthews, CFA). When analysts estimate a valuation discount for the lack of voting rights in the stock of a private company, they typically look to the public market. Many studies have compared the market prices of publicly traded high-vote shares with the market prices of publicly traded low-vote shares. Unfortunately, when the inputs into these studies are examined, the emperor has no clothes.
“Why Analysts Should Consider the Asset Approach for Going Concerns” (BVR Editor). Weston Kirk and Robert Reilly, who are both with Willamette Management, urge analysts not to reject the asset approach for going concerns automatically. And they stress (multiple times) that the asset approach is not the same as the cost approach.

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

Valuation News Updates

Lisa Guo — Thu, 16 Jun 2022 02:35:30 GMT

Husband shuns BV expert, loses case

In a Pennsylvania divorce case involving a restaurant, neither the husband nor the wife submitted formal business appraisals. But the wife had an accounting degree and had worked as an auditor, so she herself did a valuation using the “gross sales method,” and she prevailed in the trial court. On appeal, the husband argued that she was not competent to testify as to the valuation and that the method she used was not appropriate. But the appellate court disagreed, finding she was competent and that prior experts had used the gross sales method, so it was appropriate.

The case is Snyder v. Snyder, 2022 Pa. Super. LEXIS 175; 2022 PA Super 72, and a case analysis and full opinion are available on the BVLaw platform.

Comment on COE data sources survey

In last week’s issue, we reported on a survey of the data sources analysts use to estimate the cost of equity (COE) (click here to see the news item). It triggered some comments from Peter J. Butler (Valtrend), who is the co-developer of the Butler Pinkerton Calculator, which offers empirical data for total cost of equity (TCOE) and company-specific risk premiums (CSRP).

“I am glad to see ‘Damodaran’s data and analyses’ used [cited by survey respondents] at 14% (mean) and 14% (median),” Butler says. “Presumably, his industrywide total beta (TB) calculations are included in the category, along with his calculations of the implied equity risk premium (ERP). I am one of the 14% who look at both his TB calculations and ERP, in addition to (no surprise) the Butler Pinkerton Calculator (BPC). Presumably, since the BPC has had subscribers since 2007, its respondents were captured in the ‘Other or none of the above’ category, at 8% (mean) and 7% (median).”

Butler continues: “For the last 15 years, I have successfully (and easily) used the BPC (with no successful challenges—Daubert or otherwise) for individual guidelines while knowing the pertinent industry TBs (from Damodaran calculations). After all, we call it ‘company-specific risk’ for a reason. Thus, I ‘know’ the industry from Damodaran, and I ‘know’ the best publicly traded ‘guidelines’ to assist with my subject company’s cost of equity. While selection of the overall COE is still qualitative in nature with the BPC, I do not feel like I am ‘flying blind’/completely guessing as to the company-specific risk or total cost of equity for my subject company as I would if I solely relied upon the other data sources, which capture publicly traded stock returns.”

He concludes: “In summary, if you are going to use beta, which everyone does in one form or another, it only makes sense to use TB, too, and get the full benefit of publicly traded stock returns to assist with the valuation of your privately held company.”

Long-term inflation estimates rise, per Kroll infographic

Long-term inflation expectations for the U.S. and Germany, a key starting point to evaluate the long-term growth rate used in the terminal year of DCF analyses, are significantly higher when compared to June 2020, at the height of the COVID-19 crisis, according to a newly updated infographic from Kroll. For the U.S., inflation estimates over the long-term rose from 2.0% in June 2020 to 2.6% in May 2022. For Germany, long-term inflation expectations have surged from 1.6% in June 2020 to 2.6% in May 2022. The “Cost of Capital in the Current Environment” infographic tracks the impact of COVID-19 on some of the financial market and economic indicators used to support the Kroll (Duff & Phelps) recommended U.S. equity risk premium (currently 5.5%) and accompanying normalized risk-free rate (currently 3.0%).

Human capital and valuation explored in new paper

Everyone knows the phrase “our people are our most valuable asset,” but just how does human capital generate value for organizations? And what are the attributes of such value creation? How is this analyzed by investors and measured by valuers? Part 2 in a series of perspectives papers on intangibles from the International Valuation Standards Council (IVSC) explores the concept of human capital. To download the paper, click here.

ASA announces keynote for its annual conference

The state of the current—and future—economy is more important than ever for valuations, so the American Society of Appraisers has lined up a top-notch keynote for its 2022 ASA International Conference, September 10-12 in Tampa, Fla., and virtually. The speaker will be Dr. LaVaughn Henry, former senior economist for the Council of Economic Advisers in the Executive Office of the President (the White House), and the senior regional officer and vice president for the Federal Reserve Branch in Cincinnati. He will discuss key economic drivers and analysis of external factors impacting global markets, particularly as they relate to the valuation profession. Of course, the rest of the conference is just as compelling, with 65 educational sessions across six discipline tracks. See you there!

CPA firms continue to have trouble finding staff

Historically, “finding qualified staff” has been a leading concern of all CPA firms other than sole proprietors, and that held true to a large degree this year, according to the “2022 PCPS CPA Firm Top Issues Survey” unveiled during the recent AICPA ENGAGE Conference in Las Vegas. It’s the No. 1 concern for all firms with over 10 professionals. For smaller firms, challenges with working with the IRS is their top concern. The survey was conducted online from April 19 to May 23 and had 752 respondents, representing a mix of practice types and firm sizes, from sole practitioners to large firms with 21 professionals or more.

Global BV News

New edition released of Business Analysis and Valuation: IFRS

Cengage has released the 6th edition of Business Analysis and Valuation: IFRS Edition in the educational market. The book uses international cases to illustrate the interpretation and use of IFRS-based financial statements and financial data in various valuation tasks. A fully updated companion website is also available with PowerPoint slides, an instructor’s manual, additional questions, solutions, example spreadsheets, and weblinks. The authors are Krishna G. Palepu (Harvard University), Paul M. Healy (Harvard University), and Erik Peek (Erasmus University).

CBV Institute launches LinkedIn page for students

The Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO), has just launched a CBV Program of Studies LinkedIn showcase page. The page focuses solely on current and prospective students and provides them with the information they require to develop an “exciting career in the growing world of business valuation.”

Valuation News Updates

Lisa Guo — Thu, 09 Jun 2022 02:34:32 GMT

Morrison cautions appraisers regarding automation

Blind reliance on automated tools for business valuation is a danger, says past ASA international president Bob Morrison, FASA, who spoke on a recent webinar on the future of the valuation profession. While he agrees that the profession should embrace AI and other technologies, professional judgment must not take a back seat to computer models, he cautions. The other major issues he sees the profession facing are diversity, equity, and inclusion (DEI) and the “silver tsunami,” meaning the aging of the profession and the need to attract new young professionals. Morrison, who is also on the board of trustees of The Appraisal Foundation, made his comments during the International Webinar: The Future of the World’s Valuation Profession on June 3, organized by the FIABCI World Council of Experts.

Hitchner surveys COE data sources of choice

The Kroll (formerly Duff & Phelps) Navigator has been the consistent clear choice for cost of equity (COE) data by valuation analysts, according to ongoing surveys by Jim Hitchner (Valuation Products and Services). He’s been doing a number of surveys over the years, and the COE survey has been done periodically since 2019, which has shown consistent results for all of the data providers (see below).

Mean Median

Average Average

Kroll (Duff & Phelps) Navigator 88% 88%

BVR Cost of Capital Pro 22% 21%

Damodaran’s data and analyses 14% 14%

Pepperdine survey data 11% 10%

Other or none of the above 8% 7%

The results of more surveys are in the June 2022 issue of Hardball With Hitchner.

No deduction for tax in shareholder buyout

In a North Dakota partnership dissolution case, the defendants argued on appeal that the district court erred in its valuation. They asserted that the district court was required to consider taxes in calculating the plaintiffs’ buyout. The district court found that the agreement in principle called for a valuation without a discount. The accounting firm for the defendants provided an analysis of what would happen if the assets of the partnership were liquidated. However, the district court found this to be speculative because the plaintiffs indicated there was no intention currently to liquidate. The state Supreme Court affirmed the district court’s decision.

The case is Sproule v. Johnson, 2022 ND 51; 2022 N.D. LEXIS 56; 971 N.W.2d 854; 2022 WL 803346, and a case analysis and full opinion are available on the BVLaw platform.

Cannabis lawsuit could be a game changer

A coalition of influential marijuana companies and stakeholders are planning to sue the federal government over alleged unconstitutional policies that affect their operations, according to a report in Marijuana Moment. Two lawsuits will be filed in federal district court. One will challenge the Controlled Substance Act (CSA) and will argue that prior court rulings on the federal government’s authority over intrastate commerce should not apply to marijuana companies. The second lawsuit will focus on the tax law’s Section 208E, which impedes cannabis businesses from deducting federal taxes. Our thanks to Ron Seigneur (Seigneur Gustafson LLP), who alerted us to this news. Seigneur is the co-author of The Cannabis Industry Accounting and Appraisal Guide, and he will co-present a BVR webinar on cannabis valuation in August.

Stout releases guide to ASC 842

Accounting Standard Codification (ASC) 842 is the new lease standard, and Stout has released a guide designed to give practical guidance and key takeaways from their experience with both public- and private-company adoptions. Public business entities have already adopted the new lease guidance. For private companies, the standard is effective for fiscal years beginning after Dec. 15, 2021. One consideration is impairment—leases will show up on the balance sheet and will be subject to impairment consistent with any other long-lived asset. The guide is available if you click here.

Global BV News

EY releases global transfer pricing guide

The EY Worldwide Transfer Pricing Reference Guide 2020-2021 is designed to help identify transfer pricing rules, practices, and approaches. The guide covers 131 jurisdictions and gives an overview of transfer pricing tax laws, regulations, rulings, documentation requirements, transfer pricing returns and related-party disclosures, transfer pricing methods, benchmarking requirements, and much more. There’s also an interactive map where you can just click on a jurisdiction to view the guide chapter for that territory. To download the guide, click here.

BV movers . . .

People: Brittany Dela Rosa, CPA, CA, CBV, has been named a partner at Calgary-based MNP; she is a member of MNP’s Valuations and Litigation Support Services team and prepares business valuations for a variety of purposes, including tax planning, corporate reorganizations, matrimonial and estate proceedings, and shareholder disputes … Rishi Aswani, CFA, has joined Houlihan Lokey in the firm’s Financial and Valuation Advisory (FVA) business in Mumbai as a managing director in the Portfolio Valuation and Fund Advisory Services practice; he joins from Duff & Phelps in Mumbai.

Firms: Calgary-based MNP is adding Jean Luc Quenneville CPA of Laval, Québec, which has a team of five professionals … Toronto, Ontario-based firms Segal LLP and GCSE LLP are joining forces under the new name of Segal GCSE LLP; Segal provides audit, accounting, tax, and advisory services to a wide range of clients, while GCSE offers accounting, tax, and advisory experience and has long been the go-to Canadian firm for the legal industry … New York City-based Marcum LLP is adding LTSP Inc. of Newport Beach, Calif., which provides accounting and advisory services to closely held businesses and high-net-worth individuals; three partners and 19 associates from LTSP will join Marcum in its new Newport Beach office … Kroll has acquired Crisp, a real-time risk intelligence company that protects brands, assets, and people from reputational damage, security threats, and online harm.

Valuation News Updates

Lisa Guo — Thu, 12 May 2022 02:33:17 GMT

Study says there is ‘clear evidence’ of bias among BV experts

Researchers say they have found “clear evidence for the existence of … engagement bias” in valuation professionals who were assigned randomly to perform valuation tasks on behalf of a buyer or a seller. The study has been published in the Journal of Behavioral Finance.

The researchers state that “valuators appear to be affected by their clients’ interests, such that they indicate that a valuation should be adjusted in accordance with their clients’ interests. Specifically, when they represent a buyer and therefore have an incentive to lower the value of the shares, they also indicate the valuation should be adjusted downwards more heavily and also indicate a lower value range for the true value of the company. The opposite is the case when they represented the seller.”

Also, the study found that experts exhibited a “blind spot” for their own potential bias: “Whereas 58.7% believed the valuator representing the opposing party was biased, only 25.1% believed they themselves were biased.”

The study’s authors are Marc J. R. Broekema, Niek Strohmaier, Jan A. A. Adriaanse, and Jean-Pierre I. van der Rest (all Leiden University). The paper is “Are Business Valuators Biased? A Psychological Perspective on the Causes of Valuation Disputes.” A full copy is available if you click here.

IP damages expert Bania testifies in Johnny Depp-Amber Heard trial

One of BVR’s authors, Douglas Bania, testified that ex-wife Amber Heard’s allegations of abuse damaged Johnny Depp’s image. Bania is an expert in intellectual property (IP) damages and valuation and is one of the founders of Nevium Intellectual Property Consultants.

Damaged goods: Using some eye-catching charts, Bania showed the jury his analysis of Depp’s Q scores (a measure of familiarity and public appeal) and Google search results. His analysis showed that, before May 2016 (when Heard filed for a restraining order), Depp had largely positive and ordinary search results. But, after that, his search results revealed much more negative news coverage and his Q scores dropped—and it got worse after the op-ed Heard wrote in late 2018. Bottom line: The public perception of Depp has been damaged. You can watch a video of his testimony if you click here (at 46:47).

His testimony gave an interesting look at the use of internet analytic tools in matters such as these. Bania, along with Brian Buss (also with Nevium), co-wrote two chapters on IP damages in BVR’s Comprehensive Guide to Economic Damages, 6th edition.

Delaware Chancery rejects partnership valuation in a freeze-out

In a coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, the court found that AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review, and AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation, awarding more than triple the amount originally paid to partners who were squeezed out.

The case is In Re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56. This is a long case opinion that involves many issues of interest to valuation professionals. The June 2022 issue of Business Valuation Update will have a case digest as well as commentary by Gil Matthews (Sutter Securities) and BVR legal editor Jim Alerding (Alerding Consulting).

More business owners deciding to sell, most retiring

The long anticipated “Silver Tsunami” wave of retiring baby boomers appears to be arriving and is expected to supply the market with a steady stream of available businesses throughout the year, according to a report from BizBuySell. An increasing number of small business owners, many aging and no longer willing to wait on the sidelines, believe now is the time to exit. Of surveyed owners, over 63% say they are over 50 years old and 30% say they are over age 60. More than a third (37%) say they plan to sell within two years. Of owners recently surveyed, the majority (55%) cite retirement as their motivation for selling, while a substantial 31% say their business is doing well and feel they can currently receive a good price. Active for-sale inventory has climbed 10% over the past year, the report says.

Conference season is here!

Two upcoming conferences of note (click the links for more information and to register):
Tomorrow, Thursday, May 12, is the Houston ASA Energy Valuation Conference: A BVR Live Webcast, a full-day event—the 12th year for this event—presenting leading-edge valuation techniques applicable to all sectors of the energy industry (nine CPE credits available); and
On Monday, May 16, the annual New York State Society of CPAs’ Business Valuation and Litigation Services Conference will be webcast. This full-day conference will feature many topics including an update on BV-related court cases, tax litigation involving valuation issues, SPAC warrant valuations, debt valuation, control premiums, exit planning, and more (eight CPE credits available).

Global BV News

Valuing early-stage firms: full-day seminar from Malaysia

The valuation of early-stage companies is the focus of a full-day seminar August 17 in Malaysia. The speaker will be Adie Gupta, co-founder and managing director of Spring Galaxy, a valuation and strategic advisory firm. Attendance options are on-site and virtual. The full agenda and registration information are available if you click here. The Business Valuers Association Malaysia (BVAM) organized the seminar

Valuation News Updates

Lisa Guo — Thu, 05 May 2022 02:31:20 GMT

TAF issues exposure draft regarding conclusion of value vs. value calculations

In the first in a series of valuation briefs, The Appraisal Foundation (TAF) has published an exposure draft, “Understanding the Differences: Conclusion of Value v. Value Calculations.” TAF’s Business Valuation Resource Panel wrote the draft. A copy of the exposure draft is available if you click here.

Feedback wanted: Comments on the exposure draft are due by May 26. To submit a comment, TAF has a special form that is available if you click here. The comment submission form notes that all written comments will be published for public viewing, exactly as submitted, on TAF’s website, but names may be redacted upon request.

If you have questions or need assistance, please contact Jalin Debeuneure at jalin@appraisalfoundation.org.

Experts in, lay witnesses out in damages case

In a Michigan case, there were a number of motions to exclude expert witnesses in a damages case that involved employee poaching in the automotive industry. The motions were granted with respect to lay witnesses but denied (or partially granted) with respect to damages experts, as follows:
The defendants’ motion to exclude the plaintiff’s industry expert was denied (the expert had over 40 years of experience in the industry and would testify as to industry customs and practices);
The plaintiff’s motion (in limine) to preclude the defendant from presenting expert testimony from lay witnesses was granted (they were employees of the defendant);
The defendants’ motion to exclude testimony of the plaintiff’s owner as an expert was granted (he can testify as to his own personal experiences but not as to industry customs and practices);
The defendants’ motion to exclude the plaintiff’s damages expert was denied (he was not a CPA or had business valuation credentials, but he was a JD/MBA who had testified in a number of damages cases); and
The plaintiff’s Daubert motion to exclude specific expert testimony from the defendant’s expert was granted in part (he was an ASA and CVA who would be a rebuttal expert to the plaintiff’s damages expert).
The case is Auto Konnect, LLC. v BMW of North America, LLC, 2022 U.S. Dist. LEXIS 42345, and a case analysis and full opinion are available on the BVLaw platform.

Extra: There are proposed changes to strengthen Rule 702, which is the federal rule of evidence regarding testifying experts. See the April 2022 issue of Business Valuation Update for details.

Twitter’s brand value soared prior to Musk’s bid

The brand value of Twitter increased by 85% to US$5.7 billion this year, even before the takeover attempt by Elon Musk, according to an analysis by Brand Finance. This “provides strong underlying support for Musk’s apparent investment thesis that significant improvements to revenue are possible,” the report says. Other findings in the report include:
Google retains the title of world’s most valuable media brand, at US$263 billion;
Chinese social media giant WeChat is the strongest media brand in the world, with an elite AAA+ brand rating;
TikTok/Douyin is the highest new entrant in the Media 50 2022 ranking, valued at US$59 billion; and
Technology brands constitute 66% of the total brand value in the ranking.

The full Media 50 2022 report is available if you click here.

Extra: Professor Aswath Damodaran (New York University Stern School of Business) gives his analysis of Musk’s bid for Twitter in a blog post.

Becoming an industry expert—from the ground up

Some valuation analysts become expert in certain industries by chance—they get some engagements in a particular sector and learn along the way. Others, such as Bryce Erickson (Mercer Capital), do it from the ground up and in a very deliberate way. Erickson has been involved in hundreds of valuations and related engagements since 1988 and has developed a specialty in the energy sector. He publishes research related to the oil and gas industry and is a regular contributor to Mercer Capital’s blog Energy Valuation Insights and the energy sector of Forbes.com. During a recent webinar, he recounted that, early in his career, he was with a merchant bank, making unsecured loans to oil and gas companies. He started to take continuing education courses on oil and gas at a local university. He also listened to earnings calls by public companies to learn the jargon. He spent hundreds of hours reading. With a good base of knowledge, he started to take engagements, and his learning continued. You may make some mistakes and “take your lumps,” but you’ll be in a much better place with a solid understanding of the industry.

Extra: Speaking of the energy sector, plan to attend the 2022 Houston ASA Energy Valuation Conference: A BVR Live Webcast, a full-day event on May 12. This is the 12th year for this event, and it will present leading-edge valuation techniques applicable to all sectors of the energy industry.

Free model helps take DCF a step further

In an article “Analytical Insights From DCF Value Analysis,” the authors include a free model business valuers can use to take their “DCF calculation a step further and analyze the resulting value into four components.” Their four components of value each represent the value contribution from different periods, and they are: (1) current operating value; (2) short-term growth value; (3) medium-term investment value; and (4) long-term franchise value. The objective of the authors (from The Footnotes Analyst) is to show that “there is more to DCF than simply an explicit forecast and a terminal value and that, by analyzing value in this alternative way, additional insights can be obtained.” The authors include an explanation of the model and the underlying math in “Interactive Model: Target Enterprise Value Multiples.”

New trends help eateries build business

Virtual restaurants—commercial kitchens that operate through delivery services and do not have a physical dine-in space—are increasing due to the coronavirus pandemic, reports the Vertical IQ industry research platform in a recent “Coronavirus Update” for the restaurant industry. These operations may be extensions of existing brick-and-mortar restaurants or startups using rented kitchen space. The need to replace lost revenue combined with a greater emphasis on carryout and delivery is driving growth. Industry experts say that full-service operators that were already experimenting with off-premises options before the pandemic were best positioned to capitalize on the model.

Extra: A spin on this concept is the “ghost franchise,” such as MrBeast Burger, that has no physical locations—it contracts with local restaurants to make its burgers and fries, which are 100% delivery only (using third-party delivery apps).

Global BV News

Free webinar series from the IVSC June 2-10

Kroll is sponsoring a series of webinars presented by the International Valuation Standards Council (IVSC) from June 2 through June 10. The IVSC Valuation Webinar Series will present panel discussions from leading international experts on topics including the global economic outlook, the impact of inflation on valuation and the cost of capital, and the growing influence of digital assets in the investment world. Speakers include IVSC chair and former UK Chancellor of the Exchequer, Alistair Darling; Kroll chief economist and Financial Times columnist, Megan Greene; IMF Global Markets chief and former IOSCO deputy chair, Ranjit Singh; Corporate Reporting Users’ Forum (CRUF) chair, Jeremy Stuber; PwC global asset and wealth management leader, Olwyn Alexander; UCLA emeritus professor of finance, Bradford Cornell; and many others. For details and to register, click here.

Valuation News Updates

Lisa Guo — Thu, 28 Apr 2022 02:29:00 GMT

Hitchner’s advice on which BV glossary to follow

In his latest issue of Hardball With Hitchner, Jim Hitchner (Financial Valuation Advisors) commends the “fine work” done on the 2021 International Valuation Glossary—Business Valuation. He also points out that six glossaries are now available and/or required to be followed, depending on which valuation professional organizations (VPO) you belong to. Here are his recommendations for three distinct groups with the following designations:
CPA and/or ABV: The AICPA has not adopted the 2021 glossary, and the 2001 version is still part of SSVS VS Section 100, so these practitioners must follow the 2001 glossary. Hitchner (who is a CPA/ABV) says he will follow the required 2001 version (which is still relevant, he says) but will also follow the 2021 glossary as well, but on a “selective basis,” he writes.
ASA only: The ASA has adopted the 2021 glossary, so it must be followed (ignore the 2001 version), he believes.
· CPA/ABV, ASA: For those individuals holding both AICPA and ASA credentials, follow both the 2001 and 2021 glossaries, Hitchner advises. He also suggests that you include (in the body of your report or in a footnote) a discussion of which definition, between the two glossaries, you followed and why (or a statement that either definition would apply correctly to your work).
We also suggest that analysts check with their own professional organizations for guidance.

In the issue, Hitchner also provides 40 pages of analysis with commentary about the differences between the 2001 and 2021 glossaries. Future issues will address the use of all six sets of glossaries.

Nothing personal about goodwill in dental practice

In a South Carolina divorce case, the appellate court reversed the family court on the issue of personal versus enterprise goodwill. In this state, enterprise goodwill is marital property subject to equitable division, but personal goodwill is not (see BVR’s Charting Goodwill map).

Retiring dentist: In this case, the husband, who was 72 years old, was retiring from dentistry altogether and sold his practice to his son for $569,000 plus $51,113 of accounts receivable. The sale was done after the couple had separated but prior to the equitable division of the marital estate. The sales contract designated $424,140 as goodwill and also included a covenant not to compete. The son changed the name of the practice. The family court included all goodwill related to the value of the husband’s dental practice as personal goodwill and not part of the marital estate.

The appellate court disagreed, noting that, since the practice was not an “ongoing concern,” the goodwill was enterprise, not personal, and thus should be included as marital property. The court also noted that the husband had previously sold a second practice of his in another location at similar terms (and also including goodwill and a noncompete) and the remaining payments to the husband were treated as marital property.

Dissenting opinion: There was a dissenting opinion, which pointed out that goodwill in professional dental practices such as the one in this case “has always been classified as personal, non-marital property”—and the prior decisions did not hinge on whether the business was still an ongoing concern at the time of trial.

The case is Bostick v. Bostick, 2022 S.C. App. LEXIS 33, and a case analysis and full opinion will be available shortly on the BVLaw platform.

Helping BV staff advance—when ‘up’ is in short supply

What should you do when staffers want to move up, but it doesn’t look like there’s any “up” to offer? “Think about helping your employees to move forward, instead of up,” advises John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years. “This approach can be the ounce of prevention that helps you reduce turnover.” His suggestions:
Offer lateral movement, such as assigning a broader range of engagements or getting them involved in a practice management activity such as campus recruiting;
Enrich their existing job by, for example, dubbing the employee the “go-to” person for a particular engagement or analysis;
Give the employee a temporary assignment so he or she can examine other options; and
Realign the employee’s position by, for example, returning him or her to those job duties which, in hindsight, really are more interesting.

In his latest newsletter, Borrowman also explores how to use learning and development to attract and keep the best talent, offers tips for differentiating your practice in a recruiting pitch, and more.

Global BV News

IVS and Spanish standards are broadly aligned

That’s the conclusion of an analysis the International Valuation Standards Council (IVSC) carried out in conjunction with the Asociación Española de Análisis de Valor (AEV). The AEV is the professional association that represents the Spanish Registered Valuation Companies that carry out around 85% of the valuations for regulated purposes in Spain. The analysis focused on the alignment between the International Valuation Standards (IVS) and the Spanish national regulations contained within the ECO Order 805/2003. Even though there are no major contradictions between them, the IVSC and AEV make several recommendations for additions to the ECO Order. They are:

· Adoption of IVS Core Principles of valuation standard-setting and valuation;

· Adoption of the definitions contained within the IVS Glossary;

· Inclusion of a section on compliance with IVS within valuation reports;

· Inclusion of a Scope of Work or Terms of Engagement as per IVS 101 Scope of Work;

· Inclusion of minimum report contents as per IVS 103 Reporting; and

· Inclusion of sensitivity analysis for the determination of values based on unobservable or estimated inputs, as this is particularly helpful during periods of uncertainty such as during the recent coronavirus pandemic.

You can read more details if you click here.

What’s in the May 2022 issue of Business Valuation Update

Here’s what you’ll see:

“Comments on an Article on Attracting More Practitioners to BV” (BVR Editor). An article in last month’s Business Valuation Update discussed the need to make business valuation a more recognized career path. This article includes some very thoughtful comments by Dr. Michael A. Crain, CPA/ABV, CFA, CFE, an academic and practitioner.

“How Direct Loan Market Participants Are Handling the Handoff From LIBOR to SOFR” (John Czapla). The transition from the London interbank offered rate (LIBOR) to the secured overnight fund rate (SOFR) will continue to present challenges for private lenders and their operating and valuation teams as long as loan portfolios have a mix of LIBOR- and SOFR-based deals and as long as there are numerical differences between term SOFR and term LIBOR. The author is chairman of Valuation Research Corp. and head of its portfolio securities valuation practice.

“A Lesson in Healthcare Supply and Demand—and Market Power, Part 2” (Mark O. Dietrich, CPA/ABV). This is Part 2 of a two-part article that follows up on the author’s landmark research on the fair market value of physician compensation. The issue of insurance market structure and the related impact on the negotiating of provider contracts was addressed in Part 1 of this article. Physician distribution and the impact of local payment rates that determine compensation is addressed in Part 2.

“A Bird’s-Eye View of Major Intangible Asset Benchmarks” (Christof Binder, Ph.D.). An analysis of over 30,000 intangible assets and the types most prevalent in acquisitions, including asset values, royalty rates/profit margins, and useful lives.

“Breaking Into Bankruptcy Valuations With Little—or No—Experience” (BVR Editor). There are a lot of opportunities for business valuation analysts in the context of financially distressed or bankrupt companies. A veteran expert gives some advice on how to add this area to your practice regardless of your level of direct experience.

“Using the Valuation Report as a Selling Tool” (Gary Trugman, CPA/ABV, FASA, MVS). A business valuation report is the perfect forum for selling the valuation analyst’s conclusion regarding the value of the valuation subject. This is an excerpt from the new sixth edition of Understanding Business Valuation, which has a companion website that includes a good selection of full sample valuation reports.

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.

Valuation News Updates

Lisa Guo — Thu, 21 Apr 2022 02:28:12 GMT

Court tweaks blue-sky method in valuing a car dealer in Tennesee

A Tennessee appellate court recently considered the Chancery Court’s determination of the value of an oppressed minority shareholder’s interest in an “ultra-high-end” car dealership. The valuation of one expert utilized the “blue-sky method,” a commonly used method to value the dealership and ultimately the minority interest. “Blue sky” represents the intangible value of a car dealership. A blue-sky multiple is applied to normalized earnings, and then the tangible net assets are added in to get the fair market value of the entire enterprise. The other side’s expert also used a blue-sky multiple but did not add in the tangible net assets, saying it would be “double counting.”

While the Chancery Court accepted the blue-sky approach, it did not accept either expert’s normalization factor and made its own determination. Additionally, the Chancery Court added back only half of the adjusted net assets. The case was appealed, and the appellate court affirmed the Chancery Court’s valuation and its methodology, saying it was “generally accepted by the financial community.”

The case is Buckley v. Carlock, 2022 Tenn. App. LEXIS 75; 2022 WL 593549, and a case analysis and full opinion are available on the BVLaw platform.

Kroll increases U.S. normalized risk-free rate to 3.0%

Kroll has increased its recommended normalized risk-free rate to 3.0% from 2.5%, effective April 7. This new rate, used in conjunction with the firm’s current recommended U.S. equity risk premium (ERP) of 5.5%, implies a “base” U.S. cost of equity capital estimate of 8.5% (5.5% + 3.0%). “Kroll regularly reviews fluctuations in global economic and financial market conditions that warrant a periodic reassessment of the ERP and the accompanying risk-free rate,” the firm says. They also provide a table summarizing these recommendations over the period from January 2008 to the present.

Global BV News: Eurozone ERP, risk-free rates unchanged: Kroll

Kroll has left unchanged (until further notice) its recommended German normalized risk-free rate of 1.5% and its current eurozone equity risk premium range of 5.5% to 6.0% (from a German investor’s perspective). Kroll has published its recommended eurozone ERP and corresponding risk-free rate since 2019, and it provides a table summarizing these recommendations over the period from December 2019 to the present.

Holy cow! New York Yankees hit $6 billion in value

That’s what the legendary announcer Phil Rizzuto would be yelling over this news. The New York Yankees have held their ground as Major League Baseball’s (MLB) most valuable team, according to Forbes’ latest rankings. What’s more, the Bronx Bombers have become the first MLB team to hit a $6 billion valuation, says Forbes, and it is the second most valuable franchise in U.S. sports, eclipsed only by the National Football League’s Dallas Cowboys ($6.5 billion). While the Yankees lead MLB in overall value, Forbes says that the second-ranked Los Angeles Dodgers ($4.08 billion) received the highest local-TV rights revenue, with $189 million as compared to the Yankees reportedly bringing in $135 million in local broadcast rights fees.

Extra: Don Erickson (Mercer Capital) provided a recent overview of valuing sports franchises during a recent BVR Power Panel webinar. Erickson has valued over 50 pro sports teams.

Tip: Add an expiration date to an engagement letter

During a very informative—and entertaining—webinar on expert witnessing, Robert Vance (Forensic & Valuation Services PLC), gave this advice: Consider putting an expiration date on the cover letter to your proposed engagement letter. He has found that certain firms will try to “conflict you out,” meaning they don’t necessarily want to hire you, but they don’t want the other side to hire you. They somehow think that the engagement letter ties up the expert even though it doesn’t get signed. Therefore, Vance uses a 10-day expiration date. He notes that this is especially important if the opposing side is a firm you have worked for before, so the 10-day expiration can clear the way to be hired by the other firm.

Vance gave many other good pieces of advice during his webinar, So You Want to Testify as a Financial Expert Witness? Testimony Tips, Traps, and Video Demonstrations From the Trenches. Click here for a recording (free to holders of BVR’s Training Passport Pro).

Mercer continues to examine appraisal review

After a hiatus from his blog, veteran valuer Chris Mercer (Mercer Capital) certainly has made up for lost time. A few weeks ago, he started a series of thoughtful posts focusing on appraisal review, a process he deems “essential.” As of now, he has done five installments in the series, the latest post discussing—from an appraisal review standpoint—the definition of fair market value and the basic eight factors in IRS Revenue Ruling 59-60. While these factors are discussed in nearly every business valuation report, “not every business valuation report reflects a solid understanding of this important standard of value,” he writes. “Often, one or more of the critical three factors of common sense, informed judgment and reasonableness are missing.” He discusses these three critical factors and gives an example of a simple reasonableness test still missing from certain appraisals he reviews. Mercer will continue the series in future weeks.

Extra: Speaking of appraisal reviews, there is a webinar today, April 20, Appraisal Review for Financial Reporting, with Raymond Rath (Globalview Advisors).

‘Eye-opening’ valuations for RIA firms

A review of 2021 M&A activity among registered investment advisors (RIAs) shows that valuations “increased materially, while the median-adjusted EBITDA multiple set a record,” according to the newest edition of “The RIA Deal Room,” an annual study from Advisor Growth Strategies. “The median valuation multiple for sellers increased for the fourth straight year to 8.99x EBITDA,” the study says. “However, this marks a 12% increase over the previous year, compared to the 21% increase in 2020 and 29% increase in 2019. While deal volume is likely to persist for years, valuations may soon hit their ceiling.”

Three special BVR workshops in May: energy, estate/gift, and intangibles

The month of May will see BVR webcast three special events:
1. May 12: 2022 Houston ASA Energy Valuation Conference: A BVR Live Webcast, a full-day event—the 12th year for this event—presenting leading-edge valuation techniques applicable to all sectors of the energy industry (CPE credits: 9);
2. May 24: Estate and Gift: The Complete Valuation Package, a four-hour workshop (4.5 CPE credits) with Carla Glass (Marcum LLP) and Marissa Turrell (Marcum LLP); and
3. May 26: Best Practices In Developing Intangible Asset Valuations and Asset-Based Approach Business Valuations, a four-hour workshop (4.5 CPE credits) with Weston Kirk and Robert Reilly, both with Willamette Management Associates.

Click on the links above for more information. Mark your calendars

Valuation News Updates

Lisa Guo — Thu, 14 Apr 2022 02:26:08 GMT

Goodwill impairments in U.S. doubled in 2020: Kroll study

Total goodwill impairment in U.S. public companies was $142.5 billion in 2020, more than double the $71 billion recorded in 2019, according to the “2021 U.S. Goodwill Impairment Study” by Kroll. Even so, the level of impairments still fell short of the amount recorded at the onset of the 2008 financial crisis, which was $188.4 billion, the study says.

The study examines general and industry goodwill impairment (GWI) trends of more than 8,900 U.S. publicly traded companies through December 2020. The top three industries with the largest increase in GWI in 2020 were energy, financials and real estate, and industrials. This edition also gives a preview of the 2021 recovery from the COVID-19 pandemic on goodwill impairments taken by U.S.-based public companies. “At the time of writing, the disclosed top 10 GWI events for 2021 reached a combined $5 billion, which pales in comparison to the top 10 in 2020 of $61.9 billion,” the study says.

No proof of personal goodwill in Utah divorce case

In some states, personal goodwill in a business is not part of the marital estate—but you have to have evidence that it exists. In a Utah divorce case, the wife had a veterinary pharmaceutical business with a number of employees. In its decision, the court noted that Utah case law generally associates personal goodwill with “sole proprietorships essentially run by one person” and that the wife’s business was not comparable to a sole proprietorship. The court also noted that the wife did not provide any evidence that her involvement in the business “is essential for that business to continue, given the number of employees and the extent of the operations that it has.” The wife presented a valuation rebuttal witness, whose testimony was excluded for procedural reasons. But the court noted that, even if it had not excluded the rebuttal expert, “his testimony was unpersuasive.” The wife appealed the decision, but the appellate court upheld it.

There are other issues in the case, including the wife’s “intentional scheme” to dissipate assets and devalue the marital estate and that the imposed sanctions against her were greater than the injury her misconduct caused.

The case is Erickson v. Erickson, 2022 UT App 27; 2022 Utah App. LEXIS 27; 2022 WL 619796, and a case analysis and full opinion are available on the BVLaw platform.

Gary Trugman shares sample valuation reports

A good selection of eight sample valuation reports is available on the companion website of Gary Trugman’s book, Understanding Business Valuation, 6th edition. The website is available to buyers of the book and subscribers to the BVResearch Pro platform (who already have the book in their libraries). Here is a description of the reports—and more will be added in the future:
Member buyout. A calculation report for a 100% equity interest for a possible member buyout of a transportation company;
Matrimonial litigation. A valuation report for a 100% equity interest in an insurance agency;
Limited partnership interest. Valuation of a 90% limited partnership interest in an asset holding company for estate tax purposes;
Estate tax. Valuation of a 51% interest in a life insurance brokerage;
Fair value. Valuation of a 25% common stock interest in a clothing manufacturer for a shareholder buyout;
Real estate holding company. A valuation of a 45% interest and a 10% interest in an investment firm that operates as a commercial real estate holding company for estate and gift tax purposes.
Asset holding company (marketable securities). Valuation of a 49.5% limited partnership interest in an investment firm for gift tax purposes; and
Proposed sale of a franchise business. Valuation of a 100% interest in a franchised business for a proposed sale to the franchisor.
The companion website also includes appendices, key court cases, glossary of terms, updated valuation standards, and an explanation of data sources.

Tennis great Becker convicted of hiding assets in bankruptcy

In London, ex-tennis star Boris Becker has been found guilty of four charges under the UK’s Insolvency Act relating to his 2017 bankruptcy, the BBC reports. He was found guilty of transferring hundreds of thousands of pounds from his business account after his bankruptcy, failing to declare a property in Germany, and concealing €825,000 of debt. He could face a jail sentence carrying a maximum term of seven years for each count.

Coincidentally, BVR recently did a webinar on fraudulent transfers in a bankruptcy context. Jeff Baliban, a practitioner who currently teaches statistics at New York University’s School of Professional Studies, explained that the key issue in matters of fraudulent transfers is solvency—whether the debtor was solvent when it made the transfer (or would remain solvent as a result of the transfer). Baliban described the three solvency tests (under Section 548 of the Bankruptcy Code): (1) the balance sheet test (do assets exceed liabilities?); (2) the cash flow test (can the company pay off debts as they come due?); and (3) the capital adequacy test (does the company have enough capital to operate?). If the debtor fails any one of the tests, it is an indication of a fraudulent transfer.

Twitter poll on the size effect

Wes Gray, a Ph.D., financial analyst, and CEO of Alpha Architect, recently conducted a poll on Twitter about the size effect (implicit in traded stocks where returns can be observed). About 2,200 people responded to the poll. The results:
Over half (51%) believe there is a size effect (i.e., smaller firms tend to outperform bigger firms);
A quarter (25%) believe there is an inverse (negative) size effect (i.e., bigger firms tend to outperform smaller firms); and
The remainder (24%) believe there is no size effect.

Ongoing academic research concludes that the size effect has diminished or disappeared since it was first documented in 1981 (see our last coverage here). But the vast majority of valuation practitioners believe that the size premium still exists. During a BVR webinar in 2020, a poll of the audience (of about 200 attendees) found that 94% of them use a size premium.

ASA confab moves to Tampa

Originally announced for Fort Lauderdale, Fla., the 2022 American Society of Appraisers’ International Conference (ASAIC22), will be held in Tampa, Fla., September 10-12 (same dates as before). A preliminary schedule has been posted, which shows more than 65 educational sessions across six discipline tracks. There will also be some preconference courses (starting Wednesday, September 7) and the second annual golf outing on September 9. Sessions will be presented live on-site in Tampa and available via live stream for virtual participants. All attendees will have access to OnDemand viewing post-conference.

Global BV News

VAB6 review on IVSC website

A comprehensive review of Valuing a Business, 6th edition (VAB6) is on the website of the International Valuation Standards Council (IVSC), calling it a “foundational reference for business valuation education worldwide.” Ray Moran, ASA, MRICS, who specializes in valuations for cross-border mergers and acquisitions, wrote the review. He is director and chair of the Marketing Committee at the iiBV and also serves as managing director in the FON Valuation Services group. “Valuing a Business has been on my bookshelf since the 1980s, and I’ve owned several editions through the years,” writes Moran. “While I’ve referred to it as a resource early in my career in the U.S., it became indispensable when I moved to Hong Kong in 2001.” You can read the review if you click here.

The book, which Shannon Pratt first wrote in 1981, is being published with underwriting sponsored by the American Society of Appraisers (ASA) Educational Foundation. Pratt passed away, but the ASA assembled a group of contributors to bring the book up-to-date and maintain Pratt’s legacy for the valuation profession

Valuation News Updates

Lisa Guo — Thu, 07 Apr 2022 02:24:54 GMT

Purchase price equals value of business caught up in divorce

In Wisconsin, the valuation opinions of two experts were deemed not credible for a business caught up in a marital dissolution. In this case, the husband was the out-spouse arguing for a high value of the wife’s business (Dr. Paul’s brand of herbal products for treating livestock).

Both experts rejected: The wife had bought the business from her parents one year prior to the divorce filing (no gift involved). The purchase price was $500,000 (100% financed by a note from the parents), and she also borrowed $57,920 from them shortly after for working capital. The circuit court rejected the valuation opinions of the experts on both sides and found that the best measure of value was the purchase price/loan plus the working capital loan less any remaining principal at the time of trial, for a net value of $45,230.

One of the husband’s arguments was that the purchase price was not fair market value because it was not at arm’s length. While the court agreed the transaction was not arm’s length, it was the best indicator of value especially since neither expert’s valuation of the business made “logical sense.” The husband appealed, but the appellate court upheld the circuit court’s decision.

The case is Dettloff-Meyer v. Meyer, 2022 Wisc. App. LEXIS 205, and a case analysis and full opinion are available on the BVLaw platform.

Houlihan Lokey updates its PPA study

Analysts at Houlihan Lokey have released its 2019 and 2020 Purchase Price Allocation Study, which examines key data points of purchase price allocations (PPAs) recorded by U.S. public registrants. Among the findings:
The median allocation of purchase consideration (PC) to intangible assets in 2020 was 34% (unchanged from 2019);
The median allocation of PC to goodwill in 2020 was 47% (also unchanged from 2019); and
Healthcare was the only industry with intangible assets and goodwill percentages above the mean and median in 2019 and 2020.

The study reviewed public filings, of which 560 transactions formed the basis of the 2019 study and 475 transactions formed the basis of the 2020 study. The study also provides statistics, other annual data, and a comparison to certain results from its 2018 study. To download a complimentary copy, click here.

Extra: A good basic PPA case study was recently presented during a BVR webinar by Nene Gianfala (Chaffe & Associates). Click here for a recording (free to holders of BVR’s Training Passport Pro.)

ASA/Pratt Valuing a Business book is delayed

For those of you who have preordered or will order the new sixth edition of Valuing a Business, supply-chain shortages have caused a delay. The original ship date of March 22 has been revised to a projected date of mid-to-late April.

The book, first written by Shannon Pratt in 1981, is being published with underwriting sponsored by the American Society of Appraisers (ASA) Educational Foundation. Pratt passed away, but the ASA assembled a group of contributors to bring the book up-to-date and maintain Pratt’s legacy for the valuation profession.

Extra: A perfect companion to the ASA/Pratt book is Gary Trugman’s Understanding Business Valuation, 6th edition (published by BVR), which has not suffered any supply-chain issues and has been shipping right on schedule.

Save 34% on a BVR webinar

Take your pick of any one of BVR’s upcoming webinars (except the Houston ASA Energy Conference), and you will receive 34% off. You must make your purchase by April 8 to get the discount (use priority code PRIOR6002). But it will be hard to choose among them—there’s quite a lineup of events! On April 14, Jay Fishman (Financial Research Associates) leads a “power panel” looking at some specific industries; on April 20, Ray Rath (Globalview Advisors) covers appraisal reviews for financial reporting; on May 10, Gary Trugman (Trugman Valuation Associates) examines the valuation of health clubs and gyms; and, on May 26, Robert Reilly and Weston Kirk (Willamette Management Associates) do a four-hour workshop on intangible assets and asset-based approaches for going concerns. And there’s more to choose from as well. Click here for the full schedule.

Preorders being taken for the 2022 FactSet Mergerstat Review

The 2022 edition of the FactSet Mergerstat Review delivers comprehensive rosters and statistics on mergers and acquisitions between US, UK, and global privately held, listed, and cross-border enterprises. This is one of the most referred-to sources of industry pricing, premia, and payment terms. Each annual subscription includes current updates via the Mergerstat Monthly Review, an update on M&A activities, trends, and deal data by industry.

Global BV News

Cost of capital parameters in Europe as of Dec. 31, 2021

ValueTrust has released the 9th edition of its “European Capital Market Study” that serves as a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. The study also includes trading multiples and total shareholder returns across a wide range of industries. Here are a few key findings:

· The risk-free rate decreased from 0.33% as of June 30, 2021, to 0.09% as of Dec. 31, 2021;

· The implied market return is at 7.5% as of Dec. 31, 2021, so, taking the risk-free rate of 0.09% into account, the implied market risk premium is 7.4%; and

· The technology sector shows the highest trading multiples on average, followed by the healthcare sector; the financial sector continues to have the least expensive valuation level of all sectors.

The full report is available if you click here.

Valuation News Updates

Lisa Guo — Thu, 31 Mar 2022 02:23:29 GMT

DOL-USA proposes change to ESOP prohibited transaction exemption requirements

ESOP appraisers should take note of a proposed rule to amend the Department of Labor (DOL) prohibited transaction exemption procedure, reports the American Society of Appraisers (ASA). The proposal would change several aspects of how appraisers engage with plan fiduciaries and perform engagements in connection with employee stock ownership plans (ESOPs).

Among the changes are revised definitions of “qualified independent appraiser” and “qualified appraisal report.” An appraiser would not be deemed as “independent” if the revenues he or she receives, or is projected to receive, from the exemption transaction exceed 2% of the appraiser’s annual revenues from all sources in the prior tax year or projected revenue for the current tax year, the ASA points out. The updated definition of “qualified appraisal report” requires the report to be prepared solely on behalf of the plan, thus ensuring the qualified independent appraiser only considers the interest of the plan, its participants, and beneficiaries, the ASA says.

The proposed rule is available if you click here. Written comments and requests for a public hearing on the proposed rule must be submitted to the DOL by April 14. The ASA says it intends to file comments in connection with this proposal and will make that response available when completed.

No valuation adjustment for alleged acts of oppression

In a Connecticut case, four siblings were partners in a number of restaurant properties and one of the partners (who had a 25% interest) was ousted by the others. He was accused of mismanaging company finances and committing alleged acts of anger and/or physical violence, including striking their mother. The ousted member sued, claiming he was treated unfairly, was owed money, and that his siblings forged his signature on documents. The court noted that adjustments could be made for wrongful conduct, but the plaintiff did not establish it enough to justify adjusting the value. The court also decided on the fair market value of the restaurant properties and examined whether discounts should apply for lack of control and marketability.

The case is Gavrielidis v. 80 Seaview Ave., LLC, 2020 Conn. Super. LEXIS 1302; 2020 WL 6781239. A case analysis and full opinion are available on the BVLaw platform.

Damodaran updates his implied ERP in wake of Ukraine invasion

In his blog post on how the crisis in Ukraine is playing out in the markets, Professor Aswath Damodaran (New York University Stern School of Business) updated his implied equity risk premium to 4.73% as of March 16, up from 4.24% at the start of 2022. To that he adds the risk-free rate (2.19%, the 10-year T-bond rate on March 16) to get the long-term annual expected return on equity of 6.92%, which is “still lower than historical norms, but closer to the numbers that we have seen in the last decade,” he writes. He noted that “equities were already under pressure in the weeks before the invasion, as inflation fears surfaced again, and then hostilities have put further pressure on them.” Damodaran’s implied ERP is a forward-looking method, calculated by backing it out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond.

Deloitte replaces pub on impairments and disposals

Deloitte has published A Roadmap to Impairments and Disposals of Long-Lived Assets and Discontinued Operations, which includes its insights into the guidance in ASC 360-101 and ASC 205-20 on impairments and disposals of long-lived assets and presentation of discontinued operations. This publication replaces the firm’s 2019 publication A Roadmap to Disposals of Long-Lived Assets and Discontinued Operations and has been expanded to address the accounting for long-lived assets while classified as held and used.

Updated versions of two closed-end fund reports for estimating DLOC

Closed-end fund (CEF) data are commonly used to derive discounts for lack of control (DLOC) for closely held holding companies invested in marketable securities. Updated versions (to February 2022) of two sources of CEF data, prepared by Bruce A. Johnson and James R. Park (Partnership Profiles), are now available:

· “2022 Closed-End Fund Report: Fixed Income Securities.” Use this report to compare privately held family limited partnerships (FLPs) and LLCs that hold money market funds, certificates of deposit, government bonds, municipal bonds, corporate bonds, or other fixed income investments.

· “2022 Closed-End Fund Report: Stocks and Equity Investments.” Use this report to compare privately held FLPs that hold common stock, preferred stock, mutual funds, REITs, or other corporate equity investments.

Price: $249 each.

Global BV News

RICS withdraws global COVID-19 valuation practice alert

Because many governments and markets globally have now eased restrictions and protocols relating to COVID-19 and the impact of the pandemic is clearer, RICS has withdrawn its global COVID-19 valuation practice alert as of March 3. RICS is the Royal Institution of Chartered Surveyors, a global valuation professional organization (VPO) whose members are appraisers in various disciplines, including business valuation. RICS issues the Red Book, which contains mandatory rules, best practice guidance, and related commentary for all its members undertaking asset valuations.

Valuation News Updates

Lisa Guo — Thu, 24 Mar 2022 02:22:26 GMT

Proposed rule change cracks down on testifying experts in US

Too many experts who are not qualified are being allowed to testify in court, and this has triggered proposed changes to strengthen Rule 702, which is the federal rule of evidence regarding testifying experts. If adopted, the changes will result in more experts being excluded from testifying.

Getting lax: There has been debate in the legal community over whether the courts are performing their gatekeeping function as rigorously as originally intended, according to an article in the April issue of Business Valuation Update. Under Daubert or similar standards, courts are supposed to disqualify testifying experts who are not competent or who can’t offer helpful evidence. But the courts have been getting somewhat lax about this.

In a recent case, a motion to exclude an appraiser was denied, even though the appraiser was a “ripe target” for disqualification. This is an example of what’s been going on: The courts just let the experts testify, and then the judges decide on the weight to give that testimony, or they defer that decision to the jury. But this is not what was intended—hence, the proposed changes to Rule 702.

New case affirms treatment of goodwill in Indiana divorces

In Indiana, enterprise goodwill is includable in the marital estate, but personal goodwill is not (see BVR’s Charting Goodwill map). A recent case affirms this and also affirms that testimony should be given as to the amount of personal and enterprise goodwill in order to have the court determine the amount to be included in the marital estate. The valuation was done by a court-appointed expert, who appraised the wife’s home healthcare businesses (she was a registered nurse). The wife appealed the court’s decision to include enterprise goodwill in the marital estate and asked the court to ignore the expert’s testimony. She contended that the asset approach should be used for the valuation (assets minus liabilities), but the appraiser rejected that approach because it does not reflect any goodwill. The appellate court affirmed the decision of the trial court.

The case is Adewopo v. Jaja, 2022 Ind. App. Unpub. LEXIS 58; 2022 WL 18960, and a case analysis and full opinion are available on the BVLaw platform.

Mercer examines appraisal reviews

After a two-month break from his blog, veteran valuer Chris Mercer (Mercer Capital) has started a series of thoughtful posts focusing on appraisal review, a process he deems “essential.” In his first post, he talks about when appraisal reviews are important, what the reviewer needs to know before doing a review (i.e., valuation body of knowledge), and an effective methodology for reviews. Bottom line, “replication lies at the heart of good appraisal review,” he writes. That is, given what’s presented in the report, the reviewer should be able to come to the same outcome.

