BVWire Issue #179-2 | August 9, 2017


Washington court looks to ‘husband’s toil’ in goodwill analysis

A recent Washington state divorce case included a noteworthy discussion of goodwill where the owner spouse’s business arguably was separate property. Divorce experts will notice that the court’s goodwill analysis has much in common with an appreciation analysis.

Readers who are familiar with BVR’s Goodwill Jurisprudence Chart know that Washington is a community property state and professional goodwill is subject to division. The focal point in the case was the husband’s CPA firm, which he had set up before the marriage. The issue was whether the marital estate could claim any interest in the business.

Excess earnings approach: The short answer is yes. One theory—successful—was that the business had lost its character as separate property during the marriage. Another winning argument for the nonowner spouse was that most of the business’s value lay in the husband’s professional goodwill. Excess earnings valuations by the parties’ experts confirmed this claim. The experts, and the husband himself, also testified that, during the marriage, the husband worked continuously to renew his clientele. The trial court found, and the appeals court affirmed, that any goodwill in the business was acquired through the husband’s “toil,” so the goodwill, therefore, was community property.

The husband’s contention that, early on (presumably before the marriage), he had created systems that enabled the business to run itself lacked support in the record, the appeals court found.

A digest of In re Marriage of Vandal, 2017 Wash. App. LEXIS 1459 (June 19, 2017), and the court’s opinion, will be available soon at BVLaw.

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More insight on divergent valuation opinions

In last week’s issue, we pointed out that judges are still asking the question: How can two highly qualified and credentialed experts come up with such different numbers? They often assume it’s advocacy, but that’s not always (and should never be) the case. Legitimate differences in assumptions can cause two experts to disagree.

Added reasons: Veteran valuation expert Chris Mercer (Mercer Capital) points out in the latest issue of Value Matters that valuation opinions and valuation conclusions between experts differ for at least six reasons:

  • Differences in legal guidance or assumptions related to this guidance;
  • Differences in information availability;
  • Access to management and due diligence opportunities;
  • Differences in valuation approaches or methods;
  • Differences in appraiser judgments and assumptions; and
  • Mistakes.

In most cases, divergent expert opinions are due to differences in just a small number of assumptions, Mercer says. The “filters” courts use to weigh two differing opinions include the credibility of the report and of the expert’s testimony, consistency with the expert’s prior writings and rulings, and what is equitable in the eyes of the court. A major filter, though, is comparability—do the multiples in the valuation conclusions make sense when compared with available market multiples?

Mercer states that courts should assume the appraiser is neutral unless there is direct evidence to the contrary. We certainly agree with that but do not see the tide turning anytime soon.

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Reminder: Please help with research on financial instruments

If your valuation practice includes financial instruments, researchers at the University of Wisconsin-Madison who are studying the complexities of these assets need your input. Please fill out the Valuation Specialist Survey, which will take between five and 25 minutes, depending on the number of categories of financial instruments that you value. Your responses are strictly confidential. When you complete the survey, you will receive a $10 Starbucks Gift Card. Thanks in advance for your help!

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Updated DCF model for Tesla confirms overvaluation

Back in 2014, Professors Aswath Damodaran (New York University Stern School of Business) and Bradford Cornell (California Institute of Technology) published an award-winning paper that examined the run-up in the price of Tesla stock. The authors presented a detailed discounted cash flow valuation model to determine whether the nearly sevenfold price run-up was anchored in fundamentals or the result of investor sentiment. Based on the valuation estimate, the authors concluded that the stock was overvalued by approximately 150%.

In a new article, Matt Cullen-Meyer (Deliberate Valuation) attempts to update the authors’ valuation model based on current information. The resultant value implies Tesla is significantly overvalued, confirming the conclusion of the authors of the paper. Cornell’s blog points out that Tesla did hit the 2016 revenue figure it used as an aggressive assumption ($7 billion) but did not hit the $200 million in operating profit it used in the model. Tesla had an operating loss of $667 million in 2016 with no effect on stock price. It’s “Tesla 2014 all over again,” says Cornell.

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Fairness opinion provider rankings for first half of 2017

We had several requests to repost Thomson Reuters’s Mergers & Acquisitions Review—First Half 2017 rankings for worldwide providers of fairness opinions. Here are the top five providers (based on the number of transactions) of announced fairness opinions rendered in the United States:

  1. Duff & Phelps;
  2. Prairie Capital Advisors Inc.;
  3. Evercore Partners;
  4. (tie) Sandler O'Neill Partners; and
  5. (tie) Bank of America Merrill Lynch.

