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.

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.

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.

• 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.

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

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

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!

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

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

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 pepperdine.qualtrics.com/jfe/form/SV_1yTdYavRHjHUO22?region=34582&spl=NB1.

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.

• 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

• 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.

• 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