Let us add that, while having a solid body of BV knowledge is essential to a thorough review of a valuation report, having a layperson also review the report can be very helpful. A person who knows nothing about business valuation, or is not numbers-oriented, should be able to grasp the “story” behind the valuation. If the valuation is of a going concern, the reader should come away with what makes the company tick and clearly see how the report’s narrative ties to the numbers.

In future posts, Mercer will discuss appraisal review methods in detail. Recommended reading!

AICPA offers free webcast on estate/gift valuations

A two-and-a half-hour webcast on estate and gift valuations is available free of charge from the AICPA. The webcast covers fundamental gift and estate strategies and discusses potential updates from the new administration that could impact estate and gift planning and valuations. It also discusses gifting in the current economic environment and considerations for valuation professionals (alternatives to lifetime exemption and low interest rate environment). The webcast is part of a course Jim Hitchner (Financial Valuation Advisors) created. You can access the estate/gift webcast if you click here (you’ll need to sign up for a free account on the AICPA website).

Yeanoplos honored with ASCPA life membership

Earlier this year, we ran an item about how the future of the valuation profession depends on practitioners giving back to the profession. Here is a perfect example of what we’re talking about.

Congratulations to Kevin R. Yeanoplos (Brueggeman and Johnson Yeanoplos PC) for being selected to receive a life membership to the Arizona Society of CPAs (ASCPA) as recognition for his many contributions to the society and the profession. He has served on the society’s board of directors, on the Business Valuation Committee for six years, and chaired the Business Valuation/Forensic Litigation Services Conference Committee during his decade of service on the committee.

“He’s been involved and participated in so many conferences as a speaker and leader, and he has put in a tremendous amount of effort and time,” said Brendan J. Kennedy (ATLAS CPAs & Advisors PLLC). “He has given back to the community individually, and we all owe a bit of a debt of gratitude for the people that are willing and able to do that.”

Yeanoplos, who has the CPA/ABV/CFF and ASA credentials, is director of valuation services for his firm, which has offices in Seattle, Phoenix, and Tucson and specializes in the areas of business and intellectual property valuation, financial analysis, and litigation support. He lectures and presents on topics such as business valuation. We here at BVR are honored to have him serve on our editorial advisory board, and he has contributed articles, co-wrote books, and has conducted webinars and conference presentations for us.

Yeanoplos is one of 63 to have received the award in the ASCPA’s 89-year history. He will be honored at the ASCPA Annual Meeting and Awards Luncheon on May 12 at the Arizona Biltmore.

2022 FactSet Mergerstat Review available for preorder

The 2022 edition of the FactSet Mergerstat Review delivers comprehensive rosters and statistics on mergers and acquisitions between US, UK, and global privately held, listed, and cross-border enterprises. This is one of the most referred-to sources of industry pricing, premia, and payment terms. Each annual subscription includes current updates via the Mergerstat Monthly Review, a monthly update on M&A activities, trends, and deal data by industry.

Global BV News

CBV Institute adds 69 new members

Now with about 2,300 members, the CBV Institute, Canada’s valuation professional organization (VPO) and standard, recently added 69 new members to its ranks of professionals entitled to use the CBV designation. In 2020, the organization saw membership grow 6%, the most in the last decade, from 2,086 members in 2020 to 2,215 members in 2021, according to its latest year in review. CBV Institute members have the Chartered Business Valuator (CBV) designation. It holds an annual conference, the CBV Congress, which BVWire attends. The next CBV Congress is scheduled for June 6-7 in Vancouver (click here for details).

Valuation News Updates

Lisa Guo — Thu, 17 Mar 2022 02:21:05 GMT

Two cases on trapped-in gains tax—with opposite outcomes

In a California divorce case we recently covered, an appeals court disallowed a discount for possible future taxes because the taxes were neither immediate nor specific. But, in Nebraska, the state’s Supreme Court came to the opposite conclusion. Experts for both sides in that case allowed some amount for the potential future liability of tax for trapped-in gains. But the court never mentioned the issue of immediacy and certainty in allowing the estimated present value of potential future taxes on trapped-in gains.

Read some commentary on these two cases in a blog post by BVR’s legal editor, Jim Alerding. He points out that these two cases exemplify the need to know the law in the jurisdiction of your case.

The Nebraska case is Bohac v. Benes Serv. Co., 310 Neb. 722; 2022 Neb. LEXIS 5, and a case analysis and full opinion are available on the BVLaw platform.

How to find hidden assets in divorce

Parties to a divorce may not be totally forthcoming with assets they own, so the valuation expert often has to help ferret them out. One tactic is to ask for “everything,” meaning all documents related to anything that involves the divorcing parties as either beneficiaries or fiduciaries. This includes trusts, estate plans, and wills—including the wills of other individuals (such as the spouses’ parents) in order to see whether the spouse will inherit anything. Be as broad as possible in your request and be aware that you may not always get everything you ask for but you need to ask anyway. Tax returns, particularly trust and estate returns, can provide a wealth of information to valuation experts, but you have to know where to look!

Locating hidden assets is just one of the topics that will be covered at the National Divorce Conference BVR and the American Academy of Matrimonial Lawyers (AAML) will present in Las Vegas, September 18-20. Leading matrimonial attorneys and financial experts will give you critical insights in sessions covering financial, valuation, forensic, and legal issues surrounding this growing area of practice. The conference will be both online and on-site at the Venetian Resort, and will have more than 20 CPE/CLE credits available. Early-bird pricing is currently in effect, and you can register if you click here. We hope to see you at this unique event!

ESOP companies more optimistic about recovering

Valuation experts assessing how a subject company will recover from the pandemic will be interested in a new study. Majority employee-owned companies with employee stock ownership plans (ESOPs) have been more resilient in responding to the pandemic than other companies, suggests the study. And they are much more optimistic about recovering. ESOPs are nearly six times more likely to anticipate their business would return to its previous level of performance than non-ESOPs. The study’s findings are similar to prior findings regarding the performance and behavior of employee-owned companies during the 2008-2010 recession. The study, “Employee-Owned Firms in the COVID-19 Pandemic,” is from Rutgers University and SSRS and is funded by the Employee Ownership Foundation, an affiliate of The ESOP Association.

Agenda set for NYSSCPA BV and litigation services conference May 16

Each year, BVWire attends the annual New York State Society of CPAs’ Business Valuation and Litigation Services Conference, and registration is now open for this year’s event, which will be webcast May 16. This full-day conference will feature many topics including an update on BV-related court cases, tax litigation involving valuation issues, SPAC warrant valuations, debt valuation, control premiums, exit planning, and more (eight CPE credits available). Click the link above to check out the full agenda.

BVRPro adds to its ASA BV Review archive

Subscribers to the BVResearch Pro platform can access issues of Business Valuation Review going back to 1982, and the Fall 2021 issue has just been added to the archive. This publication is the business valuation journal of the American Society of Appraisers. The Fall 2021 issue includes some tributes to Shannon Pratt, the new International Valuation Glossary—Business Valuation, and articles (one that addresses the volatility of financial metrics used in valuing contingent consideration and another that gives some critical commentary on pre-IPO studies). If you are not a subscriber to the BVResearch Pro platform, you can do a stand-alone subscription to the ASA’s Business Valuation Review if you click here.

Global BV News

Reminder: Take a survey on ESG and valuation

The International Valuation Standards Council (IVSC) would like to hear from business valuation providers, users, and investors on the issue of environmental, social, and governance (ESG). While the International Valuation Standards (IVS) implicitly require the consideration of ESG components within valuation, no explicit standards exist. “The IVSC’s ESG Working Group felt that it was important to carry out a survey of investors, firms and valuers to understand where they are on their journey in relation to the quantification of ESG components within their working practices,” says Alexander Aronsohn, IVSC technical standards director (tangible assets). To take the survey, click here.

Preview of the April 2022 issue of Business Valuation Update

Here’s what you’ll see:
“Business Valuation Needs to Be a Recognized Career Path” (David Foster). Despite all the progress the business valuation profession has made, BV is still not understood or widely recognized as a career path. Most individuals who enter the profession continue to discover it by accident.
“Proposed Rule 702 Change Targets Unqualified Experts” (BVR Editor). Too many experts who are not qualified are being allowed to testify in court. This has triggered proposed changes to strengthen Rule 702, which is the federal rule of evidence regarding testifying experts.
“A Lesson in Healthcare Supply and Demand—and Market Power, Part 1” (Mark O. Dietrich, CPA/ABV). This is a follow-up to the author’s landmark research on the fair market value of physician compensation. The issue of insurance market structure and the related impact on the negotiating of provider contracts is addressed in Part 1 of this article. Physician distribution and the impact of local payment rates that determine compensation is addressed in Part 2.
“A ‘Radical’ Market Data Approach to Startup Valuations” (BVR Editor). Michael Blake (Brady Ware & Co.) has issued a challenge to appraisers of early-stage companies: add rationality to valuing startups by relying more heavily on market inputs. The income approach is not always effective in prerevenue situations, so Blake turns to guideline public company and transaction method alternatives.
“Reconciling the Results of Various Valuation Methodologies” (Gary Trugman, CPA/ABV, FASA, MVS). This is an excerpt from the author’s new sixth edition of Understanding Business Valuation. It illustrates the clear, simple way he explains key concepts and provides real-world examples.
“Two BV Firms Collaborate to Serve Clients Better—and Boost Business” (BVR Editor). Solo and small business valuation practitioners can scale up their practices using an idea that two firms have discovered: collaboration. It allows them to take on engagements that they otherwise would have turned away and gives them access to each other’s knowledge, resources, and contacts.

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

Valuation News Updates

Lisa Guo — Thu, 10 Mar 2022 03:19:36 GMT

Sources of new business you may overlook

Business valuation professions know that attorneys are a prime source of new engagements, but other sources may not immediately come to mind. Victor Werley, founder of Pinnacle Advisors (Little Rock, Ark.) is a credentialed valuation expert, but his practice is mainly financial advisory, money management, business brokerage, bookkeeping, and other financial services. “I would say that a very overlooked source of potential valuation business is in the other areas of my practice,” he said during a recent webinar.

Good prospects: “If there are business brokers in your area, find them and get to know them,” he advises. “They need you to do valuation work.” As a broker himself, Werley says it’s helpful to be able to show clients a valuation from an independent source. Financial advisors are another good source of business. They typically have clients with high net worth most of which will either involve large pieces of real estate or privately held businesses. “I tell my financial planning clients that, if a private business comprises more than 20% of your net worth, you need to have that business valued every two years. That is just standard practice with my clients.” But you will need to explain to those financial advisors what valuation is, what it does, and why it is important, he notes.

Werley also suggests that valuation experts join associations of business owners but don’t just show up and expect to sign up new clients. “Educate them,” he advises, by doing presentations or writing articles.

One more idea: Werley has increased his valuation business by collaborating with another valuation expert with a solo practice, Ericka Heiser (Sioux City, Iowa). Their backgrounds and experience complement each other, so they have been collaborating on engagements that they otherwise would have turned away. Heiser’s business has increased also. You can learn all about their experience with this arrangement if you listen to a recording of their webinar, Collaborate With Valuation Professionals Who Complement Your Strengths to Better Serve Clients.

Trugman’s Understanding Business Valuation has hit the stands!

Understanding Business Valuation, 6th edition (published by BVR), is now available in print and/or PDF format. The new edition of this long-standing bestseller features an exclusive companion website as well. BVResearch Pro and Digital Library subscribers already enjoy access to the PDF of the new edition. It’s available for purchase if you click here (print and/or PDF).

The book, written by Gary Trugman (Trugman Valuation), is over 1,000 pages of clear, concise explanations of business valuation theory highlighted by practical examples from actual engagements. Plus, there is a companion website with sample valuation reports, appendices, and supplemental material. A review of the book is in the March issue of Business Valuation Update, and we will run some excerpts starting with the April issue.

Court addresses use of asset approach for a going concern

Many valuation experts rarely (or never) use the asset approach for an operating business. But this approach may be more applicable than you might think.

New case: The Supreme Court in Nebraska has found that the proper premise of value for an operating business was going concern and the proper methodology was the asset approach. The business sells and services farm equipment. The court noted that the expert referred to a “well known valuation expert” who states that the asset-based approach can be used with the going-concern premise of value. (Coincidentally, a 2020 article in Business Valuation Update refers to a well-known valuation expert discussing this very topic.)

There are more valuation issues in the case, including the definition of fair value and the treatment of built-in gains taxes. The case is Bohac v. Benes Serv. Co., 310 Neb. 722; 2022 Neb. LEXIS 5. A case analysis and full opinion are available on the BVLaw platform.

Valuation standards needed for digital assets

“An agreed-upon reliable valuation method does not exist for cryptocurrencies in 2022,” say the authors of a new paper, “Digital Asset Valuation.” This has led to uncertainty and confusion among investors and managers. The paper evaluates the existing asset valuation methods and their limited application to digital assets before contrasting new and evolving digital asset valuation trends. The authors conclude: “The industry would benefit from uniform standards for digital asset valuation.” The paper’s authors are Wulf A. Kaal (University of St. Thomas, Minnesota—School of Law), Samuel Evans (PricewaterhouseCoopers LLP), and Hayley Howe (Emerging Technology Association).

Trademark values and useful lives for bikes

The average royalty rate for the trademarks of bikes is 3.8%, according to data from MARKABLES. Bikes include bicycles, motorbikes, and similar items such as scooters, mopeds, and even indoor fitness bikes. The vast majority (84%) of bike trademarks have an indefinite useful life. For those with a definite useful life (16%), the average is 13.3 years. MARKABLES is a Switzerland firm that has a database of over 13,000 global trademark valuations published in financial reporting documents of listed companies. In addition to trademark-related data, MARKABLES offers data on customer relations and goodwill. From spring 2022, the firm will add data on software and technology to its data offerings.

ASA launches new website

The American Society of Appraisers (ASA) has launched a “newly refreshed” website (appraisers.org) designed to be faster, easier to navigate, and more user-friendly. The home page is certainly eye-catching, and it provides quick access to the online resources most popular with its members. The home page has a Latest News crawl and links to the various disciplines in which its members practice: personal property, business valuation, real property, machinery and technical specialties, gems and jewelry, and appraisal review and management. If you click on a specific discipline, you’ll find credentialing information, educational offerings, publications, news, and more. Check it out!

Reminder: Feedback wanted on company-level beta module for the Navigator

Kroll (formerly Duff & Phelps) is developing a new module for its Cost of Capital Navigator that will enable users to derive company-level betas based on their own selection of comparable companies. During a recent BVR webinar, Carla Nunes and Jim Harrington (both with Kroll) mentioned that they are conducting a survey to help determine what features should be included in the new module. Please take the survey at surveymonkey.com/r/Q3YRD8Q. Thank you!

Global BV News

CBV Institute prexy on BV profession challenges

The influx of automated valuation models and the demand for accredited professionals are two major challenges the business valuation profession faces, says Christine Sawchuk, president and CEO of the CBV Institute, Canada’s valuation professional organization (VPO), in an interview. The proliferation of automated tools allows more individuals to offer valuation services, but they may not be qualified to do so. “While such technologies can be used as tools to support decision-making and communication, they cannot replace critical thought and professional analysis to achieve the most informed view for business decision-making,” she says

She also observes that market demand for professionals accredited in business valuation is currently at an all-time high. “While this is excellent news for growth in the valuation profession, particularly amongst young professionals, it may be an ongoing challenge for us and other VPOs to keep reinforcing to the market that formal valuation education and accreditation is a professional imperative, and in the public interest,” she says.

Valuation News Updates

Lisa Guo — Thu, 03 Mar 2022 03:18:42 GMT

Dispelling the ‘hired gun’ perception of testifying experts

A question often comes up: “How can two qualified and experienced business valuation experts analyze the same company and come up with widely disparate values?” Some people may think the answer is “hired gun” or a faulty analysis, but legitimate reasons can cause two experts to be far apart, as a new case illustrates.

New case: The case is a marital dissolution matter in Nebraska. The expert for the husband valued his interest in his roofing business at $494,000, while the wife’s expert came up with a value that was almost four times higher ($1,830,500). Both experts were highly experienced and credentialed valuation experts who did everything by the book. But certain assumptions they used for the income approach differed. For example, when averaging five years of historical earnings, one expert disregarded two years because he felt they were anomalies, while the other expert disagreed and included those two years in his analysis. They also disagreed on normalization adjustments for certain expenses—one expert treated them as nonrecurring, while the other expert did not. They also used cap rates that were significantly different. In the end, the district court found the wife’s expert’s valuation to be more credible and accepted his value of $1,830,500.

On appeal, the appellate court said the lower court did not “abuse its discretion” by siding 100% with one expert over the other. The appellate court noted that the differences in the two valuations were not due to any “foundational flaw” in the analyses—they were due to differences in “professional judgment.” It was not the appellate court’s role to second-guess the district court’s determinations of weight and credibility. The decision of the lower court was upheld.

The case is Cain v. Cain, 2022 Neb. App. LEXIS 18; 2022 WL 287918. A case digest and the full opinion are available on the BVLaw platform.

AICPA bridges the VS 100-IVS gap

For those valuation experts who must comply with both the AICPA’s valuation standards (VS Section 100) and the International Valuation Standards (IVS), the AICPA has issued a “bridging” document. “This bridging document provides a framework for identifying the common requirements as well as the differences between the two standards that, in turn, will help members incorporate procedures and reporting requirements that may be needed to ensure compliance with both valuation standards,” the AICPA says.

The 28-page bridging document is available to AICPA members and nonmembers alike, and you can download it if you click here. Nonmembers will have to register to create a free account to access the document. If you have any questions about the bridging document, please email Mark Smith, the organization’s director of valuation services.

‘Key players’ in valuing IP per QYResearch

QYResearch has published a research report on the global market for valuation services for intangible assets. According to the table of contents of the report, “Global Intangible Assets Valuation Service Market Research Report 2022,” it contains analyses of the size of the market, competition, segmentation, dynamics, and profiles of what it calls the world’s “key players” providing valuation services for intangible assets. Interestingly, these profiles also include the revenue and gross margins these firms generate from valuing intangible assets. The report lists the sources of these data as the companies themselves as well as “secondary sources, expert interviews and GRD Survey, 2022.” We question these revenue data as well as the listing of key players, so we have asked for a press review copy of the full report (the price is $2,900). In any event, the report identifies the key players as: LehmanBrown, Deloitte, Duff & Phelps (now Kroll), Valuation Services Inc., Management Planning Inc., IRE, Henry+Horne, Profit Accounting, Appraisal Economics, H&A, Cambridge Partners, EverEdge, KPMG, PwC, MARKABLES, VSI, Value Management & Options Corp., Roma Group, and Taiwan-Valuer.

Weaver reviews healthcare valuation in 2021

A collection of articles by valuation practitioners at Weaver give a 2021 year in review for healthcare valuations. The articles are organized in three parts: the first part on pandemic-related valuation “tailwinds,” the second part on pandemic-related valuation “headwinds,” and the third part on “enduring topics.” Looking forward, the report states: “In 2022 and beyond, we expect health systems and private equity-backed platforms to continue consolidating to achieve more scale, and to re-invest in digital technology and alternate sites of care. Health care segments negatively affected by the pandemic will likely stabilize in the long run. These are likely to benefit from natural demand growth driven by aging demographics, increased demand for underserved segments such as mental health, and a favorable regulatory and reimbursement environment.” You can download the full report if you click here.

Preliminary agenda out for 2022 AAML/BVR National Divorce Conference

Want to learn how to value and divide intellectual property caught up in divorce? How about a peer-reviewed technique for carving out passive appreciation in business value? These topics—and much more—are on the preliminary agenda just released for the National Divorce Conference to be presented by BVR and the American Academy of Matrimonial Lawyers (AAML) in Las Vegas, September 18-20. Leading matrimonial attorneys and financial experts will give you critical insights in sessions covering financial, valuation, forensic, and legal issues surrounding this growing area of practice. The conference will be both online and on-site at the Venetian Resort, and up to 17.5 CPE/CLE credits are available. Early-bird pricing is currently in effect, and you can register if you click here. We hope to see you at this unique event!

Reminder: Pepperdine’s private cost of capital survey

Many valuation experts refer to the annual “Pepperdine Private Capital Markets Report” when estimating small private-company cost of capital. To produce the report, Pepperdine conducts an annual survey of expected rates of return of investors and lenders with respect to private companies. This year’s survey is still open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is here.

Global BV News

IVSC launches survey on ESG and valuation

The International Valuation Standards Council (IVSC) would like to hear from business valuation providers, users, and investors on the issue of environmental, social, and governance (ESG). While the International Valuation Standards (IVS) implicitly require the consideration of ESG components within valuation, no explicit standards exist. “The IVSC’s ESG Working Group felt that it was important to carry out a survey of investors, firms and valuers to understand where they are on their journey in relation to the quantification of ESG components within their working practices,” says Alexander Aronsohn, IVSC technical standards director (tangible assets). To take the survey, click here.

Valuation News Updates

Lisa Guo — Fri, 25 Feb 2022 03:17:12 GMT

Thumbs-up reviews for UBV6 and VAB6

The March issue of Business Valuation Update has reviews of two important books that are about to be released: Understanding Business Valuation, 6th edition (UBV6), by Gary Trugman (Trugman Valuation) and Valuing a Business, 6th edition (VAB6), originally written by Shannon Pratt and updated by a team of contributors.

Trugman brings many years of experience in the field and in the courtroom to fill his book with practical examples from actual engagements and sample valuation reports. His years in the classroom teaching valuation courses is evident in the book’s easy-to-understand style. Understanding Business Valuation has been thoroughly revised and will have a companion website that will keep the material up to date. “It is a great reference book that will end up with many dog-eared pages and sticky notes in a very short time,” writes Jim Alerding (Alerding Consulting LLC) in his review.

The sixth edition of Valuing a Business is made possible by the American Society of Appraisers and the ASA Educational Foundation, who took the book under their collective wing after Pratt’s retirement. A team of over 60 ASA members went about revising the chapters and adding some new ones. “I am very pleased that the ASA Educational Foundation has elected to continue to oversee the publication of Valuing a Business for current as well as the next generation of business appraisers, and I highly recommend this text for all business appraisers,” writes Harold G. Martin Jr., partner-in-charge of valuation and forensic services for Keiter, in his review.

Both books are scheduled for release in March and are now available for preorder—just click the links above.

The first thing to look at in a strip club

When valuing an adult entertainment venue or nightclub, one of the most important things to examine is the point-of-sale (POS) system. This is a “very key” source of financial data, but it is subject to manipulation, according to speakers on a recent BVR webinar. Analysts need to know what POS software the club is using and, during a site visit, make it a point to see where all of the registers are—and make sure they are all connected to the system (you can verify that when you look at the POS records). In one case, the club operators hacked into the POS software to manipulate records. The webinar speakers, Lynton Kotzin and Jason Pierce, both with JS Held, gave a fascinating look at the nightclub and adult club business and how to value these entities. To view a replay, click here.

A valuation trial—on papers only?

Yes, but only in New York? In a breach of contract case, a valuation trial was scheduled to determine damages. The court had already decided that the defendant was liable for damages, so the only remaining question was the amount of damages. Both sides had experts who submitted affidavits as to their opinion of the damages amount, which was based on the value of stock the defendant promised to purchase but then refused to close the deal. The plaintiff moved for summary judgment, saying that the damages could be established on paper as there were no issues of fact necessitating a trial. The defendant demanded an in-person trial, insisting that he had a right to cross-examine the plaintiff’s expert witness about his valuation of the stock. But the court disagreed and awarded damages to the plaintiff based on the papers filed. “Defendant has no right to cross examine witnesses at trial unless there is an issue of material fact,” states the court in its opinion. The defendant has appealed.

Attorney Franklin C. McRoberts (Farrell Fritz), who tipped us off to this case, has never seen a valuation trial conducted on papers alone, he says in a blog post. If any BVWire readers have had a similar experience, please let us know—email us at info@bvresources.com.

The case is Quattro Parent LLC v. Rakib, 2022 N.Y. Misc. LEXIS 260, 2022 NY Slip Op 30190(U), and a case digest and the full opinion are available on the BVLaw platform.

TAF seeks candidates for its board of trustees

The Appraisal Foundation (TAF) is searching for candidates to serve on its board of trustees. Trustees provide oversight to the Appraisal Standards Board (ASB) and Appraiser Qualifications Board (AQB). Three at-large trustee seats are available, and the board meets twice a year. Trustees are reimbursed for travel expenses but are not compensated for their time. The individuals selected for the board of trustees will serve three-year terms beginning Jan. 1, 2023. Completed applications must be received no later than March 1. Click here for an application.

Houlihan Lokey and ELFA issue private debt valuation guide

Houlihan Lokey and the European Leveraged Finance Association (ELFA) have published a report as part of ELFA’s Diligence Series called Technical Guide for Valuation of Private Debt Investments. The guide is designed as a primer on the methodologies and practical considerations valuation practitioners face when assessing private debt instruments. In North America, the private debt market is estimated to have more than $300 billion in capital with $18 billion raised in the first quarter of 2021, the guide says.

BVR to webcast Energy Valuation Conference May 12

For the fourth year, BVR is pleased to partner with the Houston Chapter of the American Society of Appraisers (ASA) to present a live webcast of the Energy Valuation Conference on May 12. The conference, which is in its 12th year, will feature presentations from nationally recognized speakers who are profession leaders, covering a range of important topics in the industry. Early-bird pricing is available through March 31. BVR also offers recordings, transcripts, and presentation materials for this conference. For more information and to register, click here.

Global BV News

CBV Institute releases videos on intangibles

The CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, has released a three-part series of video interviews on the valuation of intangible assets. The series features CBV members giving their views of the complexities of intangible assets from their respective areas of practice in financial reporting, litigation, and private equity. The interviewees are Tiki Cheung (EY Canada), Chris Polson (PwC Canada), and Kevin Hutchinson (OMERS). You can watch the videos if you click here.

Extra: Jeremy Stuber, global equity analyst at Newton Investment Management, recently participated in a panel discussion about intangibles, and he makes some comments that you can read if you click here

Valuation News Updates

Lisa Guo — Thu, 17 Feb 2022 03:15:33 GMT

Appellate court Knock’s Out discount for trapped-in capital gains taxes

In a Louisiana case, a dissenting shareholder was withdrawing her shares in a company and the valuation of her interest was in dispute, so a trial was held. The experts for both sides agreed on the valuation method to be used: the adjusted net asset method. The company owned a lot of real estate, and its expert took a discount for the capital gains taxes that would be owed if the properties were sold. The expert testified that, even though the company had no intention of selling any of the properties, “it is common and accepted to recognize the trapped-in capital gains taxes as a liability on the balance sheet.” The trial court allowed the discount for the taxes. However, the appellate court overturned this, saying that, while there may be times when the discount can be taken, there must be a factual basis. In this case, a sale of the assets was an unknown future event, so it ruled that the trial court should not have allowed such a discount.

The case is ShopRite, Inc. v. Gardiner, 21-371 (La.App. 3 Cir. 12/29/21), and a case analysis and full court opinion can be found on the BVLaw platform.

Hitchner’s primer on three transaction databases

“Read the instructions” to transactional databases is the advice Jim Hitchner (Financial Valuation Advisors) stressed several times in the February 2022 issue of Hardball With Hitchner. He gives a primer on three databases—DealStats, BIZCOMPS, and ValuSource Market Comps—analysts typically use for the guideline company transactions method. All three of these databases include instructions and user’s guides that explain how to use their data—and each of them are different, he points out. He also provides a nice checklist that points out what he sees as some mistakes that can be made when applying the data, such as:
Using transactions that were in a different economic or industry cycle;
Averaging widely dispersed multiples;
Not knowing whether the transaction price includes a strategic premium;
Finding only one year of financial information available; and
Not knowing or guessing at what assets and liabilities were transferred.
Hardball With Hitchner is a monthly publication. For subscription information, click here.

Start due diligence before accepting an engagement

This is one of the tips in an article from the latest journal of the Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO) and standard-setter. When you talk with the attorney, in addition to learning about the engagement, you can get a sense of whether you will be pushed in one direction or another. While most lawyers “understand that their duties as advocates differ from yours,” if you get the feeling that “you might be pressured from a lawyer you have not worked with before, we would encourage you to do some research on their past cases to see if you’d be comfortable taking this case.” The article, “Tips to Help You Avoid Blurring the Line Between Impartiality and Advocacy,” by Andrew Cochran (EY), Shaun Laubman (Lax O’Sullivan Lisus Gottlieb), and Lindsay Campbell (Hoare Dalton Litigation and Valuation Services), is in the Journal of Business Valuation, 2021 edition. Other articles discuss causation and financial losses, COVID-19 impact on valuations, forecast validation for economic losses, and the challenges of litigation engagements for smaller businesses. Some very interesting reading here! The journal is on the BVResearch Pro platform, a clearinghouse of 20,000 BV-related articles, books, court cases, webinar transcripts, and much more.

Newest valuation data for A/E firms

The latest transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries (A/E firms) is now available in the Architecture/Engineering Business Valuation and M&A Transaction Study, 9th edition. This study includes data from over 225 distinct stock transactions collected from a confidential survey. Among other information, the study provides statistical data on 10 separate valuation ratios or multiples representing both minority and controlling interests in privately held firms, as well as minority interests in publicly traded companies and minority interests in employee stock ownership plans (ESOP) sponsoring companies. The study is from Rusk O’Brien Gido + Partners and its team of accredited business appraisers with decades of experience valuing privately held A/E firms.

‘Brain drain’ is top challenge to appraisal profession, per ASA’s White

“Perhaps the greatest challenge facing the appraisal profession now and soon is the sunsetting of careers by baby boomers and their exit from the workforce,” says Johnnie White, CEO of the American Society of Appraisers, in an interview. While this will provide job opportunities for fledgling appraisers, in the short term, “there will be a collective brain drain as these senior experts with decades of experience retire.” White sees professional organizations such as the ASA and International Valuation Standards Council (IVSC) “playing a pivotal role during this transition helping new valuers fill this knowledge gap with professional development, accreditation, advocacy, networking and many other valuable programs, products, and services.” In the interview, he also discusses his other observations as well as his vision for the future of the appraisal profession. The full interview is available if you click here.

DealStats Hall of Fame members for 2021

Thanks to business brokers and other intermediaries who contribute data, DealStats is the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2021 are:
Teija Heikkila, National Kennel Sales & Appraisals (Grand Junction, Colo.);
Roger Rumble, The Stratford Associates Inc. (Kalamazoo, Mich.);
Lee Trammell, Drake Business Services (Tyler, Texas); and
Sanjay Ahuja, Sunbelt Business Brokers (Marlborough, Mass.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Looking for a few good industry experts

BVR has done a series of webinars and What It’s Worth guides that cover specific types of firms, such as restaurants, construction companies, law firms, breweries, wineries, automobile dealers, and even paving contractors. Our latest industry webinar was on diagnostic imaging centers, and, today, we have a webinar on valuing nightclubs. Our latest What It’s Worth guide is on insurance agencies, and we have one in the works on the casino industry. Valuation experts with experience in these industries generously contributed to these reports and webinars. Do you have an industry that is your specialty? If so, we want to hear from you for potential articles or for you to conduct a webinar. We’re particularly interested in these industries: auto repair shops, prepackaged software, landscapers, grocery stores, gas stations, gyms, child day care services, advertising agencies, and signs/advertising specialties. If you have experience valuing one of these–or any other—types of firms and are willing to share your expertise, please let us know. Send an email to andyd@bvreasources.com. Thanks, and we look forward to hearing from you!

Global BV News

Three valuation firms enter Saudi market

PricewaterhouseCoopers (PWC), Baker Tilly, and Land Sterling have entered the Saudi market, bringing the number of international valuers in the kingdom to nine, according to Saad Al-Baiz, director of communication at the Saudi Authority for Accredited Valuers (Taqeem). Their practices will include the valuation of real estate, businesses, and intangible assets, according to an article in Argaam, a financial news portal in the Arab world. Last November, Al-Baiz said that the total number of valuers accredited by the authority, who obtained membership in various branches (real estate, economic establishments, property and equipment, and vehicle damages) reached about 3,000 valuers, 87% of whom are Saudis, according to Argaam’s data.

Preview of the March 2022 issue of Business Valuation Update

Here’s what you’ll see:

“Book Review: Understanding Business Valuation, 6th Edition” (R. James Alerding, CPA/ABV). Gary Trugman (Trugman Valuations) has updated his book, which shows you how to apply valuation theory with practical examples from actual engagements and sample valuation reports, written in an easy-to-understand style.

“Book Review: Valuing a Business—The Analysis and Appraisal of Closely Held Companies, 6th Edition” (Harold G. Martin Jr., CPA/ABV/CFF, ASA, CFE). A review of the new edition of Shannon Pratt’s book, which gives a heavy dose of theory and has been updated by a team of 67 contributors and published by the American Society of Appraisers.

“Appraiser Uses Direct Way to Estimate Private-Company Cost of Equity” (BVR Editor). One appraiser, after 25 years and over 1,000 valuations of small owner-operated businesses, says that these firms bear no relation to public companies, so why look to the public markets for data when estimating cost of capital? Here’s the method he uses, which looks directly at the private capital markets and does not require any expensive resources.

“Additional Takeaways From the 2021 ASA International Conference” (BVR Editor). Interesting sessions covering risk-free rates, equity risk premia, expert testimony, appraisal reviews, cannabis valuations, and more from the American Society of Appraisers’ International Conference held in Las Vegas.

“Veteran Valuers Warn of This Fallout From COVID-19” (BVR Editor). Being cooped up because of the pandemic has created a potential problem, say experienced valuers, if appraisers continue to do management interviews and company tours virtually instead of in person.

“Unique Pitfalls in Valuing a Diagnostic Imaging Center” (BVR Editor). Some advice from Douglas Smith (Phase 4 Radiology Business Strategies LLC), whose his entire practice is dedicated to the diagnostic imaging space. He is not an accredited valuation expert but is called in by appraisers as a third-party expert to perform analyses and forecasts for these entities.

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,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

To stay current on business valuation, check out the March 2022 issue of Business Valuation Update.

Valuation News Updates

Lisa Guo — Thu, 10 Feb 2022 03:14:36 GMT

Willamette points up practice opportunity regarding property taxes

Tax assessors sometimes improperly inflate ad valorem property tax bills on industrial and commercial properties by including the value of the taxpayer’s intangible assets, which are not subject to property taxes in some jurisdictions. An article in the just-released Winter 2022 issue of Insights from Willamette Management Associates discusses this and summarizes the generally accepted approaches and methods related to the valuation of taxpayer intellectual property. In particular, the article focuses on the market approach—and the relief from royalty (RFR) method—related to the valuation of the taxpayer’s intellectual property. The article, “Intellectual Property Valuations for Property Tax Purposes,” was written by Barry W. Purnell, Robert F. Reilly, and Charlene M. Blalock.

What to do: Examine your local area to see whether the laws exempt certain intangible assets from commercial property taxes. You may have clients who have overpaid their property taxes if the value of intangibles was improperly included in the assessment.

Damages expert dodges exclusion bullet

In a patent infringement case in Tennessee, the defendants filed a motion to exclude the testimony of the damages expert for the plaintiffs. The product in question was medical technology used during surgery. Among the arguments for exclusion was that the expert failed to offer reliable testimony to meet his “but for causality” burden for lost profits damages. They also challenged his reasonable royalty rate. The plaintiffs contended that the expert had a reliable foundation for his opinions and any issues the defendants had should be dealt with during cross-examination and not exclusion. The defendants’ motion was denied, and the expert’s testimony was not excluded.

The case is Xodus Med. v. Prime Med. (II), 2021 U.S. Dist. LEXIS 240473, and a case analysis and full court opinion can be found on the BVLaw platform.

Extra: Get a recap of the most notable valuation-related court cases during a February 15 webinar, BVLaw Case Update, hosted by Jim Alerding, who will be joined by fellow valuer Jim Ewart and attorney Andrew Z. Soshnick.

Year-end 2021 data now in the Cost of Capital Professional

Year-end 2021 data, including equity risk premia, CRSP decile size premia, and industry betas/IRPs, are now available in BVR’s Cost of Capital Professional platform. The platform is a simple, transparent, and cost-effective service for estimating the cost of capital and is designed to bring more professional judgment and common sense back into the process, which has become too much of a complex “black box” of applied mathematics. It supports the buildup method and CAPM calculations for any valuation date. It also gives you the flexibility to choose the start year for historical return data based on what segment of history you believe best offers a reasonable basis to make estimates of expected future returns. For a personalized demo of the platform, click here.

New book on valuing fractional interests

For almost 25 years, valuing fractional interests involving real estate has been the specialty of Dennis A. Webb (Primus Valuations). He is a real estate appraiser as well as a business valuation expert, and he has updated his approach, which is explained in his new book, Valuing Fractional Interests in Real Estate 2.0. The approach relies primarily on income methods using public limited partnership and REIT market returns. He presents the updated methodology by examining the methods in use today and understanding how and why they are replaced by or used in the new approach. He also stresses the importance of telling the story behind the valuation that makes sense to the user of your report. Webb also has developed a new online application, the Partner Value Expert (PVX), that embodies his new approach.

Global BV News

European goodwill impairment up 49% in 2020

Total goodwill impairment recorded by European-listed companies in the STOXX® Europe 600 increased for the third consecutive year, rising 49%, to €54.1 billion (bn) in 2020, according to the “2021 European Goodwill Impairment Study,” from Kroll. Spain had the highest aggregate amount of goodwill impairment in 2020, followed by the United Kingdom. Overall, the top three industries with the most significant increase in goodwill impairment amounts in 2020 are (in order of magnitude): financials and real estate, materials, and communications services

Valuation News Updates

Lisa Guo — Thu, 03 Feb 2022 03:13:41 GMT

Appellate court Knocks Out damages method for soybean farm

A CPA who specializes in damages used three ways to calculate damages to a Louisiana soybean farm caused by someone who was supposed to be checking for insects. The trial court accepted one of his methodologies, which measured damages based on yields from a neighboring farm.

Growing pains: On appeal, the defendants argued that the methodology was not appropriate because the Aultman case set the proper legal standard. That case says that, in general, the amount of damages for the loss of a growing crop is the average yield and market value of crops of the same kind, planted and cared for in the same manner and in the same area, less certain costs. The plaintiff countered by pointing out that the expert used what he felt was a relevant comparable and a methodology presented in Robert L. Dunn’s book, Recovery of Damages for Lost Profits.

The appellate court sided with the plaintiff, ruling that using a comparable is not consistent with precedent, i.e., the standard used in the Aultman case. The appellate court used an alternative methodology the expert had presented, which used the subject farm’s best yield over the past five years, which resulted in a lower amount of damages.

The case is Dettenhaim Farms, Inc. v. Greenpoint Ag, LLC, 54,162 (La.App. 2 Cir.) (Nov. 17, 2021). The full court opinion and case digest can be found on the BVLaw platform.

Damodaran posts second data update, explains implied ERP

An extensive amount of free data on risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and more can be found on the website of Professor Aswath Damodaran (New York University Stern School of Business), who generously posts updates each year. He does a series of posts on his blog based on these new data, and his second post examines the equity market and explains his “implied” ERP. This is a forward-looking method as opposed to the “historical” ERP. “The danger of poring over this historical data is that a focus on the past can blind us to structural changes in markets that can make the future very different from the past,” he writes. “To get a measure of what equity markets are offering in terms of expected returns, we are better served with a forward-looking and dynamic measure of these returns.” He calculates the implied ERP by backing it out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He calculates that to be 4.24% at the end of 2021. To that he adds the risk-free rate (1.51%, the 10-year T-bond rate on Jan. 1, 2022) to get the long-term annual expected return on stocks of 5.75%.

Damodaran updates his data once a year, so you need to be careful about using the data later in the year, particularly if there is a major shift or disruption in the market or the industry of your subject company.

Feedback wanted on company-level beta module for the Navigator

Use the ‘stay interview’ to keep good BV people, advises Borrowman

Many business valuation firms are facing a crisis in terms of staffing. In his latest newsletter, John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years, advises managers to use the “stay interview” to retain good employees. Use a “casual and conversational manner” to find out how employees are doing and whether there’s anything you can do as manager to better support them in their jobs. Borrowman offers a list of questions, such as “If you could change something about your job, what would that be?” and “What would you like to learn here?” But the important thing to do is to act on the responses you get. Otherwise, it may “put you on the road to the exit interview that you wanted to avoid in the first place,” he says. To read more of his observations, click here.

Extra: You can read about the “perfect storm” in staffing at business valuation, forensic, and litigation services (BVFLS) firms in an article in the January 2022 issue of Business Valuation Update.

Apple is still the most valuable brand, per Brand Finance study

Apple has retained the No. 1 spot on the list of the world’s most valuable brands, according to the “Brand Finance Global 500 Report 2022.” The pandemic has boosted its value as people relied more on technology during the crisis. Plus, Apple has been investing in products and services that go beyond small devices. Amazon and Google are second and third in brand value, respectively. Technology remains the most valuable industry, while retail overtook banking for second place. On the rebound from COVID-19 are airlines (brand values are up after two years of double-digit declines) and hotels. The fastest growing brand is TikTok, and the world’s “strongest” brand is WeChat (for the second year in a row), says the study.

Sponsorships available for the AAML/BVR National Divorce Conference

Want to reach out to divorce attorneys? They will be in Las Vegas and online at the 2022 AAML/BVR National Divorce Conference, brought to you by the American Academy of Matrimonial Lawyers (AAML) and Business Valuation Resources (BVR). It will be held September 18-20, and sponsorships are now available. Attendees have the choice of attending either on-site at the Venetian in Las Vegas or online. What makes this conference unique is that teams of valuation experts and matrimonial attorneys present the sessions, so you get two key perspectives on the most pressing issues. The full agenda will be available soon. To see different ways to stand out to attorneys, click here.

Reminder: Pepperdine’s private cost of capital survey is now open

Forty percent of valuation experts use the annual “Pepperdine Private Capital Markets Report” for estimating small private-company cost of capital, according to a BVWire poll. To produce the report, Pepperdine conducts an annual survey of expected rates of return of investors and lenders with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is here.

Global BV News

OECD issues updated transfer pricing guidelines

A new chapter on financial transactions is in the 2022 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which are widely followed. The new edition reflects the post-2017 revision by the Organisation for Economic Co-operation and Development (OECD) of its profit-split guidance as well as guidance for tax administrations regarding hard-to-value intangibles. The OECD is headquartered in France

Valuation News Updates

Lisa Guo — Thu, 27 Jan 2022 03:11:37 GMT

Details start to emerge about the Prince estate valuation

One of the tricky assets to value in the Prince estate was the rock star’s name and likeness. The estate pegged the value at $3.1 million while the IRS came up with double that amount ($6.2 million). The valuation of a name and likeness is not something the average appraiser can do, so it requires the help of a specialist.

Third-party expert: BVWire has learned that celebrity licensing expert Mark Roesler (CMG Worldwide) worked on the name and likeness valuation on behalf of the Prince estate. The case has settled (see coverage here), so the two valuations will not go head to head in the courtroom. But we do know that Roesler’s valuation approach was similar to what he did for the Michael Jackson estate, and his name and likeness valuation prevailed in that case, which went to trial.

A person’s name and likeness is part of the concept of “right of publicity,” a form of intellectual property that not only covers a person’s name and image, but also his or her signature, voice, and so on. It is an issue that often is overlooked because of a lack of awareness. The concept does not only apply to famous people—the average person has the right of publicity, and it has a value.

Experts in other areas of intellectual property valuation should not assume they can take on a right of publicity engagement and perform a defensible valuation. True, it uses some fundamental valuation techniques, but it requires the judgment and experience of someone who works with the right of publicity regularly. Therefore, in the Prince case, the estate brought in Roesler, who has 40 years of experience with international licensing and rights management for over 1,000 famous individuals in the sports, entertainment, music, and historic fields.

Roesler explained his methodology for the Jackson case during a BVR webinar (recording available), and, since he used the same basic approach in the Prince case, one can learn some interesting insights on this type of valuation. Also, Roesler co-wrote a chapter on the topic in BVR’s Comprehensive Guide to Economic Damages, 6th edition (Chapter 26, “Damages and Right of Publicity Infringements”).

Appeals court OKs one discount, KOs another in divorce matter

In a California divorce matter, the husband’s expert applied two discounts to the valuation of the wife’s one-half interest in his business: one discount for possible future taxes and one for a discount for lack of marketability (DLOM). The wife’s expert did not apply either of these discounts. On the DLOM, her expert contended that the buy-sell agreement created a market for the stock, and, therefore, no DLOM was appropriate. On the discount for possible future taxes, the wife’s expert did not apply it because he contended that the taxes were neither immediate nor specific. A third expert had been hired (from PricewaterhouseCoopers), who sided with the fair market value opinion of the husband’s expert. The trial court ruled in favor of the husband’s valuation, and the wife appealed. The appeals court upheld the DLOM, saying that it was supported by substantial evidence (using restricted stock studies) but concluded that the tax liability was erroneously accounted for and remanded the case back to the trial court to adjust the valuation accordingly.

The case is Harvey v. Harvey (In re Michael S.), 2021 Cal. App. Unpub. LEXIS 7867; 2021 WL 5934472, and the case digest and full opinion are available on the BVLaw platform.

This year’s Pepperdine private cost of capital survey is now open

Extra: David Coffman (Business Valuations & Strategies PC) has used the Pepperdine reports in hundreds of valuations without being subject to any significant challenges. He will conduct a webinar, Valuing Small Owner-Operated Business, today, Wednesday, January 26.

Latest editions of two BVR yearbooks now available

Over 70 articles and hundreds of news items are included in the Business Valuation Update Yearbook, 2022 edition. You’ll read about the latest approaches and techniques, takeaways from the leading conferences, key court decisions, and changes in regulations and standards in the profession. A companion guide, the Business Valuation Case Law Yearbook, 2022 edition, represents BVLaw’s analysis of the most noteworthy court decisions of the past year in the areas of business valuation and damages. It also contains the court opinions and a case listing by state/jurisdiction, court, and case name, followed by a short description of the key valuation issue of each case.

Note: You already have these two new resources in your BV library if you are a subscriber to BVR’s Digital Library or BVResearch Pro.

Intangibles, ESG, and digital assets are on the FASB’s new research agenda

In response to feedback received in an agenda consultation, the Financial Accounting Standards Board (FASB) announced that its research agenda now will include the following projects (in no particular order):

· Accounting for exchange-traded digital assets and commodities. Accounting and disclosure for a subset of these assets and commodities will be explored.

· Accounting for and disclosure of intangibles. Potential improvements will be considered for items including accounting and disclosure of intangibles, including software costs, internally developed intangibles, and research and development.

· Hedge accounting, Phase 2. Stakeholder feedback will be sought to further align hedge accounting with risk management activities beyond the targeted changes made in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

· Accounting for financial instruments with environmental, social, and governance (ESG)-linked features and regulatory credits. ESG issues remain high on the list of investor priorities.

· Accounting for governments grants, invitation to comment. Feedback will be sought on whether the requirements in IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, should be incorporated into US GAAP.

· Agenda consultation. Feedback will be solicited on the financial reporting issues that FASB should consider adding to its agenda and the priority of those issues.

Goodwill project: An important but controversial project by the FASB concerns how to account for certain identifiable intangible assets acquired in a business combination. In late 2020, the FASB tentatively decided to reintroduce the amortization of goodwill over a 10-year period. The next step in the project is to issue an exposure draft for public comment. The valuation community is united in its opinion that, from a user perspective, the benefits of the transparency and information the current impairment model provides outweigh the costs.

Ownership transition in the middle market

There are an estimated 200,000 middle-market businesses in the U.S., which represent about one-third of private-sector GDP and close to 50 million jobs, according to the National Center for the Middle Market. The U.S. middle market is defined as companies with annual revenues between $10 million and $1 billion. Many of these middle-market businesses are privately owned and managed by the founding entrepreneurs along with their family members. More than three-quarters (77%) of these firms have either experienced an ownership transition in the past five years or expect one in the next five years. Valuation experts can play an important role in exit planning for these firms.

Global BV News

Family firms in Italy weathered the COVID-19 crisis well

A study of listed firms in Italy found that family firms fared significantly better than other firms during the COVID-19 pandemic. They experienced both higher daily stock returns and operating profitability, especially in the absence of relevant minority investors and with multiple family shareholders in the firm’s equity, says the study, which is in the February 2022 issue of the Journal of Banking and Finance. Outperforming their nonfamily counterparts was especially true in labor-intensive industries, as family firms exhibited a higher labor productivity and were better able to generate revenues out of their asset base. The study is “Family Ownership During the COVID-19 Pandemic,” and the authors are Mario Daniele Amore, Valerio Pelucco, and Fabio Quarato.

Valuation News Updates

Lisa Guo — Thu, 20 Jan 2022 03:09:18 GMT

Prince estate and IRS settle valuation dispute

The IRS and Comerica Bank and Trust, the administrator of the estate of rock star Prince, have agreed to settle their dispute and agree on an estate value of $156.4 million, according to settlement documents submitted in the case. The agreed upon valuation is almost double the estate’s valuation ($82.3 million) and close to the amount the IRS had determined ($163.2 million). Also, the IRS dropped a $6.4 million accuracy-related penalty it had levied on the estate. The matter had been set for trial but that has been cancelled.

Assets in dispute: The estate consists of real estate, music rights, Prince's name and likeness, and other assets. The IRS and Comerica settled on the real estate values last year, so the trial was to focus on the valuations of the other assets. Notable assets with disputed valuations included two entities: NPG Records, Inc. (Estate: $19.5 million; IRS: $46.5 million) and NPG Music Publishing LLC (Estate: $21 million; IRS: $36.9 million). The value of Prince’s name and likeness was also in dispute, with the estate putting the value at $3.1 million versus the IRS expert’s valuation of double that amount ($6.2 million). The settlement documents do not indicate the agreed upon valuations by asset type.

After receiving a notice of deficiency from the IRS (for $32.4 million plus penalties and interest) in 2020, the estate administrator filed a petition in Tax Court and the case was scheduled for this March. According to the settlement documents, the heirs to the estate indicated that minimizing the amount of estate taxes was “not their primary interest” and they expressed a “strong desire” to settle the matter and close the estate.

The case is: Estate of Prince R. Nelson, Deceased, Comerica Bank & Trust, N.A., Executor v. Commissioner of Internal Revenue, Tax Court, Docket 11442-20.

New case points up valuation perils in buy-sell agreements

From a valuation standpoint, the lack of a buy-sell agreement—or one with a valuation provision that’s poorly drafted—can result in costly litigation and a painful falling out between business partners and/or family members. A recent case highlights what happens when a buy-sell goes bad.

New case: A company’s shareholder agreement included a buyout provision with a price based on a fixed per-share value. When the relationship of the owners deteriorated, the company exercised its buyout option at the fixed price, which had not been updated. Lawsuits were filed, and the court ruled that the shareholder agreement is enforceable and the fixed price is what should be paid—leaving someone claiming that person got the short end of the stick [Estate of Connie Collins v. Tabs Motors of Valley Stream Corp., 2021 NY Slip Op 32438(U)], which is available on the BVLaw platform).

This case is not uncommon—many buy-sell agreements do not adequately address the issue of valuation when an owner exits the firm. This represents an opportunity for valuation experts to review clients’ buy-sell agreements to identify potential problems, which could mean recurring business for the practice.

Our thanks to the attorneys at Farrell Fritz, who tipped us off to this case, which was featured on its blog, “New York Business Divorce.” Two of the firm’s attorneys, Peter J. Sluka and Peter Mahler, represented the prevailing parties in the case.

Extra: The February 2022 issue of Business Valuation Update shows how to turn this opportunity into recurring business—including the best way to design a valuation provision in a buy-sell agreement.

Damodaran posts his data update for 2022

Each year, Professor Aswath Damodaran (New York University Stern School of Business) generously posts a great amount of data on his website that include risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. He does a series of posts on his blog based on these new data, and the first post explains some of these data and gives the background of his annual analysis.