Worldwide, the top five providers of announced fairness opinions are:

  1. Gram Capital;
  2. Duff & Phelps;
  3. China Merchants Securities Co.;
  4. CITIC; and
  5. China Securities Co Ltd.

Extra: Tomorrow, August 10, join us for a webinar Fairness Opinions: Best Practices + BVR Gives First Look at New Research Tool. Speakers will be Craig Jacobson (GlassRatner), Jeffrey Rothschild (McGuireWoods), and Richard Peil (GlassRatner). Plus, get a look at BVR’s new Fairness Opinion Research Service in a bonus segment.

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Peter Luger ends IP beef

For those of us who have been to Peter Luger, the famed New York City steakhouse that opened in 1887, we know that no other place compares to it. This past May, Luger served up a trademark infringement lawsuit against the owner of the Carl von Luger Steak & Seafood restaurant in Scranton, Penn., claiming diners would confuse the two eateries. The owner of the Scranton place named the restaurant for his father, who was a nephew of Peter Luger. The two restaurants are not affiliated.

Off the table: Luger has now voluntarily dismissed the case, according to a report from Reuters. Details were not revealed, but it could be that the alleged confusion could not be substantiated. One way to show confusion is through consumer surveys, and we’d bet that the survey would find that nobody could confuse any other steakhouse with the real Peter Luger.

The use of surveys is not typically part of the damages expert’s area of specialty, so it’s left up to the survey expert. However, the damages expert should be involved up to the point where the survey is ready to be piloted or pretested. The survey expert will consult with both the damages expert and technical subject expert to make sure that the survey is properly constructed in a way that produces valid results.

For more information on the damages expert’s role in surveys, see “How to Help Ensure a Valid Survey for a Damages Analysis” in the September 2016 issue of Business Valuation Update. If you’re a subscriber, it’s part of a 20-year archive of practical articles (if you’re not a subscriber, you can acquire it as a single article here).

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Beware these pitfalls in your terminal value in the DCF

In a typical five-year projection, the terminal value accounts for 70% of the aggregate value or more, points out Gil Matthews (Sutter Securities). That’s why you need to be aware that there are a number of pitfalls to consider, he advises. Matthews will be presenting a session on this at the ASA’s 2017 Advanced BV Conference in Houston (October 7-10).

One pitfall is the “perpetual” growth rate. The typical DCF valuation assumes that a mature company will survive and grow at a constant rate in perpetuity. But this is not a valid assumption, he says, because of corporate mortality—not all firms operate forever. Another factor to consider is decelerating company growth due to economic changes and/or obsolescence. Not considering these factors may result in an overstated value if you use a constant perpetual growth assumption. During his ASA session, Matthews will discuss these and other factors that impact terminal value and how to address them.

The agenda for the ASA conference is now available, and this year’s sessions will mix theory with practical tips you can use right away. BVWire looks forward to attending—come visit us at the BVR booth!

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Power-packed panel at the AICPA’s annual FVS conference in Vegas

One session we will definitely attend at the AICPA Forensic & Valuation Services Conference November 13-15 at Caesar’s Palace in Las Vegas is A Consensus View Q&A on Controversial Valuation Issues, with James Hitchner, Shannon Pratt, and Jay E. Fishman. The session title is a variation of the title of their book, so we’re looking forward to seeing these renowned experts tackle some tough business valuation questions.

Agenda posted: The agenda for this year’s conference is now posted, and it reveals that there is something for everyone—the seasoned practitioners as well as those new to the profession. If you go early, you can take either the ABV or CFF exam review course—or one of the preconference workshops: Data Analytics or Valuation Report Writing.

There’s an early-bird discount of $75 if you register before September 29. Plus, BVR has arranged with the AICPA for an extra discount of $100 for BVWire subscribers. Just use the code LVH when you register. See you there!

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Some of the best accounting firms to work for do BV

Accounting Today has announced its list of 2017 Best Accounting Firms to Work For, based on a firm’s workplace environment and employee feedback. Of course, many of the firms on the list are involved in business valuation to some extent. Some examples: Anders CPAs + Advisors (St. Louis); ATKG (San Antonio); Bennett Thrasher (Atlanta); Haskell & White (Irvine, Calif.); Henry+Horne (Tempe, Ariz.); Lutz (Omaha, Neb.); Maner Costerisan PC (Lansing, Mich.); MBAF (Miami); Porte Brown (Elk Grove Village, Ill.); Santos, Postal & Co. (Rockville, Md.); SC&H Group Inc. (Sparks Glencoe, Md.); Skoda Minotti (Mayfield Village, Ohio); and Wilkin & Guttenplan (East Brunswick, N.J.). We’re sure there are more on the list. Our congratulations to these firms and to all of the firms on this year’s list!

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Willamette’s summer Insights issue is available

The Summer 2017 issue of Insights from Willamette Management Associates is titled “Thought Leadership in Property Tax Planning, Compliance, and Controversy.” A few of the articles of interest include: “Valuation Considerations for Premarital Agreements” (Michael G. Cumming and John A. Abbo), “The Application of a Guideline Publicly Traded Company Risk Adjustment” (Kevin M. Zanni), and “Analytical Differences Between Business Valuations, Unit Valuations, and Summation Valuations” (Robert F. Reilly).

