BVWire Issue #179-3 | August 16, 2017

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Beta and CAPM don’t explain anything, says Fernandez

“It is crystal clear that CAPM and its betas do not explain anything about expected or required returns. There are mountains of evidence to support my stance.” So writes Pablo Fernandez (University of Navarra, IESE Business School) in his latest paper, “Is It Ethical to Teach That Beta and CAPM Explain Something?” The paper has already received over 100 comments from professors and financial professionals, and it has propelled him over the 1 million mark in terms of downloads of his 251 papers on SSRN (he’s ranked No. 1).

It’s absurd: Fernandez wrote the 2014 paper “CAPM: An Absurd Model,” which generated so many comments that he issued a revised version and also published the comments as a separate paper. Over three-quarters (78%) of the commenters on that paper agree with the term “absurd” to describe CAPM.

In the new paper, he has a question for professors who say that CAPM explains something: “If CAPM has some usefulness, why are you not a millionaire?”

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More thoughts on experts and their value gaps

Jim Alerding (Alerding Consulting LLC) agrees with all the reasons Chris Mercer (Mercer Capital) stated on why highly qualified and experienced experts looking at the same company may achieve very different valuations. Alerding adds that there are at least two related areas in which the court itself could make a meaningful difference. They concern access to information and to management. "My personal experience has been that the court often is very dismissive when attorneys complain about the other side’s unwillingness to make data and management available to their expert," Alerding says. Yet, an order from the court to do so could easily resolve this information deficit and result in more balanced valuations. Instead of railing against the experts, the court should use its power to create a more level playing field during the valuation process, he notes.

System’s fault? Experts and judges have also pointed out that the bias against experts in the litigation setting may have a lot to do with the adversarial system, which encourages casting doubt on (aka testing) the integrity of an expert’s work. The Honorable David Laro, and others, has, in fact, proposed a different, more collaborative approach (known as “hot-tubbing”) in which the experts sit with the judge ostensibly to hash out their valuation-related differences and achieve the “correct” value determination. Alerding says his experience has shown that often the experts’ egos get in the way and a settlement of the differences remains elusive. "Now if the judge would say, 'I am going to sit you both down in a locked room together and not let you out until you have an agreed upon resolution,' then you might get some results," Alerding says.

Extra: Alerding and attorney Sylvia Golden, BVR’s legal editor, will conduct a webinar, BVLaw Case Update: A One-Hour Briefing, on September 19.

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Big Four pecking order unchanged

Deloitte, PwC, EY, and KPMG remain in the top four positions, respectively, on the 2017 Top 100 Firms list Inside Public Accounting (IPA) recently published. The rankings for firms on IPA’s list are based on U.S. net revenue and the submissions of 587 firms across the country.

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Has the new Delaware appraisal rights law backfired?

Part of the new provisions designed to curtail the use of the appraisal remedy by dissenting shareholders in Delaware allows for a prepayment to dissenters in order to stop the interest accrual clock. This new law went into effect Aug. 1, 2016. Prior research found that the prepayment provision was “likely to greatly reduce appraisal filings.”

Opposite effect: New research reveals that appraisal filings have actually continued to increase despite the new law and despite the overall decline in M&A activity. The authors note, however, that one year of data is not enough to draw any firm conclusions. Some observers believe that the new prepayments have sparked more appraisal actions because they solved the liquidity problems of investors who weren’t able to bring such actions before.

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Companies worry about hitting deadline for new lease standard

Almost half of C-suite executives are agonizing over whether implementation of the new FASB lease accounting standards will get done on time. A recent Deloitte webcast poll of more than 2,500 C-suite executives found only 40% were not concerned about their company’s ability to adopt the new lease accounting requirements by their respective deadlines. Public companies are required to begin applying the new rules in 2019, while private companies have an extra year. Another 47% in the Deloitte poll said they were somewhat or very concerned about whether the job of transitioning to the new standards would get done on time.

Valuation experts should be aware that, under the new rules, lessees will see increases in EBITDA as well as leased assets and financial liabilities on the balance sheet. Companies with material off-balance sheet lease commitments will see significant changes in key financial metrics such as leverage ratio, return on invested capital (ROIC), and valuation multiples.

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Paper explores decline in firms going public

The proportion of companies choosing to go public in the U.S. has been plummeting for more than two decades. Is this because of public companies’ increasing regulatory costs? No, the decline started way before the onerous Sarbanes-Oxley rules kicked in. The real culprit is declining benefits of going public, according to “The Deregulation of Private Capital and the Decline of the Public Company.”

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Examine biz mix when valuing HVAC companies

“Mix drives value," according to one expert's experience when selling and valuing HVAC contractors. Prices for these firms can range from under 10% of revenue to over 100% of revenue—it depends a great deal on the mix of business. For example, a higher percentage of business associated with residential “service work” drives value. The number of active residential service (maintenance) agreements holds value. A heavy dependence on new construction depletes value. Commercial service work helps value—if it’s ongoing and can be proven.

Outlook: Another expert talks about future trends: "The value of qualified HVAC companies (and trade companies in general) is on the rise, due to the lower number of people interested in becoming HVAC technicians/tradesmen. The average cost of this service will rise significantly over the next 10 years, making this industry prime for consolidations, mergers and buyouts.”

For more Information, see the newly released BVR special report, What It's Worth: Valuing HVAC Companies.