Implied ERP at 4.9%: A favorite topic of Damodaran is the ERP, and he uses a forward-looking method he calls the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP to be 4.9% as of Jan. 1, 2022, and he reports the year-end estimates going back to 1960.

Damodaran does not update the data during the year, so his next update will be at the beginning of 2023. Therefore, you need to be careful about using the data later in the year, particularly if there is a major shift or disruption in the market or the industry of your subject company.

Poll: Some BVers say ‘no way’ to testifying in court

About one in five (18%) of business valuation experts who do divorce cases have no interest in testifying in court, according to a recent poll. During a BVR webinar on valuations for divorce, the audience was asked: Have you testified in a divorce matter? There were 139 responses, and half of them said, “Yes”; a third said, “No, but I am interested in doing so”; and 18% said, “No, and I am not interested.” Josh Shilts and his colleague, Jeff Robison, both with the Florida-based firm Shilts CPA, gave some very practical advice about testifying in court in a divorce matter, raising the confidence level of those who have testified in court. For those who have not testified—and especially those who are interested in doing so—Shilts says it is not a “life or death” situation. If your valuation does not prevail, it’s not the end of the world. Yes, it can be nerve-wracking and you need a thick skin, but he and Robison shared ways to prepare and present your valuation that will increase your confidence and improve your chances in court.

Kroll reviews 2021 capital markets

“Capital Markets Insights—2021 Year in Review” offers a look at the past year in terms of notable S&P 500 performers, DJIA performers, M&A deals, PE deals, IPOs, SPACs, bankruptcies, cost of capital, and private markets. Here are a few highlights:
Kroll is maintaining its recommended U.S. equity risk premium (ERP) of 5.5%, developed in conjunction with a “normalized” 20-year yield on U.S. government bonds of 2.5% as a proxy for the risk-free rate, implying an 8.0% (2.5% + 5.5%) “base” U.S. cost of equity capital estimate as of Dec. 9, 2020 (this estimate held constant through 2021);
LTM EBITDA multiples decreased a median 2.1x for the major indices since Dec. 31, 2020;
The EBITDA multiple for the Nasdaq Composite index increased 3.8x (S&P 500 decreased 2.0x, and the DJIA decreased 2.7x) since Dec. 31, 2020;
U.S. companies raised a record $302 billion through stock market listings;
Over 700 SPACs went public in 2021, more than five times the number from the year 2020; and
The CBOE Volatility Index (VIX) closed at 17.22 on Dec. 31, 2021, a 24% decrease since Dec. 31, 2020.
Perfect pair: VAB6 and UBV6

Two important books are in the wings for an early 2022 release: Valuing a Business, 6th edition (VAB6), from the American Society of Appraisers and Understanding Business Valuation, 6th edition (UBV6), from Business Valuation Resources. These books complement each other in that the former, by the late Shannon Pratt, gives you a heavy dose of valuation theory, while the latter, by Gary Trugman (Trugman Valuation), shows you how to apply the theory with practical examples from actual engagements and sample valuation reports, written in an easy-to-understand style. Both books are scheduled for release this March and are now available for preorder—just click the links above.

Dates set for AAML/BVR National Divorce Conference

If you do any valuation work for divorce, you do not want to miss the National Divorce Conference, brought to you by the American Academy of Matrimonial Lawyers (AAML) and Business Valuation Resources (BVR). It will be held Sept. 18-20, 2022, and you have your choice of either attending on-site at the Venetian in Las Vegas or you can attend the full event online. What makes this conference unique is that teams of valuation experts and matrimonial attorneys present the sessions, so you get two key perspectives on the most pressing issues. Up to 17.5 CPE/CLE credits are available. The full agenda will be available soon. For more information and to register, click here.

Global BV News

IASB’s Barckow on divergence with FASB regarding goodwill impairment

At the recent AICPA and CIMA Conference on current SEC and PCAOB developments, Andreas Barckow, chair of the International Accounting Standards Board (IASB), discussed the board’s key projects, one of which is goodwill impairments. In the U.S., the Financial Accounting Standards Board (FASB) has tentatively decided to reintroduce an amortization model for goodwill with a 10-year default amortization period. The IASB is leaning toward a different conclusion, that is, retaining the impairment approach with some modifications. “Given that our pronouncements on business combinations are largely converged, an important consideration is to investigate how we can stay aligned,” said Barckow. A copy of his full speech from the conference is available if you click here.

Preview of the February 2022 issue of Business Valuation Update

Here’s what you’ll see:
“Typical Way to Estimate Long-Term Growth Is ‘Flat Wrong,’ Says Grabowski” (BVR Editor). New research calls into question the common practice of using long-term real GDP growth plus expected inflation in terminal values.
“New Version of the NICE DLOM Method Now Freely Available” (BVR Editor). William Frazier (Weaver) has a new version of his nonmarketable investment company evaluation (NICE) method for estimating a discount for lack of marketability (DLOM). An Excel template for the revised version, aptly named NICE-R, is now available.
“New Case Points Up Opportunity for Buy-Sell Valuations” (BVR Editor). A recent court case illustrates that many buy-sell agreements do not adequately address the issue of valuation when an owner exits the firm. This article gives some advice as to how to turn this opportunity into recurring business—including the best way to design a valuation provision in a buy-sell agreement.
“Valuation Lessons Learned From the Gaming Industry” (BVR Editor). No matter what type of firm you are valuing, there are several lessons to be learned from the gaming industry. Several industry experts from different markets—Las Vegas, Colorado, and Illinois—shared some fascinating insights into the business of gambling including how these firms operate and how they’re recovering from the pandemic.
“Reader Question: How Much Is a Discount for Lack of Voting Rights?” (BVR Editor). In response to a reader question, we put the BVResearch Pro platform to work. It revealed what the studies, valuation textbooks, and court cases say about a discount for nonvoting stock—more than enough material to estimate and substantiate an opinion.
“Questions a Trier of Fact Will Ask About Your Valuation” (BVR Editor). The fear of every valuation analyst is to be unprepared to answer a question in a deposition or on the witness stand. Here are some questions a judge or attorney will likely ask, either directed to themselves when reviewing your report or directly to you.

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.

Valuation News Updates

Lisa Guo — Thu, 13 Jan 2022 03:07:54 GMT

New Year’s resolution: Give back to the BV profession

The future of the valuation profession depends on the contributions that practitioners make to the advancement of the profession. Practitioners contribute to the profession in a number of ways, such as:
Volunteering on a board, committee, or working group;
Teaching a course;
Writing an article or book;
Speaking at a conference; or
Conducting a webinar.

The ASA, AICPA, and IACVS are always in need of practitioners to serve on committees and working groups related to education, guidance, or standards matters. The Appraisal Foundation often has opportunities to volunteer on boards and committees, and so does, on the global front, the International Valuation Standards Council (IVSC). BVR is always looking for authors and speakers for its publications, books, webinars, and conferences (send an email to andyd@bvresources.com). In addition to helping the profession, the more you volunteer, write, teach, or speak, the more you learn about your profession. What’s more, you can be on the cutting edge of new guidance that your committee or work group is developing.

If you haven’t yet contributed to the profession, consider doing so in 2022!

Silver lining to Vinoskey ESOP appeal decision

In the well-publicized Vinoskey ESOP case (our latest coverage is here), the appellate court affirmed the district court in deciding that the company owner had extensive knowledge about the company and its prior valuations, and, thus, it was plausible to infer that “something was off.” There was no clear error in the district court finding that the owner violated ERISA.

Forgiven debt offset: However, the appellate court allowed an offset to damages for the debt the owner forgave. The American Society of Appraisers had filed an amicus brief in the appeal, and one issue it raised was that such debt forgiveness should be considered when assessing damages as per principles generally applied in valuation-related damages calculations.

The case is Walsh v. Vinoskey, 2021 U.S. App. LEXIS 35952, and a case analysis and full opinion are available on the BVLaw platform.

Survey shows the graying of the appraisal profession

Two-thirds of appraisers in the U.S. are age 55 and older, according to a survey The Appraisal Foundation (TAF) and the Appraisal Institute (AI) conducted. About 20% are aged 45 to 55 and just 10% are aged 35 to 44. Survey respondents were appraisers from different disciplines, not just business appraisers. In terms of gender, “women and non-white ethnicities are underrepresented among the appraisal profession,” the survey results say. Only 32% of appraisers reported identifying with the female gender. A mere 4.4% of survey responses were from Black or African-American respondents (although these groups make up 13.4% of the U.S. Census). Hispanic, Latino, or Spanish origin were even less represented in the survey, at 3.7%, even though they make up 18.5% of the U.S. Census. TAF and AI plan to use these survey results when developing future strategies and initiatives. More information on TAF’s diversity, equity, and inclusion initiatives can be found if you click here.

Extra: An article by Jim Alerding (Alerding Consulting) in the January 2022 Business Valuation Update spotlights the staffing problems BV firms are facing.

Imaging centers: If you’ve seen one, you haven’t seen them all

If you value the local hardware store, the next one you value is likely to look pretty much the same. But, if it’s a diagnostic imaging center, the differences between one facility and another, or one market and another, can be quite substantial. This is due to a number of variables in imaging center content and local-area competitive influences on the business, according to Douglas Smith (Phase 4 Radiology Business Strategies LLC), the author of a chapter on imaging centers in the BVR Guide to Ancillary Healthcare Services Valuation. He will conduct a webinar today, January 12, on valuing imaging centers.

There have been many changes to the healthcare landscape that impact valuation, such as referral patterns. For example, upon review of historical referring physician metrics, the valuation expert learns that material numbers of referrals to the subject entity have come from private-practice physicians who have recently become employees of a hospital with its own imaging centers. The expert would have to assess to what degree, if any, historical referrals to the subject entity will continue in the future.

Updated ‘Stout Restricted Stock Study Companion Guide’ available

The most widely used restricted stock transaction database for providing empirical support for a discount for lack of marketability (DLOM) is the Stout Restricted Stock Study (formerly FMV Opinions). The 2021 version of the “Stout Restricted Stock Study Companion Guide” is now available. It reflects updated tables and graphs that contain new transactions, and it also addresses higher levels of volatility due to COVID-19 and how utilizing the VIX adjustment may now be appropriate depending on the valuation date. The study is updated quarterly and contains over 750 screened transactions with up to 60 data fields. The database includes the Stout Calculator, which makes it easy to use Stout’s methodology and determine a DLOM driven by the financial characteristics of your subject company, as well as the volatility of the market. This is the preferred analysis as opposed to a simple listing of all the studies and their average discounts and then estimating a DLOM from these benchmark averages. To download the new “Stout Restricted Stock Study Companion Guide,” click here.

Free replay of Kroll’s Alternative Investments Conference 2021

Hot-button global valuation and regulatory issues facing alternative asset managers and investors were among the topics discussed at Kroll’s 15th Annual Global Alternative Investments Virtual Conference. You can access recordings of all the sessions if you click here. Industry experts shared their perspectives on the alternative fund sector, with a focus on valuation, risk, governance, and fund operations. Alternative investments can include hedge funds, private equity and venture capital, real estate and offshore fund vehicles, commodities, and the like.

Global BV News

CBV Institute releases its 2021 journal

The Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO) and standard-setter, puts out an excellent journal each year, and the 2021 edition is now available. The Journal of Business Valuation, 2021 edition, includes articles on how to maintain independence as an expert, causation and financial losses, COVID-19 impact on valuations, forecast validation for economic losses, and the challenges of litigation engagements for smaller businesses. Some very interesting reading here! The journal is on the BVResearch Pro platform, a clearinghouse of 20,000 BV-related articles, books, court cases, webinar transcripts, and much more.

IVSC gets two new members

The newest members of the International Valuation Standards Council (IVSC) are:

· The Union of Accountants, Auditors and Financial Workers of the Federation of Bosnia and Herzegovina (UAAFWFBH), which is a nongovernmental, nonprofit professional association, membership in which is mandatory for all certified professional accountants in that area; and

· Sparta & Co., with offices in Istanbul and London, which is a strategy and corporate finance company that provides international M&A advisory services.

The IVSC’s member and sponsor network includes more than 170 organizations, including the leading valuation professional organizations (VPOs), valuation service providers, government and regulatory bodies, academic institutions, and the users of valuation professional services.

Valuation News Updates

Lisa Guo — Thu, 23 Dec 2021 03:06:13 GMT

Updated NICE DLOM model available for free download

During a recent BVR webinar, Will Frazier (Weaver) did a demo of the revised version of his nonmarketable investment company evaluation (NICE) method for estimating a discount for lack of marketability (DLOM). An Excel template for the revised version, aptly named NICE-R, was given to the audience along with a user’s guide—and they are now available on his website if you click here.

Court test: The year 2020 saw the first use of the NICE method in Tax Court, in Grieve v. Commissioner. The taxpayer brought in Frazier as the second valuation expert for trial, and his valuation was only slightly lower than that of the taxpayer’s original expert. The court accepted the valuation of the original expert and rejected the approach by the IRS valuation expert. While the court did not adopt the NICE approach, it was not critical of it. Neither was the IRS expert, who agreed that it was a “reasonable approach.”

The method is not designed for operating businesses. As its name implies, it is designed specifically for determining the fair market value of equity interests in closely held investment entities, such as family limited partnerships, S corporations, and limited liability companies. While NICE is referred to in the context of estimating a DLOM, it does not determine DLOM as a separate and distinct amount. Instead, it is an income-based method that embodies the DLOM as well as discounts for control and lack of liquidity in the discount rate and views them as investment risks.

Use of DCF for damages survives challenge

In an antitrust lawsuit in Nevada, the expert for a company that alleges it was forced to close due to anticompetitive practices used the discounted cash flow (DCF) method to calculate damages. The court granted a motion to strike the expert’s testimony on the grounds that the DCF was too speculative. Upon reconsideration, the court decided that the DCF was allowable in this case and, therefore, the testimony should be reinstated and presented to the jury for use in determining damages. In allowing the DCF, the court noted: “Relying on future lost profits does not eliminate the rule that a party may not recover both future lost profits and going-concern value.”

The case is V5 Techs., LLC v. Switch, Ltd., 2021 U.S. Dist. LEXIS 216426; 2021 WL 5237228. An analysis and full opinion are available on the BVLaw platform.

Damodaran on the CEO mismatch

Assessing management is a key part of the valuation analysis of a subject company. Interesting reading from the “dean of valuation”: Professor Aswath Damodaran (New York University Stern School of Business) talks about why he feels that traditional thinking about what makes a great CEO is flawed. “There is no one template that works for all companies,” he writes in a blog post, citing research from the Harvard Business School and McKinsey that leans to a “one-size-fits-all great CEO model.” For example, companies have life cycles, and they go through different stages—from startup to decline—and the CEO will need a different mindset for each stage.

Ask questions: For the valuation analyst, if, during the management interview, you get the impression that the CEO is a visionary, is that good or bad? If it’s an early-stage company, it may be a good fit because the CEO needs to think outside the box in terms of new ideas, markets, and ways to attract investors. But, if the company is in a mature stage, a visionary may not be a good fit—the mindset needs to be on maintaining market share, fending off competitors, and other tactics for “trench warfare.” The analyst’s questions should be geared toward ferreting out whether management is up to the task. If not, that may mean adjusting company-specific risk.

This phenomenon may be more noticeable in closely held companies or family-run firms where top management tends to stay entrenched as the company goes through the various stages of its life cycle.

Takeaways from an interview with Duff & Phelps

The International Valuation Standard Council (IVSC) recently interviewed David Larsen, Srividya Gopal, and James Gavin, managing directors at Duff & Phelps, A Kroll Business, about their perspectives on current issues facing the valuation profession. Here are some takeaways:
· One result of the pandemic is that the importance of valuation has increased significantly, as has the need for experienced and qualified valuation professionals;
· Over the past two decades, as capital deployed by the alternative asset industry has dramatically increased, the need to institutionalize valuation practices and processes has expanded;
· Great strides have been made to align global valuation standards, such as U.S. GAAP and the International Financial Reporting Standards (IFRS), which have unified most requirements as it relates to, for example, fair value measurements and business combinations;
· More work is needed to find a reliable and consistent measure of the impact of environmental, social, and governance (ESG) initiatives; and
· From a corporate boardroom perspective, there is certainly a lot more awareness of the need for independent valuations or fairness opinions.

You can read the full interview if you click here. It was also mentioned that the Duff & Phelps brand will transition fully to Kroll by the end of 2021.

Reminder: 20% off the 2022 Business Reference Guide expires December 31

The 2022 edition of the Business Reference Guide (BRG) by Tom West is now available for preorder at a 20% savings if you click here. The discount offer expires December 31. Now in its 32nd year, the guide contains the latest industry-related information including “rules of thumb,” pricing tips, benchmarking information with comparison data, industry resources, and general industry data on nearly 600 types of businesses. There is also an online version with a fully searchable database, and it includes the print version of the guide.

Global BV News

CFA Institute debuts Kroll’s global cost of capital summary edition

The CFA Institute Research Foundation has put out the first edition of the “International Guide to Cost of Capital (IGCC) Summary Edition” from Duff and Phelps/Kroll. This 173-page work is an abridged version of the research and data that are available on the D&P/Kroll website and is the result of a new long-term partnership between the foundation and D&P/Kroll for the annual publication of the IGCC. The publication examines the important difference in risk characteristics of investing in various countries and has the following seven chapters:

1. “International Cost of Capital Overview”;

2. “Strengths and Weaknesses of Commonly Used Models”;

3. “International Equity Risk Premia”;

4. “Country Yield Spread Model”;

5. “Relative Volatility Model”;

6. “Erb-Harvey-Viskanta Country Credit Rating Mode”; and

7. “Firm Size and the Cost of Equity Capital in Europe.”

The publication is free of charge, and you can download it if you click here.

Free webinars as lead-in to IVC conference

The first in a series of free webinars leading up to the International Valuation Conference (IVC) has been posted, and you can watch it if you click here. The discussion focused on upcoming changes in valuation standards and practice, and the panelists include Mark Zyla (Zyla Valuation Advisors), Paakow E. Winful (TAQEEM), and Johnnie White (ASA). The IVC conference is scheduled for Oct. 3-5, 2022, in Riyadh, Saudi Arabia. The theme will be “The Future of the Profession,” and the agenda (not yet finalized) will include topical roundtable discussions, multidiscipline workshops, and training sessions. This conference is held every two years and is supported by the IVSC, ASA, China Appraisal Society, and many other national and international valuation organizations.

Valuation News Updates

Lisa Guo — Thu, 16 Dec 2021 03:04:06 GMT

BV luminaries celebrate Festivus

What are the bugaboos of leading BV practitioners? For Roger Grabowski (Duff & Phelps/Kroll), it’s errors he sees in estimating long-term growth rates—he contends that analysts should not be using long-term real GDP growth plus expected inflation. For Chris Mercer (Mercer Capital), it’s analysts who cling to the myth that the “typical” range of restricted stock discounts is from about 25% to 45%, with an average of about 35%. For Jay E. Fishman (Financial Research Associates), it’s valuation experts who fail to realize their limitations and do not reach out for specialized help. These three luminaries also tackled some “grievances” from the audience in a lighthearted Festivus-themed Power Panel webinar (a recording will be available shortly). Unfortunately, there was no time for the final Festivus tradition—the Feats of Strength. Maybe next time!

New toolkit in development for active/passive appreciation

During a BVR webinar, Ashok Abbott (West Virginia University) discussed his recent peer-reviewed paper that explains his methodology for separating active from passive appreciation of business assets in a divorce context. His methodology involves identifying significant economic environmental factors (market forces) in an industry and measuring their relative contribution to growth in revenues, which requires statistical analysis. An audience member made the comment: “BVR should develop an automated solution for this.” A good idea! So BVR and Dr. Abbott are developing such a solution that will include a calculator, economic data (on a national level), and a user’s guide. The guide will include a plain-language explanation of the methodology, which will help the user explain it to the client or trier of fact (a major challenge when using a model of this type). A beta version is expected during the first quarter of 2022, so stay tuned!

The Nelson Tax Court case ‘has it all’

An appellate court recently affirmed the Nelson Tax Court case, which “has it all” in terms of valuation issues, said Barry Sziklay (Friedman LLP) in his session at the New Jersey CPA Society’s Business Valuation and Litigation Services Conference. The issues in the case include:
Do the cost, income, and market approaches produce a control versus a minority level of value?
Are so-called guideline companies and closed-end funds truly comparable to the subject company?
Are restricted stock and pre-IPO studies useful to determine a DLOM?
Is the Mergerstat Review useful to determine a DLOC?
What is the relationship between tiered entities with regard to valuation discounts?

The case is Nelson v. Commissioner, T.C. Memo 2020-81, which an appellate court recently affirmed. An analysis and full opinion of both the original case and appellate court case are available on the BVLaw platform.

Impairments triggered by climate change

For the first time in a securities filing, Exxon Mobil Corp said that some of its oil and gas properties may face impairment due to climate change, according to a report in Reuters.

Now that we’ve hit year-end, companies will be examining whether there have been any triggering events over the course of the year, which could signal a need for asset impairment testing. Triggering events can include a number of different happenings, including adverse changes in legal factors, regulation, or business environment. It would not be a stretch to expect other oil and energy companies to experience triggering events related to climate change similar to what Exxon Mobil believes it may see.

Global BV News

Date set for international valuation conference in Riyadh

The 12th International Valuation Conference will be held Oct. 3-5, 2022, in Riyadh, Saudi Arabia. The theme will be “The Future of the Profession,” and the agenda (not yet finalized) will include topical roundtable discussions, multidiscipline workshops, and training sessions. This conference is held every two years and is supported by the IVSC, ASA, China Appraisal Society, and many other national and international valuation organizations.

Preview of the January 2022 issue of Business Valuation Update

Here’s what you’ll see:

· “BV Year in Review 2021: End of an Era” (BVR Editor). A recap of significant new ideas and developments as reported in over 70 articles and hundreds of news items in the pages of Business Valuation Update during 2021.

· “Colleagues Pay Tribute to Shannon Pratt” (BVR Editor). A few words of tribute and remembrances about Shannon Pratt, who passed away recently at age 88.

· “BVLaw Review: The Top Valuation Cases of 2021” (BVR Editor). Here is our pick for the state and federal court decisions that enhanced our understanding of valuation issues as they arose in a litigation setting during 2021

· “A Closer Look at the ‘Perfect Storm’ in BVFLS Staffing” (Jim Alerding, CPA/ABV, Alerding Consulting LLC). A vigorous discussion has been underway about the demand and supply issues related to staffing at business valuation, forensic, and litigation support (BVFLS) firms.

· “Avoid This Mistake When Using an Exit Multiple in the Terminal Year” (BVR Editor). There is nothing wrong with using exit multiples on the terminal year of a DCF, but the devil is in the details.

· “Final Version of Global Business Valuation Glossary Released” (BVR Editor). The International Valuation Glossary—Business Valuation has been completed, and a final version has been released. The prior glossary (from 2001) needed an update because new terms have gained traction and become more popular in the market and in practice.

· “Vertical IQ Enhances Its Industry Research Platform” (BVR Editor). Audience Q&As from a webinar on the Vertical IQ industry research platform. The addition of behind-the-paywall industry news from LexisNexis will enhance the platform’s industry news feature.

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.

To stay current on business valuation, check out the January 2022 issue of Business Valuation Update.

Valuation News Updates

Lisa Guo — Thu, 09 Dec 2021 03:02:50 GMT

Incompetent valuation Knocks Out jury verdict

The jury’s verdict in an eminent domain trial could not stand because the jury relied solely on the valuation the expert for the Pennsylvania Department of Transportation (PennDOT) did, “which was incompetent.” The expert limited the damages to the partial taking of the property and did not take into account the after-taking damages to the remaining property, a hotel. Further, the trial court erred in denying the condemnee’s motion for a new trial “because the after-taking valuation of the property offered by PennDOT’s expert was not competent or based on evidence in the record.” As a result, the judgment was reversed and remanded for a new trial.

The case is State Route 00700, Section 21H v. Bentleyville Garden Inn, Inc. (In re Condemnation by DOT), 2021 Pa. Commw. LEXIS 562; 2021 WL 4483462, and you can read a case analysis and the full opinion on the BVLaw platform.

Poll: Most business valuers are generalists

During a recent webinar, the audience was asked: Do you specialize within a particular industry? Three-quarters of respondents said that they are generalists and have little or no industry specialization. One in five (20%) said that they do specialize and mainly work in a few (from two to five) industries, and 6% said they mainly work in one industry. The webinar was a free walk-through of the Vertical IQ industry research platform, and 70 audience members responded to the poll.

Strong LEI performance continues, reports BVR’s EOU

In October 2021, the U.S. Leading Economic Index (LEI) rose 0.9%, to 118.3 points, reports the Economic Outlook Update (EOU), published by Business Valuation Resources (BVR). The report notes that, following the rise, the U.S. LEI broke its previous record high reached in September 2021. “The increased pace now suggests that the economy is projected to grow in 2022 and perhaps gain some momentum into the final months of the year,” the report says. The Conference Board now forecasts real GDP growth to reach 5.0% for the fourth quarter of 2021 and 2.6% for the first quarter of 2022. The 52-page Economic Outlook Update for October 2021 contains expansive research from leading authoritative resources, which you can use in your valuation reports as long as you give proper attribution. To learn more, visit bvresources.com/eou.

‘Author’s Notes’ highlight Trugman’s new book

Jurisdictional Exception

.10 If any part of this statement differs from published governmental, judicial, or accounting authority, or such authority specifies valuation development procedures or valuation reporting procedures, then the valuation analyst should follow the applicable published authority or stated procedures with respect to that part applicable to the valuation in which the member is engaged. The other parts of this statement continue in full force and effect (Interpretation No. 1 [VS sec. 9100 par. .01-.89]).

AUTHOR’S NOTE: What does this really mean? If someone else makes the rules, and you are playing in their backyard, you have to follow their rules. For example, if you are engaged to value a business for a divorce in a state that excludes personal goodwill from equitable distribution, you cannot hide behind this standard to avoid carving out the personal goodwill piece of the pie. So, if you represent the nonbusiness owner-spouse, don’t think that you can get away with ignoring personal goodwill to pump up the value. Besides the fact that this is unethical (because advocacy for a client should never be done as an expert witness), the law of the land supersedes this standard. However, all other provisions of this standard will still apply.

Trugman’s book will be available in early 2022, and you can preorder if you click here. Note: If you are a subscriber to BVResearch Pro or BVR’s Digital Library, the book will be included with your subscription, so there is no need for you to preorder.

Preorder deal on the updated Business Reference Guide for 2022

The 2022 edition of the Business Reference Guide (BRG) by Tom West is now available for preorder at a 20% savings if you click here. Now in its 32nd year, it contains the latest industry-related information including “rules of thumb,” pricing tips, benchmarking information with comparison data, industry resources, and general industry data on nearly 600 types of businesses. There is also an online version with a fully searchable database, and it includes the print version of the guide.

Global BV News

KPMG issues fair value guide

Some potential changes are on the horizon in the world of fair value measurement. “Valuation practices continue to evolve, partly as a result of standard-setting activities and partly because of the increasing attention being paid to how climate-related risks (and opportunities) and reference rate (IBOR) reform affect the components of a valuation—e.g., cash flow projections and discount rates,” says KPMG. The firm has a new edition of its guide designed to help you apply the principles of IFRS 13 Fair Value Measurement and ASC Topic 820 Fair Value Measurement and understand the key differences between them. You can download a copy if you click here.

IACVS Note… this is an excellent resource for all that are involved with engagements requiring use of the fair value standards.

Valuation News Updates

Lisa Guo — Thu, 02 Dec 2021 03:01:26 GMT

BV pioneer and legend Shannon Pratt passes away

It is with deep sadness that we announce the passing of Shannon Pratt, who died over this past weekend at age 88. He contributed more to the development of the business valuation profession than any single individual. Armed with a vision, he published his first book in 1981 (Valuing a Business) and began the process of transforming a small group of untrained professionals into the true profession it is today. Along the way, Dr. Pratt would write many more books and articles, teach courses, and give hundreds of presentations—touching thousands with his wisdom as well as his humor and charm. Everyone in the business valuation profession owes him a great debt of gratitude.

Dr. Pratt was the founder of Business Valuation Resources, LLC (BVR), which continues to maintain his Pratt’s Stats database (now DealStats) along with providing other deal and market data, news and research, training, and publications. David Foster, BVR’s CEO, recalls: “I befriended Shannon first as a publisher, before I knew he was the leading voice of the young business valuation profession. At the time, though he was already known worldwide, he was new to our industry, but he took avid notes, listened and questioned carefully, and learned from all of us rapidly. He was always the first to share his start-up mistakes willingly, so we learned from him, too. When his health required that he sell BVR, he came back to our publishing community with generosity and kindness. He could have sold BVR elsewhere but felt strongly that he wanted to repay our early support—training his first hires, sharing war stories over martinis, and talking shop during endless doubles tennis matches. Shannon’s loyalty to this group of friends he made later in his life changed my life profoundly, and I remain forever thankful to him and to Millie and his family for trusting us.”

Ron Seigneur (Seigneur Gustafson LLP), who is also on BVR’s advisory board, adds: “What a legend our profession has lost with the passing of Dr. Shannon Pratt. Shannon was so kind and gracious to me in the early years when I got to know him as a friend and mentor, and he inspired me to take a deeper dive into business valuation as a profession. I hope we can all find ways to pay it forward to the next generation of valuation professionals who will continue to benefit from his many contributions.”

There will be many more words of tribute and remembrance, and we will share them in future issues.

Personal goodwill likely in martial estate in Wyoming divorce case

In Wyoming, personal goodwill is not part of the marital estate, but it’s likely that some was included in a recent case. The husband owned a business and valued it at $75,000, which was merely the appraised value of the firm’s assets (asset approach). The husband did not provide any testimony of a valuation expert at trial. The wife used an expert (a CPA and CVA) who used the capitalization of earnings approach to come up with a value of $308,000, which notably included all goodwill. Even though the husband argued that the goodwill was all personal goodwill, the court accepted the $308,000 valuation and an appellate court affirmed.

The case is Snyder v. Snyder, 2021 WY 115, and you can read a case analysis and the full opinion on the BVLaw platform.

New BV glossary’s title sets stage for more to come

The newly revised glossary of business valuation terms (see last issue’s coverage) also has a new title: International Valuation Glossary—Business Valuation. One reason for the new title was that the developers “wanted to set the stage for perhaps the publication of other international glossaries for other specialisms, such as real estate, where there is also a market need for consistently understood terminology,” says Muath Alkhalaf (TAQEEM, Saudi Arabia) in a video.

A working group made up of members of the American Society of Appraisers (ASA), Royal Institute of Chartered Surveyors (RICS), Saudi Authority for Accredited Valuers (TAQEEM), Canadian Institute of Chartered Business Valuators (CBV Institute), and the International Valuation Standards Council (IVSC) developed the revised glossary.

Trugman reveals the ‘easiest trap’ in a valuation engagement

BVWire has been getting a sneak peek at some of the revised chapters in the new, sixth edition of Understanding Business Valuation by Gary Trugman (Trugman Valuation). The book is known for its real-world examples and practical advice based on the author’s many years of experience. In one chapter, he reveals that the “easiest trap” to fall into in a valuation engagement is when the attorney asks the analyst for a ballpark opinion. “Next thing the analyst knows, the so-called ‘ballpark’ becomes an expert report without the analyst even realizing that it has been submitted to the other side in a litigation,” Trugman writes. Imagine yourself trying to explain to the court why you did a calculation of value when a full valuation engagement was called for.

What to do: To avoid this trap, the engagement letter and report must be crystal clear regarding what the valuation analyst will and will not do and what restrictions are placed on the use of the report, he advises.

Vertical IQ industry research platform to add news from Lexis/Nexis

Behind-the-paywall industry news from Lexis/Nexis will be added to the Vertical IQ platform that provides industry research for business valuations. During a free webinar, Bobby Martin, the platform’s CEO, told attendees that a new partnership with Lexis/Nexis will add curated, hand-picked news from subscription products, such as industry trade magazines, to the Vertical IQ platform, thereby adding to the already substantial amount of industry insights the platform provides. This enhancement comes on the heels of recently added U.S. Sector Profiles, which showcase a macro-level look at the major segments of the economy. Martin also revealed that future enhancements include more graphical presentations of industry drivers. During the webinar, veteran valuation expert Jim Ewart, who is a Vertical IQ user, joined Martin for a walk-through of the platform. You can watch a replay of the free webinar if you click here.

Global BV News

Free webcast of IVSC technical boards update

The chairs of the technical boards of the International Valuation Standards Council (IVSC) recently shared updates on the latest and planned future activities of their respective boards. Updates included details of recent changes to the International Valuation Standards and areas of focus based on the outcomes of the recent Agenda Consultation. The webcast was on November 8, and a complimentary replay is now available if you click here.

iiBV updates on-demand global BV core courses

BVR and the International Institute of Business Valuers (iiBV) have completed the current updates of their core Advanced Business Valuation course. The five e-learning modules qualify for iiBV 210, 211, 212, 213, and 214 credits, which align with the current International Valuation Standards from IVSC. The five modules are: Valuing Intangible Assets, Valuing Early-Stage Companies, Valuing Minority Interests, International Cost of Capital, and Black-Scholes Option Modelin

Valuation News Updates

Lisa Guo — Thu, 18 Nov 2021 02:58:00 GMT

Working group comments on new global BV glossary

A video has been posted that includes members of the working group that developed the International Valuation Glossary—Business Valuation, a revised version of a prior glossary published in 2001. This was a collaborative effort that began in May 2019 and involved several valuation professional organizations (VPOs) as well as other stakeholders. You can access a copy of the new glossary if you click here.

Key point: “We do not intend the glossary to be authoritative—rather a helpful tool and a precursor to a harmonization of terms,” says Lucas Parris (ASA, USA) in the video. Steve Choi (RICS, USA) adds: “If any term in this glossary conflicts with a published governmental, judicial, or accounting authority, precedence should be given to the use and interpretation of terms as they appear in applicable published authoritative guidance, given the purpose of the valuation.”

The prior glossary needed an update because new terms have gained traction and become more popular in the market and in practice, particularly with the introduction of fair value in IFRS and US GAAP and the increasing importance of intangible asset valuation.

Living document: It will certainly not be another 20 years before this new glossary gets updated. “The working group expects to revisit the glossary periodically and update it as needed, bringing in input from additional organizations beyond those listed in the glossary to promote ever wider use of the document,” says Alexander Aronsohn (IVSC, UK).

The other members of the working group are Catalina Miranda (chair; CBV Institute, Canada); Jeffrey Tarbell (ASA, USA); Muath Alkhalaf (TAQEEM, Saudi Arabia); and Omar Mohammad Zaman (TAQEEM, Saudi Arabia).

NOTE: IACVS participates in this process through examination and response to Exposure Drafts issued by IVSC

Dietrich updates landmark research on physician compensation

The December issue of Business Valuation Update includes an article by Mark Dietrich that updates his important research on the geographic distribution of physicians in the United States. It includes an updated comparison of the actual physician marketplace to MGMA’s Provider Compensation data report 2020 based on 2019 data. Dietrich has long maintained that the use of compensation surveys to determine the fair market value of physician compensation is seriously flawed. The article also incorporates key commentary from CMS about the use of surveys for Stark fair market value. Finally, there is a discussion of the pitfalls of survey usage for transaction valuation and marital property litigation involving physician practices.

Letter sent to Congress regarding valuation discounts

The American Society of Appraisers and over 100 other business groups and organizations sent a letter to Rep. Neal (D-Mass.) and Rep. Wyden (D-Ore.) urging exclusion of any tax proposals that would impact family businesses and farms, such as eliminating discounts for lack of control or marketability. Proposals such as taxing unrealized gains, halving the estate tax exemption, limits to grantor trusts, and changes to valuation discounts are not in the current framework of the Build Back Better Act—for now, the ASA points out.

Extra: Will Frazier (Weaver) has an article on the resiliency of valuation discounts for family limited partnerships despite ongoing efforts to eliminate them.

Article examines brand values, ratios, and multiples

There has been a dramatic shift in the importance of brands in M&A transactions, with the value of customer relations overtaking the brand-value-to-enterprise-value ratio, reveals a new article. Between 2003 and 2020, the share of brand value dropped by half while customer value almost doubled. The article, by Christof Binder, managing partner of Trademark Comparables AG, covers the importance of brands in corporate M&A and provides a comprehensive list of the 50 most expensive brands and brand portfolios ever acquired, including their values, ratios, and multiples. The article also discusses general trends in importance and appreciation of brands versus customer relations in M&A and country-by-country differences.

Another interesting point: The perception that brands have a very long life has changed. The average useful life assumed in the valuation of brands has decreased over time, from more than 40 years to less than 20 years today, says Binder.

To access the article, which appeared in the World Trademark Review (WTR) magazine, click here.

More jabs at the proposed billionaire tax

Although it could give a lot of work to appraisers, the proposed billionaire tax is an example of “really bad tax law,” says the dean of valuation, Aswath Damodaran (New York University Stern School of Business). An article in The Wall Street Journal also rips into the proposal, making some of the same points Damodaran did, but also notes that it would accelerate the shrinkage of the U.S. public capital markets. The proposal’s tax on unrealized gains would discourage entrepreneurs from taking their companies public, the article says. For now, the proposal has been eliminated from the latest version of the spending bill, but the current version has a provision that would impose a 5% surtax on those earning more than $10 million a year, with an additional 3% on income of more than $25 million.

Reminder: Preorder Trugman’s sixth edition

Understanding Business Valuation by Gary Trugman (Trugman Valuation) has been the go-to book for real-world examples on how to apply valuation theory and complex topics. Praised for its easy-to-understand style, the book draws on the author’s long and practical experience. A revised, sixth edition is available for preorder for an early 2022 release, which will also include an access link to bonus materials—everything from court cases to checklists to sample valuation reports. To preorder, click here.

Note: If you are a subscriber to BVResearch Pro or BVR’s Digital Library, the book will be included with your subscription, so there is no need for you to preorder.

ASA fair value virtual conference December 1

The American Society of Appraisers will hold its 2021 ASA Fair Value Virtual Conference on December 1 from 1:00 p.m. to 5:10 p.m. ET. Conference chair Ray Rath (Globalview Advisors) has put together an impressive program of topics and speakers: stock-based compensation (Amanda Miller, EY); SPACs (Harris Antoniades, Stout); discount rates for ASC 842 debt valuations (Vincent Covrig, Crowe LLP); an IVSC Update (Mark Zyla, Zyla Valuation Advisors LLC); and an update from the company-specific risk premium task force (Roger Grabowski, Duff & Phelps). There will also be a FASB update. This is a virtual event with up to four hours of CPE credit.

Global BV News

Most finance execs think global BV standards are in conflict

Almost three-quarters (72%) of finance executives around the world believe there are material inconsistencies and/or contradictions between the various business valuation standards currently in use globally. This is according to a new study on the importance of business valuation standards to finance executives. The final sample consists of 196 participants from 32 different countries across all continents. One of the conclusions in the study is that ideally one independent standard-setter should issue standards that are applicable and accepted across the world. The study is explained in an article published in Bewertungs Praktiker, which you can access here.

We point out that the article does not mention the detailed comparison that has been made of the global valuation standards that concludes that they do not conflict with each other. There are two interrelated charts, one on the different sets of U.S. business valuation standards and the other on the various international standards.

The study was led by three academics, all of whom are members of the International Valuation Standards Council’s Europe Board: Dr. Marc Broekema, assistant professor at the Department of Business Studies, Leiden Law School of the Leiden University; Dr. Olesya Perepechko, lecturer at the Great St. Petersburg Polytechnic University; and Professor Klaus Rabel, a professor of business valuation at the University of Graz.

Preview of the December 2021 issue of Business Valuation Update

Here’s what you’ll see:

“Valuers Converge (in Person!) at the ASA International Conference” (BVR Editor). This is a recap of some sessions covering small promissory notes, shareholder disputes, sports businesses, valuing defensive patents, IRS news, competing appraisals, and more. Over 600 valuation experts from all disciplines came together for the American Society of Appraisers’ International Conference in Las Vegas, October 24-26. This was a hybrid event, and many of the attendees were on-site.
“An Inside Look at the Landmark ESOP Valuation Case” (BVR Editor). For over a decade, the Department of Labor has not lost a major ESOP case on a valuation issue, but its winning streak ended with Walsh v. Bowers. The case involves many key valuation issues, and Ken Pia (Marcum LLP) and Ian Rusk (Rusk O’Brien Gido + Partners LLC), expert witnesses for the defense, give their insights.
“Items of Interest Gleaned From the ASA Conference Networking Ops” (BVR Editor). BV firm staffing troubles, Shannon Pratt’s video remarks about his new book, a new app for fractional interests, a heightened interest in businesses with a real estate component, and help needed in developing a new module for the Cost of Capital Navigator are just some of the things we learned outside the regular sessions at the ASA conference—in and around the exhibit hall and during the many networking breaks.
“Letter to the Editor: A New Development in Personal Goodwill” (R. James Alerding, CPA/ABV). This article presents remarks and comments from BVR’s legal editor on a previous article that discussed Florida’s proposed legislation to clarify the value of goodwill in the marital interest of closely held businesses.
“How to Explain Personal Goodwill to a Trier of Fact for a Divorce Valuation” (Gary Trugman, CPA/ABV, MCBA, ASA, MVS). This is an excerpt from the author’s upcoming sixth edition of Understanding Business Valuation, which will be available from BVR in early 2022.
“Physician Distribution, Mobility, Fair Market Value, and Compensation Surveys: An Update” (Mark O. Dietrich, CPA/ABV). This article updates the author’s peer-reviewed research on the geographic distribution of physicians in the United States, including some key commentary from CMS about the use of surveys for Stark fair market value.

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

Valuation News Update

Lisa Guo — Thu, 11 Nov 2021 06:05:52 GMT

Final version of global BV glossary released

The International Valuation Glossary—Business Valuation has been completed, and a final version has been released. You can access it if you click here (free registration required). A working group made up of members of the American Society of Appraisers (ASA), Royal Institute of Chartered Surveyors (RICS), Saudi Authority for Accredited Valuers (TAQEEM), Canadian Institute of Chartered Business Valuators (CBV Institute), and the International Valuation Standards Council (IVSC) developed this new version, which is intended to replace the glossary last published in 2001.

Not authoritative: Is the new glossary an authoritative document? The working group does not intend the new glossary to be authoritative. The ASA, RICS, TAQEEM, and the CBV Institute will adopt and publish the new glossary as a practice aid/guidance to their members. The IVSC is supportive of the new glossary, but the International Valuation Standards (IVS) define only terms used within IVS. The working group encourages other organizations to use and reference the glossary in any way they see fit.

The process of developing the new glossary was a challenging one and was designed to build consensus. Subject matter experts were consulted, as were other organizations, such as IACVS, the National Association of Certified Valuation Analysts (NACVA) and The Appraisal Foundation. A draft version was issued in December 2020, and public comments were solicited. All comments received were given thorough consideration by the working group and addressed in the final version as appropriate.

Stay tuned for more news on the glossary, including some comments from members of the working group.

Will the landmark ESOP valuation case open the door?

During an amazing webinar with the testifying experts in the recent Walsh v Bowers ESOP case, a question came in from the audience: “Do you think this case will open the door for the Department of Labor and the valuation profession to work together to develop guidance around ESOP valuations?” The hope is that it will, say Ken Pia (Marcum LLP) and Ian Rusk (Rusk O’Brien Gido + Partners LLC), who testified for the defense and gave webinar attendees an inside look at the valuation issues in the case.

The idea of the valuation profession working with regulators has worked in other areas of valuation. For example, the Appraisal Issues Task Force is a voluntary group of valuation professionals who work with the FASB and the SEC to evaluate proposals and recommend methodology, assumptions, and approaches in the area of fair value for financial reporting. A similar mechanism could be set up between ESOP valuation professionals and the DOL. Pia and Rusk say the profession would welcome that kind of collaborative effort.

A recording of the webinar with Pia and Rusk is available if you click here (free to holders of BVR’s Training Passport when available).

Appellate court KOs unaccrued interest on dissipated assets

In a divorce case, an appellate court vacated the order of the trial court that erroneously charged the husband with over $4 million in unaccrued interest on marital assets that the husband fraudulently dissipated from the marital estate. This altered the equitable distribution, so the case was further remanded to the trial court to issue a new order in accordance with the appellate court’s opinion.

Both the husband and wife were accountants, but the wife left her job in 1990 to “tend to the children.” The husband purchased and operated various real estate entities during the marriage, and he created trusts for the parties’ children that ended up being valued at over $9 million. The wife claimed she did not know of the trusts until after the couple separated. She claimed that the transfers to the trust were fraudulent transfers, and the value of the trusts should be charged against the husband in the parties’ equitable distribution scheme. The husband claimed that he had told the wife of these trusts. The trial court deemed the husband’s transfers of assets to the trusts for the children to be fraudulent and void and thus chargeable against the husband in the equitable distribution. The court also charged the husband with $4 million of unaccrued interest, but the appellate court vacated this.

The case is Mohen v. Mohen, 2021 Pa. Super. Unpub. LEXIS 2560; 2021 WL 4281296 (Sept. 21, 2021). A case digest analysis and full court opinion are available on the BVLaw platform.

FASB updates Topic 805 on business combinations regarding deferred revenues

The Financial Accounting Standards Board (FASB) announced an update to its business combinations standard (Topic 805) aimed at clarifying how to apply requirements under its revenue recognition rule. The update requires companies to apply the new revenue recognition standard, ASC 606 (Revenue From Contracts With Customers), which will result in companies recognizing contract assets and contract liabilities at amounts consistent with those the acquiree recorded immediately before the acquisition date. This is expected to result in the acquirer recognizing more revenue in its post-acquisition financial statements related to acquired deferred revenue. Prior to this update, fair value measurement commonly resulted in a reduction, or “haircut,” to the amount of deferred revenue that was previously recognized in the acquiree’s financial statements prior to the acquisition.

The update applies to all entities that enter a business combination within the scope of Subtopic 805-10 (Business Combinations—Overall). The amendments are effective for public companies for fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years, and for all other entities beginning after Dec. 15, 2023, including interim periods within those fiscal years. Early adoption is permitted.

PCAOB 2020 inspection reports released

The Public Company Accounting Oversight Board (PCAOB) has issued its 2020 annual inspection reports for the largest U.S. audit firms, including each of the Big Four, BDO, and Grant Thornton. The inspections look at a wide variety of audit issues, including fair value measurements. The majority of the annually inspected audit firms had fewer findings in 2020 compared to 2019 inspections. In audit firms that are inspected every three years, “some improvements were noted, although deficiencies continue to remain high,” according to a PCAOB staff update on the 2020 inspections.

New edition of a guide on valuing FLPs

BVR is happy to announce that the Comprehensive Guide for the Valuation of Family Limited Partnerships and LLCs is the newest addition to its bookstore. This is the 6th edition of this book, and it includes all new updates since the last edition was released in 2018. This new edition has five new case study valuation examples, an updated study on market pricing of liquidating noncontrolling real estate interests, using the best empirical data in a valuation, and more. The book’s authors are Bruce A. Johnson, James R. Park, and Spencer Jefferies, and Partnership Profiles Inc. publishes the book.

Global BV News

TAQEEM launches study on the value of camels

The Saudi Authority for Accredited Valuers (TAQEEM) has signed a memorandum of understanding with the Camel Club to develop standards and criteria for evaluating the market value of camels, according to a news release. Under the agreement, the Camel Club will contract with a consulting firm to prepare a market study for the camel sector in all regions of Saudi Arabia. TAQEEM will develop a professional guide for evaluating camels as biological assets and the intangible assets they include, such as goodwill

Valuation News Update

Lisa Guo — Thu, 04 Nov 2021 05:03:52 GMT

ASA conference hits the jackpot in Vegas

About 600 attendees converged—both on-site and virtually—for the American Society of Appraisers’ International Conference in Las Vegas October 24-26. It was great seeing many people at a live event after all these many months so there was a lot of catching up to do! Here are just a few items of interest—just the tip of the iceberg—from the sessions and the many networking opportunities (full coverage will be in the December issue of Business Valuation Update):

Johnnie White, the ASA’s CEO, has great things planned for the organization, including new headquarters, a new website, a systems overhaul, and a new PR campaign to raise awareness;
Activity on the Vegas Strip has bounced back in strong form—which was confirmed by a session Ray Moran (FON Valuation Services) moderated covering M&A and valuation issues in the gaming industry;
During the preconference sessions, Ray Rath debuted a new advanced course on the valuation of intangible assets, BV303—Valuation of Intangible Assets and Special Topics, which is a combination of two prior courses;
BV recruiter John Borrowman (Borrowman Baker) told us some alarming news: From May 2021 to October 2021, 63 professionals have left the business valuation, forensics, and litigation services profession;
Duff & Phelps would like some feedback on its development of a company-level beta module for its Cost of Capital Navigator;
A sports team’s current win-loss record doesn’t always have an impact on value, according to Drew Dorweiler (IJW & Co.);
The traditional relief from royalty method for valuing patents has serious shortcomings, one being that it doesn’t capture the value of a defensive patent portfolio, says Brian Dies (Hoffman Alvary & Co. LLC);
Closed-end fund data and expanded economic data are now available on the Tagnifi platform of guideline public-company data (it was a platinum sponsor of the conference); and
In their session, Ron Seigneur (Seigneur Gustafson LLP) and Nicholas Parseghian (Marcum LLP) said the pandemic has had some very positive effects on the cannabis industry—and much of it will stick going forward (Seigneur is a co-author of the Cannabis Industry Accounting and Appraisal Guide).

Kudos to the ASA and its conference staff for an amazing event! Next year’s conference will be in Fort Lauderdale, Fla. See you there!

Valuation experts spar over fraudulent transfer matter

In the bankruptcy court, two valuation experts squared off in a case where the trustee argued that a cash transfer by the debtor was a constructively fraudulent transfer under the bankruptcy code. The expert for the trustee was not able to show that the debtor was insolvent at the date of the transfer or became insolvent as a result of the transfer. The expert did not perform a balance sheet insolvency test but noted that, while total assets were about $20 million greater than liabilities, the bulk of the assets consisted of goodwill and was likely significantly overstated. The defendant’s expert did perform a balance sheet test and opined that the company was solvent at the date of the transaction. He valued the business as a going concern, which includes goodwill, and he offered credible evidence that the goodwill represented the results of a competitive market transaction.

The case is Yaquinto v. Thompson St. Capital Partners (In re Stone Panels, Inc.), 2021 Bankr. LEXIS 2635; 2021 WL 4436166 (Sept. 27, 2021). A case digest and full court opinion are available on the BVLaw platform.

Audax PE invests in Stout

Audax Private Equity has agreed to make an investment in Stout, a firm that provides advisory services in corporate finance, valuation, financial disputes, and investigations. The transaction is expected to close in the fourth quarter of 2021, according to an announcement. This is a continuation of the recent push by PE firms into accounting and valuation firms. Last month, Citizens Financial Group Inc. acquired Willamette Management Associates, a leading valuation consulting and forensic analysis firm.

Valuation experts are familiar with the Stout Restricted Stock Study and DLOM Calculator for quantifying a discount for lack of marketability (DLOM). In a recent BVR survey, nine out of 10 respondents say they use restricted stock studies for DLOM, with the Stout study being the front-runner (75% say they use the Stout study).

Damodaran on proposed billionaire tax

“A boon for appraisers and accountants,” but it is one of the worst tax proposals ever, says Aswath Damodaran (New York University Stern School of Business), in an appearance on CNBC. He’s referring to the Democratic proposal to tax the unrealized capital gains of people with either $1 billion or more in assets or three consecutive years of income of at least $100 million. Under current law, such assets are subject to tax only when they’re sold. The proposal meets all of Damodaran’s requirements for “really bad tax law,” namely that it targets very few people (and those who can fight back), it is tied to a volatile measure (capital gains), it is very difficult to compute (unrealized gains), and it may possibly cannibalize taxes already being collected from other sources. Plus, some billionaires would escape the tax if, say, the billion dollars they have does not grow—so it singles out successful entrepreneurs. “It’s almost perverse,” says Damodaran. There are better alternatives, he says, such as eliminating the free step-up in basis for inherited assets and raising rates.