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Global BV News

Japan’s views on goodwill and impairment

The Accounting Standards Board of Japan (ASBJ) has published its Research Paper No. 3, “Analyst Views on Financial Information Regarding Goodwill,” and an Agenda Paper, “Possible Approach for Addressing the ‘Too Little, Too Late’ Issue.” Both papers were presented in July at the meeting of the Accounting Standards Advisory Forum (ASAF) at the IASB's offices in London.

For the research paper, the ASBJ conducted in-depth interviews with 11 analysts in Japan with the aim of understanding their current views on goodwill and impairment more thoroughly. The paper notes the following findings:

  • The method of analyses varied among analysts;
  • The views on the subsequent accounting for goodwill (the amortization of goodwill) varied among analysts;
  • Some analysts thought that information regarding the management’s estimate of the period for which expected future cash flows would increase due to the business combination was useful; and
  • Many analysts thought that impairment losses on goodwill were recognized later than when they thought the deterioration in the value of goodwill had occurred.

The agenda paper is intended to be the basis for discussion of a proposed new optional approach that would require an entity to choose either the impairment-only model under current IAS 36 or the amortization and impairment model based on what the entity thinks is useful to discharge its accountability responsibilities. The ASBJ believes that this approach would offer an opportunity for preparers and investors to communicate more effectively.

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Deadline looms re: feedback on IVSC agenda

Public feedback is due by August 15 on an Agenda Consultation Paper on future revisions to the International Valuation Standards (IVS). This is part of the IVSC’s new efforts to continually evolve IVS instead of issuing completely revised standards every few years.

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BV movers . . .

People: Justin Johnson was named co-CEO of Valuation Research Corp. (VRC) and will oversee VRC’s West Coast and Central regions from VRC’s San Francisco office. Co-CEO PJ Patel will manage the East Coast region from VRC’s Princeton, N.J., office. The co-CEO structure is fairly unique within the industry and is designed to allow both leaders to continue to support clients while guiding overall strategy … Mercer Capital added three financial analysts: John T. (Tripp) Crews, David W. Harkins, and William C. Tobermann, who will provide business valuation and financial consulting services to public and private companies and financial institutions across the U.S. … Nili Shah is now executive technical director at the International Financial Reporting Standards Foundation in London where she will lead the technical staff that supports the International Accounting Standards BoardChristian Mouillon joined Duff & Phelps as a global senior advisor and will focus on growth in the firm’s valuation practice internationally. He is a former global vice chairman at EYMarcus Norrell joined Gregory, Sharer & Stuart as manager in the tax department and part of the firm’s team of wealth strategies and services experts, which includes business valuation … Kim Fusco, director of Ellin & Tucker, has been elected board president of Disability Rights Maryland.

Firms: Adamy Valuation partnered with the Michigan Science Data Team at the University of Michigan to build a statistical model using public company data to value private companies … GBQ Partners LLC has outgrown its offices in Cincinnati and will move into new digs August 14 with room for up to 48 employees with options to expand … Marks Paneth cut the ribbon on its new office location in Parsippany, N.J. Citrin Cooperman promoted 40 executives: 12 directors to partner, 27 managers to director, and the chief marketing officer to a principal … Walthall CPAs received the 2017 Business Longevity Award from Power Players of Cleveland. The firm, founded in 1944, is a full-service regional certified public accounting and business advisory firm with several offices in Ohio … OnPointe Valuation LLC moved its Colorado office from Englewood to Castle Pines; its office in St. Charles, Ill., stays put … To accommodate growth, Howell Valuation LLC moved to larger offices in downtown Exeter, N.H.

Please send your professional and firm news to us at

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CPE events

Fairness Opinions: Best Practices + BVR Gives First Look at New Research Tool (August 10), Craig Jacobson (GlassRatner), Jeffrey Rothschild (McGuireWoods), and Richard Peil (GlassRatner)

This is for the rookie as well as the seasoned pro looking to get advanced insight into the legal requirements and valuation considerations for fairness opinions. Bonus: A sneak preview of BVR’s new Fairness Opinion Research Service.

Valuation of Private Equity Firms and Interests (August 15), with Vladimir Korobov (Marcum LLP) and Peter Rahe (Marcum LLP). This is Part 7 of BVR's Special Series on Banking and Financial Services.

Practical pros and cons about the methodologies for these firms, including the discrete DCF, Monte Carlo simulation-enhanced DCF, and option pricing methods.

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In this issue:

Goodwill case

Clashing values

FI survey

Tesla déjà vu

Fairness opinions

IP damages

Terminal value

Legendary panel

Top CPA firms

Property taxes

Global news

BV movers . . .

CPE events

LinkedIn discussions

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