Are you still following ‘old school’ deposition testimony?

During a deposition, financial experts should try to answer all questions from opposing counsel with a brief “yes” or “no”—or at least, they should answer only the question asked, because otherwise, they could set themselves up for damaging cross-examination at trial. Right?

Not anymore.  The “old school” primed financial experts to keep the trial always in mind as they prepared and delivered their deposition testimony. But over the past several years, as discovery and other litigation costs have skyrocketed, the “new school” deposition strategy is to facilitate mediation and cost-effective settlements, according to attorney Miles Mason Sr. (Crone & Mason, PLC, Memphis, TN).  “The paradigm has shifted,” he told the BVWire™.  More and more, depositions are becoming “beauty contests” for the financial experts, a chance to demonstrate the “quality and elegance” of their testimony.  “If my expert outshines the other, then it will intimidate the other expert—and, more importantly, it will intimidate the other side,” Mason said. Mediation often follows the deposition, and “when I settle cases, I get higher client satisfaction, which is one of my goals.”

Client satisfaction is always paramount—and attorneys are still one of the best referral sources for business appraisal experts. So before your next deposition, be sure to discuss strategy thoroughly with the attorney, and decide whether the “new school” might work to your advantage in the case. Then, when asked whether you included certain data in your discounted cash flow analysis, for example, or if you considered certain factors in assessing guideline company comparables, take the opportunity to describe your approach fully and thoughtfully, using your testimony as a platform to educate (and impress) the opposing attorney. Don’t go beyond the “four corners” of your valuation report; and do avoid “diarrhea of the mouth.”  “Listen to the question carefully,” Mason advised, “and answer it as asked—not as the question should have been asked.”  Stick to your area of expertise, and use the deposition as an opportunity to show your sincerity, confidence, competence, and quality. Who knows? One of the best compliments (and business development opportunities) is when opposing counsel calls you about the next valuation case.
NY courts may be limiting the value of professional licenses

The Fleischmanns got married in the middle of the husband’s law school education, which he paid for with scholarships, family gifts, savings, and summer earnings. After graduation, he embarked on a “steady rise to partner” at Shearman & Sterling (New York), billing upwards of 3,000 hours per year. His wife had a graduate degree in healthcare management, but left work to raise their three children. After 26 years, the couple filed for divorce in Fleischmann v. Fleischmann, 1207-06 (S. Ct., Westchester Co.)(July 22, 2009).  At stake: the value of the husband’s law license and his 0.5% partnership interest in the firm. 

A court-appointed financial expert valued the marital component of the license at $1.4 million, based on the present value of the husband’s annual enhanced earnings for 17 years (2009 through 2025). The same expert valued the 0.5% partnership interest at $709,000 (based on the partnership agreement). The court accepted both values—but in light of the “quantity, quality, and directness” of each party’s contribution to the husband’s degree, and his “proven aptitude, ability, tenacity, hard work, and perseverance,” it awarded the wife only 10% of the law license’s value. Her homemaking efforts, though considerable, were directed more toward the “overall” marriage than the husband’s attainment of his license. The wife contributed “somewhat more” towards his partnership career, the court observed (including entertaining clients and attending firm functions), justifying a 25% award of the law firm partnership interest.

“This decision for the trial judge represents a continuation of the recent trend [of New York courts], which is to limit the equitable share for licenses and practices” of law partners and other professionals, according to the husband’s lawyer (as reported in the New York Law Journal). The trial court’s decision is not binding, of course, unless reviewed (and ratified) on appeal.  Where you can find a summary of authority: An advanced search of BVLaw™ turned up 16 of the leading New York opinions on the value and disposition of a professional degree in divorce. Got a research question, legal or valuation-specific? Try the search engine at BVResources: it’s quick, comprehensive, and free.
New model captures IP cost of capital

In BVR’s soon-to-be-released Guide to Valuing Intellectual Property, author Mike Pellegrino takes aim at current cost of capital (COC) models and their ability to capture the critical factors in pricing intellectual property (IP) projects. Specifically, Pellegrino examines how the existing models may not fully or accurately account for factors such as: the target rate of return on the investment; the success rate of getting the IP to the market; the holding period for the investment; and the expenses associated with the holding period, including managing and marketing the IP.

In response to these highlighted shortcomings, Pellegrino has developed and field-tested a new, COC estimation model specific to the valuation of intellectual property and similar intangibles.  For a thorough scrutiny and review of the new model, join two well-known COC and IP experts, Neil Beaton and Rob Schlegel, for “An IP Cost of Capital Estimation Model,” a 100-minute teleconference hosted by BVR on August 20, 2009. During the presentation, Pellegrino will introduce and showcase his model before Beaton and Schlegel test his claim that it works for “any IP at any stage of development.”  The teleconference begins at 10:00am PT/1:00pm ET.  Two CPE credits are available for attendees, as well as a special discounted price on BVR’s Guide to Valuing Intellectual Property. For more information and to register, click here.