Update on the pandemic’s impact on the gaming industry

While at the ASA International Conference in Las Vegas, we reached out to industry research provider Vertical IQ to give us an update on the impact of the pandemic on the gaming industry. They tell us that experts say that the increasing number of organizations requiring proof of vaccination to enter Nevada entertainment venues will put pressure on casinos to do the same. Experts say that Las Vegas Raiders games at Allegiant Stadium could provide a blueprint for how events will function. The team has contracted with tech company Clear for use of its Health Pass app to verify vaccination status. The team’s rule is succinct: no vaccination, no entry. Clear’s digital Health Pass requires the user to scan a state-issued ID or passport and upload pictures of his or her face and CDC vaccination card. The health pass, which is a QR code, expires after 12 to 24 hours. To access it again, the user provides a new photo that is matched to the original using facial recognition technology. The user must also answer a short health-screening questionnaire.

The Vertical IQ platform is geared to business valuation experts and provides details of industry trends, financial metrics, operations, risks, and financial challenges inherent in more than 500 industries. Learn more about the platform during a free webinar on November 18—click here to register.

Global BV News

Latest issue of OIV Journal available

The spring 2021 issue of the journal of the Organismo Italiano di Valutazione (OIV), the valuation standards-setter in Italy, contains the following articles:

· “Cross-Border DCF Valuation in a Nutshell” (Andreas Schueler);

· “Level 3 Reporting Quality: Trend Analysis of Derivative Instruments’ Restatements” (Joel M. DiCicco, Richard S. Gendler, Uliana Filatova, and Teodora Minkova); and

“Business Valuation and Fundamental Analysis” (Mauro Bini)

To download the journal, click here

Valuation News Update

Lisa Guo — Thu, 28 Oct 2021 05:02:08 GMT

COVID-19 and BV: Hitchner gives an update

In the opening session of the Virginia Society of CPAs’ Forensic and Valuation Services Virtual Conference, James Hitchner (Valuation Products and Services) gave a current perspective about the many challenges the pandemic has presented for business valuations.

Hitchner hasn’t changed his opinion about the “magic date” of Feb. 24, 2020, in terms of when the pandemic was known or knowable. “Dates matter” he said, but there is no single date that everyone can use for determining when the virus was known or knowable—it depends on the facts and circumstances of your subject company. For example, a company with all local customers and suppliers would be in a different situation than, say, a company that depends on a supply chain in another part of the world. That’s why it’s important to consider timelines in your analysis. Hitchner’s timeline (that he generously makes available to everyone) is a very helpful tool that includes significant events, including the pandemic’s effect on the U.S. stock market.

Some of his other observations include:

If a pre-COVID-19 valuation does not serve the purpose, consider using a “hypothetical situation” to do two valuations as of the same date (one with COVID-19 and one without)—this complies with SSVS and USPAP;
Company-specific risk became the “great equalizer” in his valuations during the pandemic—the extra risk is reflected there (otherwise the discount rate would be lower than before the pandemic, given standard data inputs);
He has never spent so much time on economic and industry research (he relied heavily on McKinsey’s free information); and
He has “changed his mind” about the work of Aswath Damodaran (New York University Stern School of Business), such as his implied ERP—he currently doesn’t use Damodaran’s data but is reconsidering it.

CFAs support annual testing for goodwill impairment

Global standard-setters, such as the Financial Accounting Standards Board (FASB) in the U.S., are revisiting the issue of annual impairment testing versus amortization of goodwill. During a recent webinar, Sandra Peters, head of financial reporting at the CFA Institute, previewed a forthcoming survey of institute members that found broad support for regular testing of goodwill for impairment and skepticism about amortization. She agreed with the majority of the members: “Amortization over a straight-line period tells you nothing. Impairment … says that something you acquired didn’t turn out, and users of financial statements should ask more questions.”

Peters added that, in practice, many investors perform their own impairment analysis with much less information than the companies have, suggesting it is valuable to them and may not be as onerous and costly as proponents of amortization suggest. Finally, Peters noted that international standard-setters appear to be moving away from the idea of amortizing goodwill, so a U.S. move that embraces the approach would create headaches for users of financial statements.

The webinar, What’s New in Goodwill, featured a panel discussion with Peters along with VRC co-CEO PJ Patel and Calcbench CEO Pranav Ghai. You can access a replay if you click here.

Trugman talks about his new book at the ASA confab

If you visited the BVR booth at the American Society of Appraisers International Conference in Las Vegas, you would have had the chance to chat with Gary Trugman (Trugman Valuation), who was taking a break from working on the new, sixth edition of his book Understanding Business Valuation. He explained that the entire book is being revised, but some of the notable revisions include an expanded section on personal goodwill. Also, he will add much more material on report writing that will include tips on how to write good rebuttal reports. The new edition will be published by BVR and will also include a special access link to court cases from the BVLaw platform as well as a companion website with supplemental and bonus materials that will be revised regularly.

At the BVR booth, preorders were taken for the book, which will have an early 2022 release (you can preorder if you click here).

Extra: At the conference, Trugman received the highest honor the ASA bestows—he is now a member of the ASA College of Fellows (FASA).

Business owners have many misconceptions about value

Many private-business owners overestimate the value of their business, says an article on Axial by Al Danto, “Business Valuation Misconceptions.” This is a particular problem when the owner wants to sell. The sellers, of course, want the highest valuation possible when they sell, but their misconceptions about value makes a successful sale less likely. For example, business owners think that other companies in their industry with similar sales and revenue averages will have the same valuation. Of course, valuers know this is simply not true! The averages can be the same, but what about trends? A company with downward trends will have a different value than one with upward trends. Knowing how a buyer values a business and what drives a valuation up or down is, therefore, critical for an owner to understand. The article gives a good summary of how buyers evaluate acquisition targets.

Latest issue of the ASA BVReview now in BVRPro

The BVResearch Pro platform contains the full archive of BVReview (going back to 1982!), the business valuation journal of the American Society of Appraisers. The latest issue (Summer 2021) has been added to the platform, and it has these articles:

“A Current View of the Restricted Stock Studies and Restricted Stock Discounts” (Z. Christopher Mercer, Mercer Capital). Restricted stock studies can be helpful for marketability discount determinations, but too many valuation analysts continue to rely on simplistic comparisons with averages of restricted stock discounts from dated studies.
“When Averaging Multiples, the Arithmetic Mean Is Inferior to the Harmonic Mean” (Gilbert E. Matthews, Sutter Securities). A multiple is an inverted ratio with price in the numerator. The harmonic mean is a statistically sound method for averaging inverted ratios. It should be used as a measure of central tendency for multiples, along with the median.
“Attrition Analysis, Midperiod Convention, and Customer Retirement Forecasts” (Richard K. Ellsworth). Valuation practitioners that develop an attrition analysis founded on a midperiod retirement convention should not then apply an end-of-period convention when forecasting customer retirements.
“Business Valuation: An Integrated Theory.” This is a review by William H. Frazier of the recently published third edition of Business Valuation: An Integrated Theory (BVIT) by Z. Christopher Mercer and Travis W. Harms.

If you are not a subscriber to the BVResearch Pro platform, you can do a stand-alone subscription to the ASA’s BVReview if you click here.

Global BV News

Most large firms suffer major impact from illicit activity

Kroll’s Global Fraud and Risk Report reveals that 57% of respondents at companies with a turnover of more than $15 billion reported a very significant impact of illicit activity, such as fraud, corruption, and money laundering, on their organization, with a further quarter (25%) describing the impact as somewhat significant. This trend continued for firms with an annual revenue of between $10 million and $15 billion, with 48% of respondents saying their organization had been very significantly impacted and 44% reporting the impact was somewhat significant.

Valuation News Update

Lisa Guo — Thu, 21 Oct 2021 05:01:15 GMT

Can’t answer a question with a simple yes or no in court?

It is always very interesting to hear what judges have to say about giving expert testimony. At the recent New Jersey CPA Society’s Business Valuation and Litigation Services Conference, retired judge Charles M. Rand, who presided in New Jersey Superior Court, was asked a question: What should the expert do if he or she cannot answer yes or no to a question from opposing counsel? Some judges have said that the witness can turn to the judge and ask to expand on their answer. Some judges may not welcome that, so Judge Rand offers an alternative strategy. The witness should respond, “I can’t answer yes or no to that question.” If the opposing counsel keeps pushing you, then you simply have to give an answer. But the attorney on your side should, on redirect, ask you to explain why you couldn’t answer yes or no.

Full coverage of all of the sessions at the conference will be in the November issue of Business Valuation Update.

Justifying hockey-stick projections

Valuation experts frequently receive from management what may appear to be an unrealistic forecast that starts off modestly but shoots up in future years as if by magic. These hockey-stick projections may be perfectly valid, but it’s up to the analyst to scrutinize them. If the valuation ends up in litigation, the analyst will surely be questioned about them.

In a blog post, Chris Mercer (Mercer Capital) recalls having a hockey-stick projection from a bank that currently had low earnings. It appeared that the bank could not possibly achieve that level of performance found in the bank’s own current capital plan for the next five years, which had been prepared for regulatory review in the normal course of business. Mercer was accused of unrealistically relying on the bank’s capital plan.

In response, Mercer referred the attorney to an exhibit in the valuation report that compared the previous five years’ performance with the earnings and returns of the capital plan. “There, it was clear that the projected returns (on assets and equity) were within the levels achieved by the bank in the previous few years, and below the current level of the bank’s peer group,” Mercer writes. “Value today is a function of expectations for future performance—and the expectations used were in line with past performance, management’s stated plans, management’s business plan, and the performance of similar banks.”

This situation illustrates the importance of professional skepticism, especially when reviewing management’s prospective financial information (PFI). Common procedures include, but are not limited to, a comparison of prior forecasts to actual results, comparison of PFI to industry expectations, checking the PFI against other internally prepared financial information for consistency, a comparison of entity PFI to historical trends, an understanding of who prepared the PFI and how often it is prepared, and math and logic checks.

D&P/Kroll updates multiples in healthcare services

The S&P Healthcare Services Index declined by 0.6% in August, compared to the S&P 500 Index, which increased 2.9% over the same period, according to the August 2021 “Healthcare Services Sector Update” from Duff & Phelps, a Kroll Business. The best performing sectors were healthcare staffing (up 15.5%), specialty managed care (up 10.7%), and healthcare information technology (up 9.5%). The poorest performing sectors were behavioral health (down 18%), consumer-directed health/wellness (down 12.9%), and providers—other (down 11.1%). The current average LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 3.63x and 15.2x, respectively.

Preview of the November 2021 issue of Business Valuation Update

Here’s what you’ll see:

“‘Survey Says’ for FMV of Physician Compensation Is on Its Last Legs” (BVR Editor). The use of compensation surveys to determine the fair market value of physician compensation is seriously flawed, a position well-known expert Mark Dietrich has long maintained. Plus, recent government regulations confirm his position, and he offers an alternate methodology.

“Recap of the VSCPA Forensic and Valuation Virtual Conference” (BVR Editor). Topics at the Virginia CPAs’ event included COVID-19, the use of statistics for lost profits, key federal tax cases, personal goodwill, forensics, reasonable compensation, and cybercrime.

“How COVID-19 Has Impacted Insurance Agencies and Brokerages” (BVR Editor). Industry intelligence excerpted from the new guide, What It’s Worth: Valuing Insurance Agencies.

“Statistical Methodologies for Analyzing Active and Passive Appreciation” (BVR Editor). A rundown of the existing quantitative models that have been developed that separates the active and passive appreciation of a closely held business involved in a marital dissolution case. The models seek to statistically identify market forces that reasonably cause changes in the value of assets.

“Benchmark Data on Contract-Based Intangible Assets and Remaining Useful Lives” (BVR Editor). Many contract-based relationships represent identifiable intangible assets that require valuation apart from goodwill. The data here are from the third edition of Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations, which includes data from almost 16,000 purchase price allocations.

“Economy, Cannabis, Physician Pay, SPACs, and Expert Testimony Among the Hot Topics at the NJCPA BV Conference” (BVR Editor). Key takeaways from the 2021 New Jersey CPA Society’s Business Valuation and Litigation Services Conference.

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,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

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

To stay current on business valuation, check out the November 2021 issue of Business Valuation Update

Valuation News Update

Lisa Guo — Thu, 14 Oct 2021 05:00:23 GMT

Trugman’s sixth edition now available for preorder

The new, sixth edition of Gary Trugman’s Understanding Business Valuation is now available for preorder for an early 2022 release. The entire book is being revised, but Trugman tells BVWire that some of the notable revisions include an expanded section on personal goodwill. Also, he will add much more material on report writing that will include tips on how to write good rebuttal reports. Trugman has conducted workshops on report writing and rebuttals, so this new material will be a very welcome addition. The new edition will also include a special access link to court cases from the BVLaw platform as well as a companion website with supplemental and bonus materials.

Calculation of value at center of Arizona court battle

A court in Arizona rejected the use of a calculation report, but an appellate court ruled it was wrong to do that and sent the case back to the lower court. The trial court excluded the evidence of a business valuation expert because he had submitted a calculation of value report and was then asked to testify to it. The expert self-admitted that he would not testify to a calculation of value and had explained in his engagement letter that, if he had to testify, a valuation engagement would be required. Despite the exclusion by the trial court and the self-admission of the inadequacy of a calculation of value for testimony purposes, the appellate court nevertheless ruled that a calculation of value is not unacceptable per se. The case has been remanded in part to determine whether the calculation of value met the requirements of Arizona Rule 702 for allowable evidence.

The case is Larchick v. Pollock, 2021 Ariz. App. Unpub. LEXIS 895; 2021 WL 3929954. The full court opinion and a case analysis are available on the BVLaw platform.

Clint Eastwood awarded $6.1 million in right of publicity case

In a default judgment, actor Clint Eastwood has been awarded $6.1 million from a company that falsely claimed Eastwood had endorsed its CBD products. The lawsuit claimed that the defendants created fake news articles and manipulated search results to make it appear that Eastwood had endorsed their products. This case points up the intriguing valuation issue known as the “right of publicity.” This is a form of intellectual property that covers an individual’s likeness, including his or her name, image, signature, voice, and so on. As the Eastwood case shows, there could be a great deal of value when it comes to a celebrity.

How to do it:A veritable road map on how to value the right of publicity can be found in the recent case of the Michael Jackson estate. Experts for the estate presented a fascinating look at how the name-likeness valuation was done during a BVR webinar. The webinar panel consisted of Jay E. Fishman (Financial Research Associates) and celebrity licensing expert Mark Roesler (CMG Worldwide), whom the estate engaged to value the name and likeness. Also on the panel was music industry financial advisor David Dunn (Shot Tower Capital), who advised on other valuation issues.

Feedback wanted on Abbott model for active/passive appreciation

For several years, Professor Ashok Abbott (West Virginia University) has been developing a methodology for separating active from passive appreciation of business assets in a divorce context (see our first coverage here). During a recent BVR webinar, Dr. Abbott brought us up-to-date on his methodology, which is an analytical framework based upon econometric modeling.

Dr. Abbott also has a recent peer-reviewed paper out that explains his methodology (including a detailed example), which is available if you click here. During the BVR webinar, he encouraged the audience to read the paper and provide feedback to him (his contact information is in the paper).

Expert predicts continued PE push into accounting

Recently, EisnerAmper became the first top 20 accounting firm involved in a private equity deal. “I would make a bold prediction here that in the next month, there will be a second top 20 firm to go the way of private equity,” says Allan D. Koltin, in an interview in the Journal of Accountancy. Koltin is CEO of Koltin Consulting Group and has served as an adviser and broker on many of the biggest M&A deals in the accounting space. “But I wouldn’t stop there,” he continues. “I think we could wake up a year from today and there could be no less than three, maybe even as many as four, of the top 20 CPA firms owned by private equity.” Koltin also remarked that, once PE firms acquire a large accounting firm as an “anchor tenant,” they will seek out smaller firms with between $15 million and $100 million in revenue for potential M&A deals.

Gearing up for the ASA conference October 24-26 in Las Vegas

BVR will be attending—in person—the 2021 ASA International Conference at Planet Hollywood in Las Vegas, October 24-26. You can find us at our booth in the exhibit hall (unless we are attending some of the great presentations), so please stop by and say hello. This will be a hybrid event featuring live in-person sessions combined with a simultaneous virtual online option for remote attendees. The conference brings together appraisers of all disciplines, and the agenda features the latest trends presented by top thought leaders in the profession. To see the at-a-glance schedule, click here.

Expand your practice with value growth advisory services

A natural extension for a valuation practice is advising business owners on ways to maximize firm value. A training and credentialing program is available for valuation professionals who want to offer this service. The Certified Value Growth Advisor (CVGA) program is a five-day course that focuses on the fundamental best practices that drive value of any business. You will also learn how to build on those drivers to develop a short-term tactical plan and long-term strategic plan for the client’s business. This course is designed to help your clients increase company value by two to three times over a two-to-five-year period. The next CVGA program is scheduled for November 8-12 and will be in a virtual environment. For more details, click here.

Global BV News

Full agenda for IVSC Virtual AGM October 21-28

This year’s annual general meeting (AGM) of the International Valuation Standards Council (IVSC) will be held as a virtual program from October 21 to October 28. There will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. The full agenda is now available, and you can see it if you click here. Some parts of the overall program are restricted to IVSC sponsor/member organizations or their representatives, but other aspects are open to anyone with an interest in valuation and the work of the IVSC.

Valuation News Update

Lisa Guo — Thu, 07 Oct 2021 04:59:08 GMT

BV book alert: Two important titles are in the works

Two books that all valuers should have on their shelves will soon have new editions!

Understanding Business Valuation, by Gary Trugman (Trugman Valuation), will come out with its new (sixth) edition in early 2022. Acclaimed for its easy-to-understand explanations of complex topics, the book draws on the author’s long and practical experience to present real-world examples on how to apply valuation theory. The new edition will also include an access link to court cases from the BVLaw platform as well as a companion website with ancillary materials designed to keep you up-to-date on key matters.

Valuing a Business, by Shannon Pratt, will also come out with its new sixth edition, scheduled for a March 2022 release. The book, first published in 1981, is being published with underwriting sponsored by the American Society of Appraisers Educational Foundation. Pratt is now retired, but the ASA has assembled a group of contributors to bring the book up-to-date and maintain Pratt’s legacy for the valuation profession.

Stay tuned for more details on these two volumes as they develop.

Record attendance at VSCPA conference

Again this year, BVR was pleased to sponsor the two-day Virginia Society of CPAs Forensic and Valuation Services Virtual Conference, which saw record attendance, reports Harold Martin (Keiter), who served as chair of the conference planning task force. Excellent speakers presented a lot of great information, and here are a few interesting bits of information we picked up:

Pre-COVID-19 valuations may not be useful, so consider using a “hypothetical situation” to do two valuations as of the same date (one with impacts of COVID-19 and one without)—this complies with SSVS and USPAP;

Several speakers remarked that business at their practices dipped during 2020, but it’s rebounded in 2021—and then some (“we’re slammed,” “our best year in decades,” “a lot of estate and gift work”);

A case to watch: A court in Arizona KO’d the use of a calculation report, but the appellate court ruled it was wrong to do that and sent the case back to the lower court (the case, Larchick v. Pollock, is in BVLaw);

Developing the proper statistical model for lost profits analysis hinges on understanding the drivers of—and trends in—firm performance;

Tax proposals in Washington seek to eliminate valuation discounts for family limited partnerships and personal holding companies, but it’s a narrower provision than the 2017 proposed Sec. 2704 regs that targeted estate valuation discounts for minority interests;

When doing forensics, you need a definite methodology (e.g., the IRS uses financial status audit techniques (FSAT));

The biggest problem with determining reasonable compensation is dealing with owners with two hats—as an owner and also as an employee/executive—where there is a commingling of compensation and profit; and

An FBI agent spoke on cybersecurity and noted that each of the 56 FBI field offices have a least one cyber squad investigating ransomware and other cyber crimes.

Much more coverage of the conference will be in the November issue of Business Valuation Update.

Insurer not required to defend valuation firm in ESOP lawsuit

A valuation firm can no longer force its professional liability insurer to defend a lawsuit challenging the firm’s ESOP valuation because the case’s surviving claim falls under a policy exclusion, a federal court has ruled. While the policy covered valuation services, the policy also featured an exclusion for claims against the insured for securities violations. The insurer’s duty to defend the firm ended when the ESOP participants suing the firm filed an amended complaint that included only one claim for federal securities fraud. The policy featured an exclusion for claims against the insured for securities violations.

The case is Great Am. Fid. Ins. Co. v. Stout Risius Ross, Inc., 2021 U.S. Dist. LEXIS 158553; 2021 WL 377 (Aug. 23, 2021). A case analysis and the full opinion are available on the BVLaw platform.

Free model adjusts ROI distortion from missing intangibles

Intangible assets that are “missing” from corporate balance sheets (see prior coverage) distort performance metrics and generally overstates return on capital. In a new article, the authors suggest adjustments to correct for this distortion—and they provide a free interactive model to illustrate. They demonstrate the model by calculating an intangible asset adjusted return for Amazon. The article and model, from The Footnote Analyst, is available if you click here.

Newest What It’s Worth guide examines insurance agencies

What makes insurance agencies and brokerages tick? How are changes in the industry impacting firms? What’s the best valuation approach? Get the answers to these questions and more in the new guide, What It’s Worth: Valuing Insurance Agencies. The report draws upon the best benchmarking data and industry research sources available, summarizes key insights and appraisal factors, and will help guide your professional judgment in determining a conclusion of value that is as reliable as ever. Check out the table of contents if you click here. Note: You already have access to this new guide if you are a subscriber to the BVResearch Pro platform!

Global BV News

Want to help develop global standards for valuing financial instruments?

Here’s a great chance to give back to the valuation profession. The International Valuation Standards Council (IVSC) is looking for someone to help write and lead the international approach to valuing financial instruments. The candidate would have to be able to make a commitment (flexible) of 30% of his or her time per week for nine to 18 months, so the support of the candidate’s firm or organization is important. The role would be to support the lead financial instruments director in efforts to further develop the International Financial Instruments Standards of the IVSC. If you are interested in this opportunity, click here for more details and how to apply.

Valuation News Update

Lisa Guo — Thu, 30 Sep 2021 04:57:52 GMT

Major win in ESOP valuation case vs. DOL

A district court has ruled “decisively” against the Department of Labor (DOL) in an ESOP valuation case, stressing that the DOL failed to follow standard valuation practices. “The decision is one of the most comprehensive rebukes of DOL arguments in valuation cases,” says Corey Rosen, founder and senior staff member of the National Center for Employee Ownership (NCEO), in a blog post.

The case is Walsh v. Bowers, 2021 U.S. Dist. LEXIS 177184 (Sept. 17, 2021), and it involved the ESOP company Bowers + Kubota (an architecture and engineering firm). The DOL had alleged that the ESOP paid more than fair market value for stock of the sponsor company. Valuation experts have long maintained that the DOL has been playing by its own valuation rules—rules that are not consistent with accepted valuation standards.

Stay tuned for more coverage of this important case. A copy of the opinion is available on the BVLaw platform, and a case digest analysis will be available soon.

Value of Coke’s secret formula could end up in Supreme Court

At last week’s New Jersey CPA Society’s Business Valuation and Litigation Services Conference, Barry Sziklay (Friedman LLP) gave an update on the huge battle between Coca-Cola and the IRS over transfer pricing that involves the trademark and secret formula for the soda giant’s iconic beverage. Coke is facing a more-than-$3 billion tax bill in a dispute over the valuation method used for determining the royalty charged to suppliers that provide the soda concentrate to bottlers.

Not refreshing: Coca-Cola had been using a “10-50-50” method that the IRS had approved in the wake of the agency’s audit of the company for the years 1987 to 1995. The approval came in the form of a closing agreement executed in 1996 between the company and the IRS. Going forward, the company continued to use that transfer pricing method for 11 years with the approval of the IRS. Then, when the IRS audited the company for its 2007-to-2009 tax years, the agency did an about-face and rejected the “10-50-50” method in favor of the “comparable profits method” for apportioning income between the U.S. parent company and its foreign supply points (i.e., manufacturers who produce Coca-Cola concentrate using The Coca-Cola Co.’s secret formula, which they, in turn, sell to unaffiliated bottlers who turn the concentrate into the soft drink retailers sell worldwide).

The 10-50-50 method permitted the supply points to retain as profits 10% of their gross sales with the balance of the profit split 50-50 between the parent company and the supply points. The comparable profit method (set forth in U.S. Treasury Reg. Sec. 1.482-5) attempts to determine an arm’s-length apportionment result based on the amount of operating profit an uncontrolled “comparable” company would earn in comparison to the subject company (The Coca-Cola Co. and subsidiaries). In this case, the IRS expert based his analysis on a return-on-assets metric. Result: an approximate more-than-$9 billion increase to the company’s taxable income and a more-than-$3 billion bill for back taxes. The matter went before the Tax Court.

On Nov. 18, 2020, the Tax Court judge ruled in favor of the IRS. Sziklay told the conference audience that, on June 21, 2021, Coca-Cola filed a “motion for reconsideration,” which includes a separate motion requesting that all Tax Court judges rule on the case, not just the one who rendered the original decision. “Stay tuned,” says Sziklay. “This case could end up before the U.S. Supreme Court.”

Sziklay points out that this is a very important case because transfer pricing is becoming ever-more important as the world moves toward a global minimum tax regime as the Organization for Economic Co-operation Development has articulated in its July 2021 issuance of OECD/G20 Base Erosion and Profit Shifting Project, “Addressing the tax challenges arising from the digitalisation of the economy.”

You can find the Tax Court opinion and continuing coverage on BVR’s BVLaw platform. The case is: Coca-Cola Co. v. Comm'r, 155 T.C No. 10 (Nov. 18, 2020). Also join the Gift and Estate Tax Valuation Update with Barry Sziklay on October 19.

Today! Take a fresh look at the GPC method

What are the best sources of data for the guideline public-company (GPC) methodology when valuing a closely held interest? How do you narrow down the initial comps? What about adjusting for size and growth differences from the subject business? Get the answers to these questions and more from veteran valuer Rob Schlegel (Houlihan Valuation Advisors). He’s conducting a webinar today, September 29, titled Relying on Guideline Public-Company Data in Appraisals of Closely Held Interests, and you can register if you click here (no charge to holders of BVR’s Training Passport Pro).

2021 Johnson/Park DLOM study is now available

The Johnson/Park empirical method to estimate a discount for lack of marketability (DLOM) is one of the most popular methods business appraisers use for this purpose, according to a recent BVR survey. The method highlights the relation of the DLOM to the return on the investment and quantitatively measures the impact of the rate of return as a function of the DLOM. This methodology has been used in several tax court cases including the first family limited partnership (FLP) case to go to trial. The “2021 Discount for Lack of Marketability Study” provides objective rate-of-return measures to implement the Johnson/Park empirical method and includes a thorough explanation and example on how to apply these data.

Did you ever value a bar or nightclub?

If so, then BVR wants to hear from you! We are preparing the newest in our What It’s Worth series of special reports, and it’s on bars, nightclubs, and adult entertainment venues. We already have an expert on the adult clubs, but we need some help on bars and nightclubs, i.e., value drivers, risk analysis, unique operational considerations, M&A landscape, a sample valuation report (redacted), etc. If you can help us, please contact the BVWire editor at andyd@bvresources.com. Thanks!

Global BV News

Market risk premium reverts in Germany

Recent analysis on the German market suggests that the perceived risk of equity investing has dropped back to its precrisis levels, according to Alvarez & Marsal, which does a regular analysis of pricing dynamics in Germany. In terms of pricing levels, forecasted 2021 EV/EBITDA multiples rank significantly above historical levels for certain industries. “In a 10-year comparison, Healthcare, Energy & Materials and Software & IT rank highest among industries, while Retail & Wholesale Trade is priced at a significant discount,” the report says. You can read the full report, “A&M Germany: Valuation Insights,” September 2021, if you click here.

Valuation News Update

Lisa Guo — Thu, 23 Sep 2021 04:56:54 GMT

New push to explore realignment of intangible asset disclosures

Long overdue is a re-examination of the reporting and disclosure framework for intangible assets (IA). Even though IA is a powerful driver of corporate value, only a small fraction of it shows up on balance sheets. And what’s disclosed bears no relation to the total amount of IA because so much of it is internally generated and not required to be disclosed.

Series of papers: “Time to Get Tangible About Intangible Assets” is the first paper in a three-part series from the International Valuation Standards Council. The paper’s subtitle reveals its goal: “The case for realigning reporting standards with modern value creation.” Like a predecessor IVSC series on goodwill, the paper is well thought out and written by Kevin Prall (BDO), IVSC business valuation technical director, with contributions from the IVSC Business Valuation Board. The second paper in the series will take a deeper dive into the issue, and the third paper will present an analysis of potential frameworks.

The dollar amount of IA has hit $15 trillion worldwide—but this is just IA that has been disclosed, that is, the IA that has been acquired through third-party transactions—and it’s only a small fraction of the total. During a recent webinar, respondents were asked: “How strong do you think is the quality of global IA disclosure today?” Only 5% of respondents said “strong,” while 35% said “weak,” with the majority (59%) saying “mixed.” The need is definitely there for a fresh look at this issue.

Expelled partner should get FMV—but of what?

An Oregon appellate case deals with compensation for a partner’s 25% interest in a business after he is expelled from the firm. The trial court allowed for discounts for lack of control and marketability from the fair market value of the partner’s 25% interest. But the appellate court noted that the firm’s operating agreement called for compensation at 25% of the FMV of the assets of the business—not the interest in the business. The case was remanded back to the trial court for recalculation, sans discounts.

The case is Dipak Patel v. Siddhi Hospitality, LLC et al, 312 Or. App. 347 (June 16, 2021), and the case digest analysis and full opinion are available on the BVLaw platform.

Damodaran’s strong feelings about ESG

A year ago, Professor Aswath Damodaran (New York University Stern School of Business) called it “the most overhyped, oversold concept in the history of business.” He was talking about environmental, social, and governance (ESG) factors. He got some pushback and felt a “little guilty” of hyperbole, so he kept an open mind about it. Over the past year, he read all of the arguments in favor of it and heard from people who disagree with him. Has Damodaran changed his tune? “I am more convinced than ever that ESG is not just overhyped and oversold, but it’s become a gravy train for all the people who make money on ESG, and none of those people are in the groups that ESG is supposed to help.” In a recent blog post, he argued that the difficulty of determining whether a company or fund was “good” in terms of ESG makes the measure difficult to apply. Plus, he contends that the practical benefits of a strong focus on ESG in terms of metrics such as the cost of capital are “muddled.” You can read his blog post and watch his video on ESG if you click here.

Extra: ESG ratings have issues. Read the article “Warning to Business Valuers Looking to Use New ESG Ratings” in the October issue of Business Valuation Update.

New online tool for valuing fractional interests

This October will see the launch of the Partner Value Expert (PVX), an online application that represents a new approach to valuing fractional interests involving real estate. The developer, Dennis A. Webb (Primus Valuations), gave an explanation of the new application during a recent BVR webinar. Webb is a real estate appraiser as well as a business valuation expert who has specialized in fractional interests for almost 25 years. The application has been in development for six years and is also explained in Webb’s new book, Valuing Fractional Interests in Real Estate 2.0. The approach relies primarily on income methods using public limited partnership and REIT market returns. During the webinar, he presented the updated methodology by examining the methods in use today and understanding how and why they are replaced by or used in the new approach. He also stressed the importance of telling the story behind the valuation that makes sense to the user of your report. A recording is available of the webinar, 2.0: The New Breakthrough in Fractional Interest Valuation.

Extra: You can see PVX for yourself in the Exhibit Hall at the ASA International Appraisers Conference October 24-26 in Las Vegas.

Mercer chimes in on BVR DLOM survey

“Our profession has a long way to go in terms of understanding what DLOMs, or marketability discounts, really are,” concludes Chris Mercer (Mercer Capital) in his analysis of BVR’s 2021 DLOM survey. In his blog post, Mercer takes critical aim at the methods most respondents use for developing a DLOM, saying that the survey’s finding that 90% of respondents use restricted stock studies is “astounding.” The survey also found that 43% use pre-IPO studies, which Mercer says is “even more amazing.” He also comments on the use of the Mandelbaum factors and whether it’s appropriate to take a DLOM on a 100% interest in a private company.

Almost a quarter (22%) of valuation analysts polled in the survey say they use the quantitative marketability discount model (QMDM), a model Mercer developed. QMDM is a shareholder-level DCF model that values interests in a business in the context of an appraisal of the entire enterprise. The model focuses on shareholder-level cash flows, risk, and growth to reflect what a willing buyer would pay for a willing seller’s interest. The model is discussed in detail in the recently released third edition of the book, Business Valuation: An Integrated Theory, which Mercer co-wrote with Travis W. Harms (Mercer Capital).

In his blog, Mercer says that DLOMs are “not some magic thing that appraisers apply based on ‘Kentucky windage.’ They only exist to the extent that there are differences from the base value in terms of expected cash flow, growth and risk.” He also says: “Thanks to BV Resources for conducting the DLOM Survey and for sharing it with the appraisal profession.” The full survey results, including some interesting comments from respondents, is available if you click here.

Today! Valuation and legal experts examine latest cases

BVR legal editor Jim Alerding has hand-picked a number of the most consequential recent valuation and financial litigation court decisions for the next installment of our regular BVLaw Case Update webinars, which will be today. Joining him will be valuation expert James D. Ewart (James D. Ewart LLC) and family law attorney Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP), who was directly involved in two of the cases that will be discussed. To register, click here (no charge to BVR Training Passport holders).

Global BV News

Multiples in China lower than year-end 2020

As of Aug. 31, 2021, earnings multiples (price to LTM earnings) for Chinese companies were lower overall than those at the end of 2020, with an average of 30.8x compared to 40.3x for year-end 2020, according to “China Transactions Insights—Fall 2021” from Duff & Phelps (a Kroll business). Healthcare, technology, consumer discretionary, consumer staples, and real estate sectors showed declines in earnings multiples since December 2020, while multiples for the industrials and materials sectors increased, the report says.

Trailing EBITDA multiples (enterprise value-to-LTM EBITDA multiples) for Chinese companies decreased on average 7% from year-end 2020 to Aug. 31, 2021. Healthcare, technology, consumer discretionary, and consumer staples showed declines in EBITDA multiples, with multiples for the industrials and materials sectors showing improvement through August.

The report has much more information and data on industry sector performance, IPO activity, COVID-19 recovery, cross-border investment, and more.

Valuation News Update

Lisa Guo — Thu, 16 Sep 2021 04:55:27 GMT

New case to address goodwill impairment dispute

Goodwill impairment does not appear often in litigation, but a court case in Tennessee will go forward after a judge ruled not to dismiss the plaintiff’s claims. The plaintiffs brought a class action suit on behalf of those who purchased stock in Tivity (the defendants), which acquired Nutrisystem in 2019, and one of the claims involves goodwill impairment.

Inflated assets:The plaintiffs allege that the defendants impaired goodwill by inflating its assets and carrying a goodwill value that exceeded its implied fair value. They further allege that the defendants knew of multiple triggering events for impairment of goodwill but failed to impair and write down both the goodwill and the Nutrisystem trade name. In their motion to dismiss, the defendants countered that the claim failed to allege a misstatement, but their arguments were “unpersuasive,” so the case will proceed, the court ruled.

The case is Strougo v. Tivity Health, Inc., 2021 U.S. Dist. LEXIS 141711, __ F.Supp.3d __, 2021 WL 3209567. A case digest analysis and the full opinion are available on the BVLaw platform.

Frazier reviews ‘very important’ book on business valuation

A very comprehensive review of an important book is in the Summer 2021 issue of the Business Valuation Review™, published by the American Society of Appraisers. Veteran valuation expert William H. Frazier (W.H. Frazier & Co. Inc.) reviews the third edition of Business Valuation: An Integrated Theory, co-written by Z. Christopher Mercer and Travis W. Harms (both with Mercer Capital). The book is designed to demystify modern valuation theory and show how to apply fundamental valuation concepts. It also includes a detailed discussion of the quantitative marketability discount model (QMDM) for estimating a marketability discount. The book is a “very important contribution” to the business appraisal body of knowledge, writes Frazier. “I highly recommend my fellow business appraisers get a copy of this book and read it thoroughly—especially the parts you initially disagree with,” he concludes. “It will test and challenge your own theory. I know in my own experience, it has caused me to change the way I think about things—well, some of them anyway.” You can read the full review if you click here.

Extra: Did you know that you can find the full archive of past issues of Business Valuation Review™ on the BVResearch Pro platform? They go all the way back to 1982!

Jim Alerding joins BVR as legal editor

BVR is extremely pleased to announce that veteran valuation expert Jim Alerding, CPA/ABV (Alerding Consulting LLC), has joined us as legal editor. Jim will draw on his extensive appraisal and litigation experience to review and analyze all new business valuation-related court cases to be included in BVR’s BVLaw platform. He will also offer his perspective and commentary on the cases and other litigation-related matters. Jim worked closely with BVR’s former legal editor, Sylvia Golden, Esq., who passed away recently. Together, they did a regular webinar on BV-related court cases, and Jim will continue that tradition (the next BVLaw Case Update webinar is scheduled for September 22).

A highly respected valuation expert, author, and teacher, Jim has performed over 1,000 valuations and has testified over 400 times during his long career. In his current practice, he consults with business valuation professionals on a wide range of appraisal and litigation projects. Jim is a former member of the AICPA’s Business Valuation Committee and is the co-author of VS 100, which is the AICPA’s Statement on Standards for Valuation Services. He is in the AICPA’s Business Valuation Hall of Fame, and he is on the Editorial Advisory Board of BVR’s Business Valuation Update. He is a co-author of Financial Valuation: Applications and Models and has written or co-written four other books on business valuation-related topics.

BVR is very fortunate to have Jim with us, and we look forward to sharing his unique insights with readers.

Specialty pharmacies resilient amid COVID-19

The pandemic had less of an impact on specialty pharmacies than other types of entities, say speakers on a recent BVR webinar. What is a specialty pharmacy? There’s no standard definition, but it’s generally a pharmacy that dispenses specialty drugs, as opposed to a retail pharmacy that typically does not. Jarrod Barraza, a senior manager in the Healthcare Valuation Service Line at Horne LLP, was in the middle of valuing a pharmacy when COVID-19 struck. The pharmacy simply expanded its hours and started curbside pickup with relatively little impact to the business. Barraza also deals with dental practices, and he saw a sharp contrast. You can actually pinpoint the day that dentists’ cash flows stopped coming in—and then starting up again when restrictions were lifted and people started coming in again. People could forego certain dental visits, such as annual checkups, but that was not the case with specialty pharmacies.

Barraza co-presented the webinar, Valuation of Specialty Pharmacies—Practical Considerations, with Mike Gerling, president of Veros Health, who deals with mergers and acquisitions of specialty pharmacies.

New course on intangibles debuts at the October ASA conference

A new advanced course on the valuation of intangible assets will make its debut at the ASA International Appraisers Conference in Las Vegas. BV303—Valuation of Intangible Assets and Special Topics will take place October 21-24, prior to the main conference, which runs from October 24 to October 26. Students attending the class also receive a discount to the conference. The course instructor will be its developer, Ray Rath (Globalview Advisors).

There are a number of other preconference education sessions to choose from, including the four-day BV201 (Introduction to Business Valuation, Market Approach), BV203 (Introduction to Business Valuation, Asset Approach, Discounts and Premiums), and AR204 (Appraisal Review and Management Application) classes.

Two state CPA societies host BV events his month

Some state CPA societies organize business valuation conferences, and two of them are coming up later this month. Both events will be online only, and BVWire is looking forward to attending!

New Jersey: First up is this year’s Business Valuation and Litigation Services Conference, hosted by the New Jersey Society of CPAs, which will be a live webcast on September 21. The fine program includes sessions on cannabis, estate and gift, federal taxation, physician compensation, and a panel with a retired judge about expert witness testimony. To register, click here.

Virginia: The Virginia Society of CPAs (VSCPA) will hold this year’s two-day Forensic and Valuation Conference September 29-30. The agenda includes topics related to COVID-19, using statistics for lost profits, recent federal tax developments, goodwill, financial forensics tools, reasonable comp, and more. For more information and to register, click here.

Free webinar reveals what’s new in goodwill

The amount of goodwill on corporate balance sheets is at the highest level since 2017—and it’s growing. The possible change in the standards for accounting for goodwill has significant unintended consequences. This—and more—will be discussed on September 23 during a free webinar hosted by the CFA Institute, Calcbench, and Valuation Research Corp. The speakers will be from these three organizations, and they will be, respectively, Sandra Peters, Pranav Gai, and PJ Patel. To register, click here.

Global BV News

Initial agenda for IVSC Virtual AGM October 21-28

This year’s annual general meeting (AGM) of the International Valuation Standards Council (IVSC) will be held as a virtual program from October 21 to October 28. There will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. There will be more items added to the agenda, and you can see it if you click here. Some parts of the overall program are restricted to IVSC sponsor/member organizations or their representatives, but other aspects are open to anyone with an interest in valuation and the work of the IVSC.

Preview of the October 2021 issue of Business Valuation Update

Here’s what you’ll see:

“Florida’s Proposed Change to Goodwill Could Set a Precedent” (Richard West, Esq.; Bruce Parisi, ASA, ARM; and Thomas Gillmore, CPA/ABV/CFF, CFE). The Family Law Section of the Florida Bar is proposing legislation to clarify the value of goodwill in the marital interest of closely held businesses. The authors envision that this proposed legislation could set a precedent for future family law matters throughout the United States.
“Good News: Key Research on Private Cost of Capital Is Back” (BVR Editor). On the brink of ending its long run, the Private Capital Markets Project from Pepperdine University has secured funding to continue its ongoing survey of expected rates of return of providers in the private capital market.
“Updated Data Help Appraisers With RULs of Intangible Assets” (BVR Editor). To estimate the expected remaining useful life (RUL) of an intangible asset, it can be helpful to see how other appraisers have assigned RULs to similar assets in the subject industry. Data on 18 identifiable intangible types (also broken down by industry) culled from almost 16,000 purchase price allocations (PPAs) have been assembled into the third edition of Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations.
“Warning to Business Valuers Looking to Use New ESG Ratings” (BVR Editor). A hot topic today is environmental, social, and governance (ESG) factors and how to reflect the impact of these factors in business valuations and financial reporting. Data are starting to emerge to help quantify the impact of ESG—but analysts need to be careful in using these data.
“Premium Gap Closes Between Strategic and Financial Acquisitions” (BVR Editor). The difference between the premium strategic buyers pay for acquisitions versus what financial buyers pay has decreased, according to recent data in the Factset MergerStat/BVR Control Premium Study.
“COVID-19 Cloud Has Silver Lining in the Cannabis Sector” (BVR Editor). A good example of the varying effects of COVID-19 on different industries can be found in the cannabis sector. Of course, the pandemic has had devastating effects overall, but something interesting happened in this sector that allowed it to weather the storm fairly well, according to valuation experts close to the industry.

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.

To stay current on business valuation, check out the October 2021 issue of Business Valuation Update

Valuation News Update

Lisa Guo — Thu, 02 Sep 2021 04:54:08 GMT

QMDM increases foothold in DLOM toolbox

Almost a quarter (22%) of valuation analysts polled say they use the quantitative marketability discount model (QMDM) for quantifying a discount for lack of marketability (DLOM). This percentage is double the results from our 2018 survey, when 11% reported that they use this method. We point out that this year’s survey had over 200 respondents, which is twice the number as the 2018 survey. The full results of BVR’s 2021 DLOM survey are available as a free download if you click here.

First introduced in 1997 by Chris Mercer (Mercer Capital), the QMDM is a shareholder-level DCF model that values interests in a business in the context of an appraisal of the entire enterprise. The model focuses on shareholder-level cash flows, risk, and growth to reflect what a willing buyer would pay for a willing seller’s interest. The model is discussed in detail in the recently released third edition of the book, Business Valuation: An Integrated Theory, which Mercer co-wrote with Travis W. Harms (Mercer Capital). They also discussed the model and went through several case studies in the final part of a three-part webinar series for BVR.

Asset vs. income approach for valuing goodwill in Tennessee

In Tennessee, personal goodwill is not a marital asset that can be divided between the divorcing parties. In a recent case, the wife owned a speech clinic operated as a sole member LLC. The wife’s expert valued the firm at $82,000 using the asset approach, reasoning that all goodwill was personal. The husband’s expert used the income approach and came up with a value of $790,000. The trial court sided with the husband’s expert but reduced the value by 14.3%, which was the percentage of revenue attributable to the wife. The husband appealed, raising several issues, but the state’s appellate court upheld the trial court’s decision. The case is Cela v. Cela, 2021 Tenn. App. LEXIS 304, 2021 WL 3240238 (July 30, 2021), and a case digest analysis and the full opinion are available on the BVLaw platform.

BVR releases updated data on identifiable intangibles

Data from almost 16,000 purchase price allocations (PPAs) are included in Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations, 3rd edition, which has just been released. The guide includes useful life and value analytics for 18 types of identifiable intangibles and goodwill. The data covers PPAs from 2007 to 2019 and can help corroborate conclusions in a valuation analysis and assist preparers and reviewers of a useful life (amortization) estimate. Also, fully updated discussions give an overview of key accounting and intangible asset valuation guidance, insights on lifing, and an in-depth look at the five groupings of identifiable intangibles.

Raymond Rath (GlobalView Advisors), who acted as editorial advisor of the guide, conducted a webinar in which he discussed the data in the guide as well as his perceptions based on years of experience conducting and reviewing these types of engagements. You can view a recording of his webinar if you click here (free for holders of BVR’s Training Passport Pro).

New rules for FMV in healthcare should dull DOJ’s sword

The Department of Justice has taken an aggressive stance in fraud and abuse cases involving the measurement of fair market value of physician compensation. Hospitals paid huge fines to settle cases such as Tuomey, Halifax, Citizens, and North Broward. But, this past January, new regulations from the Centers for Medicare & Medicaid Services (CMS) went into effect that clear up some of the ambiguity that made hospitals easy targets for these lawsuits.

Brighter line: During a recent BVR webinar on physician compensation, an audience member asked: “Will the new regs reduce or eliminate the DOJ’s aggressive enforcement?” While it’s unclear that the new regs will eliminate it, there is now a “brighter line” in terms of knowing what potentially could create issues, especially with respect to the matter of “commercial reasonableness,” which has been a major issue in past enforcement actions.

Kathryn Taylor and Justin Conant (both with PYA PC) conducted the webinar, Physician Compensation and COVID-19: Then and Now and Now What? A recording is available if you click here. For additional insights, see the article, “New Ballgame for FMV in Healthcare Under Final CMS Rules,” in the August 2021 issue of Business Valuation Update.

Strong LEI performance continues, reports BVR’s EOU

In June 2021, the U.S. Leading Economic Index (LEI) rose 0.7%, to 115.1 points, reports the Economic Outlook Update (EOU) for the second quarter of 2021, published by Business Valuation Resources (BVR). The report notes that, following the rise, the U.S. LEI broke its previous record high reached in May 2021 and has fully recovered and passed its peak from before its contraction caused by the coronavirus outbreak. The Conference Board now forecasts real GDP growth in the second quarter could reach 6.6% for 2021 and 3.8% for 2022.

The 56-page Economic Outlook Update for the second quarter of 2021 contains expansive research from leading authoritative resources, which you can use in your valuation reports as long as you give proper attribution. To learn more, visit bvresources.com/eou.

DealStats Hall of Fame members for 2020

Thanks to business brokers and other intermediaries who contribute data, DealStats is the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2020 are:

· Scott Bushkie, Cornerstone Business Services (Green Bay, Wisc.);

· Bob Forbes, Forbes Business Investments (Greenwood Village, Colo.);

· John-Erik Grain, Lee & Associates (Vancouver, British Columbia);

· Greg Kells, Sunbelt Business Advisors—Ottawa (Ottawa, Ontario K1V 8N4); and

· Al Statz, Exit Strategies Group Inc. (Petaluma, Calif.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Global BV News

ESG in the spotlight at IVAS-IVSC conference October 6-7

Extra: The IVSC has published two perspective papers on the implications of ESG factors on business valuation, and they are available if you click here

Valuation News Update

Lisa Guo — Thu, 26 Aug 2021 04:48:45 GMT

Appellate court affirms zero DLOM for a 100% control interest

In a divorce matter, an Indiana appellate court has upheld the lower court’s decision not to allow a discount for lack of marketability (DLOM) on a 100% control interest in a business the husband owned. The business consisted of six dental practices, to which the husband applied a very high DLOM, primarily to reflect that most of the revenue was from Medicaid (according to him). The wife’s expert applied no DLOM to the valuation, and the trial court accepted it partly because the husband had shown no intention of selling the business. This is the first time the issue of intention to sell has arisen in Indiana in this context. The appellate court affirmed the decision of the trial court. There are some interesting points in the details of the case, which is Kakollu v. Vadmaludi, 2021 Ind. App. LEXIS 232; 2021 WL 3137204. A case digest analysis and the full opinion are available on the BVLaw platform.

Extra: BVR’s recent DLOM survey reveals that there is significant disagreement among valuation experts as to whether a DLOM is appropriate for a 100% control interest.

Sneak preview of updated data on identifiable intangibles

Get an advance look at the new edition of a guide that analyzes data on the useful lives of intangible assets culled from over 15,000 purchase price allocations. This will be part of a presentation by Raymond Rath (GlobalView Advisors) in an August 26 webinar that gives key insights on the determination of the economic and useful (amortization) lives for intangible assets. You’ll also get an overview of key accounting guidance pertaining to the valuation of intangible assets as well as industry-specific factors impacting the valuation and economic lives of different types of intangible assets. He will also discuss the data in the guide, Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations, 3rd edition, which is available now. Tune in to the webinar by clicking here.

Surprising results in private cost of capital survey

Over half (58%) of privately held business owners believe their cost of equity is less than or equal to 12%, according to the “2021 Private Capital Markets Report” from Pepperdine University Graziadio School of Business and Management. Approximately 21% of respondents indicated their business cost of equity capital is in the range of 9% to 10%, the range most cited. These low figures indicate that there may be a misunderstanding among business owners about the returns that investors require.

The report is the result of an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers. We note that the majority of private firms that responded had 20 employees or fewer, with 46% having no more than five employees. Also, over half of them had annual revenues less than $1 million.

Respondents to the 2021 survey will receive the report for free and should have already received coupon codes for this and other reports. The codes will expire at the end of this month, so, if you are planning to use one of them, please do it quickly. For others, a small fee of $100 will be charged for the report, which is available if you click here.

Extra: Selected required rates of return from the Pepperdine survey are now included in the Cost of Capital section of the monthly Business Valuation Update.

IACVS NOTE: The use of the term “cost-of-capital”, as used by valuation analysts is not universally understood by business owners as am “…expected ate of rerurn…” Instead, most business owners associate “cost-of-capital” with their borrowing rate, This misunderstanding has been commonly found over the last 25 years! The Pepperdine survey does not make this misunderstanding clear when asking business owners about their “cost-of-capital”.

New paper on CEO tenure and firm value

If you’re valuing a business with a CEO who has been in that job for 20 years, is that a positive or a negative? A new research paper shows that there is a “hump-shaped CEO tenure-firm value relation.” That is, CEOs who stay on too long may be adversely impacting firm value. When do they wear out their welcome? The researchers say the average “turning point” is 14 years, and they note that even successful CEOs “may be associated with declining firm value over the later course of their tenure.” The paper adds to the longstanding debate about CEO term limits and examines existing literature on CEO impact on firm value and performance. To download the paper, click here.

Citizens to acquire Willamette Management Associates

Citizens Financial Group Inc. will acquire Willamette Management Associates, a leading valuation consulting and forensic analysis firm with offices in Chicago, Atlanta, and Portland, Ore. This acquisition will significantly expand Citizens’ valuation services division and put it “among the top valuation services providers in the country,” according to a press release. Citizens also says that it will also accelerate the build-out of its corporate financial advisory capabilities, which includes the 2019 acquisition of Bowstring Advisors and the 2020 acquisition of Trinity Capital Partners. Terms of the transaction, which is expected to close this quarter, were not disclosed, the release says.