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Valuing a VAC carve-out and conversion

Many vascular access centers (VACs) that currently operate as an extension of practice (EOP) are evaluating the viability and legal permissibility of a conversion to an ambulatory service center (ASC) and the related costs. VACs are outpatient facilities that specialize in access maintenance for patients with end-stage renal disease (ESRD). The valuation of a VAC in-office carve-out and the related conversion to an ASC is explained in an article, “Valuation Considerations for Vascular Access Centers in 2017,” by Brad Brumbaugh and Jason Ruchaber, both with VMG Health in the Denver office.

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Global BV News

Report card rates IFRS Foundation performance

The IFRS Foundation gets high marks for its transparency and independence according to the findings of a reputational research study. Also, its consultations are perceived as professional, open, and effective with good quality documentation. However, several weaknesses were also identified, the main one being the perception that the foundation is not timely and does not respond quickly enough to a changing world. Also seen as a weakness are especially long development and consultation phases.

The report offers six recommendations: (1) continue the good work; (2) improve outreach and consult more widely; (3) develop events, training, and education; (4) improve timeliness, (5) respond to the need for simple, practical, and workable standards; and (6) harness advocates to act as ambassadors.

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IACVA sets conference dates

The International Association of Consultants, Valuators and Analysts (IACVA) has announced the dates of its 2017 International Business Valuation Conference: Nov. 2-4, 2017, in Shen Zhen, People’s Republic of China. IACVA has held this conference since 2007, and this year’s event is presented with the support from the International Valuation Standards Council (IVSC) and the China Appraisal Society (CAS). The agenda and speakers will be announced soon.

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Preview of the September 2017 issue of Business Valuation Update

Here’s what you’ll see:

  • Work File Checklist for Fair Value Overview Under New Regulations (BVR Editor). Latest in a series of checklists to help comply with the new requirements for documenting work done for fair value for financial reporting. This checklist covers an overview of fair value measurement and the selection of valuation approaches and methods.
  • Five Tips to Help BV Experts Succeed in Mediation” (Nancy Neal Yeend, The End Strategy). Best practices have emerged for valuation experts to increase their inclusion in mediation, manage the process, and improve the chances for finding a resolution.
  • News You Can Use From the NACVA Annual Conference” (BVR Editor). BVU was at the annual conference of the National Association of Certified Valuators and Analysts (NACVA) and collected some tips and advice valuation experts can use in their practices.

The issue also includes:

  • Regular features: “BV News At-a-Glance/Global Perspective,” “Ask the Experts,” and “Tip of the Month.”
  • BV data spotlight: “Pratt’s Stats MVIC/EBITDA Trends,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and “Cost of Capital Center.”
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the September issue of Business Valuation Update.

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BV movers . . .

People: Lawrence W. Smith, former board member of the Financial Accounting Standards Board, joined FTI Consulting Inc. as a senior managing director based in New York City. He is in the firm’s SEC & Accounting Advisory Services practice within its Forensic & Litigation Consulting area … Adam Herman was named chief visionary officer at Mueller Prost in a new management structure where the CVO will work alongside the new COO, Quinn Martin, to guide the firm Kathy Taylor was named business valuation manager at Howell Valuation LLC (Exeter, N.H.) … Alfredo Cepero of BDO USA was awarded the Lifetime Achievement Award via the Association of Latino Professionals for America. Cepero is the firm’s office managing partner for assurance services in Miami … Brian Little joins Duff & Phelps as a managing director in the Consumer, Food, Restaurant and Retail M&A Advisory practice based in the firm’s Los Angeles office … Joseph Nardulli and Jacob Roese are new financial analysts in the portfolio valuation group at Valuation Research Corp. (VRC).

Firms: Grant Thornton LLP plans to hire 65 staffers in the next few years to fill up its new penthouse office in the KeyBank building in Albany, N.Y. … Moss Adams LLC (Seattle) moves up a notch in the 2017 Top 100 Firms list from Inside Public Accounting—to No. 14 (from No. 15 in 2016) Crowe Horwath LLP opened two new office spaces in San Jose and downtown Los Angeles, bringing its total number of California offices to six and U.S. offices to 36 … The board of directors of Stout is now a full board member of the National Association of Corporate Directors (NACD), a group devoted to advancing exemplary board leadership … New York City-based Prager Metis CPAs LLC expands in South Florida by combining with Miami-based CPA firm Vizcaino Zomerfeld LLP.

Please send your professional and firm news to us at

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CPE events

Fair Value and Valuation: Understanding the SEC, PCAOB and Key Case Law (August 17), with Mark Zyla (Acuitas Inc.), Yvonne Williams-Wass (Eversheds Sutherland), and Peter Anderson (Eversheds Sutherland). This is Part 10 of BVR's Special Series on Fair Value.

Two attorneys and a leading fair value expert talk about how to reduce exposure to regulatory scrutiny from the SEC or PCAOB and avoid enforcement actions or costly litigation—and corresponding damages or financial penalties.

The Application of Professional Judgment in a Data-Driven World (August 24), with Barry Baker (CapVal-American Business Appraisers).

There are concerns that the profession is trying to turn the “art” of valuation into the “science” of valuation and becoming overly mechanistic in the process. This session will show you how to justify and support your professional judgment amid a sea of data.

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Business Valuation/Appraisal Standards Comparison Chart 2017

Not Knowing This Will Cost You Big Time

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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:

CAPM hubbub

Value gaps

Big Four endure

Appraisal suits

Leasse rule agita

No-go public

HVAC firms

VAC valuations

Global news

BVU preview

BV movers . . .

CPE events

LinkedIn discussions

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