BV experts weigh in on the factors that impact value conclusions
Our coverage of Professor Aswath Damodaran’s well-attended session at the recent AICPA/ASA conference in Las Vegas (see issue #74-2) generated a fair amount of buzz among readers. Consider, for instance, the comments offered by Stephen Koons CPA/ABV, CFF, ASA, who wrote: “I am troubled and very offended by the comment made by Professor Damodaran as quoted in your latest BVWire suggesting that we, as valuation professionals, ‘Have a number in mind, and spend the entire process trying to back into this number…’ in the performance of a valuation. This suggests that we violate one of the basic tenets of our profession: independence, lack of bias and intellectual honesty.”
Few would argue (BVWire includes the esteemed professor in this group) that BV analysts operate with anything less than the utmost in professional integrity. The reader’s point, however, does raise key questions. Bill Quackenbush, ASA, CBA posited a few in a recent issue of the ASA E-update, published by the Business Valuation Committee of the American Society of Appraisers. With each point, Quackenbush offers interesting food-for-thought:
- Some of the more difficult valuation assignments we take on are assignments where there is little, if any, market data similar to the subject interest. For those of us in the profession that value smaller businesses, this often occurs when we value, under a fair market value valuation standard, small non-control equity interests in owner-managed entities where a near shareholder oppression environment exists–there’s little, if any, sharing of economic benefits to the non-control interests. Additionally or separately, the economic benefit stream of the subject interest may be so variable as to defy rationally supportable projections. Under a value-in-exchange basis of value, what would buyers pay for such interests?
- In the absence of any market data for interests having little or no rational basis for estimating future economic benefit, are we reporting on market value or are we stating what the market should be when we come to a value conclusion?
What do you think? Quackenbush is seeking comments to the last query; you can e-mail him your thoughts at email@example.com. Quackenbush will follow up in a future ASA E-update column, which we look forward to reading and providing further reports.
Good news for the BV profession? Securities litigation on the rise
In our November Business Valuation Update™ article, “What Will the Wall Street Meltdown Mean to the BV Profession?” several respected industry insiders surmised that the current financial crisis will be the basis of a lot of future litigation that will require business valuation experts.
Data suggests this might actually be the case. Indeed, Securities and Exchange Commission (SEC) enforcement action settlements are projected to reach a three-year high in 2008, continuing a dynamic period of SEC enforcement since the enactment of Sarbanes-Oxley (SOX) in 2002. This is reported in the National Economic Research Associates (NERA) Economic Consulting’s study, SEC Settlements: A New Era Post-SOX. NERA reviewed every SEC litigation release and administrative proceeding document published from July 31, 2002 through September 30, 2008 for its study.
Since the passage of SOX, the SEC has imposed unprecedented monetary penalties on a range of defendants. Prior to SOX, the largest penalty imposed in an SEC enforcement action against a publicly traded company for financial fraud was a $10 million penalty against Xerox in April 2002. By contrast, NERA’s research shows that since SOX, the SEC has imposed penalties of $10 million or more against 115 parties, including 14 that were penalized at least $100 million. Other findings show that:
- The number of settlements with individuals is on the rise, projected to reach 568 by year-end 2008. Company settlements, on the other hand, are declining, and will total just 171 by year-end, which would be the lowest number in any full year since SOX.
- Slightly more than half (56%) of SEC settlements with company defendants since SOX have included monetary penalties.
- In 2007, the median company settlement dropped to $0.7 million, less than half the 2006 high of $1.5 million.
- Forty-three percent of company payments have been in the form of disgorgement, and 57% in the form of civil penalties. For individuals, disgorgement penalties account for 88% of payments.
- Insider trading is the most frequent allegation in SEC settlements for individuals; NERA projects 92 settlements with individuals will occur in 2008, compared to 52 in 2007.
In conjunction with the release of its study, NERA has launched a website that features additional statistics and analysis, as well as a searchable database of documents relating to SEC settlements. You can check out the new website and the study here.
New changes to report submission requirements mean more analysts can seek ASA accreditation
Have you heard? The American Society of Appraisers’ Business Valuation Committee recently voted to change, effective immediately, the number of reports required for advancement to the ASA designation from two reports to one report. This shift is retroactive for two years, according to a just-released Note from the Chair, Terry Allen, CPA/ABV, ASA. According to Allen’s explanation of the change:
- “If you are getting ready to apply for accreditation, you need to submit only one report.”
- “If you are currently in the process of having your reports reviewed, staff will monitor the process and, as soon as one report is approved by the Board of Examiners (BOE), you will have met the necessary report requirement.”
- “If, within the past two years (since December 1, 2006), you submitted two reports and had at least one report approved, you can now proceed with the accreditation process.”
Those in need of additional information should contact accreditation specialist Sabri Math at firstname.lastname@example.org or at 703.733.2106.
BV experts looking to keep up with happenings within the industry’s professional associations will find BVR’s Professional Association Directory, 2009 Edition, of particular interest. Inside this updated publication are brief descriptions of each association, their relevant publications and professional certifications where applicable, key contact information, and the composition of certain key committees and officers. To download this comprehensive—and free—reference click here.