Global BV News

Revised glossary included in updated IVS

One of the changes in the latest edition of the International Valuation Standards (IVS) is a revised glossary of terms. You can find a red-lined version that shows the changes from the prior glossary if you click here. Key point: The glossary defines certain terms used in the IVS, so it is only applicable to these particular standards. You’ll also see that it does not contain basic valuation, accounting, or finance terms.

The updated IVS have an effective date of Jan. 31, 2022. Valuers can use the updated standards before the effective date and will need to make clear which edition of the IVS they are using when preparing a valuation report. Among other revisions, there is a new chapter, “IVS 230 Inventory,” as part of the intangible asset standards. IVSC member and sponsor organizations are provided with digital copies of IVS. Nonmembers/sponsors can access IVS through the IVS Online portal.

ASA’s Johnnie White joins iiBV board

The International Institute of Business Valuers (iiBV) has announced that Johnnie White, CEO of the American Society of Appraisers (ASA), has joined its board of directors. White has close to 30 years serving in a variety of management and leadership roles. At the ASA, he is responsible for the oversight and management of the organization’s business and executing the directives the ASA board of governors and its executive committee set

Valuation News Update

Lisa Guo — Thu, 19 Aug 2021 04:45:46 GMT

New Pepperdine report on private cost of capital released

The “2021 Private Capital Markets Report” is now available from the Pepperdine University Graziadio Business School. The report is the result of an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers.

Range of returns: The survey reveals that loans have the lowest average rates (banks require a median return of 3.3% to 5.5% depending on loan size) while capital obtained from angels has the highest average rates (ranging from a median of 23% for later-stage financing to 43% for seed money). The full report contains details on each type of funding.

A BVWire poll found that 40% of respondents use this survey as part of their toolbox for estimating small-private-company cost of capital. The Pepperdine Private Capital Markets Project (details here) was originally launched in 2007 and was temporarily halted last year due to funding issues. Thanks to the ESOP Association and Employee Ownership Foundation stepping in as sponsors, the research has been able to continue. But, because of an ongoing funding gap, a small fee of $100 will be charged for the report. However, respondents to the 2021 survey will receive the report for free and should have already received coupon codes for this and other reports. The codes will expire at the end of this month, so, if you are planning to use one of them, please do it quickly. The 2021 annual report is available if you click here.

How many BV credentialed members are in the three U.S. VPOs?

The AICPA, American Society of Appraisers (ASA) and the National Association of Certified Valuation Analysts (NACVA) are the three main valuation professional organizations (VPOs) in the U.S. that issue business valuation credentials. How many members do these organizations have? Chris Mercer (Mercer Capital) revealed the figures during his session on the future of the profession at the NACVA conference this past June.

U.S. VPO 2021 Membership (BV Credentials and Candidates)

National Association of Certified Valuators and Analysts (NACVA)* 6,075

Association of International Certified Professional Accountants (AICPA) 3,300

American Society of Appraisers (ASA) 2,168

Total 11,543

* includes 585 members of GACVA, NACVA’s group of international chapters.

Note: The numbers for the ASA and NACVA are confirmed; the AICPA figure is an estimate. These numbers also include individuals with multiple credentials.

Changes coming: Mercer also set his analytic sights on the business of educating and credentialing by these three organizations, and his conclusions and predictions may surprise you. See the September issue of Business Valuation Update for all the details.

Recap of recent BV cases of note

A number of recent cases have emerged that contain various valuation issues. Here are the most notable:

· Judicial dissolution/breach of fiduciary duty: Guge v. Kassel Enters. was decided on appeal under the Iowa “election-to-purchase-in-lieu-of-dissolution statute.” The Iowa Supreme Court decided that, because the parties’ experts had “both included transaction costs in their valuations under a net asset approach, the district court’s failure to reduce the asset values to account for the costs to liquidate the corporation’s assets warranted reversal.” Additionally, since there was no evidence of an intention to liquidate the company or its assets, the court declined to adjust for the built-in gains tax consequences urged by the majority shareholder. Guge v. Kassel Enters., 2021 Iowa Sup. LEXIS 81 (June 18, 2021).

· Marital/goodwill: In Maginnis v. Maginnis, an unpublished opinion, the Kentucky Appellate Court remanded the decision as to the value of the husband’s business for, among other things, the Family Court’s failure to consider an apportionment of goodwill between enterprise and personal goodwill. It also remanded for a reconsideration of the maintenance award to the wife since that award is based in part on the value of the business and the income of the husband. Maginnis v. Maginnis, 2021 Ky. App. Unpub. LEXIS 378; 2021 WL 2483877 (June 18, 2021).

· Shareholder dissent: In Island Light & Power, the one-third shareholder dissented to a forced sale of the assets resulting in a liquidation of the company and of the shareholder Trust’s stock. In a resulting bench trial, the court rejected the fair value determinations of the experts for both parties and adopted its own methodology (as is allowed by Rhode Island courts, including its Supreme Court) to determine the fair value of the one-third interest the Trust held. Island Light & Power Co. v. Sara Golvinveaux McGinnes 2011 Trust, 2021 R.I. Super. LEXIS 48 (June 3, 2021).

Case digests and full opinions are available through BVLaw or the BVResearch Pro platform (along with over 4,000 other valuation-related cases).

The biggest challenges when benchmarking a client

Valuation experts seem to be evenly split on what they see as their main challenge when doing an industry analysis. During a recent BVR webinar, attendees were asked about that. Here’s what they said:

· Finding the right industry (36%);

· Finding a reliable data source (33%);

· Getting local information (28%); and

· Other (3%).

During the webinar (free recording available), Galen Pugh of BizMiner addressed these challenges. BizMiner is a 20-year-old data analytics firm that collects U.S. industry and geographic raw data from 15 different sources and reports on over 5,000 industry segments. Because of the granularity of the data, you can benchmark a client against industry peers by drilling down to a specific line of business. For example, under restaurants, you can find different types, such as Chinese, steakhouses, food trucks, and the like. And you can drill down geographically to a ZIP code.

An audience member asked: “How many years of data do you have?” The standard report goes back five years, but you can get a legacy report that goes back to 2001 for some industries, according to Pugh.

A free recording of the webinar is available if you click here.

CVGA program for value growth advisory services

A training and credentialing program is available for valuation professionals who want to advise business owners on ways to maximize the value of their firms. The Certified Value Growth Advisor (CVGA) program is a five-day course that focuses on the fundamental best practices that drive value of any business. You will also learn how to build on those drivers to develop a short-term tactical plan and long-term strategic plan for the client’s business. This course is designed to help your clients increase company value by two to three times over a two-to-five-year period. The next CVGA program is scheduled for November 8-12 and will be in a virtual environment. For more details, click here.

Willamette focuses on tax and transfer pricing

Taxation-related valuation and transfer pricing issues are the focus of summer 2021 Insights from Willamette Management Associates. The articles cover:

· Tax pass-through entities;

· Intercompany transfer price analysis;

· Income tax (Estate of Warne); and

· A review of judicial decisions (Nelson v. Commissioner).

The editors for this issue are Ben R. Duffy andSam S. Nicholls. To download the articles, click here.

Global BV News

Cost of capital parameters in Europe as of June 30, 2021

ValueTrust has released an eighth edition (dated June 30, 2021) of its “European Capital Market Study” that serves as a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. The study also includes trading multiples and total shareholder returns across a wide range of industries. Here are a few key findings:

· The risk-free rate in Europe increased from -0.14% as of Dec. 31, 2020, to 0.33% as of June 30, 2021;

· The implied market return is at 7.4% as of June 30, 2021, so, taking the risk-free rate of 0.33% into account, the implied market risk premium is 7.1%; and

· The implied sector return (unlevered) of the energy sector increased from 4.0% as of Dec. 31, 2020, to 5.6% as of June 30, 2021, which is the largest increase compared with the other sectors.

The full report is available if you click here.

Preview of the September 2021 issue of Business Valuation Update

Here’s what you’ll see:

“Red Flags Appear in BVR’s DLOM Survey Results” (BVR Editor). There are a number of areas of concern in the responses to BVR’s recent survey on methodology and practice for estimating a discount for lack of marketability (DLOM).

“Insiders Examine Michael Jackson Estate Valuation Dispute” (BVR Editor). Testifying experts for the estate give their main takeaways from this fierce dispute with the IRS.

“Mercer Predicts a Shakeout in the U.S. BV Credentialing Landscape” (BVR Editor). Intense competition will trigger a consolidation among the three business valuation credentialing organizations in the U.S., predicts Chris Mercer (Mercer Capital), speaking at the recent NACVA conference.

“Examining the ‘Reasonably Objective Basis’ Concept for Projections” (BVR Editor). Recent developments have raised the bar with respect to how valuation analysts document financial projections and forecasts with regard to a “reasonably objective basis.” But what exactly is this concept and where can analysts look for specific guidance.

“SEC Comment Letters Reveal COVID-19 Impacts—and Much More” (BVR Editor). How to benefit from the great deal of useful information about fair value measurement issues in comment letters the Securities and Exchange Commission (SEC) sends after it reviews public companies’ financial statements and disclosures.

“How Recent Insolvency Reform in the UK Impacts Business Valuations” (BVR Editor). Driven by the pandemic, the Corporate Insolvency and Governance Act (CIGA) 2020 is the largest reform to insolvency law in the United Kingdom in over 20 years. Although targeted to large companies, the impact on business valuation methods and standards will likely trickle down to smaller firms.

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.”

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

To stay current on business valuation, check out the September 2021 issue of Business Valuation Update.

Valuation News Update

Lisa Guo — Thu, 12 Aug 2021 04:44:30 GMT

Prince estate valuation featured on latest AICPA podcast

In the shadow of the recent court decision in the Michael Jackson estate valuation dispute, the estate of pop star Prince is currently locked in a fierce estate and gift tax dispute. The IRS argues the executor has seriously undervalued the estate, and the executors claim the IRS’ calculations “are riddled with errors.” Valuation experts Josh Shilts (Shilts CPA, PLC) and Heather Tullar (Valuation Research Corp.), who are both on the AICPA BV committee, discuss the case in the latest in a series of AICPA podcasts, which is available if you click here. In the 45-minute podcast, they talk about the complexities that arise when working on a multifaceted engagement with a wide spectrum of hard-to-value or highly specialized assets. The speakers point out that Prince was well known for keeping tight control over the release and use of his music and for aggressively enforcing his intellectual property rights. Also, he died without leaving behind a will.

Extra: Shilts is the consulting editor for the recently published BVR Guide to Management Projections and Business Valuation: Analysis and Case Law.

The most popular option model for estimating DLOM

Almost half (48%) of respondents to a recent survey say they use option pricing models to estimate a discount for lack of marketability (DLOM), and the Finnerty model is the one most cited, according to BVR’s DLOM survey. Over half (57%) of those who use option methods use John Finnerty’s option model, with the David Chaffe and Francis Longstaff methods almost tied for second place (27% and 25%, respectively). Ten percent of survey respondents use the models from analyst Stillian Ghaidarov. A few respondents noted that they use Black-Scholes, but studies have shown that actual market behavior is different than what Black-Scholes theory suggests. The survey allowed for multiple choices, which accounts for the total being over 100%. Top valuation experts never rely entirely on one option model.

BVR’s survey on DLOM methodology and practice garnered over 200 responses. The full results are available as a free download if you click here.

Extra: Ghaidarov has a new framework for DLOM and he is looking for feedback on it—see details in the July 2021 issue of Business Valuation Update.

Earnouts trigger higher returns in M&A deals

Valuation experts who advise in M&A should be interested in a new research paper that examines earnouts. The paper finds that earnout-based M&As yield higher returns relative to the acquirer than M&As without earnouts, particularly in small deals and those involving a great deal of intangible assets. “Acquirers realize the highest returns from earnouts when the deferred payment is around 30% of deal value,” the paper says. “The Real Effects of Earnout Contracts in M&As” is by Leonidas G. Barbopoulos and Jo Danbolt, who are both with the University of Edinburgh Business School in Scotland. The paper appears in the Journal of Financial Research.

A sad note …

BVR is deeply saddened to share the news that our executive legal editor, Sylvia Golden, has passed away. She contributed all of the legal-related news to BVWire, and she oversaw the BVLaw platform, building it up to a resource with over 4,000 case digests and court opinions of business valuation and damages cases. She also made valuable contributions to many of BVR’s books and guides. Sylvia was an attorney who received her J.D. from the University of California at Berkeley, School of Law, and was an active member of the State Bar of California. She left the actual practice of law for a career as a legal editor, and we here at BVR had the great privilege of working closely with her for years, but it was all too short a time. She was a joy and a pleasure to work with, and we will miss her greatly. Her incredible dedication to her work continued right up until her final days, and it brought her much happiness. BVR sends its sincere condolences to her family, friends, and colleagues. Sylvia leaves behind a great legacy—her insightful writings will benefit valuation professionals for many years to come.

D&P/Kroll survey of cost of capital inputs

During a recent Duff & Phelps (a Kroll business) webinar, the audience was polled on various valuation and cost of capital topics. One question asked about the sources used for the equity risk premium (ERP) and the majority rely on the D&P recommended U.S. ERP (see below).

Which Methods/Data Sources Do You Use as the Equity (Market) Risk Premium (ERP) Input in Your Cost of Equity Estimates?

Duff & Phelps recommended U.S. ERP 57.5%

Long-term historical average 31.1%

Professor Aswath Damodaran’s implied ERP 23.7%

Supply-side ERP published by D&P 22.8%

Other implied ERP sources (e.g., Market-Risk-Premium.com) 10.1%

Other/not applicable 3.4%

Professor Pablo Fernandez’s survey of ERPs 2.3%

This question was multiple choice, and respondents could choose more than one answer. There was a total of 730 respondents to the survey (17% were D&P/Kroll employees, and 83% were external/third-party participants). The full results of the survey are available if you click here.

Carla Nunes and Jim Harrington of D&P/Kroll conducted the webinar COVID-19 One Year Later—Impact on Cost of Capital and Related Valuation Issues and discussed the impact of COVID-19 on global financial markets and cost of capital assumptions one year after the outbreak. A replay of the webinar is available if you click here.

Global BV News

Updated version of IVS released

The latest edition of the International Valuation Standards (IVS) has been released, and it has an effective date of Jan. 31, 2022. Valuers can use the updated standards before the effective date and will need to make clear which edition of the IVS they are using when preparing a valuation report. Among other revisions, there is a new chapter, “IVS 230 Inventory,” as part of the intangible asset standards. IVSC member and sponsor organizations are provided with digital copies of IVS. Nonmembers/sponsors can access IVS through the IVS Online portal.

Valuation News Update

Lisa Guo — Thu, 05 Aug 2021 04:41:56 GMT

Michael Jackson estate valuers give rare inside look

Experts for the estate of pop superstar Michael Jackson presented a fascinating look at how the valuations were done for the “tax trial of the century” in a BVR webinar. The case, Estate of Michael J. Jackson v. Commissioner, T.C. Memo 2021-48 (May 3, 2021), triggered intense media attention and was closely watched by valuation experts because of the contentious issues involved. In dispute was the value of three assets: Jackson’s name and likeness, his 50% interest in a music publishing company (operating business), and an entity that held a catalog of music.

The webinar panel consisted of Jay E. Fishman (Financial Research Associates) and celebrity licensing expert Mark Roesler (CMG Worldwide), who worked together on valuing the name and likeness. Also on the panel was music industry financial advisor David Dunn (Shot Tower Capital), who advised on the valuation of the publishing entity and the music catalog.

Widely divergent opinions: There was a huge difference between the valuations of the estate and the IRS—so great that, if the government prevailed, the estate would have to pay an extra $500 million in taxes. Why such a massive difference? As in most cases, divergent values are the result of different assumptions and inputs (some legitimate and some questionable), and the panel went into great detail about these matters, including the valuation approaches, projections, discount rates, discounts for lack of marketability and control, tax affecting, and more.

In the end, the court sided with the estate on the name and likeness value and the value of the music publishing company. The court sided with the IRS on the value of the music catalog. On the issue of tax affecting, although the Tax Court had ruled in the Estate of Jones (2019) that tax affecting was appropriate, it ruled that the facts and circumstances in this case did not support tax affecting.

A recording of the webinar, Power Panel: Estate of Michael J. Jackson v. Commissioner, is available if you click here (free to holders of BVR’s Training Passport and subscribers to BVR’s Desktop Learning Center). A case analysis as well as the court’s opinion are available at BVLaw.

Full results of DLOM survey now available

BVR’s survey on methodology and practice for estimating a discount for lack of marketability (DLOM) garnered over 200 responses. The full results are now available as a free download if you click here. BVR has been conducting this survey for over 10 years, the last one being done in 2018. The survey asks about specific methods and tools used, such as restricted stock studies, option price modeling, pre-IPO studies, and much more. Respondents were also asked to provide some open-ended comments and observations about the way they estimate DLOM. Thanks to everyone who participated!

2021 EBITDA multiples down slightly, per DealStats

Despite the vaccination rollout starting in the first quarter of 2021, EBITDA multiples ticked slightly lower, to 3.8x, according to BVR’s DealStats Value Index (DVI) report for 2Q 2021.

The path of the coronavirus outbreak negatively affected EBITDA multiples, which

sharply declined in the second quarter of 2020, to 3.7x, when the initial economic shutdowns were implemented, rose to 4.3x in the summer period when the coronavirus numbers improved, and fell yet again by the fourth quarter of 2020, to 3.9x, as cases spiked in the winter (see graph below). Because there has been relatively little movement over the past three quarters, a trend or clear direction has yet to emerge regarding the direction of EBITDA multiples in the near future as the questions remain, new variants of the coronavirus continue to emerge, and a new administration starts to implement its economic policies. DealStats will continue to monitor the trends in the EBITDA multiple.

Today! Take a free tour of Bizminer’s industry data

Galen Pugh of Bizminer will conduct a free 50-minute webinar today (August 4) of its industry and market research database that covers over 5,000 industry segments. Market areas range from the U.S. down to the ZIP code, and it offers a variety of customizable reports. Pugh will give an in-depth look at the functions and features of the database as well as insights into how BV professionals are using its reports. To register, click here (one CPE credit).

Damodaran to conduct valuation training through IMAA

Professor Aswath Damodaran (New York University Stern School of Business) will conduct a 12-hour training class in valuation hosted by the Institute for Mergers, Acquisitions and Alliances (IMAA). The training will consist of four daily sessions (three hours each) from September 14 to September 17 (it will be repeated November 8 to November 11). The objective of the training is to provide the fundamentals of each approach to valuation, together with limitations and caveats on the use of each, as well as extended examples of the application of each. For more information and to register, click here.

Global BV News

IVSC adds to Financial Instruments Board

The International Valuation Standards Council (IVSC) has announced that four new board members will join its Financial Instruments Board, the group responsible for drafting and consulting on International Valuation Standards (IVS) for financial instruments. The new board members are: Larry Levine, a managing director at Lincoln International LLC, based in Chicago; Marcus Morton, a managing director, valuation services, at Duff & Phelps, A Kroll Business, based in London; Manish Saxena, a partner in valuation advisory services at Grant Thornton, based in Bangalore; and Stephanie Sparvero, the global head of Bloomberg’s Evaluated Pricing Service (BVAL), based in New York. These individuals will take up their positions in August on an initial three-year term.

Valuation News Update

Lisa Guo — Thu, 29 Jul 2021 04:40:54 GMT

Tax reporting loophole shields some cryptocurrency

Uncovering assets is a common challenge in many valuation and forensics engagements, and the challenge becomes even greater when cryptocurrency is involved. True, the IRS now requires taxpayers to disclose their cryptocurrency dealings. In fact, it put a question right near the top of the Form 1040: “At any time during 2020, did you receive, sell, or otherwise acquire any financial interest in any virtual currency?” The plain language of this question would lead you to believe that, if a taxpayer owns cryptocurrency, he or she needs to answer “yes,” but that is not the case.

Through the cracks: During a recent BVR webinar, a question from the audience was: Is tax reporting triggered if someone merely buys and holds cryptocurrency? The answer is “no,” say the speakers, Katerina Gaebel and Mark DiMichael, both with Citrin Cooperman. They pointed out that the IRS specifically addresses this in its FAQs on virtual currency transactions, which states: “If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.”

The bottom line is that you cannot completely rely on the Form 1040 to determine whether someone owns cryptocurrency. Nevertheless, tax forms do play an important role in uncovering cryptocurrency, but many more methodologies and tools need to be used. You can view a recording of the webinar, Cryptocurrency Fraud and Forensics: What Valuation Professionals Need to Know, if you click here (free to BVR Passport Pro holders).

Discounts inappropriate under controlling agreement, appeals court finds

In a buyout dispute involving a limited liability company, the Oregon Court of Appeals recently overturned a trial court’s decision to apply discounts when valuing the departing member’s minority interest. The controlling operating agreement required a valuation of the plaintiff’s proportional interest in the value of the entity’s assets, not a valuation of the plaintiff’s specific interest in the company, the appeals court found.

The plaintiff owned 25% interests in two LLCs, which separately owned and operated franchise hotels. Three fellow LLC members each owned equal shares in the remainder interests. The plaintiff felt unfairly treated by the other members and sued, alleging a number of claims, including minority oppression. The plaintiff also asked to have the LLCs buy out his two interests. The defendants filed counterclaims, asking for the right to expel the plaintiff from the companies.

‘Subtle but significant’ distinction: The trial court found that there was no oppression and that, under the entities’ operating agreements, the defendants had the right to expel the plaintiff. The court also found the operating agreements were controlling in terms of how to determine the compensation due to the plaintiff for his respective interests. Under the one agreement, the buyout price was to be determined “by multiplying the member’s percentage ownership interest by the fair market value of all LLC assets.” Under the second agreement, the buyout price was to be based on the company’s book value.

A valuation expert testified he was retained to determine the fair market value of the plaintiff’s 25% interest and that it was appropriate to apply a 10% discount for lack of control and a 20% discount for lack of marketability. The expert calculated that the fair market value of all of the company’s assets was $5.5 million and the value of the plaintiff’s undiscounted 25% interest was almost $1.4 million. The use of discounts reduced the value of the plaintiff’s interest by $385,000. The trial court adopted the expert’s value determination.

The plaintiff appealed, arguing, among other things, that, in the fair market value determination, the application of discounts was inappropriate.

The Court of Appeals agreed. It found that the operating agreement was controlling and the language as to how to value a departing member’s interest was unambiguous. The plaintiff was to be compensated “for his share in the fair market value of all the assets of the LLC, not for the fair market value of his share of the company,” the reviewing court emphasized. “The distinction is subtle but significant.” The court said the agreement did not provide a basis on which to justify discounts to reflect that the plaintiff’s ownership interest was a minority interest in a closely held company. Consequently, the trial court erred when it adopted this part of the expert’s value determination.

At the same time, the reviewing court dismissed the plaintiff’s challenge to the trial court’s determination of book value to compensate the plaintiff for his interest in the second LLC.

A digest of Patel v. Siddh Hospitality LLC, 312 Ore. App. 347 (June 16, 2021), and the court’s opinion will be available soon at BVLaw.

Interesting question on the Michael Jackson case

There were three main valuation matters in the case of the Michael Jackson estate versus the IRS, and the estate prevailed in two of them (see our most recent coverage here). During a recent BVR webinar, former IRS official Michael Gregory (Michael Gregory Consulting) discussed the case, and an interesting question came up from the audience. Gregory pointed out that the valuation expert for the IRS lied on the witness stand but not about his work on the estate valuation—the lies were about other matters. The judge did not exclude the expert’s testimony, instead saying that he would “discount the credibility and weight” he gives to the expert’s opinion of value. Had the expert not lied, what would the outcome have been? Instead of the estate going two for three, would it have been one for three? Would the IRS have prevailed in the case?

When a witness lies on the stand, it can be a fatal blow. That is, judges may discount or disbelieve everything the witness says. That extreme did not happen in this case, Gregory points out, because the judge sided with the IRS in one of the three matters. As to whether the overall outcome would have been different had the expert not lied, “it very well could have,” Gregory says, but “you never know.”

Extra: You can hear the testifying valuation experts for the Jackson estate give their inside view of the case during an upcoming BVR webinar, Power Panel: Estate of Michael J. Jackson v. Commissioner, on July 27. Don’t miss this one!

Pro golfer values analyzed in Duff & Phelps/Kroll study

Everyone who plays golf knows how confounding the game is. One day, you hit fairways and make putts, and, the next day, you’re in the rough and come down with a case of the “yips.” It even happens to pro golfers: One week, they’re on the leaderboard, and, the next week, they miss the cut. Wouldn’t it be great if the golf ball were made of crystal and you could see how you’ll do in the future?

New study: Using statistical analysis and mathematical modeling, Duff & Phelps/Kroll has estimated the present value of over 1,000 pro golfers’ potential earnings through age 50. The calculations account for three sources of income: tournament winnings, endorsement income, and projected earnings from the PGA Tour’s Player Impact Program. The study ranks the top 60 male professional golfers globally, as measured by their future career value (FCV). Rory McIlroy from Northern Ireland earned the No. 1 spot on the leaderboard, with $401 million in FCV, finds the study, “Measuring Their Shot: Study of Professional Golfers’ Future Career Value.”

It’s a fun and interesting study, and it explains the valuation and mathematical modeling principles used in the analysis. A 10% discount rate is used to calculate the present value of a player’s deferred income stream, which implies a low company-specific risk premium (or should we say a player-specific risk premium). Knowing how fickle the game is, some players would opt to take their FCV today and run to the 19th hole.

Reminder: Please take our DLOM survey

BVR is conducting a short survey that examines the methodologies and specific tools practitioners use to estimate DLOM. We’ve received a good number of responses so far but would love more, so, if you have not taken it yet, please do so by going to this direct link: surveymonkey.com/r/3Q2Z5NJ. It will take just three minutes, and all responses are anonymous. We’ve run this survey several times over the past 10 years, so it will be interesting to see what has changed over time. The survey results will be made freely available to everyone. Thanks for your participation!

CSRP working group needs input

The Appraisal Foundation’s Business Valuation Resources Panel’s Work Group on Company-Specific Risk Premia (CSRP) is seeking input via survey to understand how valuation practitioners address such premia within their valuations. While the Working Group’s focus is financial reporting, input from other practice areas is welcome and encouraged. Your input will help to prepare more formal guidance relating to the subjective area of cost of capital. All responses will be confidential. If you have not yet taken the survey, please do so by clicking here. Thank you in advance for participating!

Global BV News

Free replays available for IVSC webinar series

Over 3,000 attendees from around the world listened to the recent International Valuation Webinar Series from the International Valuation Standards Council (IVSC). If you missed a session, the entire series is available for replay if you click here. The series, sponsored by Duff & Phelps, A Kroll Business, consists of five panel discussions, assembling over 20 leading experts from around the world, on topics such as the post-pandemic economic environment and its impact on valuation, the treatment of operating leases, IBOR reform, valuing alternative investments, and more

Valuation News Update

Lisa Guo — Thu, 22 Jul 2021 04:38:16 GMT

DLOM survey reveals methods of choice

The use of restricted stock studies remains the most cited methodology for quantifying a discount for lack of marketability (DLOM), according to the preliminary results of BVR’s 2021 DLOM survey. Nine out of 10 respondents say they use restricted stock studies, with the Stout study being the front runner (75% say they use the Stout study).

Option pricing models are the second most-cited methodology (48%), and 45% of respondents use pre-IPO studies. Rounding out the top five are the Johnson/Park empirical method (27%) and Mercer’s quantitative marketability discount model (22%). The survey had over 200 respondents, and multiple methods could be chosen in the survey questions. When asked how many methods respondents use in their analysis, 38% say they use two methods, 25% use three methods, and 21% use just one method.

BVR has been conducting this survey for over 10 years, the last one being done in 2018. The order of the five most-cited methodologies remains the same (see chart below) but the percentages for most of them have increased. We point out that this year’s survey had twice the number of respondents as the 2018 survey, so that may account for some of the changes.

DLOM Methodology	2021	2018
Restricted stock studies	90%	75%
Option pricing models	48%	42%
Preinitial public offering (pre-IPO) studies	45%	38%
Johnson/Park empirical method (Partnership Profiles)	27%	32%
Mercer's quantitative marketability discount model (QMDM)	22%	11%
None of the above	1%	n/a
Other	24%	23%

Respondents who checked the “Other” category cited such methods as cost of flotation (14%), Long-Term Equity Anticipation Securities (13%), VFC DLOM Calculator (7%), Ashok B. Abbott analysis (6%), and NICE (5%).

More next week: The survey asked more questions about DLOM methodology and practice, and we will have more results in next week’s BVWire. We will also make the full results freely available to everyone. Thanks to everyone who participated!

Kentucky appeals court explains state’s goodwill law

An unpublished opinion from the Kentucky Court of Appeals provides important insight into the court’s thinking as to the goodwill analysis trial courts must perform under the applicable state law when valuing business entities. Under controlling Kentucky law, only enterprise goodwill is a marital asset subject to marital distribution.

Scope of Gaskill: During the marriage, the ex-spouses started a chimney business. The husband worked as a chimney sweep, and the wife performed other tasks, including bookkeeping. The valuation of the company was important both for marital distribution purposes and determining alimony to the wife.

The wife relied on expert testimony from a CPA whose testimony and expert report included statements that 70% of the company’s value was personal goodwill and 30% was enterprise goodwill. The trial court accepted this expert’s overall valuation. At the same time, in determining the value of marital assets for property distribution’s sake and calculating income for alimony’s sake, the trial court disregarded the expert’s goodwill allocation.

The husband appealed the court’s findings on a number of grounds, including assigning error to the trial court’s decision to ignore the opposing expert’s goodwill analysis.

The Court of Appeals sided with the husband. The reviewing court first noted that the controlling case is the state Supreme Court’s Gaskill v. Robbins decision, which involved the valuation of an oral surgery practice that was organized as a sole proprietorship. In Gaskill, the high court adopted the distinction between enterprise and personal goodwill. Under the facts of Gaskill, the court found: “[T]here can be little argument that the skill, personality, work ethic, reputation, and relationships developed by [the owner spouse/doctor] are hers alone and cannot be sold to a subsequent practitioner.” Further, “[t]o consider this highly personal value as marital would effectively attach [the owner’s] future earnings, to which [the nonowner spouse] has no claim.”

In the instant case, the Court of Appeals invalidated the trial court’s judgment on this ground.

Moreover, the Court of Appeals dismissed the wife’s argument that Gaskill did not apply here because Gaskill dealt with a professional business whereas the contested business was a nonprofessional entity. The appeals court said it knew of no authority that definitively addressed whether Gaskill applied to valuing professional and nonprofessional business entities alike.

But, according to the appeals court, “though the issue may more often arise when valuing a professional entity, we conclude that Gaskill also applies to valuing nonprofessional entities.” Here, ignoring the expert’s unrebutted goodwill conclusions resulted in an approximately $200,000 increase in the marital portion of the company’s value, the Court of Appeals noted. In remanding, the appeals court ordered the trial court either to accept the expert’s goodwill conclusions and make the requisite apportionment of value or reject the goodwill analysis and provide a good explanation for doing so.

A digest of Maginnis v. Maginnis, 2021 Ky. App. Unpub. LEXIS 378; 2021 WL 2483877 (June 18, 2021), and the court’s opinion will be available soon at BVLaw. Subscribers also have access to a digest of Gaskill v. Robbins (II), 282 S.W.3d 306 (Ky. 2009), and the court’s opinion.

SEC comment letters uncover COVID-19 disclosures per PwC analysis

Valuable information can be gleaned about fair value measurement issues from comment letters the Securities and Exchange Commission (SEC) sends after it reviews public companies’ financial statements and disclosures. These letters are sent if the agency has questions or sees problems. PwC has posted its latest version of “SEC Comment Letter Trends” (comment letters publicly issued in the 12 months ended March 31, 2021), and the SEC has begun to issue comments related to COVID-19 disclosures. These comments focus on company-specific disclosures of pandemic-related risk factors and the discussion of known trends and uncertainties, including expectations of the impact on operating results and near- and long-term financial condition. Other topics of interest in the comment letters include business combinations, fair value (valuation techniques and inputs), and goodwill and other intangibles. Examining the issues in the comment letters can help you make sure you have addressed these areas properly in your own engagements.

Paper examines vanishing $10 billion of Sprint’s brand value

Prior to being acquired by T-Mobile in April 2020, Sprint had a brand with a value of $8 billion to $12 billion, according to all the major rankings of the most valuable brands. In August 2020, T-Mobile officially discontinued the brand. What happened to all that brand value? A new white paper from MARKABLES covers the whole story. It discusses the longevity of brand spending and the circumstances that foster a successful rebranding. One key finding is that digitized customer relations make branding and brands more dispensable. “It is one of the great misunderstandings of brand valuation—the impact of modern business models and customer relations on the longevity (and size) of brand value,” the paper says. The white paper is available for download if youclick here. MARKABLES is a provider of data designed to support the valuation of IP assets.

Updated data for estimating DLOC in closely held holding companies

Closed-end fund (CEF) data are commonly used to derive discounts for lack of control (DLOC) for closely held holding companies invested in marketable securities. Updated versions (to January 2020) of two sources of CEF data, prepared by Bruce A. Johnson and James R. Park, are now available:

· 2021 Closed-End Fund Report: Fixed Income Securities. Use this report to compare privately held family limited partnerships (FLPs) and LLCs that hold money market funds, certificates of deposit, government bonds, municipal bonds, corporate bonds, or other fixed income investments.

· 2021 Closed-End Fund Report: Stocks and Equity Investments. Use this report to compare privately held FLPs that hold common stock, preferred stock, mutual funds, REITs, or other corporate equity investments.

Global BV News

CBV Institute sees healthy membership growth

The Chartered Business Valuators Institute (CBV Institute) is Canada’s valuation professional organization (VPO) and standard-setter. Over the past year, it saw membership grow 6%, the most in the last decade, from 2,086 members in 2020 to 2,215 members in 2021, according to its latest year in review. CBV Institute members have the Chartered Business Valuator (CBV) designation. It holds an annual conference, the CBV Congress, which BVWire attends. You can see some takeaways from this year’s event if you click here.

Valuation News Update

Lisa Guo — Thu, 15 Jul 2021 04:35:52 GMT

ESOP litigation has become ‘risky business,’ says Alerding

As BVWire recently reported, the latest development in the long-running Brundle ESOP litigation is a lawsuit the trustee has filed against the very ESOP appraiser it once had hired to work on the case. After paying the $30 million judgment, the trustee is currently trying to obtain contribution from the nonfiduciary ESOP appraiser based on a number of valuation errors the Brundle court cited in its ruling. Veteran appraiser Jim Alerding (Alerding Consulting) has the following comments.

Alerding says this offshoot from the notorious Brundle case is shaping up to be a battle of experts on technical business valuation issues. He notes that the Brundle court had taken particular issue with the ESOP appraiser’s approach to determining beta. The court later acknowledged that it had misinterpreted what beta measured, i.e., the risk of a particular industry relative to the risk of the market as a whole, but this misunderstanding didn’t change the overall outcome of the case.

Alerding says he is “not a fan at all of Betas.” He notes the selection of an industry risk is a judgment call by the valuation analyst. “I am sure if this litigation over contribution continues, there will be valuation analysts willing to testify on both sides of the issue, which makes this a good case for settlement.”

As Alerding sees it, “regardless of the outcome, this case puts valuation analysts on notice that performing valuations for ESOP transactions is risky business. There is no doubt in my mind that the Department of Labor has been on a crusade to wipe out ESOPs, and litigations such as the Brundle suit provide a map as to how to get there.” “I have valued ESOPs a number of times in my career, but I would not touch one now,” Alerding says.

DLOM for a 100% interest in a private company?

One-third of valuation practitioners apply a discount for lack of marketability to a 100% interest in a private company, and 50% say “maybe,” reveals preliminary results of BVR’s DLOM survey. This is just one of the interesting results from the survey, which was launched during a recent webinar. The survey examines the methodologies and specific tools practitioners use to estimate DLOM. About 100 responses have come in so far, and, if you have not taken the survey yet, please do so by going to this direct link: surveymonkey.com/r/3Q2Z5NJ. It will take just three minutes, and all responses are anonymous. We’ve run this survey several times over the past 10 years, so it will be interesting to see what has changed over time. Thanks for your participation!

Van Vleet comments on use of SEAM in Ryan case

BVWire recently reported on the Ryan Trust v. Ryan case, a buyout dispute in which the Nebraska Supreme Court affirmed the district court’s decision to credit the valuation testimony of the expert for the late majority shareholder. As part of their analyses, both parties’ experts applied an S corp premium whose rate was based on the SEAM model. Daniel Van Vleet (GriffingGroup), the developer of the SEAM model, has the following comment on the case.

“In Ryan, testimony was provided by two nationally recognized valuation experts. Both opposing experts initially valued the subject S corp on a C corp equivalent basis. The Van Vleet Model (described as the ‘S Corporation Economic Adjustment Model’—aka SEAM) was used to adjust the C corp value to reflect the ‘economic benefits’ associated with an S corp.

“Both experts initially concluded a SEAM of 1.14 (14% equity adjustment). However, one of the experts adjusted the SEAM downward by 50% to a 7% equity adjustment (SEAM of 1.07). This subjective adjustment was made to reflect the assumed risk that the subject company would become a C corp in the future. But the district court was not convinced that this adjustment was appropriate and used this treatment as further evidence of the ‘downward bias’ of the expert.

“The SEAM is a mathematical formula that is primarily based on federal and state tax rates. I generally recommend against making subjective adjustments to the calculated SEAM absent significant empirical support data. In Ryan, it appears the court found that the subjective adjustment to the SEAM was not appropriate.”

A digest of Ryan Trust v. Ryan, 308 Neb. 851 (April 9, 2021), as well as the court’s opinion, are available at BVLaw.

A busy initial public offering (IPO) market

June had over 60 initial public offerings, and the second quarter of 2021 was the busiest quarter for IPOs in over 20 years. Valuation Advisors will be updating its quarterly summary DLOM statistics, which are available to subscribers of the database, by the middle of this month. The Valuation Advisors Lack of Marketability Pre-IPO Discount Database is the largest DLOM database in the world, with over 17,000 pre-IPO transactions. Some of the recent companies you might recognize were LegalZoom.com, Krispy Kreme, DiDi Global, and Oatly.

Check out the lineup of presenters for the ASA International Conference

A veritable who’s who of the business valuation profession will make presentations at this year’s International Appraisers Conference to be held October 24-26. The conference is presented by the American Society of Appraisers (ASA). You can see the lineup of presenters if you click here. Their sessions include a mock trial (multisession), cost of capital inputs, cannabis, earnouts, debt valuations, digital assets, VC/PE funds, sports businesses, global issues, and much more. This will be a hybrid conference featuring a live in-person event at Planet Hollywood in Las Vegas combined with a simultaneous virtual online option for remote attendees. Up to 16.2 CE hours may be earned at the conference. Early-bird pricing is currently available.

Global BV News

Framework proposed for cross-border DCF valuations

A paper in the Journal of Business Economics presents a comprehensive framework to cross-border discounted cash flow valuation, something that “has not yet been proposed,” says the author, Andreas Schüler (Bundeswehr University Munich). The paper addresses not only the valuation of a foreign company, but also the valuation of a domestic company that generates cash flows in foreign currency and/or uses debt in foreign currency. The paper is available if you click here

Valuation News Update

Lisa Guo — Thu, 01 Jul 2021 04:34:38 GMT

Size effect is ‘fiction,’ Damodaran reiterates

“There has been no size premium for the past 40 years,” said Professor Aswath Damodaran (New York University Stern School of Business), who has been called the “Dean of Valuation.” This was in response to an audience question during his keynote address at the recent CBV Institute Congress 2021.

Two camps: This is not a new remark by Damodaran—he has been saying this for years (see his 2015 post here). He is referring to ongoing academic research that concludes that the size effect has diminished or disappeared since it was first documented in 1981 (recent paper here). But the vast majority of valuation practitioners believe that the size premium exists. During a BVR webinar, a poll of the audience (of about 200 attendees) found that 94% of them use a size premium.

If the academic community says that the size effect disappeared long ago, why do valuation practitioners continue to embrace it? As Damodaran points out, one reason is the time horizon of historical returns. If you look at the last 40 years, the size effect is very different than if you go all the way back to the 1920s. You can clearly see this difference in the Cost of Capital Professional platform, which gives you control over the time horizon of historical return data that are appropriate for your subject entity. That is, professional judgment is required in choosing the part of history you believe best represents investor expectations of the future.

Damodaran points to another reason for clinging to the size effect, which is simply this: It’s easier to defend something everyone else is doing.

He also notes that the market does not seem to buy into the size effect. “After all, if the proponents of small cap premiums are right, bundling together small companies into a larger company should instantly generate a bonus, since you are replacing the much higher required returns of smaller companies with the lower expected return of a larger one. In fact, small companies should disappear from the market.”

In buyout dispute, ‘downward bias’ sinks expert’s fair value determination

In a bitter buyout dispute involving a successful private family business and featuring two veteran appraisers, the Nebraska Supreme Court recently affirmed the district court’s decision to unreservedly credit the valuation testimony of the expert for the late majority shareholder. In contrast, the district court found the company’s expert’s valuations under various methods showed a “downward bias” that made the expert’s value conclusion unreliable.

Oppression claim: Streck Inc. was a worldwide industry leader in developing and manufacturing cell stabilization technology for use in hematology, immunology, and molecular diagnostics. Sales were strong and increasing every year since its creation, and it had no product recalls in the past 25 years. The company had long-lasting relationships with large customers and a valuable portfolio of intellectual property. Its financial performance surged in recent years, and it expected more growth in future years.

Streck was founded by Dr. Wayne Ryan, who, at the relevant time, owned over 52% of the company’s stock by way of a trust (RRT). However, one of his daughters came to own two-thirds of the company’s voting shares, enabling her to appoint a majority of the members of the board of directors. In September 2013, she replaced her father as CEO. She encouraged her father to retire. Dr. Ryan did not object to her becoming CEO as long as the company was sold. In 2014, the CEO took steps to sell the company.

According to a trial industry expert for RRT, the sales process was “flawed and failed.” Despite the company’s ongoing solid performance and a growing healthcare life sciences market, bids solicited by an investment banker on behalf of Streck were relatively low, which the expert found was due to growth projections that were too conservative and not properly explained to prospective buyers. The industry expert said the investment banker lacked experience in the appropriate market. Further, the company decided to exclude the highest bidder in the first round.

Dr. Ryan complained he was not listened to and could not approve the sale. The board and his daughter, as CEO, abandoned the process. RRT, representing Dr. Ryan (who died before trial), sued the daughter and Streck, alleging oppression and breach of fiduciary duty and asking for judicial dissolution of the company. Ultimately, Streck elected to buy RRT’s shares under the applicable statute, which triggered a fair value determination by the district court.

‘Dysfunctional’ sales process: Both sides’ experts were highly experienced appraisers and used the discounted cash flow (DCF) approach in combination with the guideline publicly traded company (GPTC) and guideline merger and acquisition (GMA) methods to determine the fair value of Dr. Ryan’s shares. In adopting RRT’s 74-page proposed findings verbatim, the district court wholly adopted the testimony of RRT’s industry and valuation experts. Regarding the DCF, the court said the appraiser’s revenue and income projections aligned with the company’s projections and prospects for growth; his growth rate was reasonable as were the selected company-size risk premium and company-specific risk premiums. Further, the expert, who applied a 14% S corp premium, “credibly and convincingly testified” that no rational company would convert from an S corp to a C corp prior to a sale. In contrast, the company’s expert gave “misleading and not credible” explanations for his projections and “double-counted” the same risks to justify his projections and company-specific risk premium, the court said. It noted this expert arrived at the same 14% S corp premium but decided to half it to account for the risk of the company becoming a C corp in the future. The district court found this adjustment was “arbitrary” and said it reflected the expert’s “downward bias.”

The company appealed, and, based on the parties’ request for bypass, the case went in front of the state Supreme Court, which affirmed. The high court said its de novo review of the record led to the conclusion that the district court’s valuation was reasonable and based in fact and principle.

A digest of Ryan Trust v. Ryan, 308 Neb. 851 (April 9, 2021), as well as the court’s opinion will be available soon at BVLaw.

Michael Jackson case featured on BVR ‘power panel’ July 27

Experts involved in the high-profile case involving the Michael Jackson estate versus the IRS will discuss the contentious valuation issues in the case during a BVR webinar, Power Panel: Estate of Michael J. Jackson v. Commissioner. The panel, moderated by Jay E. Fishman (Financial Research Associates), includes celebrity licensing expert Mark Roesler (CMG Worldwide) and music industry financial advisor David Dunn (Shot Tower Capital).

As a sneak preview, hear the prevailing valuation expert, Jay Fishman, discuss some of the questions arising in the Jackson case. Click here.

A few recent papers of note

“Forecasting: Theory and Practice” is a recently updated encyclopedic presentation of forecasting methods in theory and practice. Even though it’s quite long (268 pages), the authors do not claim it’s an exhaustive list of forecasting methods and applications. The paper is freely available for download.

Another paper finds that there are problems with the Black-Scholes options pricing formulas during times of market stress. The authors examined two periods—the subprime crisis (October 2008) and the onset of the COVID-19 pandemic (March 2020)—and found that the “accuracy of these formulas is very poor.” A link to the paper is here, and it’s available for a charge.

Thanks to Dr. Michael A. Crain (Florida Atlantic University) for alerting us to these papers.

Reminder: Please take a survey about company-specific risk

BVWire is pleased to present a survey by The Appraisal Foundation’s Business Valuation Resources Panel’s Work Group on Company-Specific Risk Premia to understand how valuation practitioners address such premia within their valuations. While the Working Group’s focus is financial reporting, input from other practice areas is welcome and encouraged. Your input will help to prepare more formal guidance relating to the subjective area of cost of capital. All responses will be confidential. To take the survey, click here. Thank you in advance for participating!

Global BV News

Global valuers challenged by lack of data

A lack of empirical data on small private companies outside the U.S. makes valuations challenging. It’s a “real problem,” noted Andrew Neuman, a valuer in Canada. Speaking at the NACVA 2021 Business Valuation and Financial Litigation Hybrid and Virtual Super Conference, he pointed out that, because of the dearth of data, more professional judgment is necessary.

One idea:A valuer who practices mostly in Australia, Morris Kaplan, ICVS, agreed with Neuman. So what do you do? In one case in Australia, Kaplan used U.S. data in developing his buildup method—and he was not challenged on it when he testified in court.

Kaplan also gave kudos to the global research Pablo Fernandez (University of Navarra—IESE Business School) did on the equity risk premium and risk-free rate used in various countries (see the latest research here).

Valuation News Update

Lisa Guo — Thu, 24 Jun 2021 04:32:56 GMT

Another wrinkle in the Brundle ESOP case

Although the district and appellate courts in the landmark Brundle ESOP case ruled years ago against the trustee, Wilmington Trust, litigation related to the case is not over. A current lawsuit pits former allies, the trustee and ESOP appraiser, against each other. Recently, a district court ruled in favor of Wilmington’s claim for contribution.

In 2013, the owners of a private security firm, Costellis, sold their shares in the company to an ESOP in what a financial advisor called “a more advanced 100% structure” that would allow the owners to retain some control over the company. Constellis hired Wilmington Trust to serve as independent trustee representing the interests of the ESOP. Wilmington hired Stout Risius Ross (Stout) as ESOP appraiser. Both firms had extensive ESOP experience. In 2015, a former employee and participant in the ESOP (Tim Brundle) sued the trustee, alleging it violated its fiduciary duties to the ESOP by causing the latter to overpay for company stock.

The Brundle case was litigated in the eastern district of Virginia. The federal district court found the trustee liable for a nearly $30 million loss to the ESOP. Among other things, the court concluded the trustee failed to adequately scrutinize the ESOP appraiser’s valuation, which, the court said, included numerous defects and red flags. The court said Wilmington’s reliance on the Stout valuation was not “reasonably justified.” In a key decision, the 4th Circuit Court of Appeals affirmed the district court’s liability and damages rulings.

Trustee pays but wants contribution: Wilmington paid the $30 million judgment but has subsequently tried to recover from Stout some or all of the money. Wilmington, based on the district court’s findings as to the defects in the valuation report, sued Stout, alleging breach of contract and negligence and asking for contribution. In response, Stout filed a motion to dismiss the claims. The instant action is in the southern district of New York.

The court adjudicating this case agreed with Stout that the statute of limitations had run out on Wilmington’s breach of contract and negligence claims. However, the court sided with Wilmington regarding the contribution claim. Stout tried to argue this state law claim was preempted by federal law, specifically ERISA, “because that claim seeks to recover on a judgment for breach of ERISA-imposed fiduciary duties.”

In contrast, the court found, “ERISA does not bar Wilmington’s contribution claim against a non-fiduciary [Stout] merely because the judgment for which Wilmington seeks recovery is based on an ERISA violation.” Citing 2nd Circuit case law that has said Congress did not intend for ERISA to “completely immunize non-fiduciary plan advisors from damages claims,” the court allowed the case to proceed on Wilmington’s claim for contribution.

“[A] holding that ERISA preempts Wilmington’s contribution claim would immunize Stout from liability for breaching its common law duties,” the court said.

The case is Wilmington Trust N.A. v. Stout Risius Ross, Inc., 2021 U.S. Dist. LEXIS 54961; 2021 WL 1110040.

Digests of Brundle v. Wilmington Trust N.A. (I), 2017 U.S. Dist. LEXIS 35811, and Brundle v. Wilmington Trust N.A. (II), 2017 U.S. Dist. LEXIS 97752, and the court’s opinions are available at BVLaw.

Magnifique! Takeaways from the CBV Congress 2021

The work the Chartered Business Valuators Institute (CBV Institute) does as Canada’s valuation professional organization (VPO) and standard-setter is amazing, and the sessions at its CBV Congress 2021 June 16-18 represented best-in-class global learning. BVWire was pleased to attend its Congress, and here are a few very interesting and useful takeaways:

· Keynote speaker Dr. Aswath Damodaran (New York University Stern School of Business) said the lessons you learn during a crisis such as COVID-19 are the most important lessons you can learn in valuation (one being “don’t give up on fundamentals”);

· Calculation report or a full valuation? Valuers in Canada have a third option that falls in between the two;

· The “limited critique” is a type of report generally used in disputes and litigation to identify the main disagreements between the opposing experts; guidance has been issued on a framework of thinking regarding the impact of climate change on valuations;

· Market volatility is not going away any time soon, but the big worry is inflation (if it stays, we’re “in big trouble”);

· One of the big red flags in financial models in Excel is hidden rows and columns, a “very bad and dangerous practice” (better to use grouping);

· When using visuals, don’t get fancy—keep it simple (e.g., for fonts, Calibri or Arial are good choices);

· Recent court cases in Canada reveal that the manner in which you present your opinion is equally as important as what is actually included in your opinion; and

· A judge said he has a much better view of the expert witness in a virtual trial, so facial expressions become much more visible than from the bench.

The first day of the conference was devoted to business valuation, the second day examined the world of litigation, and the third was devoted to recent trends in M&A. A recap with more details will be in the August issue of Business Valuation Update.

Four questions you must always ask about PFI

There are many things to consider when evaluating prospective financial information (PFI), and much of it can be boiled down to four questions you should be asking, according to the just-released BVR Guide to Management Projections and Business Valuation: Analysis and Case Law:

1. Does the forecast correspond to internal budgets (or external forecasts by stock analysts)?

2. Is the current forecast consistent with previous forecasts?

3. Do the assumptions in the forecast appear reasonable in relation to historical performance?

4. Do the assumptions in the forecast appear reasonable in relation to performance of guideline companies or assets?

Of course, a lot of work is involved in answering these questions, and the guide can help. It is a collection of articles from BVR’s cache of “greatest hits” written by some of the top thought leaders in the profession that discuss a variety of elements, issues, and techniques practitioners should consider when utilizing management projections. Plus, the guide includes close to 100 digests that analyze court decisions involving projections and forecasts (the full court opinions are also available to buyers of the guide).