As M&A returns, reach out to clients on FAS141R

The market for mergers and acquisitions is not exactly “roaring back to life,” asserts Stamos Nicholas, Deloitte’s national business valuation service line leader, who spoke to the BVWire this week. “There is still a lot of skittishness in the market, and activity has been subdued because of the current turmoil.”  Still, there are signs that “things are stabilizing a bit,” he said. Corporate executives are preparing to make better, smarter acquisitions, including “refreshing themselves” on the requirements of FAS141R, which became effective for companies with fiscal years ending in December 2008—right as the credit markets and other M&A drivers crumbled.
In fact, a recent Deloitte poll of 2,000 executives discovered nearly half(44.3%) are rethinking their deal strategy as a result of FAS141R—a 10.5% increase since Deloitte asked the same question in February 2008 (several months before the effective date) and a 40.6% increase since June 2007, during the exposure period. “Since FAS141R took effect, we have definitely seen changes in how companies approach financial planning and reporting around mergers, acquisitions, and ownership transactions,” Nicholas said. In particular, executives are mindful of the new reporting and disclosure requirements, and the need to “book” these deals (and perform a purchase price allocation) at fair value during the same quarter they are completed. The FAS141R requirements “incentivize” the parties to get the numbers right the first time, he added.

How valuation analysts can help. “The rules of the [M&A] game have changed,” Nicholas said.  Executives are reaching out to valuation experts to educate them on the new rules and look at the numbers early on rather than “in the heat of the deal.”  “It would be helpful to have a dialogue with company executives as they get back into the M&A market,” he said, ”to minimize surprises.”

New updates to the FMV Restricted Stock Study

The FMV Restricted Stock Study™ has just been updated with nearly 90 new restricted stock transactions. With over 60 data points, The FMV Restricted Stock Study is well-suited for the Comparative Analysis of Restricted Stock approach (CARS) to determine discounts for lack of marketability. To ensure the data is of the highest quality, FMV Opinions employs a comprehensive screening process that eliminates approximately 95% of all restricted stock placements.  Primary screening criteria include:

  • Ensuring the stock was issued at arm’s length and not to an affiliate of the company in connection with a merger or acquisition, in exchange for services, or in connection with any other transaction that could cast doubt on the fair market value of the stock.
  • Rejecting transactions that are not “plain vanilla.”
  • Confirming the buyer and seller had no special contractual arrangements that might affect the buyers’ upside or downside in the deal.
  • Verifying the stock was not registered, and became fully marketable either prior to the transaction or within 30 days after the transaction.

To learn more, visit The FMV Restricted Stock Study.

IRS renews interest in transfer pricing

The current recession has eroded the corporate and consumer tax base.  “From a public policy perspective, this creates the formidable challenge of balancing the need to increase Federal tax revenues while ensuring that corporations do not face exorbitant tax expenses, and that individuals have the disposable income available to increase the all-important consumer spending metric,” says David R. Jarczyk, a director and the head of research for Ceteris (New York) in a Special Report to the Business Valuation Update.  “One way of decreasing the political ramifications of increasing tax revenues is to focus on transfer pricing, which (in theory at least) implies that increases to the U.S. tax base would come not at the expense of U.S. corporations or individual taxpayers, but at the expense of the tax bases of foreign tax administrations.”  Consider these supporting facts, Jarczyk says:

  • The White House weighs in. In recent testimony before the Senate Finance Committee, the Director of the White House’s National Economic Council noted the gap from non-compliance with the tax code could reach $751 billion annually by 2015. In particular, “There are also important issues and abuses associated with transfer pricing…that require Congressional attention. I am convinced that substantial revenues can be obtained from these sources.”  (Emphasis added)
  • IRS reaffirms its focus. More recently, IRS Deputy Commissioner for Services and Enforcement stated: “International issues are, and will continue to be, an area of major strategic focus for the IRS.  [We] cannot allow an environment to develop where wealthy individuals or companies can go offshore and avoid paying taxes with impunity.”  The financial crisis has only served to sharpen the agency’s focus on international tax compliance, including aggressive moves to address transfer pricing.
  • New agency hires. The IRS recently announced that it would hire more than 3,500 frontline enforcement employees, including more than 2,000 new revenue agents and officers, of which several hundred will focus on international issues.

For a complete round-up of transfer pricing issues and the role of the accounting expert, including making sure that documentation meets the regulatory requirements and conducting a “second look” review, see Jarczyk’s full report in the next (September 2009) Business Valuation Update™.

FASB responds to SEC accounting advisory committee

To recognize the one-year anniversary of the August 1, 2008 report issued by the SEC’s Advisory Committee on Improvements to Financial Reporting (CIFiR), the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB) have just published their response and recommendations.

“Over the past year, the SEC, the FASB, and others have been understandably devoting significant time and attention to addressing the issues brought to light by the current economic crisis,” the Executive Summary begins. “While accounting did not cause the crisis and accounting will not end it, it did reveal a number of areas requiring improvement,” including the need for enhanced communication throughout the financial system and for improved infrastructure and transparency around markets for complex structured securities and certain derivatives. To read the complete recommendations and response, click here.  

Gone on vacation: The BVWire will be taking a break next week to enjoy the last of summer.  Publication will resume with the August 26, 2009 issue.














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