BVWire Issue #163-4 | April 27, 2016

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Arkansas KOs active appreciation in divorce

In a dramatic about-face, a divided Arkansas Supreme Court recently decided to get rid of the active appreciation rule—a rule the court had introduced almost 30 years ago when it interpreted a state statutory provision on nonmarital property. What adds to the controversy is that the court decided to overrule its earlier decisions of its own volition. Neither of the parties had advocated for a change in case law.

Trial court follows precedent. The case reached the state Supreme Court after the husband contested a trial court’s decision to award the wife half of the appreciation in value of his company, which was separate property. The appreciation was over $556,000. Performing an active appreciation analysis, the trial court found that the appreciation was the result of the husband’s efforts during the marriage as well as the wife’s contributions to the company.

In contesting the trial court’s analysis, the husband argued that, under the applicable state statute, the increase in value of the nonmarital business remained nonmarital property. But he also acknowledged that in a line of cases the state Supreme Court had used the active appreciation doctrine to carve out an exception to the statutory law. Instead of claiming the controlling case law was wrong on the issue, the husband argued the exception was inapplicable to the facts of the instant case. Therefore, the trial court in this case erred when it awarded the wife part of the appreciation.

High court overrules precedent. A majority of the state Supreme Court performed a different analysis altogether. It began by noting that the applicable statutory provision defines marital property as “all property acquired by either spouse subsequent to the marriage except … the increase in value of property acquired prior to marriage.” Therefore, the court said, “the increase in value of property during a marriage is nonmarital, without exception, and should be returned to the owning party.”

The majority then went on to “expressly overrule” all prior cases in which the court once had “redefined marital property through the ‘active appreciation’ rule.” These cases, and the active appreciation rule, “clearly conflict with the statutory scheme,” the court’s majority said. How to define marital property and how to divide property at divorce is “a matter of policy with which the legislature, not this court, is almost exclusively tasked.”

The majority observed that, over time, some trial courts confused the issue even more by weighing the efforts of both the owner and nonowner spouse in determining whether or not to reclassify nonmarital property as marital property. This happened in the instant case.

In creating the active appreciation doctrine, the judiciary moved the law “too far from the statute,” the high court decided. The only way to correct this “palpable error” was to overturn the prior case law, notwithstanding the legal doctrine of stare decisis, which cautions against overruling precedent.

Majority too activist: Two judges dissented on this issue. Their main contention was that, during the 30 years in which the exception was in effect, the legislature failed to express disagreement with the court’s jurisprudence. Moreover, the question of whether to overrule the active appreciation rule was not in front of the court at this time. It should be reserved for another day, the dissent said.

Takeaway: The Arkansas Supreme Court invalidates the active appreciation doctrine; under the applicable statute, the appreciation in nonmarital property is nonmarital.

A digest of Moore v. Moore, 2016 Ark. LEXIS 82 (March 10, 2016), will appear in the June edition of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Damages experts pushing the bounds of comparability

Since 2008, district courts have granted or partially granted motions to exclude expert testimony for relying on noncomparable transactions in 75 out of 123 decisions with regard to damages cases. This is according to an analysis reported in the Docket Report blog. Questions that arise include: Are litigation-induced licenses comparable to the hypothetical negotiation that would occur in the instant case? What about licensing negotiations that did not produce an agreement, licenses involving different patents or technology, or licenses for patent pools or bundles instead of individual patents?

Extra:The new Comprehensive Guide to Economic Damages, edited by Nancy Fannon and Jonathan Dunitz is available now. Click here for more.

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Experts predict more scrutiny on goodwill impairments

In the wake of a spike in M&A activity in 2015 and recent stock market declines, experts foresee an increase in scrutiny of goodwill impairments, according to ComplianceWeek. PwC is advising companies to “look hard” at goodwill impairments to see whether the 1Q16 stock market drop resulted in any triggering events. Calcbench, with its XBRL-powered research tool, says goodwill impairments of $250 million each quarter are trending upward. Greg Franceschi (Duff & Phelps) points out that significant amounts of goodwill have been added to company balance sheets as a result of record M&A levels last year. However, he believes it’s a little too early in the year to determine whether those acquisitions were overpayments or are starting to not meet expectations put forth in the deal models.

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Audit deficiencies increase over fair value measurements

The PCAOB has released a Staff Inspection Brief that previews the agency’s inspection findings on audit deficiencies for 2015. While the agency found that the overall number of audit deficiencies decreased compared to 2014, preliminary results indicate an increase in the number of audit deficiencies regarding auditors’ testing of fair value measurements associated with business combinations. In addition, there were frequent deficiencies in evaluating impairment analyses for goodwill and other long-lived assets. Auditing internal control over financial reporting and assessing and responding to risks of material misstatement were also areas where the PCAOB found frequent audit deficiencies.

Extra: George Wilfert of the PCAOB will appear at the NYSSCPA FAE Business Valuation Conference in New York City May 16. He will discuss fair value reporting for GAAP. It’s uncommon for representatives of the PCAOB to speak at events such as this, so this is notable. For details on the event, click here.

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Valuing a franchise? Don’t get caught off guard by this issue

One issue that often pops up—sometimes unexpectedly—when valuing a franchise is in the area of improvements or maintenance of the location, according to a recently released guide on valuing franchises. The timing of this issue may not always be a good thing. For example, a franchise restaurant could make significant improvements to its dining area—and then the franchisor mandates a makeover of the restaurant design and layout. The franchisee will likely be required to make those changes despite the fact that it has just sunk a significant capital expenditure into the business.