Note: You already have this new resource in your BV library if you are a subscriber to the Digital Library or BVResearch Pro.

(IACVS NOTE: This is the best resource available for BV professionals that must deal with management projections. In some countries, valuators are required to express confidence in the projections provided by management. This Guide will help the valuator understand management’s projections, and also help provide some much-needed guidance to management for the best practices when preparing these all-important projections used in valuations)

Call for papers: New Stark regs and healthcare valuation

We here at BVR are putting together a special report on the revised definition of fair market value (FMV) for the Stark regulations. Part of this report will feature interpretations and assessments of the new regulations for valuation practices and analysis. To that end, BVR is seeking paper proposals for the following areas:

Topics for All Valuation Disciplines: BV, CV, M&E, and Real Estate

1. What are the implications for valuation practice of CMS’ finding that Congress intended the definition of Stark general market value to be consistent with “the concepts and principles of the valuation community”?

2. What is the valuation impact of CMS adding the phrase “of the subject transaction” to the various new regulatory definitions of fair market value (general, equipment rental, and the rental value of office space)?

3. How should CMS’ comment that fair market value is “buyer neutral” impact valuation analysis and practices of the healthcare valuation community?

4. CMS states that the agency is willing to accept “any commercially reasonable” valuation method for Stark FMV compliance purposes. What is a commercially reasonable valuation method? How does this standard relate to the valuation body of knowledge and generally accepted valuation principles and methods?

5. CMS reaffirmed that the definition of general market value precludes reliance on market data from parties in a position to refer or generate business for each other. How should this guidance be applied in Stark FMV valuation work?

6. What are the implications for valuation analysis and practices in light of CMS’ comments about practice losses in its discussion of both fair market value and commercial reasonableness?

Topics for Compensation Valuation

1. How should CMS’ comment about precluded reliance on market data from parties in a position to refer or generate business for each other affect the use of physician compensation survey data?

2. What valuation guidance can and/or should be taken from CMS’ three compensation examples involving survey data and FMV (orthopedic surgeon, family medicine doctor, and a cardiothoracic surgeon)?

3. What is the valuation impact of the new valuation date standard of “at the time the parties enter into the service arrangement” in the revised general market value definition for services?

If you are interested in submitting a paper for the special report, please respond by July 8 to tim@tshealthcon.com with a paper proposal. The proposal should include a description of the paper’s topic and the key points addressed, along with a short bio of the author(s). First drafts of the papers are due by August 10. There is no minimum or maximum word count for a submission, but papers will need to meet certain writing guidelines in order to be accepted for publication.

Reminder: Please take a survey about company-specific risk

BVWire is pleased to present a survey by The Appraisal Foundation’s Business Valuation Resources Panel’s Work Group on Company-Specific Risk Premia to understand how valuation practitioners address such premia within their valuations. While the work group’s focus is financial reporting, input from other practice areas is welcome and encouraged. Your input will help to prepare more formal guidance relating to the subjective area of cost of capital. All responses will be confidential. To take the survey, click here. Thank you in advance for participating!

Global BV News

New book on intangibles and transfer pricing

How do you value intangibles in line with the arm’s-length principle that is required internationally for transfer pricing purposes? That’s the central question addressed by

Intangibles in the World of Transfer Pricing: Identifying—Valuing—Implementing, a new book edited by four Deloitte partners who are leading transfer pricing and valuation experts in Europe. Published by Springer International Publishing, the hardcover version has 733 pages in 46 chapters (including 20 country-specific chapters) that cover all different aspects and details of the treatment of intangible assets in transfer pricing.

A sad note …

We were shocked and saddened to learn that Madam Liu Ping passed away on June 5. During her long career in asset appraisals and business valuation, she served as Secretary General of the China Appraisal Society (CAS), was on the board of the International Valuation Standards Council (IVSC), was vice chair of the International Association of Certified Valuation Specialists (IACVS). “During our years of working with her, she demonstrated the utmost professionalism and contributed tremendously to the practical body of knowledge for all of us participating on the world stage in the accounting and valuation fields,” the IACVS said in a statement. We had the great pleasure of meeting Madame Liu, and we offer our deepest condolences to her family and her many colleagues and friends.

Valuation News Update

Lisa Guo — Thu, 10 Jun 2021 04:31:02 GMT

Insights from the inaugural National Economic Damages Virtual Conference

Attorneys and financial experts joined forces for the first-ever National Economic Damages Virtual Conference to discuss intellectual property damages, COVID-19 damages, forensic evidence, and the ins and outs of appearing in court. Here are a few interesting points:

· If an eligible business didn’t get a PPP loan, it may trigger a mitigation-of-damages issue;

· Courts are asking that valuations be made as current as possible to reflect COVID-19 impacts subsequent to the original valuation date;

· The concept “value of what was taken” has been revived—it first showed up over 100 years ago in court and has now re-emerged;

· Being excluded in court is not a career-ender, and, sometimes, it can be adequately explained;

· Don’t destroy drafts of valuation reports—you could violate spoliation rules (check state law);

· “Stay in your lane,” speakers advise—if something is outside your area of expertise, bring in a specialist to help; and

· Just because you pass a deposition with flying colors does not mean you will not be attacked on the witness stand.

Conference speakers were contributing authors to BVR’s Comprehensive Guide to Economic Damages, 6th edition. More detailed coverage of the conference will appear starting in the July issue of Business Valuation Update.

Connecticut Supreme Court clarifies double-counting rule

In a recent decision, the Connecticut Supreme Court clarified this jurisdiction’s approach to double counting (or double dipping). The court acknowledged that it had never been asked to determine whether the rule against double counting applied where the case involved the distribution of the value of the owner’s business and the consideration of income from that business to determine alimony.

Value vs. ownership: The husband owned two closely held businesses that were the sole source of his gross annual income. The trial court credited the testimony of the wife’s valuation expert and found that the combined value of the two businesses was $904,000. Based on this finding, in turn, the court awarded the wife a permanent nonmodifiable alimony of $18,000 per month. Additionally, the trial court awarded the wife the sum of $452,000, representing her half of the value of the businesses.

The husband successfully appealed the ruling with the state appellate court, which found the trial court improperly double counted the husband’s income by permitting it to be considered for purposes of the division of property and then again for the determination of alimony.

In asking for review by the state Supreme Court, the wife argued that the appellate court had misapplied the double-counting test by treating the allocation of a portion of the business value to the wife as the equivalent of transferring an interest in the business. Here, the trial court awarded 100% of the ownership of the businesses to the husband, which meant he had an income stream from which to make the alimony payments that was separate from the lump-sum payment the plaintiff received as part of the property distribution.

The state Supreme Court agreed with the wife. The court explained that the issue of double counting has arisen in the context of pensions and retirement. The court noted that, while no case law says so specifically, the court itself has suggested it would be double counting if income from property that was awarded to the nonpaying spouse and, therefore, was no longer available to the paying spouse, would be awarded to the nonpaying spouse in the form of an alimony award.

But the high court had never “clearly extended our case law regarding double counting to the valuation of businesses.” The court said case law from other jurisdictions suggested “it is not double counting for a trial court to award a spouse a lump sum representing a portion of the value of a business and also awarding the spouse alimony that is based on the paying spouse’s actual income from that business.”

Here, the trial court did not improperly double count the value of the [husband’s] businesses “because any rule against double counting does not apply when the distributed asset is the value of a business and the alimony is based on income earned from that business.”

A digest of Oudheusden v. Oudheusden (II), 2021 Conn. LEXIS 111 (April 27, 2021), as well as the court’s opinion will be available soon at BVLaw. A digest of the appellate court ruling, Oudheusden v. Oudheusden, 209 A.3d 1282 (2019), and that court’s opinion are available to BVLaw subscribers.

Tomorrow! Catch up on fair value for financial reporting

During a recent BVR Power Panel webinar, Ray Rath (Globalview Advisors) said there is “a lot of activity going on” in the area of fair value for financial reporting. He gave a rundown, including FASB’s efforts on a number of topics that impact fair value, including final guidance on impairments for private companies and not-for-profits, simplifying fair value of equity-class share-based awards, accounting for asset acquisitions, and underwriter restrictions. He also mentioned that PCAOB standards regarding auditing fair value measurements and the use of third-party specialists are becoming effective. The SEC has issued several releases, including a fund valuation framework and issues concerning SPACs. The Appraisal Foundation is working on guidance on company-specific risk, and the AICPA has a few guides in the works, he noted.

Zoom nightmare: trial verdict overturned

Wandering pets, faux backgrounds, technical glitches, and the like are common during Zoom calls, but it’s a serious matter when it comes to remote testimony in court. In a New Jersey case, a Zoom trial verdict was reversed on appeal because a witness was being coached off-camera, according to an article in the New Jersey Law Journal. The article also refers to a Michigan Zoom trial that was halted after it became apparent that the victim and defendant were appearing from the same apartment. Some judges have become adept at detecting signs of coaching of witnesses who are remote, such as eyes that dart off the screen, the article says, and some judges make the witness pan the camera 360 degrees to check for other people in the room. Our thanks to Ron Seigneur (Seigneur Gustafson LLP) for alerting us to this case.

Reminder: IRS is hiring BV experts

The IRS is looking to hire experienced business appraisers for six open positions in various locations across the U.S. According to the job posting, the salary ranges from $92,143 to $146,120 per year, and the positions have the title of financial analyst. Duties include preparing and reviewing appraisals of businesses and business interests, serving as an expert witness in court, meeting with taxpayers, and more. To get all the details, including job description, experience requirements, locations offered, how to apply, and more, click here.

Full agenda available for ASA International Conference

The American Society of Appraisers (ASA) has posted the agenda for this year’s International Appraisers Conference to be held October 24-26. The conference brings together appraisers of all disciplines, and the BV agenda is available if you click here. Sessions include a mock trial (multisession), cost of capital inputs, cannabis, earnouts, debt valuations, digital assets, VC/PE funds, sports businesses, global issues, and much more. This will be a hybrid event featuring a live in-person event at Planet Hollywood in Las Vegas combined with a simultaneous virtual online option for remote attendees. Early-bird pricing is currently available.

Global BV News

Miss the free IVSC webinar series? No problem

Over 3,000 attendees from around the world listened to the International Valuation Webinar Series May 17-27 from the International Valuation Standards Council (IVSC). If you missed a session, the entire series is available for replay if you click here. The series, sponsored by Duff & Phelps, A Kroll Business, consists of five panel discussions, assembling over 20 leading experts from around the world, on topics such as the post-pandemic economic environment and its impact on valuation, the treatment of operating leases, IBOR reform, valuing alternative investments, and more.

CBV Congress marks 50-year milestone

The Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO), will present a very special Congress to mark the great milestone of reaching 50 years of service as a CBV profession. The CBV Congress 2021 is a three-day event that will be online June 16-18. The first day is devoted to business valuation, and there will be a keynote by Dr. Aswath Damodaran (New York University Stern School of Business). The second day will examine the world of litigation, and the third is devoted to recent trends in M&A. You can check out the full agenda if you click here.

Valuation News Update

Lisa Guo — Thu, 27 May 2021 04:29:54 GMT

What you should know from the spring BV conferences

BVWire has been on the virtual road attending some excellent events. Last week, we brought you some coverage of the ASA Energy Valuation Conference from Houston. This week, we share some interesting takeaways from three events we attended.

The New York State Society of CPAs (NYSSCPA) Business Valuation and Litigation Services Conference had two timely sessions on cryptocurrency. Valuations are tricky, but finding them in the first place can be even trickier. Locating crypto assets is a long, slow, and complex process. There’s no IRS reporting if you just buy and hold it, so it won’t show up on Forms 1040 or 8949. Reporting is triggered if you sell or trade in it—and just spending it to buy something constitutes a “sale” that is reportable. Of course, some of this goes unreported and some transactions are done under the table. One of the speakers was a Certified Cryptocurrency Forensic Investigator (of which there are very few) who pointed out that not all Bitcoin transactions are recorded—some are done on the dark web, a “very dangerous” place where conventional tracing tools do not work, he said. Other topics at the conference included more emerging issues (SPACs, Zoom as a practice-builder) and some new twists on evergreen topics (estate valuations, cannabis, distressed firms, and collaborations).

Later in the week, it was the first-ever ASA Complex Securities Virtual Conference, where new research on volatility was presented that revealed that the market is not capturing the full extent of volatility. Convertible debt with high volatility is being overvalued—and so are those with lower market volatility (but not as much). An entertaining session compared the valuation of complex securities to valuing NFL contracts. Player contracts often include options, but teams are not required to value them. What are they worth and how do they affect risk? Should a player enter into a contract with a guaranteed minimum and team options? The principles developed in valuing options on common stocks can help answer these questions. Monte Carlo simulation can be used just as analysts use it to value complex financial options. Other speakers discussed SPACs and contingent consideration, and there was a lively ask-the-experts session.

Then it was on to the United Kingdom for the Institute of Chartered Accountants in England and Wales (ICAEW) Valuation Conference. Professor Pablo Fernandez (IESE Business School, Universidad de Navarra), who has written extensively on valuation and common sense and is well-known for his opinions on the capital asset pricing model (CAPM), did the lead-off session While CAPM received a Nobel Prize and is used in nearly every business valuation textbook, “CAPM can be an absurd model, lacking any relationship to human understanding,” he told the audience. His position is that CAPM and its betas do not explain anything about expected or required returns. Professor Ian Cooper (London Business School) did a separate session on the adjustments many analysts apply (for small size, distressed assets, country risk, or other factors). These adjustments can compound business valuation “anomalies.” With today’s historically low interest rates, premiums have a disproportionate impact and can “drive your entire valuation. Your adjustments matter a lot at the moment,” he said. He showed that a 12% micro-cap size premium reduces value by about 76% for small firms. “Certainly, the evidence for this kind of adjustment is less clear now than it was in the past,” making the application of size premia more complicated. Other sessions included more on the impact of company size, cost of capital for family firms, an economic update, and a town hall-style panel session.

Of course, these events contained a great deal more useful information. More detailed recaps of these conferences will be in the July issue of Business Valuation Update.

Court of Chancery adopts deal price, adjusting for synergies and tax savings

In a statutory appraisal action, the Delaware Court of Chancery recently adopted the deal price minus synergies as the best indicator of fair value. The court found one further adjustment to account for the change in the target’s operative reality between the date of signing and closing of the merger also was necessary. This is one of those increasingly rare cases in which the petitioners, as shareholders of a public company, obtained a price that was slightly higher than the merger consideration.

Background: The petitioners owned shares in Regal Entertainment Group (Regal). In February 2018, Cineworld Group (Cineworld) acquired Regal by way of a reverse triangular merger. The merger consideration was $23 per share. The petitioners owed shares in Regal. Regal’s board approved the merger agreement in early December 2017. In late December 2017, then-President Trump signed the Tax Act into law. Most changes took effect starting Jan. 1, 2018. The merger closed in February 2018.

Two required adjustments: The court looked to the deal price and found the sale process was sufficiently reliable to consider it the best evidence of Regal’s fair value as of the signing of the merger. However, this was a synergistic transaction. Under the applicable law, the court must determine the value of the company as a going concern, meaning the court must deduct any value derived from the expectation of the merger. The buyer, Cineworld, undertook detailed analyses as to the synergy value it could derive from the merger. Ultimately, this value was important to Cineworld’s financing. Much of the court’s analysis deals with how to estimate the value of synergy and how much of that value to allocate to the seller. The court was guided by the Delaware Supreme Court’s ruling in Aruba, which says a trial court has to make a synergy deduction, even if it is difficult to determine this value, using its best judgment.

The court noted that, here, there was evidence that the buyer had not overpaid for the target but had allocated some of the anticipated synergies to the seller. There also was contrary evidence that the buyer did not contemplate synergy value from the deal. The parties apparently did not bargain over synergies. Cineworld’s trial expert said he could not determine how the parties split synergies. He relied on a 2018 Boston Consulting Group (BCG) study that found that sell-side stockholders of the target company typically capture about 54% of synergies.

The court acknowledged it faced a less-than-optimal record and unsettled precedent as to what is necessary to prove a synergy allocation. It decided the 2018 study was “the best tool available for an imprecise task.” If the amount of the synergy value was $6.99, based on the study, the seller side captured 54% of it. Therefore, the court said, $3.77 must be subtracted from the deal price as synergy value.

A second, upward, adjustment was necessary as a result of the 2017 Tax Act, the court found. It noted that the applicable appraisal law requires fair value be measured by the operative reality of the company at the close of the merger. Both sides agreed that the company’s value changed as the new Tax Act lowered corporate taxes to 21%. The court noted Regal’s lowered tax rate reduced the amount of financial savings that the buyer could achieve. After the Tax Act, those financial savings were part of the value available to Regal in its operative reality as a stand-alone entity, the court said. It added $4.37 per share to the deal price minus synergies. As a result, the court decided the fair value of the petitioners’ shares was $23.60 versus the $23 deal price.

A digest of In re Appraisal of Regal Entertainment Group., 2021 Del. Cha. LEXIS 93; 2021 WL 1916364 (May 13, 2021), and the court’s opinion will be available soon at BVLaw.

Today! Inaugural National Economic Damages Virtual Conference

Attorneys and financial experts join forces for the first-ever National Economic Damages Virtual Conference, a two-day event that starts today, May 26. Dynamic topics direct from the pages of BVR’s Guide to Economic Damages will come to life during the event, including intellectual property damages, COVID-19 damages, forensic evidence, and the ins and outs of appearing in court. Also, several panels will recap key takeaways and field your questions. Earn up to seven CPE/CLE credits. If you hold a BVR Training Passport Pro, there is no additional charge for this conference. You can check out the agenda and register if you click here.

TAF needs volunteers for BV panel

The Appraisal Foundation (TAF) is accepting applications from volunteers to serve on its Business Valuation Resource Panel (BVRP). The purpose of the BVRP is to oversee the development of business valuation advisories, provide input on exposure drafts, and offer insight into emerging issues or other matters of like significance. The panelists will serve for a term of up to three years. Completed applications must be received by September 1. For an application, click here.

Global BV News

Discrepancy in data breach data

Data breaches reported to the UK Financial Conduct Authority (FCA) dropped by 30% between 2019 and 2020, the regulator says. This represents a significant discrepancy to proprietary data from Kroll that show actual cyber incidents increased by 56% for the same period. Also, Kroll’s data show that the fintech industry was more prone to be a target of such cyberattack attempts.

A concern here is that organizations may misinterpret the data and underestimate the true risk.

Extra: How do you account for cybersecurity risks in business valuations? See the BVR briefing Cybersecurity in Business Valuation: Addressing the Impact of Data Breaches on Value.

iiBV adds to growing staff

The International Institute of Business Valuers (iiBV) has added two individuals to its staff. Roberta Di Chiara, based in Toronto, Canada, will provide administrative assistance to the executive director, the board of directors, and the iiBV education, marketing, finance, and audit committees. Amine Zaari, based in Agadir, Morocco, has joined the team as a marketing and communication manager. He is responsible for optimizing iiBV’s website and social media and managing advertising campaigns and marketing channels for students and member organizations. The iiBV provides educational opportunities, promotes consistent professional ethics and standards, facilitates the exchange of information and ideas, and encourages international co-operation and communication.

Valuation News Update

Lisa Guo — Thu, 20 May 2021 04:26:52 GMT

Major changes in energy sector valuations

In the wake of the pandemic, there is a “paradigm shift” in valuations in the energy sector, according to one speaker at the Energy Valuation Conference, hosted by the Houston Chapter of the American Society of Appraisers on May 12. Well over 200 attendees in 10 different countries listened to a full day of sessions from top experts in this sector. BVR sponsored the live webcast of the event.

The pandemic hit the energy sector particularly hard. Earnings plummeted, and more than 100 North American oil and gas firms filed for bankruptcy in 2020. M&A activity took a hit, and now there appears to be more sellers than buyers. Speakers pointed out that transaction multiples going forward are expected to shift in certain subsectors.

Rebound timing?Several third-party forecasts predict the energy sector won’t get back to pre-pandemic levels until 2030. Best case is 2024, if there’s a big economic recovery, and worst case is 2050, if the recovery is slow, speakers said. Interestingly, several speakers did not put much weight on the impact of the rise of electric vehicles on the oil and gas business.

Several speakers discussed the regulatory environment, which is abuzz with a number of major proposals that would directly impact this sector. What’s more, there are serious concerns about the Biden administration’s actions so far concerning the oil and gas industry.

For valuation experts not familiar with this industry, speakers gave some good overviews of the different components of the industry, namely, the upstream, midstream, and downstream subsectors. There was also an interesting session on the new proposed tax provisions and the important role valuations play in tax credits. Also interesting was a session on the fast-paced world of used equipment auctions (this sector is fixed asset-heavy). The growing trend in environmental, social, and corporate governance (ESG) was also covered. A recap and key takeaways from the conference will appear in the July issue of Business Valuation Update.

Court disses restaurant’s ‘direct physical loss’ theories in COVID-19 suit

The key question in many COVID-19-related insurance disputes is what constitutes “direct physical loss,” a federal court recently explained as it rejected a plaintiff’s breach of contract claim against the insurer. The plaintiff unsuccessfully offered two theories to meet this prerequisite for coverage, and they are similar to the arguments Caesars Entertainment recently presented in its massive lawsuit against nearly 60 insurers. The outcome here and in similar cases bodes ill for Caesars’ case.

The plaintiff owned a restaurant in South Miami whose operations were curtailed by pandemic-related measures. The plaintiff had an all-risk commercial property insurance policy with Certain Underwriters at Lloyd’s. (Caesars, too, had all-risk insurance, as its complaint emphasized.) The policy included business interruption coverage and covered the actual loss of business income due to the necessary “suspension” of the business’s “operations.” The “suspension” had to be caused by “direct physical loss of or damage to property.”

Cleaning is not direct physical loss: In its suit (subject to Florida law) against the insurer, the plaintiff proposed two explanations of how the virus and various governmental actions caused it to suffer direct physical loss. Under one theory, the plaintiff contended it lost the use of its facilities because of the high risk of transmission of physical coronavirus inside the premises.

The court rejected the “loss of use theory,” as has the “vast majority of federal courts around the country and all courts within this district.” The court said, “[C]ourts reject this theory because it is an attempt to recover for economic losses that happen to be caused by something physical (e.g., the coronavirus particles) rather than a ‘direct physical loss.’ In contrast, losses caused by a hurricane would be ‘clearly covered.’” Here, the property did not change on account of the virus, but the world around it did. “And for the property to be usable again, no repair or change can be made to the property—the world must change,” the court said.

Under the plaintiff’s physical contamination theory, the plaintiff maintained the virus was physically present inside its premises. The plaintiff acknowledged that there was no test to show so but claimed that, as the virus was omnipresent in the community, it is a “virtual certainty” that it was on the premises at some point. The court cited applicable 11th Circuit case law that has rejected this argument, finding “an item or structure that merely needs to be cleaned has not suffered a ‘loss’ which is both ‘direct’ and ‘physical.’” The court in the instant case said that, by now, “it is widely accepted that life can go on with hand sanitizer and disinfecting wipes.” The court also observed that the plaintiff had in fact continued to do take-out business “from the very premise they argue has suffered direct physical loss.”

The court dismissed the plaintiff’s complaint.

The case is Town Kitchen LLC v. Certain Underwriters at Lloyd’s, 2021 U.S. Dist. LEXIS 361919 (Feb. 26, 2021). BVLaw has been tracking many of these disputes (the list keeps expanding), and digests and the court opinions are available to BVLaw subscribers.

Updates to BV standards and guidance you should know

Constantly evolving, business valuation standards and guidance come from a variety of sources. During a recent webinar, veteran valuation expert Jim Alerding (Alerding Consulting), who has been involved in the development of some of the key standards, gave a review and update, which included these important developments:

The AICPA has put out a Subsequent Events Toolkit that gives guidance on making disclosures about events occurring after a valuation date that impact the valuation, which is particularly useful now as valuations deal with the pandemic;
The Appraisal Foundation has issued a series of four valuation advisories for financial reporting (relevant in other areas as well); the latest one is on contingent consideration, and two new ones are in the works (one on company-specific risk and another on discount rates for intangibles);
The AICPA has issued a Statement on Standards for Forensic Services No. 1 (SSFS 1) designed to provide more tailored authoritative guidance to CPAs who perform forensic accounting services;
Several valuation groups have collaborated on a proposed revision to the International Business Valuation Glossary, which has triggered some concerns among valuation experts; and
A relatively new credential, the Certified in Entity and Intangible Valuations (CEIV), has a set of documents known as the Mandatory Performance Framework (MPF) that CEIV holders must follow for fair value measurements but that others should use as best practices (there’s also a Certified in the Valuation of Financial Instruments (CVFI) credential that has its own MPF).

Alerding covered a lot more in his 100-minute webinar, which is available if you click here (purchase required for nonsubscribers).

Extra: During this time of uncertainty, a good paper to read is “Dealing With Valuation Uncertainty at Times of Market Unrest,” by Alexander Aronsohn, who is the technical standards director at the International Valuation Standards Council.

Leading damages guide spawns two-day virtual conference May 26-27

Compelling topics direct from the pages of BVR’s Guide to Economic Damages will come to life during the first National Economic Damages Virtual Conference on May 26-27. Intellectual property damages, COVID-19 damages, forensic evidence, and the ins and outs of appearing in court are among the topics. Speakers include attorneys and financial experts who are contributing authors to the guide. Also, several panels will recap key takeaways and field your questions. Earn up to seven CPE/CLE credits. If you hold a BVR Training Passport Pro, there is no additional charge for this conference. You can check out the agenda and register if you click here.

Damodaran to teach valuation fundamentals at IMAA

Professor Aswath Damodaran (New York University Stern School of Business) will present a four-day, 12-hour online course on valuation May 25-28 at the Institute for Mergers, Acquisitions and Alliances (IMAA). Damodaran (known as the “dean of valuation”) will go over the fundamentals of each approach to valuation, together with limitations and caveats on the use of each, as well as extended examples of the application of each. He will also conduct this program in September and November. For more information, click here.

Global BV News

Global Investor Valuation Forum being considered

There will be an exploratory meeting with some of the world’s largest investors to determine whether it would be worthwhile to establish a global Investor Valuation Forum. The purpose would be to discuss common valuation issue areas that major investors encounter, explore emerging areas of interest (e.g., intangibles, ESG), and provide input to help improve the global approach to valuation. The meeting will be held on May 26 by the International Valuation Standards Council (IVSC). If you would like to attend, please email contact@ivsc.org for more information.

Preview of the June 2021 issue of Business Valuation Update

Here’s what you’ll see:

· “How to Use New Data on Invested Capital Premiums” (BVR Editor). To estimate acquisition premiums, the use of invested capital premiums is highly encouraged in certain situations. This article presents a case study and step-by-step guide to using these data that are now included in the Factset Mergerstat/BVR Control Premium Study.

· “Economic Damages From Design Patent Infringements” (Richard F. Bero, The BERO Group PA, and Christopher V. Carani, Esq., McAndrews, Held & Malloy Ltd.). The authors discuss the challenges of determining lost profits for design patent infringement. This is an excerpt from The Comprehensive Guide to Economic Damages, 6th edition.

· “Updated Data in Largest Pre-IPO Study Reveal High Discounts” (BVR Editor). New pre-IPO data for the first quarter of 2021 has been added to the Valuation Advisors Lack of Marketability Discount Study, which is the largest study of its kind. The use of pre-IPO data is a widely used and accepted method for estimating a discount for lack of marketability (DLOM).

· “COVID-19 Just a Speed Bump in Hot M&A Market, Say Speakers at Transaction Advisors Forum” (BVR Editor). Coverage and key takeaways on valuation from the April 30 M&A Strategy Forum that included sessions conducted by corporate development leaders, in-house M&A counsel, board members, and private equity investors.

· “Eliminating Outliers in Financial Data Without Cherry-Picking” (J. Richard Claywell).The author discusses one method for determining outliers that is defensible from the allegation of cherry-picking, that is, bias in selecting data to either suit the client’s wishes or to generate a specific result for the client.

· “Defining Terms: Forecasts v. Projections—Why Does It Matter?” (BVR Editor). One area that can trigger some confusion is the difference between the terms “forecast” and “projection.” Some people use them interchangeably, but these are formal terms found in the literature, so they should be used appropriately.

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.”

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

To stay current on business valuation, check out the June 2021 issue of Business Valuation Update.

Vluation News Update

Lisa Guo — Thu, 13 May 2021 04:21:50 GMT

Tax Court resists tax affecting in Michael Jackson case

Although the U.S. Tax Court recently handed the Michael Jackson estate a decisive victory regarding the estate’s tax liability, the court did not side with the estate on tax affecting, an issue that has preoccupied valuators, many of whom are proponents of the practice, for a long time.

Estate of Jones is distinguishable: Michael Jackson died in 2009. The tax dispute was over the fair market value of three contested assets at Jackson’s death: the value of Jackson’s image and likeness and the value of his interest in two music publishing assets. Each of the assets was held by a pass-through entity (PTE), “which means the Code imposes no tax on the income that these assets produce.” Rather, the income passes through to the owners, who pay tax on it at their individual rates. C corporations, on the other hand, are subject to entity-level taxes and investor-level taxes. Tax affecting seeks to reflect the tax implications to a hypothetical buyer.

At trial, the estate engaged four experts, two of whom collaborated on valuing the image and likeness asset. The Internal Revenue Service presented testimony from a single expert. As the court noted, all of the estate’s experts took tax affecting into account in their discounted cash flow analyses but all applied different tax rates. For example, the lead valuator of the image and likeness asset used a 35% rate based on the then-applicable corporate rate. For its part, the IRS objected to tax affecting.

The court noted that, “in the past, we’ve shied away from tax affecting because of these practical problems.” It noted that proponents of the practice have often pointed out that many potential buyers of PTEs, including S corporations, are C corps that would tax affect (at C corp rates) in calculating income to decide how much to pay for the asset. Opponents of the practice have claimed tax affecting produces an appraisal that gives no value to the benefit of S corp status.

Here, the estate’s experts argued that a C corp would be the only likely buyer for the assets. For example, in valuing Jackson’s image and likeness, the estate’s appraiser pointed out that any buyer would have to spend considerable money to rehabilitate the asset and defend its value. C corps historically have bought the image and likeness of other celebrities, he said. But the court said it was not convinced that a C corp was the more likely buyer. The same appraiser valued this asset at $3 million, which “is not a sum so large as to make it likely that only a C corporation would be able to buy it,” the court said. It noted there now exist many different (less restrictive) types of PTEs that have many of the same benefits as C corps when it comes to raising capital while avoiding double taxation. The court suggested the “gap between C corporations and other entities has narrowed over time.” The estate’s experts did not “persuasively explain” why those new PTEs wouldn’t be suitable buyers, the court said.

The court noted there seemed to be only one case where the Tax Court allowed tax affecting in a valuation, the 2019 Estate of Jones case. However, that case was distinguishable in that both parties’ experts agreed that a hypothetical buyer and seller would take into account the corporate structure. The parties only disagreed over how to account for this effect. Here, the estate’s experts themselves used inconsistent tax rates and they were met with opposing IRS testimony that, “at least on this very particular point,” was persuasive considering Tax Court precedent, the court said.

“This all leads us to find that tax affecting is inappropriate on the specific facts of the case,” the court said.

Stay tuned for more reporting on this important decision.

A digest of Estate of Michael J. Jackson v. Commissioner, T.C. Memo 2021-48 (May 3, 2021), as well as the court’s opinion will be available soon at BVLaw.

Valuers: The IRS is looking for you

Don’t worry—this is not about a valuation you did! The agency is looking to hire experienced business appraisers for six open positions in various locations across the U.S. According to the job posting, the salary ranges from $92,143 to $146,120 per year, and the positions have the title of financial analyst. Duties include preparing and reviewing appraisals of businesses and business interests, serving as an expert witness in court, meeting with taxpayers, and more. To get all the details, including job description, experience requirements, locations offered, how to apply, and more, click here.

Today! ASA Energy Valuation Conference streams live

A post-COVID-19 outlook for the energy sector, downstream refineries, upstream reserves, oil and gas valuations, and complex infrastructure assets are some of the topics on today’s agenda for the Houston Chapter of the American Society of Appraisers (ASA) Energy Valuation Conference. Today, May 12, BVR will present a live webcast of the full-day conference, now in its 11th year, which will feature nationally recognized speakers who are profession leaders. You can earn up to eight CPE credits.

Where acquirers often see value in pre-revenue firms

Typical early-stage companies are built around technology, and they often have not yet generated any revenues. To an acquirer, the value of these prerevenue companies often stems from a classic “build vs. buy” analysis, speakers said at the M&A Strategy Forum on April 30, hosted by the Transaction Advisors Institute. Other sessions discussed value in innovation-driven firms, COVID-19 impacts, regulatory environment, special purpose acquisition companies (SPACs), and more. Speakers included corporate development leaders, in-house M&A counsel, board members, and private equity investors. It was interesting to hear about M&A from their perspective and their views on valuations. You can read a recap of the conference in the upcoming June issue of Business Valuation Update. The next M&A Strategy Forum will be September 17 and will be online. Click here for the agenda.

Natural extension for a BV practice

The next logical step after valuing a business is advising business owners on ways to maximize that value. A training and credentialing program is available for valuation professionals who want to add this type of advisory service to their practices. The Certified Value Growth Advisor (CVGA) program is a five-day course that focuses on the fundamental best practices that drive value of any business. You will also learn how to build on those drivers to develop a short-term tactical plan and long-term strategic plan for the client’s business. The next CVGA program is scheduled for June 7-11 and will be in a virtual environment. For more details, click here.

TAF launches weekly podcast series

The Appraisal Foundation (TAF) has launched Appraiser Talk, a podcast that answers questions from every corner of the appraisal profession from consumers to appraisers and real estate to business valuation. A new podcast will be released each week. Each episode will answer a different question submitted by readers and listeners. The latest episode has Lisa Desmarais and Amy Timmerman discussing how the foundation is working to combat discrimination, develop new diversity initiatives, and build public trust in the appraisal profession. To listen, click here.

Next week is chock full of BV events

BVWire is saddling up and hitting the virtual trail next week for a batch of events that promise to be very informative. Here’s where we will be:

New York State Society of CPAs Business Valuation and Litigation Services Conference (May 17);
COVID-19 and Assessing the Global Outlook (also May 17; first in the IVSC webinar series);
Illiquidity Discounts for Restricted Equity Securities With Random or Indefinite Liquidity Horizons with Stillian Ghaidarov (May 19, BVR webinar);
2021 ASA Complex Securities Virtual Conference (May 20); and
The ICAEW Valuation Conference from the United Kingdom (also May 20).

No time to get to all of them? Coverage of key takeaways from these events will appear in the Business Valuation Update (BVU) monthly newsletter.

Global BV News

IVSC publishes comments on valuation topics for agenda

The International Valuation Standards Council (IVSC), the global standard-setter for valuation practice and the valuation profession, issued an Agenda Consultation to solicit input to help set the agenda for the future development of the International Valuation Standards (IVS). Feedback was solicited about valuation topics that the IVSC should address as part of its current agenda as well as additional valuation topics that should be prioritized or added to the agenda. A total of 55 responses were received from every world region, with global or multinational organizations accounting for 24% of the responses received. The feedback and comments have been published, and you can download the original consultation and the comments if you click here.

Valuation News Update

Lisa Guo — Thu, 22 Apr 2021 04:11:59 GMT

DLOM gauge spiked in 1Q2021, per updated pre-IPO study

The use of pre-IPO data is a widely used and accepted method for estimating a discount for lack of marketability (DLOM). New pre-IPO data for the first quarter of 2021 in the Valuation Advisors Lack of Marketability Discount Study should be of interest to valuation analysts.

High discounts: “The pre-IPO discounts this quarter are higher than they usually are,” says Joseph Cotton of Valuation Advisors LLC, the firm that researches and provides the data for the study. “Recently, the stock market has been hitting new highs. Also, valuations for medical, healthcare and drug development related companies have been increasing rapidly in value. These factors led to higher discounts this quarter, as demand for IPO shares increased.”

For U.S. transactions, the median discount was 53.7% for the 1Q2021 zero-to-three-month time frame (compared to 39% for all of 2020 and 21.5% for all of 2019). For all transactions (U.S. and non-U.S.), the 1Q2021 zero-to-three-month time frame median discount was 51.4% (compared to 35.5% for all of 2020 and 21.2% for all of 2019).

Pre-IPO studies and restricted stock studies are the most commonly used methods for estimating a DLOM. Which is better? You should not rely on only one approach but use evidence from several sources for your analysis.

Important tip:Whether you use pre-IPO or restricted stock studies, do not use averages of the data. The characteristics of your subject company much be matched to those companies in the data. This is especially true when considering pre-IPO data. The Valuation Advisors Study (which has over 17,000 transactions from 1985 to the present) allows you to search by industry, revenue, operating income, and assets to find companies that compare closely with the company you are valuing. You also need to ask this question about your subject company: “Is this company really a candidate to take public?”

New evolving ESOP case raises familiar valuation-related issues

A new ESOP litigation is underway in federal district court related to a 2011 transaction in which the majority owner of the company sold his remaining stock to the company’s ESOP. The Department of Labor is the plaintiff, and many of its allegations against the seller, company directors, and the independent trustee have a familiar ring. Recently the court denied both parties’ motions for partial summary judgment, finding resolution of the issues required development of the evidentiary record.

Backstory: The company is Kurt Manufacturing, a closely held Minnesota company. William Kuban was the majority shareholder (75.6%) and chairman of the board. Besides Kuban and his daughter, the board included three non-Kuban-related members. In 2011, the non-Kuban directors approved the sale of Kuban’s shares to the company’s ESOP. The deal left the ESOP with 100% of company stock. This was a debt-financed transaction. On advice of the seller-side financial advisor, Chartwell, the directors appointed Reliance Trust to represent the ESOP’s interest in negotiating a purchase price. Stout Risius Ross (SRR) was the designated ESOP appraiser. The transaction closed on Oct. 5, 2011. The closing price was $39 million.

Breach of fiduciary duty claim: Six years later, the DOL filed an initial complaint, which it amended. In essence, the DOL alleges that Reliance and the non-Kuban directors breached their fiduciary duties to the ESOP and Reliance allowed the ESOP to pay more than fair market value for the seller’s stock, enriching him and the defendant directors (“prohibited transaction” claim). The DOL argues the directors are liable as co-fiduciaries and were knowing participants in the transaction.

According to the DOL, the directors “orchestrated” the transaction in that they and the seller arranged the price, structure, and financing in advance and only considered Reliance and SRR, but not other ESOP professionals, for the transaction. Reliance’s role was to “rubber-stamp” a done deal.

Also, the DOL contends, Reliance breached its duties to the ESOP when it failed to act with an “eye single” to the ESOP. Emails, the DOL says, show Reliance was only concerned about closing the deal, not with getting the best result for the ESOP. For example, when the seller insisted on securing compensation of nearly $500,000 to serve as consultant to the company, Reliance was primarily concerned about this amount raising a “red flag” for the DOL and IRS, saying “any counter changes we ask for are to help protect [Kuban], [Kurt], and Reliance from the DOL.” Reliance counters that $39 million was the price the parties settled on after discussions, primarily over Kuban’s salary. The purchase price included a substantially reduced salary to Kuban. Reliance also says it secured various favorable terms for the ESOP.

Control premium:The issue of control also features in this case. SRR, in a draft analysis of transaction fairness, said a primary benefit of control was the ability to change the capital structure of the company. This was one factor SRR considered in applying a 10% control premium to the stock prices of the guideline companies it used for its guideline company method (SRR also did a DCF analysis and combined the results). The DOL claims that the ESOP did not gain control of the company’s board and its voting rights did not change. Reliance’s failure to question the use of a control premium alone resulted in the ESOP’s overpayment of at least $4.7 million. Reliance argues valuing the stock on a control basis was appropriate. For one, the parties negotiated an investor rights agreement that allowed the seller to designate one member of a five-member board until the seller’s noted was paid. The ESOP was able to elect the remaining members.

The court found all of these, and a host of other issues raised, are disputed issues of material fact that preclude summary judgment.

Stay tuned for further reporting as the litigation develops.

A digest of Scalia v. Reliance Trust Co., 2021 U.S. Dist. LEXIS 38705 (March 2, 2021), as well as the court’s opinion will be available soon at BVLaw.

Today! Third and final part of ‘Integrated Theory’ webinar series

A very special BVR webinar series concludes today with the authors of Business Valuation: An Integrated Theory, Z. Christopher Mercer and Travis W. Harms (both with Mercer Capital). They will present the third in a three-part series of webinars based on their acclaimed book, which is designed to demystify modern valuation theory and show how to apply fundamental valuation concepts. The first installment of the webinar series gave an overview of the integrated theory, and the second installment examined enterprise cash flows. The third and final installment of the series will be today, April 21, when they will delve into shareholder cash flows. If you are a BVR Training Passport holder, you have access to archive recordings of the first two, and you have a pass for the third. This series is definitely a must to watch!

BVU poised to cover an exciting slate of 2021 conferences

One of the hallmarks of the Business Valuation Update (BVU) monthly newsletter is its in-depth coverage of conferences—not just in the U.S. but around the world. BVU editors are on the ground (or online) collecting important takeaways, new ideas, and the latest thinking on front-burner valuation topics. Coverage of spring conferences around the globe will soon kick off with these events: the Houston Chapter of the American Society of Appraisers (ASA) Energy Valuation Conference (May 12), the New York State Society of CPAs Business Valuation and Litigation Services Conference (May 17), the 2021 ASA Complex Securities Virtual Conference (May 20), and the ICAEW Valuation Conference from the United Kingdom (also May 20).

Here’s a sampling of last year’s coverage (access is by subscription):

Pandemic, ESOP Woes, Fair Value, Crypto, and Fraud at the NYSSCPA Conference;

25 Tips on Dealing With COVID-19 From the NACVA Conference;

Attorneys and Valuers Link Up at the AAML/BVR Virtual Divorce Conference;

Recap of the VSCPA Business Valuation, Fraud, and Litigation Services Conference;

Appraisal Disciplines Reveal Breaking Trends at the ASA Conference; and

Global Valuers Converge for the Art and Science of Business Valuation Conference.

The next best thing to attending is reading our coverage!

M&A strategy pros convene April 30

A discussion of trends in transaction valuations in the context of M&As is part of the agenda at the spring M&A Strategy Forum on April 30, hosted by the Transaction Advisors Institute. This live online program will explore a range of current challenges impacting complex transactions and examine innovative methods to improve deal performance. Registration is $100 (free for members of the Transaction Advisors Institute). One session we’re eyeing: Strategic v. Private Equity v. SPAC, which discusses valuation formulations of these acquirers. For more information and to register, click here. BVWire will be there!

Burrage scholarship recipient named

As part of the Thomas Burrage Award for Compassion, Collegiality and Character (see last week’s coverage), a scholarship of $1,000 has been presented to Sheyla Lopez, a student at the University of New Mexico (UNM). Burrage was also known for giving his support and guidance to young people in the profession, and UNM was his alma mater. “Sheyla has a unique background and is currently working on both her master’s degree and her law degree,” says Dr. Rich Brody at UNM, who knew Mr. Burrage and who chooses students for the scholarship. “Sheyla spent much of the summer working on a huge fraud project with me (research paper) and hopes to work for the FBI once she has finished with her education. She is a great student and has taken both my fraud examination class and my forensic accounting class. She also did a lot of work with our student chapter of the Association of Certified Fraud Examiners (ACFE). I only wish I had more students like Sheyla.”

The scholarship was given by the Expert Resource Connection, co-founded by Mr. Burrage, which is a group of business valuation and forensic accounting professionals who share resources and collaborate on engagements. Contributions to the scholarship fund can be made by check payable to: Thomas Burrage Scholarship Fund, c/o 940 Wadsworth Blvd., Suite 200, Lakewood, CO 80214.

Global BV News

Learn to say ‘no’ to some clients, says former ANEVAR president

Some business valuation clients are “dangerous,” and valuers need to say “no” to them, advises Dana Ababei, former president of the National Association of Authorized Romanian Valuers, Romania (ANEVAR). These risky clients “put pressure on valuers, do not care about anyone, avoid paying for the services when the value is not what they expect and rather look for another valuer whom they subject to the same pressure,” she writes in the 2021 edition of VALUE: Wherever It Is, a publication from ANEVAR. For the good of the valuation profession, valuers should say “no” to these clients and tell them why. “I believe trust is built on the truth that we tell people, not on what they want to hear,” she says.

Valuation News Update

Lisa Guo — Thu, 15 Apr 2021 04:10:49 GMT

Tax Court deals another blow to cannabis dispensaries

In recent years, numerous cannabis businesses that are legal under state law have unsuccessfully challenged section 280E of the Internal Revenue Tax Code, which prohibits tax deductions for a business that “consists of” trafficking in a controlled substance. A recent U.S. Tax Court ruling against a California medical cannabis dispensary continues the trend.

280E’s broad sweep: The taxpayer was a medical cannabis dispensary licensed by the city of San Jose, Calif. The business also sold noncannabis items such as T-shirts, pipes, and batteries. And it offered acupuncture, chiropractic, and other holistic services. The business claimed deductions for business expenses, depreciation, and charitable contributions for various tax years. The Internal Revenue Service disallowed all the deductions under I.R.C. sec. 280E. The taxpayer petitioned the Tax Court for review.

Medical cannabis, although legal in many states, under federal law, has been classified as a Schedule I controlled substance. Generally speaking, federal law preempts state law. For purposes of section 280E, dispensing cannabis qualifies as “trafficking” in a controlled substance.

The taxpayer argued that section 280E does not preclude deductions for depreciation and charitable contributions. Depreciation, the taxpayer claimed, was not “paid or incurred during the taxable year”; further, the charitable contributions were not made “in carrying on” a trade or business. Despite being aware of Tax Court precedent to the contrary, the taxpayer (for purposes of appeal) also claimed none of the expenses it deducted should be disallowed under 280E because the taxpayer’s business did not “consist of” trafficking in controlled substances.

The Tax Court rejected all the arguments. “[T]he text of section 280E sweeps broadly to preclude a deduction for ‘any amount paid or incurred during the taxable year in carrying on any trade or business … [that] consists of trafficking in controlled substances,’” it said, with emphasis. Further, it cited a number of relatively recent Tax Court decisions that found that “section 280E means what is says—no deductions under any section” of the code for businesses trafficking in a controlled substance.

The court noted it had dismissed the argument that the taxpayer’s business did not “consist of” trafficking in a controlled substance because it also sold noncannabis items and provided various services in the 2018 Patients Mutual case. There, the court ruled against another California dispensary that claimed expense deductions should not be disallowed under sec. 280E.

As for the taxpayer’s claim that depreciation is not “paid or incurred during the taxable year,” it was “foreclosed by the Code and Supreme Court precedent,” specifically the Supreme Court’s 1974 decision in Commissioner v. Idaho Power. The Tax Court said, Idaho Power “leaves no doubt” that depreciation represents an “amount paid or incurred during the taxable year.” Therefore, “section 280E applies by its express terms to [the taxpayer’s] circumstances.” Also, the requirements of section 280E applied to charitable contributions, the court found.

The case is San Jose Wellness v. Commissioner, 156 T.C. No. 4 (Feb. 17, 2021).

Tax changes to watch for under the Biden administration

Other than the possibility of changing corporate tax rates, there is “nothing of earth-shattering importance” in terms of tax, estate, and regulatory changes expected from the Biden administration—for now, anyway—according to a panel of valuation experts on a recent BVR webinar. However, be aware that tax provisions will “start to sunset” during the new presidency, such as the 100% bonus depreciation tax break, which will start to phase out in 2023. Also watch for state tax changes, such as in New York, where tax rates may increase dramatically, which would potentially have an impact on business valuation.

The panel also discussed valuation issues with special purpose acquisition companies (SPACs), cryptocurrency, rumors of changes to fair value rules, virtual testimony, and how the pandemic has impacted our working lives. Moderated by Jay E. Fishman (Financial Research Associates), the panel members were: Raymond Rath (GlobalView Advisors), Neil Beaton (Alvarez & Marsal), and Stacy Collins (Financial Research Associates). A recording of the webinar, Power Panel: Live Expert Answers for Today’s Tough BV Questions, is available if you click here.

TAF launches diversity survey of the appraisal profession

The Appraisal Foundation (TAF) has launched a survey to gather both diversity-related demographic data and appraisers’ opinions about these issues. The survey is anonymous and does not ask for any personal information. It takes about three to four minutes to complete, and it is open through April 30. To take the survey, click here.

2020 Thomas Burrage Award recipients named

Giving back to the business valuation profession is how the late Thomas Burrage is remembered. Every year in his honor, the Burrage Award for Compassion, Collegiality and Character is given by the Expert Resource Connection, co-founded by Burrage, which is a group of business valuation and forensic accounting professionals who share resources and collaborate on engagements. The recipients of the 2020 award are Karen Warner and Jim Hitchner of Valuation Products and Services for their years of dedication to producing the Financial Valuation and Litigation Expert Journal. Our congratulations to this year’s well-deserved recipients!

Pepperdine private cost of capital survey is open

A BVWire poll found that 40% of respondents use the Pepperdine Private Capital Markets Reports for estimating small private-company cost of capital. Pepperdine conducts an annual survey of expected rates of return with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is pepperdine.qualtrics.com/jfe/form/SV_6rgU11Uj6TTzTQq?region=34582.

Tomorrow is the deadline for proposals for healthcare papers

April 15 is the deadline for proposals for papers on issues of fair market value, general market value, and commercial reasonableness under the new Stark regulations. The Centers for Medicare & Medicaid Services (CMS) released a final rule that modernizes and clarifies the regulations that implemented the Medicare physician self-referral statute (the Stark Law). The papers will be peer-reviewed, and BVR would like to see proposals from experts in all valuation disciplines, including experts not only in business and compensation valuation, but in machinery and equipment (M&E) and real estate as well. Please send an email with a summary of the topic of your proposed paper to andyd@bvresources.com.

Global BV News

Input wanted on two major IVS consultations soon to close

If you prepare, review, or use valuations that are compliant with International Valuation Standards (IVS), two consultations are of interest to you, and your input will be appreciated. Both consultations will have a significant influence on the future IVS. The public consultation on IVS 500 that outlines proposals for new standards covering the valuation of financial instruments will close on April 19. To give feedback, click here. The public consultation on Technical Revisions to IVS, which captures targeted revisions to the IVS based on feedback received since their last full update in January 2020, will close on April 30. To give feedback, click here.

Preview of the May 2021 issue of Business Valuation Update

Here’s what you’ll see:

“New Study Analyzes Earnout Data in DealStats” (Brian Wendler and Rebecca Crowley, National Business Valuation Services). What the BVR DealStats database reveals about the nature of earnouts, keeping in mind the impact of the pandemic that has affected some industries far greater than a “normal” recession.

“Company-Specific Risk Is Not All That Specific” (Peter J. Butler, CFA, ASA, Valtrend). All firms face company-specific risks, many of which are somewhat similar across industries and companies. So is anything really company-specific? An alternative method eliminates the need to totally guess at the company-specific risk premium.

“The Strategic Premium: An Inside Look at M&A Prices” (Jim Horvath, FCBV, ASA, CPA, MBA, ValuQuest Limited). Synergistic/strategic value should not be combined into one level in the typical chart that shows levels of value. Some buyers pay a “strategic premium” that propels strategic value to the very top of the value chart and well in excess of the expected synergistic value. The author uses real-world examples to illustrate this concept.

“Fair Price for Delaware Fiduciary Actions Can Exceed Appraisal Fair Value” (Gilbert E. Matthews, CFA, Sutter Securities, and Matthew L. Miller, Esq., Abrams & Bayliss LLP). Can fiduciaries of Delaware corporations breach their duties and face damages for a merger that provides stockholders with the equivalent of fair value in a judicial appraisal? The answer may surprise you.

“Letter to the Editor: The Use of the Arithmetic Mean to Average Multiples” Mark G. Filler, CPA/ABV, CBA, CVA, AM (Filler & Associates). The author takes issue with an article that concludes that the harmonic mean should be used as the appropriate measure of central tendency for a sample of market multiples.