Medical practice valuations diverge by nearly $1 million
In an all too common scenario in divorce (and other) courts, the opposing experts in Pellom v. Pellom submitted appraisals that were worlds apart. In this case—decided on December 2, 2008 by the North Carolina Court of Appeals—the husband’s expert appraised his 11% interest in an anesthesiology practice at $183,000, while the wife’s expert determined it was worth $1,267,000. The court examined the following factors and competing claims:
- Normalized income. The wife’s expert used $525,000 as the husband’s normalized annual income, based on his historic salary as of the separation date (June 2004). The husband’s expert said he should have included the doctor’s 2004 and 2005 earnings, which had declined.
- Compensation data. The wife’s expert used data from the Medical Group Management Association’s (MGMA) 2003 compensation survey to plot the husband among the 75th percentile of similarly situated anesthesiologists. The husband’s expert said that data from the 2004 MGMA survey were more appropriate, and the survey was available at the valuation date.
- Correct percentile. Based on the number of annual procedures that his practice performed (2,000 per physician), the husband’s expert said that he belonged in the 90th percentile of MGMA doctors, because they performed 1,400 procedures annually, compared to those in the 75th percentile (1,153 per year).
- Goodwill and accounts receivable. The husband’s expert did not account for the practice’s goodwill in his valuation, however. Nor did he value its accounts receivable.
Which expert ‘won’? The trial court adopted the $1.27 million valuation by the wife’s expert without adjustment. It found that the wife’s expert: 1) Used the appropriate income figures, known as of the valuation date; 2) used an acceptable MGMA survey, taking multiple factors into account—including clinical hours worked and retirement benefits; 3) correctly considered that the husband’s practice permitted nurse anesthetists to perform a portion of its 2,000 annual procedures; and 4) correctly valued the practice’s goodwill and accounts receivable. The court of appeals confirmed the trial court’s valuation conclusion in all respects. Look for a complete abstract of the case in the February 2009 Business Valuation Update.
For those interested in insights on healthcare valuation, we’ve just posted a new Free Download at BVResources, “Medical A/R: Top Issues That Impact Your Valuations,” by Mark Dietrich, CPA, ABV, excerpted from our latest industry release, BVR’s Guide to Healthcare Valuation, co-edited by Dietrich and Cindy Eddins Collier. The new Guide covers all the complicated aspects of healthcare valuation, from interpreting regulatory standards to applying compensation and other physician benchmarking data. To find out more about the Guide—including an online view of the table of contents and introduction—click here.
Last but not least, do not miss Collier and others at the 26th annual LEI National CLE Conference in Vail Colorado, January 3- 7, 2009. The business valuation track features Collier on healthcare valuations and case law update, Nancy Fannon on avoiding Daubert challenges; Ron Seigneur on the liquidation premise in valuations and reasonable compensation; Tom Hilton on emerging issues in electronic evidence, and lots more. Many of the BV speakers will be crossing over to address attorney tracks on valuation issues—and networking with the 600+ attendees in one of the most outstanding ski resorts in the world. Act now: conference lodging is available at reduced rates until December 15, 2008.
Estate & Gift Tax Guide offers analysis of Astleford, Bigelow, Holman and Jelke
The new 2009 Edition of BVR's Guide to Business Valuation Issues in Estate and Gift Tax includes new court case abstracts from the past year, including in-depth analysis on the Astleford, Bigelow, Holman, and Jelke decisions. Several new articles exclusive to the Guide have also been added, including Will Frazier’s Non-Marketable Investment Company Evaluation (NICE) method and Owen Fiore’s overview of the impact of the before mentioned court decisions, as well as a list of success factors for creating FLPs/LLCs. Other new additions include full-text court decisions, teleconference transcripts, and presentations, which have all been added to the accompanying compact disc. For more information on BVR's Guide to Business Valuation Issues in Estate and Gift Tax or to order, click here.
Recommended reading on the SEC proposed transition to IFRS
It has been almost a month since the SEC issued its much-anticipated “roadmap” for the proposed transition by U.S. public companies to use International Financial Reporting Standards (IFRS) instead of the U.S. Generally Accepted Accounting Principles (GAAP). The commission set a longer-than-expected 90-day comment period for the proposal, which puts forth milestones that, if met, could lead to the required use of IFRS by U.S. issuers in 2014. (Comments are due February 19, 2009). For an interesting take on this subject, take a look at the recent BNET Financial Services article Switching to IFRS: An Interview with Deloitte, which features comments from the firm’s D.J. Gannon, the partner who heads Deloitte’s IFRS solutions center in Washington, D.C. Noteworthy: When asked about private companies, Gannon says, “They shouldn’t be left out of this debate. There is a program targeted for private companies. More should be known by the middle of next year.” Guidance for private companies is certainly something to keep our eye out for….
Valuing IP portfolios for pharmaceuticals and medical devices
With billions spent on medical research and many billions more generated in revenues from resulting patents, it is no wonder there are disputes in the pharmaceutical and medical device industry over lucrative intellectual property assets and often widely disparate views on their value.
As any BV practitioner knows, the ins-and-outs of healthcare valuation are full of potential pitfalls. In our 100-minute teleconference, Pharmaceuticals & Medical Devices: Building & Valuing Intellectual Property Portfolios, Mike Pellegrino of Pellegrino & Associates and Dustin DuBois with the law firm of Ice Miller will tackle the unique challenges in pharmaceutical and health care patents. Among other things, attendees will learn how to wade through the science to get to the value proposition, develop an understanding of the regulatory process and its impact on value, and meet the unique challenges in the pharmaceutical and medical device space. The event—which includes a live Q&A—will take place on Thursday, December 11, 2008 at 1 p.m. Eastern time. For more information, click here.