What to do: Ask the franchisee whether it is aware of any plan changes. If the franchisor has a tendency to make changes fairly often, or if it has not done so for a while, a change may be due.

With over 10% of all businesses in the U.S. being franchises (and more in some industries), the likelihood of running across a franchise valuation in your practice is substantial. A new special report, Franchise Value: Valuation Methods and Benchmarking Data, explains the valuation challenges and presents a vast amount of franchise benchmarking data (from the Pratt's Stats database), broken down by major industry.

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Acquisitions of private firms increased 10% in 2015

The number of announced acquisitions of privately owned companies increased from 6,438 in 2014 to 7,077 in 2015 (a 10% increase), reveals the newly released 2016 Mergerstat Review. The purchase of privately held companies is a significant component of merger and acquisition activity, the report points out

Key drivers: Private firms are being acquired for several reasons. The owner lacks an heir to take over the business and, nearing retirement, needs to sell to achieve liquidity for investment diversification and estate tax purposes. Another common reason for sale is growing pains. Increasing demand for the company’s products or services puts pressure on the firm to become more sophisticated and efficient in its operations. To fulfill these demands, the owner/entrepreneur sells the business to obtain needed financial resources for expansion.

BVR offers a complimentary download of selected data from the 2016 Mergerstat Review, which includes some stats and a table of acquisitions of privately owned companies. The download also includes a complete Table of Contents and a full List of Tables.

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Global BV news:
Efforts underway to bridge IVS and USPAP

At the recent RICS Summit of the Americas 2016 in Washington, D.C., a panel discussed global valuation standards and convergence. Currently, a project is underway to “bridge” the IVS, accepted in many countries, with the Uniform Standard of Professional Appraisal Practice (USPAP). Creating this bridge would make it much easier for appraisers from the U.S. to perform appraisals in other nations, and vice versa.

Challenges: Panelists noted a number of challenges in achieving this goal, such as dealing with appraisal practices that can vary from one country to another (and sometimes even within countries). For example, U.S. appraisal reports are very detailed and long, while in the U.K., Australia, and Hong Kong, they are only around seven to eight pages. Other challenges include how to enforce the standards globally and how to manage conflicts and risks in the process.

Panelists included moderator James Park (RICS Appraisal Subcommittee), Steve Sherman (International Valuation Standards Council), David Bunton (The Appraisal Foundation), Steve Williams (Real Capital Analytics), and Mark Vollmer (New York Life).

Extra: The RICS event was a mixture of business valuation and real estate sessions. A panel of real estate experts estimated the value of the White House to be $250 million—not counting closing fees.

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Take a deep dive into valuations for M&As

BVR partner Transaction Advisors is delighted to announce its M&A Conference on May 12 in San Francisco. This technical and hands-on event provides intermediaries, advisors, investors, owners, and executives with perspective and practical insights on the latest strategies for evaluating and structuring corporate transactions. It will also cover trends in transaction valuations in the context of M&As. Take a look at the agenda here.

Discount offer: When you register, use special code BVRGuest at checkout for $100 off the registration price. This will be a great event for learning and networking!

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Meet BVR authors May 19-20 at the AICPA/AAML divorce conference

BVR is proud to be the book signing host at the upcoming AICPA/AAML National Conference on Divorce May 19-20 in New Orleans. Conference attendees will have the opportunity to meet leading authors throughout the conference and purchase signed copies of their books. Speakers/authors include Nancy Fannon, Mark Dietrich, Jay Fishman, Chris Mercer, Ron Seigneur, Neil Beaton, and Jim Harrington. Register for the AICPA/AAML National Conference on Divorce today!

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BV movers . . .

People: Gregory Bedrosian, managing partner and CEO of Redwood Capital Group headquartered in New York City, is a recipient of the 2016 M&A Advisor Leadership Award for his contribution to and accomplishments in international and cross-border mergers and acquisitions … Tomas Freyman joined the investment bank Lincoln International’s London office as a managing director of valuation and options … Tom Seidenstein and Howard Wetston have been appointed to the Board of Trustees of the International Valuation Standards Council. Seidenstein is currently VP for financial markets and policy research in the Economic and Strategic Research Group at Fannie Mae in Washington, D.C. Wetston, the former chair and CEO of the Ontario Securities Commission, currently serves as counsel at the Toronto law firm Goodmans LLP … Tony Szczepaniak was appointed chief executive officer of Moore Stephens North America Inc. … Michael Vaccarella joined the Milwaukee office of Wipfli as managing director of the Transaction Services Group.

Firms: Bennett Thrasher of Atlanta has acquired Graves Technology, a technology consultancy also based in Atlanta; this new division will be branded Bennett Thrasher Technology Services and will service clients throughout the Southeast … Value Management Inc., which specializes in business valuations and investment banking located in Bucks County, Pa., is celebrating its 25th anniversary this year.

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CPE events

Marketability Discounts for Controlling Interests: The Market Data is Out There (April 27), with Ron DiMattia (Corporate Value Partners). This is Part 5 of BVR's Special Series on Discounts for Lack of Marketability.

Fraudulent Transfers: Solving for Solvency (May 5), with Jeff Baliban and James Sottile. This is Part 2 of BVR's Special Series presented by The Comprehensive Guide to Economic Damages.

Expert Insights: Q&A with Larry Cook (May 10), with R. James Alerding (Alerding Consulting LLC) and Larry Cook (Larry R. Cook & Associates PC).

Feel the Heat! Valuations of HVAC Companies (May 12), with Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

Active appreciation

Damages pitfall

Goodwill alert

PCAOB findings

Franchise valuations

Private-firm sales

Global BV news

M&A valuations

Divorce update

BV movers

CPE events


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