“Personal v. Enterprise Goodwill in Florida Divorce Cases: What the Appellate Courts Say” (Jimmy Stewart, CPA/ABV/CFF, CFE, Baker Tilly). In the wake of the recent King case, this is an analysis of marital dissolution case law from the Florida Supreme Court and the five District Courts of Appeal (DCA) of Florida that relates to the valuation of personal and enterprise goodwill in that state.

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.”

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

To stay current on business valuation, check out the May 2021 issue of Business Valuation Update.

Valuation News Update

Lisa Guo — Thu, 08 Apr 2021 04:09:50 GMT

Caesars Entertainment sues over COVID-19-related economic damages

On March 19, Caesars Entertainment joined the long list of businesses that have filed lawsuits against their insurance companies for refusing to pay business interruption losses stemming from COVID-19-related government shutdowns of economies across the nation and world. Whether Caesars, which asserts that losses its various business entities incurred may exceed $2 billion, succeeds where a lot of other plaintiffs have failed will be worth monitoring.

Caesars describes itself as “the largest casino-entertainment company in the United States and one of the world’s most diversified casino-entertainment providers.” The suit lists about 60 insurers as defendants. Caesars claims it bought $3.4 billion of all-risk insurance for business interruption losses “precisely to cover catastrophic situations at its properties.” Regardless, insurers have refused to pay for Caesars’ “devastating losses,” Caesars says. Therefore, it decided to sue. Caesars says the insurers “are keenly aware of Caesars’ rights to coverage for its losses under the policies at issue here, and have increased premiums accordingly and inserted new exclusions in subsequent policies.”

Caesars filed suit in District Court, Clark County, Nevada. The complaint points out that, pre-pandemic, Caesars employed more than 79,000 people. “As of the date of filing, Caesars has been forced to significantly reduce its pre-COVID-19 workforce.” The complaint discusses the economic impact of the virus and the “crippling” government-mandated closures on the economy in Nevada, and particularly Las Vegas.

“Nevada’s labor market has been especially hard hit,” the complaint says, noting Caesars had to shut down properties in March 2020 based on orders of the gaming control boards and other civil authorities. Since then, other orders varying by degree and location have continued and “substantially impacted” the company’s properties and businesses, the suit asserts.

AsBVLaw’s limited tracking of COVID-19-related cases has shown, many suits fail in the pretrial, motion-to-dismiss stage, frequently because defendant insurers are able to show that their policies include a “physical damage or loss” requirement that, many courts have found, the plaintiffs are unable to meet. Another stumbling block are virus exceptions built into the policy.

Caesars’ complaint argues the virus contaminated all the grounds and, in this way, caused physical damage to the property. It talks about “the tangible, physical presence” of the coronavirus on surfaces or in the air of its properties, which “alters, damages, and renders the physical property unfit and unsafe for its intended use.”

“Caesars fortunately had the foresight to purchase broad insurance from the Defendant All Risk Insurers,” the complaint says. Caesars notes that this type of comprehensive coverage “is very expensive. Caesars paid over $25 million in premiums for the policy year at issue.”

The complaint also points out that most “of the highly sophisticated insurance companies” issuing the all-risk policies did not include a virus exclusion for 2020. The complaint says the lawsuit specifically excluded insurers that included the exclusion from the defendant list.

Valuable lessons on using economic data in valuation reports

In his very first deposition, veteran valuation expert Jim Hitchner (Financial Valuation Advisors) learned two valuable lessons. First, know what economic data you are putting into your reports, and, second, take out economic information that you do not use. In the March issue of Hardball With Hitchner, he recounts that the first questions in the deposition targeted the economic section of his valuation report, which included the term “chained growth rates.” The attorney asked him what that meant, but Hitchner had no idea. “Not having a grasp of the underlying data that appears in your report can be a litigation risk for experts,” he writes. This is especially true during the pandemic, which has increased the importance of economic data underlying a valuation.

The rest of the issue gives a practical look at how to understand and use economic data, particularly with regard to gross domestic product (GDP), which is “one of the most important economic indicators used in business valuation,” he writes. Hardball With Hitchner is a monthly publication. For subscription information, click here.

PCAOB approves formation of new advisory group

Fair value for financial reporting falls under the regulatory oversight of the Public Company Accounting Oversight Board (PCAOB), which will be forming a new advisory group for its standard-setting activities. The new Standards Advisory Group (SAG) will consist of 18 members from various stakeholder groups: Investors will hold the most SAG seats (five), followed by audit professionals (four), and three seats each for audit committee members or directors, financial reporting oversight personnel, academics, and others with specialized knowledge. SAG members will serve two-year terms. The PCAOB will soon release details on the nomination process for SAG members. “We are now taking the PCAOB’s engagement to a higher level by creating a new, more effective structure for the board to receive advice from our stakeholders on key PCAOB initiatives,” PCAOB Chairman William Duhnke said in a news release.

The PCAOB issues fair value audit standards and guidance on the auditor’s use of a specialist, which includes valuation experts. It also issues a regular report on audit deficiencies that points out problems with fair value issues found during audit inspections.

New edition of BVR’s Bankruptcy Case Law Compendium

Virtually every bankruptcy case is intertwined with valuation issues at almost every stage of the process, which is why BVR’s Business Valuation & Bankruptcy: Case Law Compendium, 3rd edition, is a must-have resource. The new edition has been updated with the most recent court cases featuring business valuation and bankruptcy. It has a handy summary table of hundreds of cases (by jurisdiction) that gives you the case name, date, specific court, and the main valuation issue in the case. From the table, you can quickly refer to the case digest section for an analysis and other details, such as the names of the judge and valuation experts involved (when known). You have access to the full court opinion of each case in the report via a special Web link. In addition, several articles provide insight on the challenges of valuing financially distressed businesses. For a look inside the Compendium, click here.

Reminder: Take the Pepperdine private cost of capital survey

The Pepperdine Private Capital Markets Project conducts an annual survey of expected rates of return with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is pepperdine.qualtrics.com/jfe/form/SV_6rgU11Uj6TTzTQq?region=34582.

Deadline looms for papers on new Stark regs and healthcare valuation

Global BV News

Free webinar series from the IVSC starts May 17

The International Valuation Standards Council (IVSC) has announced that this year’s International Valuation Webinar Series will take place from May 17-27. The series is sponsored this year by Duff & Phelps, A Kroll Business, and will include five interactive panel discussions, assembling over 20 leading experts from around the world, on topics such as the post-pandemic economic environment and its impact on valuation, the treatment of operating leases, IBOR reform, valuing alternative investments, and more. For more information and to register, click here

Valuation News Update

Lisa Guo — Thu, 01 Apr 2021 04:08:21 GMT

Pepperdine private cost of capital project is back up and running

On the brink of ending its long run, the Private Capital Markets Project from Pepperdine University has secured funding to continue its ongoing survey of expected rates of return of providers in the private capital market.

“I am very pleased to announce that we are back up and running due to generous underwriting from the ESOP Association and Employee Ownership Foundation,” says Dr. Craig R. Everett, the project’s director. This has enabled the project to launch a new cost of capital survey. “We know how important this study is to the ESOP and valuation communities, and we are pleased to ensure that this important independent source of data will continue to be provided to ESOP companies and valuation experts alike,” Patrick Mirza, director of communications for the ESOP Association and Employee Ownership Foundation, told BVWire.

Alternate analysis: Using public market data to estimate the cost of capital for a private company requires many assumptions and adjustments to convert data from actively traded stocks into proxies for private-company valuation. Pepperdine’s project, which produces the annual “Private Capital Markets Report” (available for free), provides an alternate analysis. The analysis is based on an ongoing survey of expected rates of return of investors, lenders, and business owners with respect to private companies.

A BVWire poll in 2019 found that 40% of respondents use the Pepperdine reports. Some practitioners use the reports as a sanity check on more traditional methods, and some use them as a primary method for estimating small private-company cost of capital.

New survey open: For this year’s Pepperdine survey, input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is pepperdine.qualtrics.com/jfe/form/SV_6rgU11Uj6TTzTQq?region=34582.

Goodwill analysis ignoring specifics crumbles on appeal

A divorce expert’s failure to link the facts related to a successful insurance company to his personal goodwill analysis was one of the reasons a Florida appeals court recently overturned the trial court’s valuation findings, which, the reviewing court said, were not based on competent, substantial evidence.

Principal revenue generator: During the marriage, the former spouses bought an insurance agency from the husband’s parents. The husband served as the company’s CEO, managed all aspects of the business, and was the largest generator of revenue. The wife worked as the agency’s bookkeeper.

The husband and wife initially paid $1.5 million for the business and also assumed the significant outstanding corporate debt. During the marriage, the business’s gross revenue nearly doubled. During divorce proceedings, the former spouses, relying on expert testimony, disagreed on the agency’s fair market value, the value of goodwill attributable to the husband, and the income available for alimony.

As for personal goodwill, under Florida case law, it is not a marital asset and excludable from the value of assets available for equitable distribution. Here, the husband’s expert analyzed the agency’s revenues and how much each employee generated for the business. He also considered how much business the husband could take with him if the agency were sold and the husband were not subject to a noncompete agreement. Based on this analysis, the expert concluded the value of personal goodwill in the company was about $1.6 million, which was 68% of the company’s fair market value (almost $2.1 million).

In contrast, the wife’s expert considered 30 transactions of insurance companies from the DealStats database. The transactions were not limited to Florida, and a few went back to 1997. Some of the transactions reported the value of a noncompete agreement—most assigned a value of less than 10%. The expert found the average of those values was 7.3% and used that figure to value the husband’s personal goodwill.

The trial court adopted the 7.3% value the wife’s expert proposed. The appeals court reversed, noting the expert “did not provide any specific knowledge about the particulars of the insurance businesses that reported transactions in the DealStats database.” The court said the expert did not disclose how involved the owners of the businesses he considered were in the company’s affairs, whether they sold insurance, as the husband here did, what the day-to-day operations were. The court also found it problematic that some of the analyzed transactions took place outside Florida and some were almost 20 years old. Importantly, the court pointed out that the husband here was the CEO of the company, was involved in all aspects of the company, and was its largest generator of revenue.

The testimony of the wife’s expert was not competent evidence to support the trial court’s personal goodwill value, the appeals court found. It overturned on this and other valuation issues.

A digest of King v. King, 2021 Fla. App. LEXIS 3170, 2021 WL 822476 (March 4, 2021), and the court’s opinion will be available soon at BVLaw.

Extra: Last week’s coverage of the Columbia Pipeline case, in which the Delaware Court of Chancery recently ruled in the now active breach of fiduciary duty action, omitted the case citation. The citation is: In re Columbia Pipeline Grp., Inc., 2021 Del. Ch. LEXIS 39, 2021 WL 772562 (March 1, 2021). The online version of the article now includes the citation.

Be on the lookout for BI misrepresentations

Business interruption (BI) insurance claims are on the rise, and there are “great opportunities” for analysts on both the business owner side as well as the insurance company side, according to Michael Haugen (JS Held), in an article in the April issue of Business Valuation Update. The demand for valuation and forensics experts is partly due to a great deal of misrepresentations in the claims. Haugen stresses that a misrepresentation does not necessarily mean fraud—it can simply mean an honest mistake. But a great deal of real fraud is going on in this area.

In the article, Haugen gives over a dozen ways to “sniff out” misrepresentations. One of them is to look for corroborating evidence to confirm the narrative about the loss with other sources, such as data from accounting records or other documents. In one case, Haugen was measuring the loss at a manufacturer that had two different plants. A fire shut down one of the plants, and the work was shifted to the other plant. The business income loss claim included increased labor expenses due to outsourcing to third-party labor, which was more expensive than in-house labor. To corroborate this, budgets were examined that revealed that outsourcing was planned in the normal course of business. This did not match the narrative told to the analysts about the extra expense due to the damage.

But just how far do you go in trying to detect misrepresentations? After all, it takes time and effort, which means extra costs. Haugen advises that you work with the insurance carrier and business owner when sorting out potential misrepresentations and whether to try to flush out the correct answer.

April 15 deadline for call for papers on new Stark regs and healthcare valuation

BVR is seeking proposals for papers on issues of fair market value, general market value, and commercial reasonableness under the new Stark regulations. The Centers for Medicare & Medicaid Services (CMS) released a final rule that modernizes and clarifies the regulations that implemented the Medicare physician self-referral statute (the Stark Law). The papers will be peer-reviewed, and we would like to see proposals from experts in all valuation disciplines, including experts not only in business and compensation valuation, but in machinery and equipment (M&E) and real estate as well. Please send an email with a summary of the topic of your proposed paper to andyd@bvresources.com. The deadline for proposals is April 15.

Fingertip guides to valuation cases in new BVR compendium guides

BVR’s valuation and case law compendium guides contain a very helpful feature: a handy summary table of hundreds of cases (by jurisdiction) that gives you the case name, date, specific court, and the main valuation issue in the case. From the table, you can quickly refer to the case digest section for an analysis and other details, such as the names of the judge and valuation experts involved (when known). You can also access the full court opinions from BVR’s BVLaw database. The guides also have a section of recent articles from top practitioners.

There is a series of these updated BVR guides, the latest being the fourth edition of Intellectual Property Valuation Case Law Compendium. Also recently released is the fifth edition of the Business Valuation in Divorce Case Law Compendium. New editions of other compendia are in the wings; the next one is valuation in bankruptcy and financially distressed firms.

Global BV News

PwC examines working capital in DACH and Benelux regions

An interesting analysis of how the COVID-19 pandemic has put cash and working capital into the limelight is in the 2021 edition of PwC’s annual “Working Capital Report,” DACH and Benelux regions. DACH is comprised of Germany, Austria, and Switzerland, while the Benelux region is made up of Belgium, the Netherlands, and Luxembourg. The report points out an important fundamental: “Cash tied up in working capital provides no yield.” Stockpiling cash to ease the way to recovery is certainly valid, but the key to driving value will be the optimal management of working capital. “Now is the right time to focus on cash and working capital management,” the report says. “Not prioritizing cash is both ignoring an opportunity to drive value and risking a negative impact on cash flow.”

Valuation News Update

Lisa Guo — Thu, 25 Mar 2021 04:06:45 GMT

Appraisal value does not control fiduciary litigation, Court of Chancery says

In 2019, in the Columbia Pipeline statutory appraisal case, the Delaware Court of Chancery found the unadjusted deal price was the best evidence of fair value. The appraisal litigation, however, did not close the case. The contested merger prompted more actions. In a lengthy opinion, the court recently evaluated claims of breach of fiduciary duty filed by a different set of plaintiffs. The court ruled that the new claims were not subject to the fair value determination from the appraisal proceedings and the litigation could proceed.

Background: The contested merger closed in July 2016. The subject was Columbia Pipeline (Columbia), a midstream company that developed, owned, and operated natural gas pipelines and related assets. The buyer was TransCanada Corp. (TC). The deal price was $25.50 per share.

Columbia’s plan to sell itself attracted a number of possible buyers. The new plaintiffs claim that, once TC emerged as a committed bidder, Columbia’s CEO and its CFO favored TC. The plaintiffs say these executives shut out other bidders and prevented the company from developing other alternatives. The executives, who served as key negotiators, had conflicting interests, held meetings with TC without the board’s approval, and made confidential disclosures to TC about the competition. Ultimately, TC was able to take advantage of the executives’ breaches and force the company to accept a lowered bid.

Same facts, different analysis: In the statutory appraisal litigation, the court, after its exhaustive review of the facts surrounding the sales process, acknowledged that aspects of the sales process were problematic. At the same time, the court found the process was sufficiently sound “to make the deal price a persuasive indictor of fair value.”

In the instant litigation, the defendants argued the statutory appraisal rulings should be binding on the plaintiffs in this action and the court should dismiss the plaintiffs’ complaint. After a lengthy discussion of case law and applicable legal theories, the court found the plaintiffs in the fiduciary litigation were not bound by the prior findings.

The appraisal decision was concerned with determining “whether the petitioners had been exploited in the sense of being deprived of what would fairly be given to them in an arm’s-length transaction,” the court noted. The appraisal decision did not evaluate whether the sales process resulted in the best value reasonably available to stockholders, which applies in the fiduciary litigation. The court said the damages remedy the plaintiffs in the fiduciary case could pursue is the difference between the price the stockholders received and the higher amount TC or another bidder would have paid. The court found the complaint supported “a reasonable inference that the stockholders lost out on a higher valued transaction” because of the actions of the executives and TC.

Moreover, the court said, the complaint supported a reasonable inference that the executives “tilted the sales process in favor of TransCanada and against the other bidders so that they could obtain a cash deal that would enable them to retire with the change-in-control benefits. The favoritism that TransCanada received was persistent and substantial.”

The court denied the defendants’ motion to dismiss.

A digest of the appraisal decision, In re Appraisal of Columbia Pipeline Grp., Inc., 2019 Del. Ch. LEXIS 303, 2019 WL 3778370 (Aug. 12, 2019), and the court’s opinion are available to subscribers of BVLaw.

Extra: In the upcoming May 2021 Business Valuation Update, Gil Matthews (Sutter Securities), a frequent commentator on the Delaware Court of Chancery, provides an extended analysis of the court’s approach to determine value in appraisal proceedings as opposed to fiduciary litigation.

Mercer and Harms tie BV together into one neat bundle

Business valuation is like one huge jigsaw puzzle, and practitioners can often find themselves focusing too much on the individual pieces. A framework of thinking is needed to help fit all the pieces together successfully. That’s where the “integrated theory” of business valuation comes in. This is a concept put forth by Chris Mercer and Travis Harms (both with Mercer Capital), who explain it in a series of BVR webinars.

It all jells: When you listen to Mercer and Harms, it seems as if everything you’ve learned about business valuation comes together in a very logical and understandable way. They contend that any question or challenge an analyst faces can be answered by paying attention to three elements: cash flow, risk, and growth expectations. True, it may seem as if you’ve heard this before, but not in the way they present it, which makes it all fit together very nicely. They also do a very enlightening demonstration of how the three approaches to value (income, market, and asset) are interrelated.

The first installment of the webinar series gave an overview of the integrated theory, and the second installment examined enterprise cash flows. The third and final installment of the series will be April 21, when they will delve into shareholder cash flows. BVR Training Passport holders have access to archive recordings of the first two, and they have a pass for the third. This series will definitely become a classic!

Extra: An excellent companion to the webinar series is the new, third edition of Business Valuation: An Integrated Theory, by Mercer and Harms.

New association formed for healthcare compensation pros

The American Association of Provider Compensation Professionals (AAPCP) is a new nonprofit group whose members advise and lead healthcare organizations on provider compensation, contracting, planning, recruitment, retention, strategy, and, yes, valuation. The fair market value of physician compensation and related arrangements is an area subject to increasing scrutiny amid complex regulations. The determination of FMV is handled by staffers at healthcare systems as well as external valuation experts, and both these groups are among the ranks of AAPCP members.

BVWire spoke with Alex Krouse, JD/MHA, who is legal counsel at Parkview Health and one of the key people behind the formation of the AAPCP. He told us that the organization will develop a body of knowledge, resources, best practices, and training for individuals and firms engaged in provider compensation. Plans also include providing certification and an interactive forum. They were planning their first annual conference last spring, but the pandemic derailed that event, which will be rescheduled. The agenda included topics of interest to all healthcare valuation experts, such as:

A regulatory overview for provider compensation professionals;
Nuts and bolts of FMV and commercial reasonableness;
Compensation surveys and updates; and
FMV for “thorny” deal scenarios.

The fledgling AAPCP looks like it’s off to a great start!

Extra: BVR has a call for papers on the new Stark regs and healthcare valuation. Proposals are due April 15. Click here for details.

McKinsey examines consumer goods and retail in the wake of COVID-19

Consulting firm McKinsey has some very useful economic and industry reports, research studies, and regular briefings. The latest briefing (dated March 17) assesses the long-term effects of COVID-19 on the consumer goods and retail sectors. In consumer goods, company performance has been “all over the map” as growth soared in 2020 but with the large firms capturing the lion’s share. In retail, success in a post-COVID-19 world will require “hastened progress” on several long-standing imperatives and some new strategies. One of these long-standing mandates, of course, is the shift to “omnichannel,” led by digital shopping. Too many retailers are still making decisions based on a brick-and-mortar mindset.

A lot of free material is available from McKinsey on economic and industry analyses, particularly with respect to the COVID-19 crisis. For example, one chart shows projected small-business recoveries by industry (click here to view), and another shows the most likely scenario for COVID-19’s impact on domestic GDP in various countries (click here to view). All of this material is free, and you can sign up for regular alerts on the McKinsey website.

Data breaches threaten brand values, says study

A recent study from Infosys and Interbrand analyzes the maximum risk of brand value loss in case of data breaches. For the “100 Best Global Brands” ranked in the 2020 Interbrand list, the maximum risk amounts to a loss of 11% of brand value. “While this figure doesn’t look dramatic, it can translate to more than 100% of net annual income, depending on sectors,” the folks at MARKABLES said in a statement. MARKABLES is a provider of data designed to support the valuation of IP assets. The authors of the study suggest that brand owners should re-evaluate “hygiene” aspects of customer experience, such as cybersecurity. MARKABLES adds that brand owners should establish the value of their brands, quantify the risk they are exposed to, and rethink their approach to both risk avoidance (cybersecurity) and risk management (brand insurance coverage).

Extra: For some emerging ideas and techniques in this area, see the BVR briefing Cybersecurity in Business Valuation: Addressing the Impact of Data Breaches on Value.

Global BV News

Registration opens for CBV Congress 2021

The full agenda is now available, and you can now register for the CBV Congress 2021, held by the Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO). This is a three-day event that will be online June 16-18. The first day is devoted to business valuation, and there will be a keynote by Dr. Aswath Damodaran (New York University Stern School of Business). The second day will examine the world of litigation, and the third is devoted to recent trends in M&A. You can check out the full agenda if you click here

Valuation News Update

Lisa Guo — Thu, 18 Mar 2021 04:04:45 GMT

Tax Court rejects claimed deduction for management fees

The U.S. Tax Court recently agreed with the Internal Revenue Service that management fees a corporation paid to its three shareholders over a three-year period were not deductible since none of the fees were paid “purely for services” and the petitioner failed to show the fees were “ordinary, necessary, and reasonable.” Rather, they represented disguised distributions, the court found.

Disparate shareholders: The petitioner operated an asphalt paving business and had three shareholders. The company’s president owned 20% of the stock, an S corporation held 40%, and a C corporation also owned 40%. The court noted that the determination of the deductibility of the management fees was to be determined on an individual shareholder basis.

Under the applicable regulations, a corporation may deduct ordinary and necessary expenses, including salaries and other compensation, incurred during the tax year for the purpose of conducting a business or trade. Management fees are only deductible if they are payments “purely for services.”

The evidence suggested that the claimed fees were disguised distributions to shareholders, the Tax Court found, noting the company never made distributions to shareholders. Further, the management fees were evenly distributed closely to the shareholders’ interest in the company. Also, the company had little or no taxable income after the payment and deduction of the management fees.

The court also pointed out the petitioner failed to provide evidence, documentary or otherwise, for the cost or value of any particular service. No witness could explain how the fees were determined or what service they related to. Services were not even performed by the shareholder companies but by individuals from other entities. “Petitioner has to connect the dots between the services performed and the management fees it paid. Petitioner failed to do so,” the court said.

The court also examined the fees paid to the individual shareholder, i.e., the president of the company. It noted the individual shareholder is an employee of the company and provides services on an ongoing basis. However, the total compensation paid to him in his role as president must be reasonable. Here, the court said, the payments were not for any services beyond his responsibilities as president. The IRS, the court said, provided persuasive expert testimony that the executive was already overcompensated by his salary and bonus alone.

This case was a clear win for the IRS and an epic fail on the part of the petitioner, which presented its case poorly. It’s as if the petitioner over the years dared the IRS to catch it if it could, and the IRS did.

A digest of Aspro, Inc. v. Comm’r, TC Memo 2021-8 (Jan. 21, 2021) , and the court’s opinion will be available soon at BVLaw.

Goodwill impairments fell 10% in 2019: D&P study

Total goodwill impairment declined to $71 billion in 2019, down 10% from $78.9 billion in 2018, according to the “2020 U.S. Goodwill Impairment Study” by Duff & Phelps. Although impairments dropped, this was the second highest level after the 2008 financial crisis, the study says. The study examines general and industry goodwill impairment (GWI) trends of more than 8,800 U.S. publicly traded companies through December 2019. The top three industries with the largest increase in GWI in 2019 were communication services, information technology, and consumer staples. This edition also gives a preview of the impact of the COVID-19 pandemic on goodwill impairments taken by U.S.-based public companies. “At the time of writing, the disclosed top 10 GWI events for 2020 reached a combined $54 billion, far surpassing the top 10 in 2019 (at $37.4 billion),” the study says.

Call for papers: New Stark regs and healthcare valuation

Recent regulatory changes will have a significant impact on valuations in the healthcare sector, and BVR is developing content designed to help practitioners navigate the new rules.

The Centers for Medicare & Medicaid Services (CMS) released a final rule that modernizes and clarifies the regulations that implemented the Medicare physician self-referral statute (the Stark Law). The new rule went into effect Jan. 19, 2021, and is designed to make it easier for hospitals and physicians to maintain compliance with the statute in the era of value-based care. The rules impact healthcare valuations and include guidance on how to determine whether the compensation being given to physicians is at fair market value.

Call for papers: BVR is seeking proposals for papers on this topic that will be peer-reviewed. The papers can address any topic related to issues of fair market value, general market value, and commercial reasonableness under the new Stark regulations. Also, we would like to see proposals from experts in all valuation disciplines, including experts not only in business and compensation valuation, but in machinery and equipment (M&E) and real estate as well.

Please send an email with a summary of the topic of your proposed paper to andyd@bvresources.com.

BVR is the publisher of several guides to healthcare valuation, including the BVR/AHLA Guide to Valuing Physician Compensation and Healthcare Service Arrangements, 2nd edition (Mark Dietrich and Timothy Smith), and the BVR/AHLA Guide to Healthcare Industry Finance and Valuation, 4th edition (Mark Dietrich).

We look forward to hearing from you!

Global BV News

Comments due in April on two IVSC exposure drafts

The International Valuation Standards Council (IVSC) has issued two exposure drafts with comment deadlines during April. One exposure draft is on a new standard for the valuation of financial instruments, which is part of the ongoing effort of the organization’s Financial Instruments Board. Comments are due by April 19. You can find the exposure draft if you click here, and you’ll also find a form for feedback. A second exposure draft is titled “Additional Technical Revisions 2021,” which proposes changes to the International Valuation Standards issued in 2019. Comments on this draft are due April 30, and you can find the document if you click here.

Eurozone private M&A soars despite COVID-19

Private equity acquisition prices in the eurozone soared to a new record, according to the free Q4 2020 Argos Index, confirming an overheated rebound to what now appears to be a business value “blip” caused by COVID-19. The Argos Index measures private midmarket-company valuations. What did private equity pay unlisted European SMEs during the fourth quarter? Deal volumes dropped, but the new record multiple climbed to 11.1x EBITDA. Conducted since 2006 by Epsilon Research for Argos Soditic, the index is calculated based on the information contained in the Epsilon Multiple Analysis Tool (EMAT), the database of European acquisition multiples and deal analysis reports (€1 million-to-€500 million deal value).

Preview of the April 2021 issue of Business Valuation Update

Here’s what you’ll see:

“Do Not Use the Arithmetic Mean to Average Multiples” (Gilbert E. Matthews, CFA, Sutter Securities Inc.). Valuation professionals should not use the arithmetic mean of multiples. It is mathematically incorrect because it gives excessive weight to high multiples. A multiple is an inverted ratio with price in the numerator. Therefore, the harmonic mean should be used as the appropriate measure of central tendency.
“Letter to the Editor: Comments on Using Jensen’s Alpha for Active and Passive Appreciation.” This is a Letter to the Editor from Ashok B. Abbott, Ph.D. (West Virginia University), in response to a prior article on segregating passive from active increases in the value of an asset in the context of marital dissolution.
“Letter to the Editor: Response to Dr. Abbott’s Comments on Using Jensen’s Alpha for Separating Active and Passive Appreciation.” This is a Letter to the Editor from Mark Filler that responds to comments from Dr. Ashok Abbott about Mr. Filler’s prior article on the use of Jensen’s alpha. Dr. Abbott’s comments can be found elsewhere in this issue.
“What Business Appraisers Can Learn From the GameStop Saga” (Joseph W. Thompson, CFA, ASA, Griffing Group). The lesson for appraisers in this saga is to be aware of potential pricing issues when using guideline public companies in the Reddit orbit. In the short term, the underlying price may not be representative of its “fundamental value” during the volatile period.
“14 Ways to Detect Misrepresentations in Business Interruption Claims” (BVR Editor). Business interruption insurance claims are on the rise, and analysts need to be on the lookout for misrepresentations. Michael Haugen (JS Held) conducted a session on this at the recent AICPA FVS Conference, and it’s an area where valuation experts would do well to bolster their knowledge and skills in financial forensics. Haugen gives some tips on how to “sniff out” misrepresentations in these claims.
“New BVR ‘Power Panel’ Series Offers Seasoned Insights on Timely Issues” (BVR Editor). The first in a series of “power panel” BVR webinars drew a huge audience and brought together highly experienced thought leaders in the profession to address current issues via questions from the audience. The panel, moderated by Jay E. Fishman (Financial Research Associates), consisted of Michelle F. Gallagher (Adamy Valuation), Ken Pia (Marcum), and Jeffrey S. Tarbell (Houlihan Lokey).

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,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”

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

To stay current on business valuation, check out the April 2021 issue of Business Valuation Update

Valuation News Update

Lisa Guo — Thu, 11 Mar 2021 05:01:40 GMT

Will the future of BV be in good hands?

The answer is a definite “yes,” and the key factor will be the willingness of the new generation of practitioners to give back to the profession. The future of the valuation profession depends on contributions practitioners make to the advancement of the profession, says a panel of seasoned experts on a BVR webinar. Giving back includes volunteering on committees at their respective organizations, contributing articles, writing books, and conducting conference sessions and webinars.

Get involved:The panel noted that, whether it be the ASA, AICPA, NACVA, or whatever organization you belong to, there are opportunities to contribute. All of the organizations have made efforts to attract young talent to serve on committees and contribute to education and marketing activities. Another way of fostering future leaders is through writing and speaking opportunities. For example, the panel noted that the upcoming new edition of Shannon Pratt’s classic text Valuing a Business will have seasoned experts and young rising stars co-writing chapters.

The panel, moderated by Jay E. Fishman (Financial Research Associates), consisted of Michelle F. Gallagher (Adamy Valuation), Ken Pia (Marcum), and Jeffrey S. Tarbell (Houlihan Lokey). The webinar was the first in a new series of “power panel” programs that bring together highly experienced thought leaders in the profession to address current issues via questions from the audience. The next episode will be on April 6—click here for details.

Tax Court allows for ‘slight’ discount for lack of control for majority interests in real estate holding companies

In a gift and estate tax dispute, the estate and Internal Revenue Service agreed to apply discounts for lack of control and marketability to the majority interests in a number of real estate holding companies. The U.S. Tax Court noted that, in prior decisions, the court found no discount for lack of control applied. However, given the parties’ agreement, here the court said it would apply a “slight” or “low” discount.

Considerable power over LLCs: During her lifetime, the decedent gave fractional interests in a number of limited liability companies to family members. A family trust of which the decedent was the trustee held the majority interest in the LLCs. The LLCs held ground leases in various California properties. During her lifetime, the decedent also served as manager of the companies. Under the LLCs’ operating agreements, the majority interest holder had considerable powers, including the right, “in conjunction with the manager,” to elect to dissolve the companies.

The IRS found gift tax and estate tax deficiencies. For both the gift and estate tax calculations, the IRS determined a higher fair market value of the LLCs based on the valuations of the ground leases. In terms of the estate tax, experts for the estate valued the majority interests by applying discounts for lack of control and lack of marketability. For its part, the IRS argued a lower discount for lack of control and marketability than the estate had used were appropriate. The estate petitioned the Tax Court for review.

Both parties retained experts to analyze the appropriate discounts for each LLC. Both parties used the adjusted net asset value approach to value the LLCs, but the experts had different approaches to calculating the discounts.

Regarding the discount for lack of control, the estate’s expert used the Mergerstat Control Premium Study, which measures control premiums on transactions of publicly traded companies. The expert compared premiums paid to acquire 50.1% to 89.9% controlling interests with those paid to acquire 90% to 100% interests. He explained that the difference in premiums between the two blocks suggested a discount for controlling interests that lacked total control. He then considered factors specific to the LLCs, including the possibility of costly litigation should the majority interest holder attempt to liquidate and dissolve the companies.

In contrast, the IRS’ expert used closed-end funds classified as real estate funds to calculate the discount for lack of control. The data indicated a range of 3.5% to 15.7%, with a median discount rate of 11.9%. Comparing the funds to the subject interests, he found that closed-end funds were “minority interests and completely devoid of any control.” Therefore, a discount for lack of control for the subject interests should be at the “bottom of the range” of the closed-end discount rates. He arrived at a 2% rate.

The court noted the LLCs’ operating agreements gave significant power to the majority interest holder and the family trust held a majority interest in every LLC. Therefore, the discount for lack of control “should be low.” The court noted that it had accepted valuations of discounts based on closed-end funds for purposes of determining minority-interest discounts, not discounts for lack of control for a majority interest. Further, the closed-end funds the IRS’ expert used were too dissimilar to the subject LLCs. Therefore, the court rejected the 2% discount rate.

The court also “hesitate[d] to adopt” the estate expert’s range (5% to 8%), finding he proposed a higher rate based on the risk of potential litigation when there was no evidence in the record that minority interest holders would sue in case of dissolution. The court found a 4% discount for lack of control was appropriate.

This case also includes a discussion of the discount for lack of marketability and a charitable contribution discount. In general, the Tax Court found the estate’s experts, in valuing the various properties, presented a more reliable discount analysis.

A digest of Estate of Warne v. Commissioner, T.C. Memo 2021-17 (Feb. 18, 2021), and the court’s opinion will be available soon at BVLaw.

SPAC transactions included in 2021 Mergerstat Review

The special purpose acquisition company (SPAC) flourished during 2020, and SPAC transactions are included in the 2021 edition of the Mergerstat Review. A SPAC is a shell company that raises capital in an IPO and then acquires an operating company to form a new merged entity. The Mergerstat Review features tables to highlight aggregate deal volumes and deal values for your analysis. Also, the FAQ page has been updated for the new edition. The 2021 edition will be available in mid-April in PDF format and early May for the print edition.

Mergerstat Reviewis an annual publication (with monthly updates) that presents compiled statistics relating to U.S. and cross-border mergers and acquisitions that involve both publicly traded and privately held companies. Data on M&A announcements and purchase prices are presented annually and quarterly, for the current period and historically, including details on individual deals and trends in prices, methods of payment, multiples, and premiums.

Updated DealStats Companion Guide now available

The DealStats public- and private-transaction database has a newly revised Companion Guide that reflects updated charts, graphs, and exhibits. The guide also covers recent enhancements made to the platform, such as the inclusion of the weighted harmonic mean. Also, the platform now allows a guest search so that a nonsubscriber can fully utilize the “Quick Search” and “Search” tabs to view limited information on the “Data” tab. Another enhancement was made to the download option for “Only Displayed Fields” and “All Available Fields,” which now includes a second worksheet, which contains the “Summary” tab information (so users have a record of their search criteria, their selected/deselected transaction IDs, and their summary statistics). You can find the updated Companion Guide if you click here.

Extra: Attend a free Zoom session on March 11 that will give an overview of DealStats as well as a live demo.

Credential program for value growth advisors June 7-11

A natural extension to valuing a business is advising business owners on ways to maximize that value. A training and credentialing program is available for valuation professionals who want to add this type of advisory service to their practices. The Certified Value Growth Advisor (CVGA) program is a five-day course that focuses on the fundamental best practices that drive value of any business. You will also learn how to build on those drivers to develop a short-term tactical plan and long-term strategic plan for the client’s business. The next CVGA program is scheduled for June 7-11 and will be in a virtual environment. For more details, click here.

Global BV News

New IVSC paper on business valuations and ESG

Although there is an increased awareness in environmental, social, and governance (ESG) factors, there is no common approach on how to reflect ESG in business valuations. That’s the topic of a new perspective paper from the International Valuation Standards Council (IVSC) that represents an early step “on the path toward a more systematic approach to the incorporation of ESG into business valuation practice and standards,” the organization says. The IVSC had a recent panel discussion, Unlocking the Value of ESG, and a recording of that is available. The IVSC would like to hear your views on this paper and on ESG as it relates to valuation. Share your feedback through the IVSC Group page on LinkedIn or by emailing contact@ivsc.org.

For more reading on the topic, see KPMG’s Quarterly Brief—International Valuation Newsletter for the first quarter of 2021. The KPMG brief suggests an approach to viewing business valuation through an “ESG lens” that involves assessing the ESG impact on cash flows and the discount rate and using probability-weighted scenarios.

Valuation News Update

Lisa Guo — Thu, 04 Mar 2021 05:00:06 GMT

Federal Circuit explains concept of ‘built-in’ apportionment

The Federal Circuit, in ruling on a patent infringement case involving two major pharmaceutical companies, recently clarified the apportionment requirement. The court found the plaintiff based its reasonable royalty calculation on a comparable license that closely covered the value of the patent in the instant case and made further apportionment unnecessary.

The plaintiff, Vectura Ltd., owned a patent that covered “composite active particles” for use in dry-powder inhalers. The defendant, GlaxoSmithKline LLC (GSK), made certain inhalers that Ventura said contained composite active particles that violated its patent. A jury awarded Ventura a reasonable royalty of 3% of GSK’s $2.99 billion in sales for the infringing inhalers. The award was nearly $90 million.

GSK unsuccessfully challenged the award in post-trial motions and subsequently with the U.S. Court of Appeals for the Federal Circuit.

Regarding the damages challenges, the Federal Circuit noted that the parties had a “licensing history.” Most relevant for this litigation was a 2010 nonexclusive, worldwide license Vectura had granted GSK related to more than 400 patents, covering certain GSK respiratory therapeutics. At trial, Vectura’s damages expert used the 2010 license in determining a reasonable royalty. Specifically, she used the 2010 license’s top-tier royalty rate and the royalty base, which consisted of total sales of licensed products for the royalty base. Vectura offered evidence that the key part of the 2010 license covered the contested invention and that the 2010 license and the hypothetical negotiation dealt with “roughly very similar technology.” Also, Vectura argued, successfully, that the principles of apportionment were “baked into” the 2010 license. Therefore, it was not necessary to perform further apportionment.

The district court found, where a party relied on a sufficiently comparable license, it could adopt that license’s royalty rate and royalty base without further apportionment or proving that the infringing features drove the entire market value of the accused product.

The Federal Circuit said, in ordinary circumstances, using the entire market value as the royalty base is only permissible if the plaintiff can show the patented feature created the basis for consumer demand or substantially created the value of the component parts. However, the Federal Circuit went on to say that the court’s case law provides that, if the reasonable royalty is based on a sufficiently comparable license (or comparable negotiation), further apportionment is not necessary. The idea is that the comparable license has a “built-in apportionment.”

Such was the situation here, the Federal Circuit said, noting that GSK’s own damages expert acknowledged how close and comparable the 2010 license was to covering the value of the patent giving rise to the suit.

A digest of Vectura v. GlaxoSmithKline LLC, 2020 U.S. App. LEXIS 36393; __ F.3d__; 2020 WL 6788757 (Nov. 19, 2020), as well as the court’s opinion, is available to BVLaw subscribers.

Current USPAP extended for one year

The Appraisal Foundation’s Appraisal Standards Board (ASB) announced that the current edition of the Uniform Standards of Professional Appraisal Practice (USPAP) will be extended by one year. The 2020-2021 USPAP will now be effective until Dec. 31, 2022. This extension does not impact continuing education requirements. For more details on the extension and some FAQs, click here.

Blast from the past on forecasting

During a recent BVR webinar, Josh Shilts (Shilts CPA PLLC) mentioned a helpful article that appeared in the Harvard Business Review (HBR), “How to Choose the Right Forecasting Technique.” After reading the article, Shilts realized that it was written in 1971! But what it covers still holds true, he says. It covers the basic features and limitations of classic forecasting techniques, including qualitative methods, time series analysis, and causal methods. There’s a nice chart that compares the different techniques and includes typical applications, computation times, accuracy ratings, reference material, and more. “This was gold to me when I found it,” he says. The HBR article is freely available if you click here.

New paper on IBOR reform and valuation

For many years, interbank-offered rates (IBORs) have set the benchmark rate for lending on an unsecured basis. By the end of 2021, countries (including the U.S.) plan to phase out IBOR and move to a new benchmark known as alternate reference rates (ARR). The International Valuation Standards Council (IVSC) has issued a Perspectives Paper—IBOR Transition: A Valuation Guide that outlines the key challenges that arise for valuation professionals from the termination of IBOR. The paper also summarizes the areas that can contribute to “valuation uncertainty” and thereby increase “valuation risk” in appraisals of financial instruments arising from the transition away from IBOR.

Agenda set for NYSSCPA BV and litigation services conference May 17

BVWire always attends the annual New York State Society of CPAs Business Valuation and Litigation Services Conference, and registration is now open for this year’s event, which will be webcast May 17. This full-day conference will feature updates on cyber security, high-tech investigations, and e-discovery; cryptocurrency tracing, location, and seizure; valuation of distressed and bankrupt companies; cannabis company operations and valuations; exit and estate planning; IRS court testimony; SPACs; and practicing with Zoom. Click the link above to check out the full agenda.

Global BV News

Cost of capital parameters in Europe as of Dec. 31, 2020

ValueTrust has released a seventh edition of its “European Capital Market Study” that serves as a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. The study also includes trading multiples and total shareholder returns across a wide range of industries. Here are a few key findings:

The risk-free rate declined from 0.21% as of Dec. 31, 2019, to -0.14% as of Dec. 31, 2020, the further decline in 2020 largely being the consequence of measures the European Central Bank took to fight the COVID-19 crisis;

After reaching the highest market-value weighted mean, at 9.0%, as of Dec. 31, 2018, the implied European market return decreased to 7.0% as of Dec. 31, 2020. Overall, the implied market return decreased to the lowest level within the study’s observation period; and

The technology sector shows the highest multiples on average, followed by the industrials sector; the financial sector continues to have the least expensive valuation level of all sectors.

New IACVS chapter formed in India

The International Association of Certified Valuation Specialists (IACVS) has a newly formed chapter in India with a board consisting of reputed valuers from across the country. The goal of the India chapter is to bring best-in-class global training and knowledge to its members and keep them up-to-date with valuation and fraud developments from across the world. The IACVS is a globally recognized association of business valuation professionals, with professional members in more than 50 countries. The organization issues the International Certified Valuation Specialist (ICVS) and ICVS with advanced studies in financial instruments (ICVS-A) credentials to qualified individuals. For more information on the IACVS, click here.

Valuation News Update

Lisa Guo — Thu, 25 Feb 2021 04:58:46 GMT

AICPA votes to exclude new BV glossary from standards

The AICPA Forensics and Valuation Services Executive Committee has voted not to adopt a proposed new glossary of terms into its valuation standards. This is welcome news for valuation practitioners who had concerns about making the new glossary part of the authoritative standards.

Massive overhaul: The new glossary was issued in exposure draft form with comments due January 31. The document, International Valuation Glossary—Business Valuation, is the result of a collaboration of the ASA, AICPA, RICS, TAQEEM, and CBV Institute and represents a massive overhaul of the existing version. It contains many more technical terms and methodologies, some of which have emerged since the current version was published in 2001. The AICPA sought comments on the content of the glossary and whether it should be included in the AICPA’s Statement on Standards for Valuation Services (VS Section 100).

In a letter to the BVWire editor (published here), Dr. Michael A. Crain (Florida Atlantic University), former chair of the AICPA BV committee, expressed concern that the inclusion of the new glossary in the standards could increase risk for practitioners and pointed out that it may be better to issue the glossary in nonauthoritative form, such as a practice aid. During a BVR “power panel” webinar, leading practitioners agreed that risk could be increased, especially in a litigation context. Some of the new glossary entries include methodologies that are unknown to some practitioners, so opposing counsel could ask the practitioner whether he or she used the methodologies listed. A “no” answer could seriously impact the expert’s credibility in the eyes of the court. An attorney who represents accounting professionals in professional liability matters also agreed, telling BVWire that the “proposed revised documents increase the potential for professional risk.”

Unanimous vote:The vote not to adopt the proposed new glossary into the AICPA valuation standards was unanimous, according to an announcement from the AICPA FVS committee. The announcement also noted that all feedback on the exposure draft was evaluated and will be shared with the glossary’s working group.

LLC buyout at fair value poses ‘conundrum’ for the court

In allowing LLC members to buy out a departing member to avoid the dissolution of the company, a court had to determine the fair value of the departing member’s interest in a holding company. The court, in large part, relied on the fair market valuation the remaining members’ BV expert performed, which was premised on an orderly liquidation of the company.

The plaintiff and the defendants owned a limited liability company (TONG). The plaintiff owned 37.5%, whereas the defendants owned 62.5%. TONG’s only asset was its 100% stock ownership in another holding company, Palm Park, which owned three properties. Neither TONG nor Palm Park were involved in managing the properties.

The plaintiff sued the defendants for constructive fraud and judicial dissolution. The court initially concluded TONG should be dissolved as a matter of law. But, in an amended final judgment, the court, under the applicable state statute, found the defendants had the option of buying out the plaintiff’s membership interest.

Net asset value approach: Both parties agreed the net asset value approach was appropriate to determine the fair value of the plaintiff’s interest in TONG. Only the defendants offered a valuation from a BV expert, who said he was retained to “determin[e] the Fair Market Value of a 37.5% Membership Interest in [TONG] on a control marketable basis” as of the valuation date. The expert’s fair market value determination was based on a hypothetical “orderly liquidation” of TONG, including the sale of Palm Park. Under the orderly liquidation premise, the expert accounted for capital gain taxes related to the various transactions and other obligations a liquidation would trigger. He concluded that the fair market value of the members’ equity in TONG was worth almost $3.1 million and the plaintiff’s 37.5% interest was worth a little less than $1.2 million.

The plaintiff objected that the liquidation premise made no sense where the defendants elected to purchase Horizon’s interest in TONG instead of having the company be liquidated so that the defendants could continue to benefit from the investment in TONG and Palm Park “as a going concern.” Therefore, the court should not give any weight to the expert’s valuation.

The court disagreed. It noted that “there is no dispute that the orderly liquidation premise is an accepted method for determining the fair market value of holding companies” (referencing IRS Rev. Rul. 59-60). Further, the court said, fair market value was concerned with a hypothetical sale involving a hypothetical buyer and a hypothetical seller. It “is not determined by deciding the price that would be arrived at by the specific buyer and seller involved in the particular transaction under consideration.” The likelihood of liquidation was not a proper consideration for determining the FMV of the plaintiff’s interest in TONG “and is not a basis for refusing to consider [the expert’s] valuation report.” However, acknowledging that the case did present “something of a conundrum,” the court said it would consider the fact that there would not be an actual dissolution when assessing the equities of the case. At the same time, “it would be a sad end to the unfortunate story underlying this case” if the buyout would jeopardize the continued existence of Palm Park. In an effort to conclude the lawsuit quickly and enable the parties to get on with their respective business lives, the court found the fair value of the plaintiff’s interest was $1.65 million.

A digest of Finkel v. Palm Park, Inc., 2020 NCBC 84 (Nov. 18, 2020), and the court’s opinion are available to subscribers of BVLaw.

IVSC seeks candidates for financial instruments board

The International Valuation Standards Council (IVSC) is looking to recruit up to three new members for its Financial Instruments Standard Board. The board, formed in 2018, guides the development of international valuation standards for financial instruments and recently issued an exposure draft (comments due April 19). Individuals appointed to serve on any IVSC board serve for a term of three years. Applications are due by March 31. For details, click here.

Online master’s program in BV begins April 1

The application deadline is March 15 for the spring semester of the online master’s in business valuation (MBV) program at Florida University Southeast (FUSE), and classes start April 1. At the recent Second Annual Conference on the Art and Science of Business Valuation, Heidi DiCicco, FUSE president, talked about the program, which consists of three semesters (six months each). After successful completion of the first semester, students will receive the credential of Business Certified Appraiser (BCA) from the International Society of Business Appraisers (ISBA). By the end of the program, students will have successfully prepared a portfolio having four different financial analysis and valuation reports. FUSE MBV graduates meeting the standards of International Association of Certified Valuation Specialists (IACVS) credentialing will automatically be granted the International Certified Valuation Specialist with Advanced Studies in Financial Instruments (ICVS-A) credential without having to complete a separate comprehensive examination on valuation concepts. In addition, the MBV prepares students to sit for the Level 1 Chartered Financial Analyst (CFA) examination, and various business valuation and appraisal certifications, such as the Certified Valuation Analyst (CVA), Certified Business Appraiser (CBA), and Accredited Senior Appraiser (ASA).

For a copy of the 2021 MBV program, click here. The course scheduling is flexible and can accommodate the student’s work schedule no matter where the student is geographically.

Agenda available for Energy Valuation Conference May 12

A post-COVID-19 outlook for the energy sector, downstream refineries, upstream reserves, oil and gas valuations, and complex infrastructure assets are some of the topics on the agenda for the Houston Chapter of the American Society of Appraisers (ASA) Energy Valuation Conference on May 12. BVR will present a live webcast of the conference, now in its 11th year, which will feature nationally recognized speakers who are profession leaders. Early-bird pricing is available through March 31. For more information and to register, click here.

Global BV News

New online guide to valuation standards around the world

The folks at Valuology have compiled profiles of the valuation regulatory infrastructure in over 100 jurisdictions around the world. The profiles include such information as legal and regulatory requirements for valuations, the use of International Valuation Standards (IVS), the existence of local valuation professional organizations (VPOs), whether the VPOs issue their own standards, and more. Marianne Tissier (Valuology) tells BVWire that she also did a paper based on the profiles, titled “The Path to Global Valuation Standards: Ambition and Reality.” To access the profiles and the paper, click here.

Preview of the March 2021 issue of Business Valuation Update

Here’s what you’ll see:

“Price Versus Value: A Transaction and Litigation Perspective” (Craig A. Jacobson and Richard B. Peil, B. Riley Advisory Services). According to disciples of modern portfolio theory and its efficient market hypothesis, shares of public companies should always trade at a price equivalent to their economic value, making it impossible for investors to experience short-term arbitrage profits. But try to explain that theory to any hedge fund manager or day trader who purchased or sold GameStop Corp.

“Monetary Remedies in Trademark Infringement Litigation” (Stanley P. Stephenson and Gauri Prakash-Canjels, Litigation Economics). Remedies in the Lanham Act are used to punish wrongdoers in trademark infringement litigation, but courts applying that law have dealt differently with some key issues, especially monetary remedies. This article outlines some such problems and how the courts have dealt with them.

“The NICE DLOM Method Gets a Few Shots in the Arm” (BVR Editor). The nonmarketable investment company evaluation (NICE) method, which first appeared in 2006, is included in leading valuation books, but it has not gained much traction and had not appeared in any court cases—until now. Plus, a streamlined version of the model will be out soon, according to the method’s developer, William H. Frazier (W.H. Frazier & Co. Inc.).

“Using a Discounted Cash Flow Methodology in Uncertain Times” (Ronald L. Seigneur, Seigneur Gustafson LLP). A fundamental look at the method taking center stage during the pandemic. This article outlines how the DCF method works and to highlight the nuances and trap doors that will be encountered and must be overcome to reliably apply the method to derive an indication of value that is well reasoned and supportable for the application intended.

“Assessing Additional Economic Risk Due to COVID-19 (Update)” (Ronald L. Seigneur, Seigneur Gustafson LLP). This is an update to a previously published template that can serve as a framework of thinking about the impact of the coronavirus on a subject company. The author presents a series of questions that help assess the short- and long-term risks with respect to the subject company’s industry, physical operations, financial issues, and firm management.

