April 26th, 2006
Issue #  43-2

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The BV E-Update is your complimentary source for the latest valuation court cases, plus timely practice tips, information, and definitions.

The Debate Heats up Over Marketability Discounts!

A second BVR telephone conference to cover Mercer’s QMDM, current court controversies—and more

In our last E-update (April 11, 2006), we announced an upcoming Telephone Conference on the current state of determining discounts for lack of marketability (DLOM). In the announcement, we highlighted the many questions that surround any determination of DLOM these days—including the use of Mercer’s QMDM (Quantitative Marketability Discount Model), the staying power of professor Bajaj’s study, and the effectiveness of pre-IPO studies.

It soon became clear that one session wouldn’t sufficiently cover all issues—especially when, in between the conference planning and its announcement, the Temple case came out (Temple v. U.S., 2006 U.S. Dist. LEXIS 16171)(March 10, 2006). Here, the federal court considers the applicable discounts to a taxpayer’s gifts of four partnership entities—including the QMDM, restricted stock studies as well as the more “traditional” approaches.

To accommodate the need for more “air time” on all aspects of this important topic, we’ve since planned “Discounts for Lack of Marketability: Part II”, a telephone conference currently scheduled for May 30, 2006, and featuring (so far) Chris Mercer and moderator Lance Hall. (More panelists to be added, as time/availability permit.)

In the meantime, it’s not too late to sign up for Part I of the series, which is still scheduled for this coming Wednesday, April 26, 2006, and features Prof. Ashok Abbott, the leading academic researcher on the value of liquidity; and Espen Robak, co-developer of the FMV Restricted Stock Study™, with Lance Hall slated to moderate. As always, earn two interactive CPE credits for participating.

To register for these and all future telephone conferences, please visit www.bvresources.com ; or call 1-888-BUS-VALU (287-8258)


New Court Cases

    • Edenfield v. Edenfield, 2005, Tenn. App. LEXIS 689 (October 31, 2005) (Judge Cottrell). What happens when a non-owner spouse asks for a higher valuation of the business, and then gets it—along with the business?
    • Farndale Co., L.L.C. and Val Particpations, S.A. v. Folco Gibellina and Accuma, S.p.A, SA , 2006 N.C. App. LEXIS 423 (Feb. 21, 2006) (Judge Levinson). An analyst’s notes become instrumental in the court’s finding of breach of corporate fiduciary duty.
    • Ha-Lo Industries, Inc. v. Credit Suisse Boston , 2005 U.S. Dist. LEXIS 23505 (October 12, 2005) (Judge Gettleman). Investment analyst “pleads the Fifth” rather than testify as to how “simple” valuation errors might have led to incorrect fairness opinion.
    • Weinsten v.Weinstein, 2005 Conn. LEXIS 348 (January 11, 2006) (Judge Katz). How deep must an analyst dig through marital dissolution disclosures to uncover an opposing party’s fraud?
    • American Federal Bank v. United States, 2005 U.S. Claims LEXIS 320 (October 31, 2005) (Judge Lettow). Cost of replacement capital in mitigation model must be based on actual events, an not post-mitigation merge.

    NEW! Click here for your complimentary case abstract of Ha-Lo Industries, Inc. v. Credit Suisse Boston.

    These cases and more are available to subscribers to the BVLaw database at BVLibrary.com . Abstracts will be available in an upcoming issue of Business Valuation Update® at BVLibrary.com

BVMarketData Update

We’ve now updated research results through the end of 2005 at the Pratt’s Stats™, Public Stats™, and BIZCOMPS®Subscriber Services pages (available only to subscribers) at BVMarketData.com. The updated research includes historical trends in valuation multiples by year and major industry groups.

Here are the current numbers of transactions contained in these critical databases:

  • Pratt’s Stats™ (now has 8,330 count)
  • Public Stats™ (now has 1,953 count)
  • BIZCOMPS® (now has 8,740 count)

These databases and more are available at BVMarketdata.com



More on Marketability Discounts : What range typically applies to ESOP valuations?

Question: Given the various legal requirements on ESOP distributions, how should analysts apply discounts for lack of marketability?

Answer: ESOPs are a little different from other valuations, because the law requires that ESOP-held stock be distributed subject to a “put option” in the hands of participants. This differs from other “real world” liquidity arrangements, because the liquidity right/restriction doesn’t belong to the asset holder (the ESOP trustee), but to the participant—whose put option may be subject to a deferral for up to 15 to 25 years. Yet there was a time when the standard discount for lack of marketability in an ESOP transaction was zero—and now we’re seeing discounts more in the range of 5 top 15 percent, or even higher.

Why? For many years, industry practice dictated a zero marketability discount because the put option effectively created a ready market for sale. However, along came the landmark case of Eyler v. Commissioner (1996 U.S. App. LEXIS 15831), which held that the existence of a put option “may” preclude a marketability discount, depending on whether its terms are “favorable.” So the industry practice turned from giving no marketability discount to a minimal discount in the range of 5%, and if there are issues about liquidity in certain instances, up to 15%.

Jared Kaplan, Esq. ( McDermott Will & Emery, LLP , Chicago) and Robert S. Socol, MBA (Stout Risius & Ross, Chicago)

Source: BVR’s April 5, 2006 teleconference, “Mastering the ESOP Valuation.” Copies of the conference and transcripts available at www.bvresouces.com


BV Definition of the Week

Spoilation of Evidence

The only thing worse than a document gone bad is one that has disappeared. Technically, “spoliation” is the willful destruction or material alteration of evidence; or the failure to preserve evidence for another’s use in current or reasonably foreseeable litigation. Under federal law, an expert’s duty to preserve evidence arises when that expert is or should be aware that evidence in his/her possession or control is relevant to pending or probable litigation.

Important practice tip: All information and documents that a testifying expert receives from and/or distributes to third parties in connection with any litigation is discoverable and subject to the expert’s duty of preservation.

Source: Thomas Hilton, Electronic Discovery and Evidence Spoilation, presented at AICPA/ASA National Business Valuation Conference (November 2005)


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