“Global Valuers Converge for the Art and Science of Business Valuation Conference” (BVR Editor). A recap of helpful tips and insights from this conference that attracted close to 300 attendees from all over the world.

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,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”

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

To stay current on business valuation, check out the March 2021 issue of Business Valuation Update

Valuation News Update

Lisa Guo — Thu, 18 Feb 2021 04:57:10 GMT

Is the new CMS rule that impacts healthcare valuations now at risk?

This past December, the Centers for Medicare & Medicaid Services (CMS) released a final rule that modernizes and clarifies the regulations that implemented the Medicare physician self-referral statute (the Stark Law). The new rule, effective Jan. 19, 2021, is designed to make it easier for hospitals and physicians to maintain compliance with the statute in the era of value-based care. The rule impacts healthcare valuations and includes guidance on how to determine whether the compensation being given to physicians is at fair market value.

We’ve read several articles (see one here) indicating that the new rule may be at risk of delay or replacement due to the GAO’s finding of a technical deficiency, i.e., CMS failed a required 60-day notice period for the new Stark regulations. As a result, the articles say the new rule may be impacted by President Biden’s memo of January 20 announcing a regulatory freeze, thus raising the possibility that the new administration may revisit and revise the final rule.

Tim Smith (TS Healthcare Consulting LLC) tells BVWire that, based on what he has heard within the healthcare community, it is unlikely that the new Stark regs will be changed or delayed, despite the technicalities of the notice period and the regulatory hold. Smith is the co-author of the BVR/AHLA Guide to Valuing Physician Compensation and Healthcare Service Arrangements.

Mollie Gelburd, associate director of government affairs at the Medical Group Management Association (MGMA), agrees that it is not likely that the new rule will be delayed or revised. While the GAO finding (see it here) says that the rule indeed failed the notice period that requires a 60-day delay from the date the rule is published to when it is effective, the Biden administration would have to make an argument that, because of that, the rule did not go into effect on January 19 and thus falls under the regulatory freeze signed one day later. That is unlikely, says Gelburd, for several reasons. “It is unclear whether President Biden has the authority to do that and the rule has bipartisan support,” she tells BVWire. “Also, the rule has the support of the healthcare provider community which has its hands full with the pandemic, so I don’t see President Biden trying to exert authority to have the new rule fall under the freeze memo.” Congress could strike down the rule under the Congressional Review Act (CRA), Gelburd explains, but that is also unlikely. “Congress has largely been supportive of the Stark regulations,” she points out, “so they are not likely to choose to undo the new rule.”

The position of CMS is that the regulations are in effect as scheduled. Smith reached out to CMS, which issued this statement: “The regulations finalized in CMS-1720-F (Medicare Program; Modernizing and Clarifying the Physician Self-Referral Regulations) are effective, except for the revisions to 42 CFR 411.352, which have the delayed effective date set forth in the final rule in order to give physician practices that qualify as ‘group practice’ time to comply with any changes that may affect their physician compensation models.”

Smith and Mark Dietrich (Mark O. Dietrich CPA PC), both of whom gave input to CMS during the development of the rule, conducted a BVR webinar that discussed its impact on healthcare valuation. A recording of their webinar is available if you click here (free for BVR Training Passport Pro holders).

NICE DLOM method gets a nice boost

The nonmarketable investment company evaluation (NICE) method for estimating a discount for lack of marketability (DLOM) first appeared in 2006 and is included in leading valuation books. But it has not gained much traction and had not appeared in any court cases—until now, according to an article in the upcoming March issue of Business Valuation Update. The article includes a portion of the Tax Court transcript in which the IRS expert gives his opinion of the method. The method’s developer, William H. Frazier (W.H. Frazier & Co. Inc.), was one of the experts in the case. Also, the article points out that a streamlined version of the model will be out soon.

While NICE is referred to in the context of estimating a DLOM, it does not determine DLOM as a separate and distinct amount. Instead, it is an income-based method that embodies the DLOM as well as discounts for control and lack of liquidity in the discount rate and views them as investment risks. The method is not designed for operating businesses. As its name implies, it is designed specifically for determining the fair market value of equity interests in closely held investment entities, such as family limited partnerships, S corporations, and limited liability companies.

Today! ‘Integrated Theory’ authors kick off webinar series

A very special BVR webinar series begins today with the authors of Business Valuation: An Integrated Theory, Z. Christopher Mercer and Travis W. Harms (both with Mercer Capital). They will present the first in a three-part series of webinars based on their acclaimed book, which is designed to demystify modern valuation theory and show how to apply fundamental valuation concepts. The first installment is today, February 17, and it will give a conceptual overview of the integrated theory and explore its fundamental principles. The authors will then describe the integrated theory on an equity basis, giving particular attention to the conceptual scaffolding that it provides to discussions of the levels of value and the associated valuation discounts and premiums. They will conclude this installment by extending the conceptual basis for the integrated theory to the enterprise value perspective.

Discount offer: Webinar attendees get a special $30 discount on the book. For details on the webinar and how to register, click here (this webinar is included in BVR’s Training Passport Pro holders).

FASB OKs goodwill triggering standard update for private firms

The Financial Accounting Standards Board has decided to give private companies and not for profits the option to assess at a later point a situation that might trigger a goodwill impairment. This change is designed to address the cost and complexity of having to perform triggering event evaluations and measure potential impairment in interim periods although they only prepare GAAP financial statements annually. FASB expects to publish the new standard in late March and entities that exercise this option don’t have to monitor for triggering events in between reporting periods. This is part of the FASB’s efforts to advise companies on how to account for the impact of the pandemic, and it has delayed implementation of certain rules. Separately, FASB is working on a new standard that will require companies to write down a portion of goodwill each year, instead of doing annual impairment testing.

Global BV News

IVSC roundtable on new standards for financial instruments

The International Valuation Standards Council (IVSC) will hold a virtual roundtable on February 18 on the proposed new international standards governing the valuation of financial instruments. The IVSC’s Financial Instruments Board issued an exposure draft, and comments are due April 19. During the webinar, members of the board, led by Gavin Francis, will discuss the background to the initiative and share details of the current exposure draft. You can register for the webinar if you click here.

Extra:The IVSC is looking to recruit new members for its Financial Instruments Standard Board. Applications are due by March 31. For details, click here.

Valuation News Update

Lisa Guo — Thu, 11 Feb 2021 04:54:30 GMT

DOL and Professional Fiduciary Services settle ESOP suit

The DOL recently settled a suit against Professional Fiduciary Services (PFS) related to a 2012 transaction in which PFS served as trustee in an ESOP acquisition of outstanding company stock. Following the playbook, DOL alleged PFS breached its fiduciary duties by causing the ESOP to pay more than fair market value for the shares.

The company was Contractors Register Inc., a New York-based company that provides construction search engines. According to Bloomberg, the company publishes regional directories and databases for the construction industry. In 2010, the company’s shareholders recapitalized most of their equity in the company with long-term, low-interest notes. The company’s capital structure was highly leveraged, but the balance sheet showed over $90 million in cash. The remaining shareholder then wanted to sell his interest to employees via an ESOP. The acquisition, which took place in late 2012, left the ESOP with 100% of the company stock.

PFS was engaged as independent trustee. PFS hired an independent appraisal firm and a law firm to act as trustee counsel.

Familiar complaint:The DOL’s complaint alleged PFS breached its fiduciary obligations to the plan by failing to scrutinize the valuations underlying the transaction and overlooking red flags, such as overly aggressive revenue projections, which produced an inflated valuation of the company’s stock. Among other things, the DOL objected to the projected 2.2% compound annual growth rate for 2013 to 2017. The DOL said the appraiser did not explain how the company would achieve this growth rate but simply relied on management projections. Further, projections of capital expenditures and working capital needs were unreasonable. Also, there was no real negotiation over the purchase price.

The seller offered to sell the outstanding shares for $26,770,000. The independent valuator arrived at a value range between $26.2 million and $40.5 million, with a midpoint of $32.9 million (3.4 to 4.1 times average EBITDA). PFS agreed to a price of $26.7 million. The seller provided 100% of the financing in the form of a note from the company. There were no warrants or other claims on equity.

The DOL sued PFS in December 2019. In December 2020, the parties agreed to a settlement in mediation.

Settlement: Under the recent settlement, PFS will pay $750,000 to the ESOP in three installments. Also, PFS and its president, John Michael Maier, agreed that Maier would no longer accept engagements to serve as trustee in new ESOP formation transactions. PFS notes that the settlement does not prevent PFS/Maier from accepting engagements to sell ESOP stock, serving as successor trustee, undertaking stock acquisitions for existing ESOPs, undertaking, releveraging transactions, and continuing to serve as trustee for existing clients. PFS also agreed not to accept indemnification from CRI or other ESOP clients for breach of fiduciary duties violations. Under the settlement, PFS and Maier do not admit to any breach of their fiduciary duty to the CRI ESOP.

2020 EBITDA multiples rebound, per DealStats

In 2Q20, EBITDA multiples (median selling price/EBITDA) across all industries dropped to 3.7x as deal activity almost came to a halt, according to BVR’s DealStats Value Index (DVI) report for 1Q 2021. But the multiples rebounded by the second half of 2020, to 4.7x in the third quarter and 4.4x in the fourth quarter, returning to levels near historical norms (see graph). “In doing so, this continued the trend of the median EBITDA multiple reporting at its highest level during the second half of the year as seen from 2015 to 2018 and in 2020,” the report says. As small businesses still navigating through the COVID-19 pandemic and a new administration implementing its economic policies, DealStats will continue to monitor the trends in the EBITDA multiple.

LEI up but at slowing pace, reports BVR’s EOU

In December 2020, the U.S. Leading Economic Index (LEI) improved 0.3%, to 109.5 points, which follows an increase of 0.7% in November, reports the Economic Outlook Update (EOU) published by Business Valuation Resources (BVR). The report noted that the LEI’s slowing pace of increase in December suggests that U.S. economic growth continues to moderate in the first quarter of 2021. The report further states that, while the resurgence of COVID-19 and weak labor markets remain barriers to growth, the Conference Board expects the economy to expand by at least 2.0% (annual rate) in Q1 and then gain momentum throughout the year.

The 54-page December 2020 Economic Outlook Update contains expansive research from leading authoritative resources, which you can use in your valuation reports as long as you give proper attribution. To learn more, visit bvresources.com/eou.

Damodaran updates cost of capital data

Professor Aswath Damodaran (New York University Stern School of Business) has started his annual posting of data updates on his website that include risk-free rates, equity risk premiums, corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which is free. He does a series of posts on his blog based on these new data. The first post takes a look back at 2020 and explains the background of his annual data analysis. A recent survey of valuation analysts found that 13% use Damodaran’s data for developing an estimate of cost of equity.

Fairness opinion provider rankings for 2020

The “Global Mergers & Acquisitions Review: Full Year 2020/Financial Advisors” from Refinitiv contains M&A statistics and also rankings for worldwide providers of fairness opinions. Here are the top five providers (based on the number of transactions) of announced fairness opinions rendered in the United States:

1. Stout (2019 rank: 2);

2. Duff & Phelps (2019 rank: 1);

3. Houlihan Lokey (2019 rank: 3);

4. J.P. Morgan (2019 rank: 4); and

5. Piper Sandler (2019 rank: 9).

Globally, the top five providers of announced fairness opinions are:

1. CITIC (2019 rank: 8);

2. Duff & Phelps (2019 rank: 1);

3. (tie) Houlihan Lokey (2019 rank: 4);

4. (tie) Stout (2018 rank: tied for 3); and

5. J.P. Morgan (2018 rank: 2).

Global BV News

Kohli scores again with top celebrity brand value in India

Virat Kohli, captain of the India national cricket team, has topped the powerful celebrity brand list of Duff & Phelps for the fourth year in a row, according to its Celebrity Brand Valuation Study 2020: “Embracing the New Normal.” The report is a deep analysis of how endorsements affect the brand value of celebrities alongside other factors such as age, fees charged per endorsement, social media presence, and the like. It also examines the impact of the pandemic on both brand value rankings and the celebrity endorsement space. Kohli has a brand valuation of $237.7 million followed by actor Akshay Kumar, at $118.9 million

Valuation News Update

Lisa Guo — Thu, 04 Feb 2021 04:52:12 GMT

Indiana Supreme Court issues key ruling on discounts in compelled buybacks

Last year, in a compelled buyout, the Court of Appeals sided with the departing minority shareholder when it found discounts did not apply in a closed-market sale. In a freshly minted decision, the Indiana Supreme Court reversed the Court of Appeals, finding there was no blanket rule disallowing discounts in a compelled buyback. This is especially true where the parties exercised a shareholder agreement whose terms suggested the use of fair market value.

Compelled buyback:The plaintiff was one of the founders of the company and held a minority interest in it. In 2018, he was terminated without cause. Earlier, all shareholders made an agreement that specified how the buyback price of a terminated shareholder’s interest would be determined. The company would buy the interest at “appraised market value,” as determined by an independent valuator and in accordance with generally accepted accounting principles. The independent valuator applied discounts for lack of control and marketability.

The plaintiff asked the trial court for a declaration that discounts are inapplicable because the shareholder agreement here did not “contemplate a fair market value standard.” Ruling on the parties’ motions for summary judgment, the trial court essentially found that the term “market value” as used in the agreement was synonymous with fair market value. According to the trial court, the word “appraised” was an adjective modifying “market value,”

The Court of Appeals reversed, finding, under controlling case law, discounts were inappropriate because the transaction involved a compulsory sale. The company petitioned for transfer to the state Supreme Court.

Parties’ freedom to contract: The opening paragraphs in the Supreme Court opinion make the court’s preference for the company’s arguments clear. The court said, notwithstanding policy concerns that may preclude the use of discounts in certain circumstances, “we hold that the parties’ freedom to contract may permit these discounts, even for shares in a closed-market transaction” The court went on to say, that, “under the plain language of this shareholder agreement—which calls for the ‘appraised market value’ of the shares—the discounts apply.”

The court said prior case law dealing with a statutory buyout “doesn’t control” in a situation such as here, “where the valuation term comes not from a statute but from a contract that contemplates the shares’ ‘appraised market value,’ not their ‘fair value.’”

The agreement’s plain and unambiguous language shows the parties to it agreed to value their shares as if they were sold on the open market, the Supreme Court said. Further, even if “the valuation term were somehow ambiguous,” the court would still find that “fair market value” was the appropriate standard.

A digest of Hartman v. BigInch Fabricators & Construction Holding Co., Inc., Indiana Supreme Court, case no. 20S-PL-618 (Jan. 28, 2021) (Hartman II), and the court’s opinion will soon be available at BVLaw. A digest of the Court of Appeals opinion in Hartman v. BigInch Fabricators & Construction Holding Co., Inc., 2020 Ind. App. LEXIS 183 (May 5, 2020), and the court’s opinion, are now available to BVLaw subscribers.

Many thanks to attorney Drew Soshnick (Faegre Drinker Biddle & Reath LLP) for alerting us to this important decision.

Free Excel models on valuing complex debt

During a recent BVR webinar, several case studies were presented on valuing complex debt instruments. The presenters offered to the audience an Excel file that contained the models used for the three case studies: (1) simple convertible debt using the DCF/yield method for the debt component and the Black-Scholes model for the option component; (2) convertible debt using a lattice model approach; and (3) valuation of warrants. If you would like a copy of the Excel file, send an email to info@bvresources.com with the words “Excel for complex debt” in the subject line, and we will be happy to get it to you. Ideally, you should listen to the case studies that the models relate to, and you can access a recording of the webinar if you click here (free to BVR Training Passport Pro holders; otherwise, it must be purchased). The webinar, Navigation Through the Maze in Complex Debt Instruments Valuation, was presented by Mark Zyla (Zyla Valuation Advisors), Rajesh C. Khairajani (KNAV), and Faisal Lakhani (KNAV).

Fiat Chrysler brand portfolio valued using 1% royalty rate

The portfolio of Fiat Chrysler brands is worth EUR 10.4 billion based on a preliminary valuation using an 1% average royalty rate, according to a white paper from MARKABLES. PSA Peugeot recently acquired Fiat Chrysler Automobiles, and its assets were valued in a purchase price allocation. The white paper notes that the valuation (which is still preliminary) makes Fiat Chrysler the 12th most expensive brand portfolio ever changing hands in an acquisition. The brands include Fiat, Chrysler, Dodge, Jeep, Ram, Alfa Romeo, Lancia, Abarth, Maserati, and SRT. The 1% average royalty rate “is in line with the royalty rate applied in 2011 when Fiat took over Chrysler,” the MARKABLES paper says. “The royalty rate might seem surprisingly low, considering the awareness and reputation of famous passenger car brands. However, it reflects weak profitability in the consumer vehicles sector, overcapacities, technological changes and environmental issues.” MARKABLES is a provider of data designed to support the valuation of IP assets. You can download its full white paper if you click here.

YE2020 data are now in the Cost of Capital Professional

Year-end 2020 data, including equity risk premia, CRSP decile size premia, and industry betas/IRPs, are now available in BVR’s Cost of Capital Professional platform. The platform is a simple, transparent, and cost-effective service for estimating the cost of capital and is designed to bring more professional judgment and common sense back into the process, which has become too much of a complex “black box” of applied mathematics. It supports the buildup method and CAPM calculations for any valuation date. It also gives you the flexibility to choose the start year for historical return data based on what segment of history you believe best offers a reasonable basis to make estimates of expected future returns. For a personalized demo of the platform, click here.

Reminder: Comments due on 2022-23 USPAP

The fourth exposure draft of proposed changes to the 2022-23 edition of USPAP is available for review, and the Appraisal Standards Board is accepting public comments. You can submit comments and access the exposure draft if you click here. Comments are due by February 17.

BVR to webcast Energy Valuation Conference May 12

For the third year, BVR is pleased to partner with the Houston Chapter of the American Society of Appraisers (ASA) to present a live webcast of the Energy Valuation Conference on May 12. The conference, which is in its 11th year, will feature presentations from nationally recognized speakers who are profession leaders, covering a range of important topics in the industry, including a post-COVID-19 outlook. Early-bird pricing is available through March 31. For more information and to register, click here.

Global BV News

KPMG on business valuations and ESG

While environmental, social, and governance (ESG) factors are seeing a “remarkable increase in awareness,” there is no “common approach regarding how to systematically factor ESG into financial valuations of specific target businesses,” says KPMG’s Quarterly Brief—International Valuation Newsletter for the first quarter of 2021. The KPMG brief suggests an approach to viewing business valuation through an “ESG lens” that involves assessing the ESG impact on cash flows and the discount rate and using probability-weighted scenarios. The brief also contains an update on recent capital market data, including major stock market performances, valuation multiples, current risk-free rates for major currencies, and country risk premiums. The full brief is available if you click here

Valuation News Updates

Lisa Guo — Thu, 28 Jan 2021 04:49:20 GMT

Attorney sees trouble with proposed new BV glossary

If the new proposed glossary of business valuation terms makes its way into the valuation standards, practitioners will face more exposure to professional risk, says an attorney in a Letter to the Editor. The new proposed glossary is out in exposure draft form with a comment period ending January 31 (see our prior coverage for details).

To the BVWire editor:

I am a civil trial lawyer, and my practice for 45-plus years has included the representation of accounting professionals in addressing and defending malpractice claims and license issues. Accordingly, I noted with interest some proposed items, including a revised glossary of terms, related to business valuation services by accountants.

I need to say that I have concerns about creating a situation where the “standard of care” for a business valuation accountant might markedly shift by the creation of new terms, definitions, and processes that such professionals may not be using now; the legal standard refers to what the reasonably prudent accountant would, or would not, do in same or similar circumstances. Accordingly, I believe the proposed revised documents increase the potential for professional risk.

Further, the Florida Supreme Court ruled midyear 2019, effective at that point and going forward, that the Florida courts will shift to the Daubert methodology currently used in federal courts in evaluating the extent of expert testimony allowed in a given case. Florida had been a Frye jurisdiction on that standard, and Frye essentially focused on one question: whether the expert’s opinion is generally accepted by the relevant scientific community. The Daubert standard offers a list of factors to consider. Florida’s evidence code, within FS 90.702, in its current form, provides: A witness who is qualified by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (a) the expert’s specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case.

I believe the risk that may arise in the proposed revisions to the glossary is it would become part of AICPA’s business valuation standard and implicitly make the valuation methods and technical terms generally accepted. And, in my experience with such experts, I am not convinced that many of them use these valuation methods and terms in the proposed revisions and may have difficulty in explaining them.

Signed

Michael J. Corso

Florida Bar Board Certified in both civil trial and business litigation law

Henderson, Franklin, Starnes & Holt P.A.

Fort Myers, FL

During a recent BVR webinar, a panel of business valuation thought leaders urged practitioners to submit comments on the proposed glossary by the January 31 deadline. You can find more details including how to submit comments in our prior coverage.

U.K. and U.S. courts differ on COVID-19 business interruption claims

A recent article in the New York Times reports that the U.K. Supreme Court recently ruled that insurers must cover COVID-19-related losses. This is a huge victory for small-business owners whose business interruptions claims often have been rejected by insurers. In contrast, many U.S. courts (state and federal) have sided with insurers and granted motions to dismiss the plaintiffs’ cases.

Legal test case: As in the U.S., many business owners in the U.K. discovered that insurers were reluctant to pay business interruption claims related to the pandemic. As the Times article explains, the many rejections caused Britain’s financial services regulator, the Financial Conduct Authority (FCA), to file a legal test case on behalf of policyholders in the country’s highest court. The goal, the FCA says, was “to urgently clarify key issues of contractual uncertainty for as many policyholders and insurers as possible.”

The test case sought to litigate key issues and obviate the need for individual policyholders to resolve their individual issues with their insurers. The FCA says for its test case it identified 370,000 policyholders with 700 types of policies that were issued by 60 insurers.

According to the Times article, the Supreme Court’s recent judgment (Jan. 15, 2021) says pandemic-related losses and losses flowing from governmental shutdown orders are covered under two key terms that appeared in many of the policies. They are the “disease clauses,” covering losses from any occurrence of a disease that must be reported to authorities, and “prevention of access clauses,” covering losses when public authorities block access to the business premises. Further, the court ruled that businesses would be able to make claims for partial closure of business or orders that were not legally binding but that encouraged businesses to close days ahead of an order becoming law.

The FCA says it will work with insurers to conclude as soon as possible processing of eligible claims. The goal was to provide businesses with interim payments wherever possible.

Two hurdles: Meanwhile, in the U.S., business owners filing suit against insurers that denied claims for business interruption losses, in many instances, have failed to get beyond the motion to dismiss stage. Diesel Barbershop is a case in point. Here, a number of barbershops operating in Texas challenged the insurance company’s rejection of their claims under policies that were essentially identical. The policies included two hurdles to coverage. One was that they required an accidental, direct physical loss to the property. The court agreed with the insurer that the businesses were not “tangibly ‘damaged’ per se.” The plaintiffs did not plead direct physical loss to their buildings, the court said.

Further, the court agreed with the insurer that, even if the plaintiffs had shown direct physical loss to their properties, they still would not prevail on their claims because of the virus exception contained in the policies.

A companion case is Turek Enterprises, which arose in the Eastern District of Michigan and had facts similar to those in Diesel as well as an almost identical business insurance policy from the same insurer. This case, too, was dismissed.

Digests of Diesel Barbershop, LLC v. State Farm Lloyds, 2020 U.S. Dist. LEXIS 147276; 2020 WL 4724305 (Aug. 13, 2020), and Turek Enterprises, Inc. v. State Farm Mutual Automobile Insurance Co., 2020 U.S. Dist. LEXIS 161198 (Sept. 3, 2020), as well as the courts’ opinions, are available at BVLaw.

Hitchner poll reveals COEC sources of choice

The January 2021 issue of Hardball With Hitchner includes the results of polls that reveal what sources valuation practitioners use for developing cost of equity capital (COEC) estimates. The results of the polls taken in 2020 show that the Duff & Phelps data are “widely used and accepted” and that the BVR Cost of Capital Professional has “gained usage,” Hitchner says (see below)

Analysts’ Usage Percentages of COEC Data Vendors

COEC Source	2/25/2020	1/21/2020
Duff & Phelps Navigator	84%	92%
BVResources COC Pro	24%	21%
Damadoran’s data	13%	12%
Pepperdine survey	8%	13%
Other or none of the above	13%	7%

(Source: Hardball With Hitchner, Issue 3, January 2021)

“Damodaran’s data” refers to the work of Professor Aswath Damodaran (New York University Stern School of Business), who publishes a huge amount of free data on his website. The Pepperdine survey refers the Private Capital Markets Project from Pepperdine University, an analysis based on an ongoing survey of expected rates of return of providers in the private capital market.

During a conference session in 2019, Hitchner used both the Navigator and Cost of Capital Professional platforms on a hypothetical company. The result was a cost of equity range from both platforms that was “not that much different,” he said. Full coverage of that session is in an article, “BVR and Duff & Phelps Cost of Capital Platforms Go Head-to-Head at VSCPA,” which appeared in the November 2019 issue of Business Valuation Update.

Hardball With Hitchner is a monthly publication written by James Hitchner (Valuation Products and Services). For subscription information, click here.

Reminder: Comments due on AICPA’s proposed standard on financial instrument valuation

The AICPA’s Auditing Standards Board (ASB) has proposed a standard designed to provide practitioners with more guidance on auditing management’s estimates of the fair value of financial instruments, including on the use of pricing services. The proposed standard provides guidance:

· When management has used the work of a specialist in making accounting estimates, as well as other proposed amendments to enhance guidance when evaluating the work of the management’s specialist;

· On the use of pricing information from pricing services when evaluating management’s estimates related to the fair value of financial instruments; and

· When using the work of an auditor’s specialist.

The Proposed Statement on Auditing Standards (SAS), Amendments to AU-C Sections 501, 540, and 620 Related to the Use of Specialists and the Use of Pricing Information Obtained From External Information Sources, has a comment period that ends February 4. Please send comments to CommentLetters@aicpa-cima.com.

Global BV News

‘Amazing’ rebound for valuations in India

Over the past six months, “we have been amazed that valuations for most industries (save some severe casualties of COVID, including tourism, hotels, and aviation) are back to pre-COVID levels,” says a study on cost of capital in India. The study, from RBSA Advisors, examines movements in cost of equity, cost of debt, and resultant cost of capital. The study provides insight into the Indian economy, risk parameters, capital budgeting and leverage, as well as resultant costs of factors of capital. RBSA Advisors is the India-based partner of Valuation Research Group, and the study can be downloaded if you click here.

Valuation News Updates

Lisa Guo — Thu, 21 Jan 2021 04:47:05 GMT

Delaware court weighs in on goodwill in sole proprietorships

A recent divorce case out of Delaware is significant for addressing the treatment of goodwill where the business is a sole proprietorship. The opinion includes important commentary on the only Delaware Supreme Court decision that has broached the issue.

In the instant case, the business was a sole proprietorship through which the husband had worked for decades as an independent contractor for a larger financial services and investment firm. Primarily his work involved financial planning, estate and business succession planning, and executive benefits planning. The husband earned income from selling clients policies that met their financial and strategic needs and maintaining the plans throughout their lifetime. Policy renewals were another earnings source.

Wrong premise: The parties’ BV experts reached very different value conclusions. The husband’s expert found the business was worth $255,000. The wife’s expert arrived at a value of nearly $3.5 million. Goodwill—specifically whether there was enterprise goodwill— was a major area of disagreement. The husband’s expert premised his valuation on the understanding that, under the controlling Delaware case law, there could be no goodwill in a sole proprietorship under any circumstances. This proposition was based on a 1983 decision from the Delaware Supreme Court, E.E.C. v. E.J.C., that deals with goodwill in the context of valuing a law firm owned by a sole practitioner. In E.E.C., the high court noted the parties conceded that “goodwill should be disregarded.”

The court ruling on the present case said there are no other high court decisions giving additional guidance “whether or not it is appropriate to ever include a value for professional good will in such a business.” Many trial court opinions have cited E.E.C. both for the proposition that the capitalization of income approach or the discounted cash flow method are not appropriate methods with which to value a sole proprietorship and that a sole proprietorship has no enterprise goodwill.

The court noted, here, the husband’s business was not a law firm “and the practice and means of generating income are different.”

“The Court does not read EEC as stating that every sole proprietorship in every case has no professional good will,” the court said. Therefore, here, the valuation of the husband’s expert was based on the wrong premise. The court found credible the analysis of the wife’s expert, who assigned 5% of goodwill to the husband (value of a noncompete) and the remainder to the business. The court said both experts agreed that, if the husband could transfer goodwill such that he could transfer to a buyer his client base and stream of income (even 95% of the income), he could obtain about $3.5 million for the business.

The opinion addresses other valuation issues, including how to account for commissions the husband received after separation but on which he worked during the marriage.

A full discussion of A.A. v. B.A., 2020 Del. Fam. Ct. LEXIS 33; 2020 WL 6379355 (Oct. 9, 2020), and the court’s opinion are available to subscribers of BVLaw.

Extra:Check out BVR’s free goodwill chartproviding a quick overview of goodwill jurisprudence in the 50 states.

BVR ‘power panel’ comments on proposed BV glossary

The first in a series of “power panel” BVR webinars drew a huge audience and brought together top thought leaders in the profession to address hot-button issues via questions from the audience (some on video). The panel, moderated by Jay E. Fishman (Financial Research Associates), consisted of Michelle F. Gallagher (Adamy Valuation), Ken Pia (Marcum), and Jeffrey S. Tarbell (Houlihan Lokey). They fielded questions about valuations amid COVID-19, PPP loans, tax affecting pass-through entities, ESOP valuations, and future leadership of the profession. They also discussed the recently proposed revision to the International Glossary of Business Valuation Terms that is currently out for public comment (due January 31).

Some concerns: Gallagher noted that some new terms and methodologies in the glossary could create a problem—especially in a litigation context—if the glossary is made part of the valuation standards. Some of the new glossary entries include methodologies that are unknown to some practitioners. Pia commented that opposing counsel could pick up on this and ask the practitioner whether he or she used the methodologies listed in the new glossary. If you answer “no,” the next question you’ll get is “Why not? It’s in your professional standards.” Enough of those questions and enough “no” answers could seriously impact the expert’s credibility in the eyes of the court.

Tarbell, who is in the working group for the glossary, acknowledged this concern and noted that the working group will consider it. He pointed out that the glossary has a number of disclaimers in it and is not meant to be authoritative, but one possibility is to issue it in a form that clarifies this. Fishman also suggested that the definitions be put into context. For example, if a term is used primarily for financial reporting purposes, the glossary should explain that, or, if a term is used primarily in a particular country, the glossary should point that out as well.

The panel urged the audience to review the terms and definitions in the proposed glossary and submit comments by the deadline. You can find more details including how to submit comments in our prior coverage.

A recording of the webinar is available if you click here. The next “power panel” is scheduled for April 6.

Extra: A redlined version of the BV glossary is included in the online version of the February 2021 issue of Business Valuation Update(subscription required).

Two new resources recap the year 2020 in BV

A lot happened in 2020 in the business valuation profession other than COVID-19, and you can get caught up on the impacts of the pandemic—and everything else—with two new guides from BVR.

The Business Valuation Update Yearbook, 2021 edition, contains over 70 articles and hundreds of news items that cover the most innovative approaches and techniques (including COVID-19-related), leading conferences, new court decisions, and changes in regulations and standards in the profession with on-the-ground reporting from valuation experts, thought leaders, and the BVR editorial team.

The Business Valuation Case Law Yearbook, 2021 edition, represents BVLaw’s analysis of the most noteworthy court decisions of the past year in the areas of damages, marital disputes, breach of contracts, dissenting shareholder disputes, federal taxation (including estate and gift tax cases), intellectual property, bankruptcy, and more. It also contains the court opinions and a case listing by state/jurisdiction, court, and case name, followed by a short description of the key valuation issue of each case.

Note: You already have these two new resources in your BV library if you are a subscriber to the Digital Library or BVResearch Pro.

Valuations remain high in senior healthcare

Strong deal flow, record levels of unspent capital, and valuations remaining at a high level characterize the M&A environment for senior living and post-acute providers, reports Jed Cheney (CliftonLarsonAllen LLP), a principal in CLA’s healthcare transaction services group. During a recent webinar, Cheney gave a good overview of the types of entities in this sector and their value drivers, including the impacts of COVID-19. Responding to a question from the audience, Cheney says that, from his perspective, he has not seen a marked change in earnouts and contingencies. From an escrow standpoint, he is still seeing the typical 5% being put into escrow. Another audience question: Are current transaction multiples good to use for future reference? Yes, says Cheney, who is seeing the same level of multiples as before the pandemic, which is “good for sellers,” he notes. This is a good example of the fact that the pandemic has impacted different sectors in different ways—some negative, some positive, and some not much at all.

ESOP valuation FAQ guide is in the works at the AICPA

A new AICPA FAQ guide is being prepared on ESOP valuations, say Natalya Abdrasilova (Wipfli LLP) and Steven L. York (Stern Brothers Valuation Advisors), who spoke at the recent AICPA FVS Conference. They have been working on the document, which is designed to provide clarity to certain issues. BVWire has covered a number of controversial valuation issues that have emerged from a series of court cases the government has been winning that claim ESOPs are purchasing sponsor company stock based on inflated valuations. These cases have stung the ESOP valuation community and have generated controversy over the tactics and valuation methods the Department of Labor (DOL) has been using. Members of Congress and the American Society of Appraisers (ASA) have objected to the DOL’s aggressive litigation-driven strategy and use of flawed valuation methodology.

More takeaways from the conference are in the February 2021 issue of Business Valuation Update.

Book review: The Art of Business Valuation: Accurately Valuing a Small Business

The current issue of NACVA’s QuickRead includes a favorable review of a recently published book, The Art of Business Valuation: Accurately Valuing a Small Business. The book, written by Greg Caruso (Harvest Business Advisors), focuses on small and very small business (companies with under $10 million in revenues and often under $5 million in revenues). Caruso, well-known to NACVA members as the host and editor-in-chief of the monthly Around the Valuation World webcasts, “fills a gap by providing his professional insight on the challenges faced valuing small and very small businesses,” writes Roberto H Castro (Law Office of Roberto H Castro PLLC), who wrote the review. “This is insight that is not readily available.” To read the review, click here.

Global BV News

European goodwill impairment up 18% in 2019

Total goodwill impairment recorded by European-listed companies in the STOXX® Europe 600 increased for a second consecutive year, rising 18%, to €36.4 billion (bn) in 2019, as fears of a slowdown in global growth persisted, according to the “2020 European Goodwill Impairment Study,” from Duff & Phelps. The United Kingdom had the highest aggregate amount of goodwill impairment in 2019. Overall, the top three industries with the most significant increase in goodwill impairment amounts in 2019 are (in order of magnitude): financials and real estate, consumer staples, and energy.

Preview of the February 2021 issue of Business Valuation Update

Here’s what you’ll see:

“Massive Overhaul of Global BV Glossary in the Works” (BVR Editor). A major revision is being planned for the International Glossary of Business Valuation Terms, and the team preparing the new glossary wants feedback by January 31 on the proposed changes. The revision would double the size of the glossary by adding over 120 new terms and methodologies to the existing glossary, which has been integrated into the various valuation standards.
Redlined Version of the International Glossary of Business Valuation Terms. Shows the extensive revisions being planned for this document, last published in 2001.

“Insights, Tips, and Practical Advice From the AICPA FVS Conference” (BVR Editor). A recap of some valuable takeaways on the use of market transactions, valuations for bankruptcy, valuing private debt, ESOPs, business interruption claims, virtual testimony, and more.

“New Research From Grabowski and Abbott on Recovery and Growth” (BVR Editor). New upcoming research from Roger Grabowski (Duff & Phelps) and Ashok Abbott (West Virginia University) challenges conventional wisdom about long-term growth rates and economic recovery.

“Highlights of 2020 Delaware Valuation Decisions” (Gilbert E. Matthews). This article discusses two 2020 Supreme Court decisions and eight decisions by the Court of Chancery.

“Practice Growth Opportunity in Valuing Financial Instruments” (BVR Editor). Valuation practitioners looking for a growth area should consider services related to financial instruments, according to Dr. Joel M. DiCicco (Center for International Business Valuation), speaking at the recent Second Annual Conference on the Art and Science of Business Valuation.

“Treasure Trove of Data in the 2021 Business Reference Guide” (BVR Editor). Here’s a look at what’s in the 31st edition of this guide, including an example of how to value equity using a rule of thumb.

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.”

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

Valuation News Update

Lisa Guo — Thu, 14 Jan 2021 04:43:16 GMT

Prince estate and IRS embroiled in fierce valuation dispute

A recent article in the Star Tribune says the executor of the estate of Prince, the late world-famous rock star, and the Internal Revenue Service are currently locked in a fierce estate and gift tax dispute. The IRS argues the executor has seriously undervalued the estate, and the executors claim the IRS’ calculations “are riddled with errors.”

Prince (full name Prince R. Nelson) died in April 2016 of an overdose of fentanyl. The fact that he had no will has resulted in complicated and extensive probate proceedings and wildly fluctuating estimates of the worth of Prince’s estate.

The executor of the estate is Comerica Bank & Trust, a financial services company headquartered in Dallas. According to the Star Tribune, Comerica filed a tax return in 2017, valuing the estate at $82.3 million. Last June, the IRS issued a notice of deficiency in which the agency claimed the estate was worth about double that much, $163.2 million, and owed an additional $32.4 million in taxes. The IRS assessed an accuracy-related penalty related to what it considered a “substantial” undervaluation of the estate.

The U.S. Tax Court’s docket shows that, in August 2020, Comerica petitioned the court for review and, at the same time, asked for a trial. At issue are the value of Prince’s real estate holdings and, most controversial, nontangible assets. The latter include ownership interests in music publishing, music compositions, and recordings. The article reports that at least one “deep-pocketed investor in music copyrights” has expressed great interest in acquiring the rights to Prince’s music.

Besides his reputation as a brilliant musician, Prince became famous for keeping tight control over the release and use of his music and for enforcing his intellectual property rights aggressively. Case research shows that Comerica, whose role as executor includes acting as “fiduciary charged with monetizing and protecting the Estate’s intellectual property for the benefit of [Prince’s] heirs,” seeks to continue along this path. It has set up the official Prince YouTube channel and has successfully litigated copyright infringement claims against those who have released unauthorized audio and/or video recordings of Prince performances (Comerica Bank & Trust, N.A. v. Habib).

Stay tuned for further reporting on this matter.

Letter to the editor: Proposed change to BV Glossary

The following letter concerns the proposed changes to the International Glossary of Business Valuation Terms (see last week’s coverage for details):

Dear Editor:

I think many certified as ABVs and CPAs who perform valuation services will be interested in the effective change to AICPA’s professional standard for valuation services, VS Section 100, if the proposed revised “international glossary” is adopted and replaces the original international glossary currently at VS 100.81.

The proposed revised glossary has about twice as many terms as the current version. The current version of the international glossary in the standard has 123 valuation terms. The December 14, 2020 proposed revised international glossary has 239 valuation terms.

Some of the new terms include valuation methods including Backsolve Method, Cost Savings Method, Current Value Method, Distributor Method, Greenfield Method, Hybrid Method, Investment Method, Premium Profits Method, Summation Method, and With and Without Method.

In addition to new methods, the proposed revised glossary adds technical terms including All Risks Yield, Calibration, En Bloc Value, Evidential Skepticism (that differs from Professional Skepticism in the document), Notional Market Valuation, Ratable Value, Self-Skepticism, and Sustainability (that relates to climate change, corporate responsibility, and other factors).

I see two issues for the AICPA’s comment period: first, should the proposed revised glossary be included in AICPA’s professional valuation standard VS 100 or separated as an obvious non-authoritative document similar to a practice aid or practitioner handbook; and, second, whether the valuation terms are reasonable or acceptable. From the perspective of ABVs and CPAs who perform valuation services, I think the first area to consider is whether the proposed glossary document belongs in the VS 100 professional standard. It could, for instance, increase risk for practitioners. Also, I think AICPA providing a mark-up (redline) version of the proposed revisions would be a large benefit to those reviewing the proposal for possibly providing comments to AICPA.

Dr. Michael A. Crain, CPA/ABV, CFA, CFE

Editor’s note: Dr. Crain was the chair of the AICPA’s Business Valuation Committee in 2007 when the AICPA issued its business valuation standard, Statement on Standards for Valuation Services (SSVS), now commonly known as VS Section 100. He is currently the director of Florida Atlantic University’s Center for forensic accounting and continues to practice on a part-time basis.

Comments on the proposed changes are due January 31. Click here for our coverage from last week that has links to the document and how to submit comments.

New guidance issued on the Payroll Protection Plan

During a recent BVR webinar, speakers report that many business owners will claim their Payroll Protection Plan (PPP) loans will be 100% forgiven. In reality, not everyone will receive 100% forgiveness, so appraisers need to make their own decisions about whether what clients are saying is reasonable or not. The U.S. Small Business Administration (SBA) and Treasury have issued new guidance for the reopening of the PPP. The new guidance released includes:

· PPP guidance from SBA Administrator Carranza on accessing capital for minority, underserved, veteran, and women-owned business concerns;

· Interim final rule on Paycheck Protection Program as amended by Economic Aid Act; and

· Interim final rule on second draw PPP loans.

Speakers on the BVR webinar also advised experts to consult with a client’s accountant and attorney about the loan forgiveness.

Today’s the deadline to send your video question to the BV ‘power panel’

You can get free admission to BVR’s Power Panel: Live Expert Answers for Today’s Tough BV Questions on January 14 if you send in a video of yourself asking a question you want the panel to answer. But you must send it in before the end of today, January 13, to qualify. The panel will consist of Jay E. Fishman (Financial Research Associates), Michelle F. Gallagher (Adamy Valuation), Ken Pia (Marcum), and Jeffrey S. Tarbell (Houlihan Lokey). Use your smart phone or other device and video yourself asking a question and send it to BVR’s training director, Jared Waters, at JaredW@bvresources.com by the end of today, January 13, and you’re all set. If you have any trouble doing this, contact Jared for help.

Business Reference Guideupdated for 2021

The 2021 edition of the Business Reference Guide (BRG) by Tom West is now available. Now in its 31st year, it contains the latest industry-related information including “rules of thumb,” pricing tips, benchmarking information with comparison data, industry resources, and general industry data on nearly 600 types of businesses. There is also an online version with a fully searchable database, and it includes the print version of the guide.

FAU offers online accounting course on data analytics

The School of Accounting Executive Master’s Degree Program at Florida Atlantic University has developed an online accounting course on data analytics in auditing, managerial accounting, and financial statement analysis. The course includes hands-on practice in extracting data from accounting systems for use in analytical software. This course covers an entire semester, which starts this month (officially on January 16) and is worth three credit hours for CPE purposes, which should translate to 45 CPE credits. There is no set class schedule—you make your own weekly schedule and arrange online meetings with the instructor for one-on-one or group meeting. There is a short video by the instructor, who is a CPA with direct experience in data analytics. The cost is $700. The contact information for the application is 561-297-0525, or you can email Deborah Cavicchia at dcavicchia@fau.edu. FAU’s School of Accounting Executive Program can help expedite the application process.

Revised resource for IP valuation insights and case law

New chapters and over 200 case digests—plus online access to the full text opinions—are available in BVR’s Intellectual Property Valuation Case Law Compendium, 4th edition. This compendium helps remove the guesswork from understanding what it takes for an effective expert/attorney team to win a case in intellectual property valuation. In addition to the case material, there are articles that outline practical tactics for use in any IP engagement, including a list of the top 20 questions to ask when completing due diligence for an IP valuation. For more details and the table of contents, click here.

Global BV News

PFI featured in latest OIV Journal

The latest edition of the journal of the Organismo Italiano di Valutazione, the valuation standards-setter in Italy, is now available if you click here. This edition contains the following articles:

The use of management’s prospective financial information: a focus on fair value measurement using discounted cash flow techniques (David C. Dufendach); and
Early warning signs (value based) of imbalances in troubled firms (Mauro Bini).

Dufendach advises that valuation professionals should increase their familiarization regarding Guidance on PFI contained in the Mandatory Performance Framework (MPF1) and Application of the Mandatory Performance Framework (AMPF) for the CEIV credential—“even though it may not be required,” he writes. The guidance addresses professional skepticism, due diligence procedures, reasonably objective basis, and documentation.

Valuation News Update

Lisa Guo — Thu, 07 Jan 2021 04:40:43 GMT

Comments wanted on revised global BV glossary

A draft of a revised international glossary of business valuation terms has been developed, and feedback is wanted on the terms included and their definitions. The draft is a result of the collaboration of the ASA, AICPA, RICS, TAQEEM, and CBV Institute. Public comments are due January 31, and the document, titled International Valuation Glossary—Business Valuation, can be found if you click here. Comments can be submitted if you click here, but the AICPA has asked its members to provide feedback directly to Mark Smith, senior manager of the AICPA’s FVS section, via email at mark.smith@aicpa-cima.com.

Key point: The revised glossary will be made part of official standards, and it contains technical terms and methodologies, a number of which have emerged since the prior version (published in 2001). Some practitioners we spoke with are worried that this could create a problem, especially in a litigation context. For instance, you might get this question related to a new glossary entry: “Did you use or consider the Greenfield method in your valuation analysis?” If you answer “no,” the next question you’ll get is “Why not? It’s in your professional standards.”

It may be better to promulgate the revised glossary in nonauthoritative form, such as an advisory or practice aid.

Vinoskey reply brief refutes DOL’s stock value and control claims

Argument continues in the contentious Vinoskey ESOP litigation, which is now in the 4th Circuit where the remaining defendant, Adam Vinoskey, has appealed the district court’s liability and damages findings. Vinoskey recently filed a reply to the Department of Labor’s defense of the court’s decision in which he discredits the DOL’s valuation-centered contentions.

As we reported earlier, at issue was a 2010 transaction in which Vinoskey and his late wife sold the remaining 52% of stock in their company to an ESOP for $406 per share. Appraisals in the five years preceding this transaction ranged from $215 per share to $285 per share in 2009. The crux of the district court’s ruling was that Vinoskey was a knowing participant in the independent trustee’s ERISA violations and was liable as a co-fiduciary for failing to remedy the trustee’s breaches. The trustee caused the plan to overpay for company stock, and Vinoskey, the selling shareholder, accepted the price knowing it was inflated.

Post-judgment, the DOL and the trustee settled, but Vinoskey appealed the findings.

Arm’s-length deal: In its response brief, the DOL claimed Vinoskey, who was a named fiduciary of the ESOP, was liable as a fiduciary concerning the 2010 transaction. He also was liable as a co-fiduciary because he failed to make reasonable efforts to remedy the trustee’s breaches. He “did nothing to protect his employees’ interests in the 2010 Transaction.” Vinoskey’s reply brief counters that he removed himself from the decision-making process underlying the transaction and that the company retained an independent trustee that had the authority to review and approve the transaction and that was insulated from Vinoskey’s influence. Vinoskey did “what a prudent fiduciary selling stock to the ESOP should do,” the brief says.

“Vinoskey sat only on one side of the bargaining table and negotiated against the independent trustee, who sat on the other side.” The brief claims he wasn’t a fiduciary and cannot be liable as a co-fiduciary of the trustee’s breaches. The DOL “advances what amounts to a per se theory of liability for selling shareholders when an independent trustee causes an ESOP to overpay for company stock,” the reply brief asserts.

Valuation is forward looking: The DOL claims Vinoskey knew “there was no business reason” that justified the stock price increase from $285 per share in 2009 to $406 per share in 2010. Vinoskey’s reply brief points out that 2009 earnings were lower as a consequence of the Great Recession. It says the DOL conceded that the company began to bounce back in 2010; Vinoskey reasonably believed it would do even better in 2011 considering the large backlog of orders, which, when filled, would boost the company’s earnings.

Valuation is forward looking, the brief notes. “For valuation purposes, the question was whether, in 2010, [the company] was poised for future growth.” Vinoskey saw a promising future particularly in light of the economy’s general improvement.

Regarding the contested issue of control, the brief says a layperson likely understands what “control premium” means. However, “even a valuation professional would not know that a buyer was paying a control premium based solely on the fact that a valuation was conducted on a controlling interest basis,” the brief says. Further, the ESOP did gain control, the brief emphasizes. The transaction caused the ESOP to own 100% of the company’s voting shares, and, under the corporate bylaws, the ESOP had the unfettered right to remove the board of directors for any reason at any time.

The brief further notes that the idea that an ESOP owning 100% of a company’s voting rights might not control the company “simply did not exist until 2017, after the district court’s decision in Brundle.” This transaction took place in 2010, the brief points out.

Stay tuned for reporting on further developments in this case.

Digests of the district court’s 2019 decision in Pizzella v. Vinoskey(earlier Acosta v. Vinoskey), 2019 U.S. Dist. LEXIS 129579 (Aug. 2, 2019), and Pizzella v. Vinoskey (II), 2020 U.S. Dist. LEXIS 15464; 2020 WL 476669 (Jan. 29, 2020), as well as the court opinions are available to subscribers of BVLaw.

Send the BV ‘power panel’ a video question—and get free admission

Here’s your chance to ask any question you want, and it will be answered live during BVR’s Power Panel: Live Expert Answers for Today’s Tough BV Questions on January 14. What’s more, if you send in a video of yourself asking the question, you will get free admission to the session. The panel will consist of Jay E. Fishman (Financial Research Associates), Michelle F. Gallagher (Adamy Valuation), Ken Pia (Marcum), and Jeffrey S. Tarbell (Houlihan Lokey). To get free admission to the webinar, you must send in a question in video form by January 13.

What to do: Use your smart phone or other device and video yourself asking a question you want the panel to answer. Send the video to BVR’s training director, Jared Waters, at JaredW@bvresources.com no later than January 13, and you’re all set. If you have any trouble doing this, contact Jared for help.

Vanguard stock market forecast implies a U.S. ERP of 3% to 5%

Annual returns of U.S. stocks over the next decade are forecasted to be in the “modest 3.7%-5.7% range,” according to a recent market outlook reportfrom Vanguard. This implies an equity risk premium (ERP) in the range of 2.2% to 4.2%, assuming a risk-free rate of 1.5% (the 20-year T-bond spot rate at the time of this writing). The forecast of stock returns “is quite different from the 10.6% annualized return generated over the last 30 years,” the report says. Some analysts believe that the past is not reflective of the future, so they do not use an ERP based on historical returns. The ERP is a forward-looking concept based on the expected excess return on the stock market, so they use a forward-looking (“implied”) ERP. An implied ERP represents investment expectations as of a particular point in time, which is what analysts are trying to determine.

Good, free economic research from McKinsey

We hear more valuation analysts touting the free material available from McKinsey on economic and industry analyses, particularly with respect to the COVID-19 crisis. A few examples: One chart shows projected small-business recoveries by industry (click here to view), and another shows the most likely scenario for COVID-19’s impact on domestic GDP in various countries (click here to view). All of this material is free, and you can sign up for regular alerts on the McKinsey website.

Do you have a story to tell?

During 2020, it was exciting to see valuation experts rise to the challenges the pandemic created. Business Valuation Update was very fortunate to publish a good number of articles submitted by experts who presented some very interesting and innovative thinking about how to reflect the impact of the pandemic on valuations. Of course, this thinking continues to evolve, so we invite you to share your ideas and experiences with your peers and submit an article to us. No time to write? No problem—just contact us and we can help you with that! Send an email to andyd@bvresources.com.

Global BV News

IVSC issues exposure draft on financial instruments

The International Valuation Standards Council (IVSC) is “eager” to hear comments on its exposure draft on a new standard for the valuation of financial instruments. This is part of the ongoing effort of the organization’s Financial Instruments Board, which was formed in December 2018. “This exposure draft represents a hugely significant evolution in the valuation of financial instruments and the IVSC is eager to hear your thoughts,” the IVSC says. Comments are due by April 19. You can find the exposure draft if you click here, and you’ll also find a form for feedback.

CBV Institute sets date for 2021 Congress

Mark your calendar for June 16-18 to attend the Interactive Virtual Congress 2021 held by the Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO). This event has always represented best-in-class global learning. Details are forthcoming and will appear on the organization’s event webpage.