BVWire Issue #171-3 | December 21, 2016


Practitioners reveal the best ways to bring in more valuation business

Traditional face-to-face techniques are—and continue to be—the best methods to bring in valuation business, according to the BVR Firm Economics Survey. Over 170 valuation firms, sole practitioners, CPA firms, and other entities with business valuation practices responded to the survey conducted during this past summer.

Get out there: Three of the five marketing methods most frequently used all require the knack for personal selling. Those techniques are: one-on-one meetings with prospective clients (cited by 89% of respondents), public speaking (81%), and joining business organizations such as associations, committees, and boards (77%).

Rounding out the top five are: updating the website (79%) and using social networking sites such as LinkedIn, Twitter, and Facebook (66%). Social networking continues to be the fastest growing marketing method, with its usage almost double the percentage in 2010 (the last time the survey was published). Of course, prevalence of use is one thing but effectiveness is another, so the question is: Which methods really work?

One-on-one is best: The most-used method—the face-to-face meeting with a prospect—is deemed “very effective” by 35% of those who use it, and 70% say it’s more than just moderately effective. Other methods that rank high on the “very effective” list are public speaking, cross-marketing to existing clients, attending or sponsoring events with prospects, updating the website, writing for journals or industry publications, and the use of e-newsletter and blogs.

For more details, see the article “30 Field-Tested Ideas to Bring in More BV Business” in the January issue of Business Valuation Update.

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Chancery opts for income approach to calculate fair value

Thumbs down on the merger price. The Delaware Court of Chancery recently declined to accept the deal price as evidence of fair value, relying instead on the value resulting from a discounted net income analysis—a method both sides’ experts used, with varying emphasis.

The dispute arose out of the 2014 merger of Farmers & Merchants Bancorp of Western Pennsylvania (F&M), a small community bank, with NexTier. The stock-for-stock transaction was based on a 2.17 exchange ratio, which implied a valuation of $83 per share for F&M and a valuation of $180 per share for NexTier.

The court found F&M pursued the merger at the request of the Snyder family, which “stood on both sides of the transaction” because it controlled both F&M and NexTier. There was no auction, and, even though there was a special committee, “the record does not inspire confidence” that an arm’s-length transaction took place. A key member of the special committee “appeared to be working toward a price that would meet the Snyders’ objective to recoup their original investment in NexTier,” the court said. It did not give any weight to the merger price.

Synergy problems: Both sides retained highly qualified trial experts who used market- and income-based approaches to calculate fair value for F&M. This was another instance where experts valuing the same company and using similar methods presented “wildly divergent valuations.”

The petitioners’ expert based his conclusion—$137.97 per share—solely on a comparable transactions analysis. He did perform a discounted future benefits analysis as a cross-check, arriving at a value of $139.45 per share. The court rejected the comparable analysis because the expert failed to account for any synergistic value captured in the eight comparable transactions. “Fair value” under the state appraisal statute means “the value to a stockholder of the firm as a going concern, as opposed to the firm’s value in the context of an acquisition or other transaction.”

In an extended discussion on synergy, the court noted a body of Chancery case law as well as academic studies recognizes the deal price often exceeds fair value “because target fiduciaries bargain for a premium that includes … a share of the anticipated synergies.” The plaintiff expert’s assumption that “bankers who buy other banks don’t pay for synergies” was unsound, the court said. Public statements related to the selected transactions (press releases, proxy statements, database reports) expressly discussed potential synergies.

The company’s expert arrived at his conclusion, $76.45 per share, by using three valuation methods whose results he weighted equally. The court rejected his M&A analysis finding “too much doubt exists over the appropriateness of the comparables.” Also, the guideline public-company valuation was problematic because the selected companies had low trading volumes.

In terms of the discounted net income analyses, the court validated the analysis the respondent’s expert performed by adopting all of the expert’s inputs (projected net income, risk-free rate, equity risk premium, growth rate, excess capital) for its own valuation, excepting the beta variable. By the court’s calculation, F&M’s fair value per share was $91.90.

Takeaway: Daniel Van Vleet (The Griffing Group) was the prevailing expert. Throughout its opinion, the court expressed a concern with “consistency”: whether the expert report was internally consistent and whether the analysis adhered to the principles set down in the Duff & Phelps Valuation Handbook, the Chancery’s own decisions, valuation treatises, and the record of the case. Van Vleet’s analysis better satisfied the demand for consistency and as such was more reliable, the court decided.

The case is Dunmire v. Farmers & Merchants Bancorp of W. Pa., 2016 Del. Ch. LEXIS 167 (Nov. 10, 2016). A digest and the court’s opinion will be available soon at BVLaw.

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NYSSCPA symposium spotlights the legal cannabis industry

It was standing room only at the Marijuana Symposium: Business, Tax and Legal Implications, sponsored by the New York State Society of CPAs. New York is one of 28 states that have legalized marijuana for medical purposes, but it is not among the eight states that have legalized recreational marijuana. If the momentum toward legality includes all states by 2020, U.S. retail marijuana sales could reach $35 billion.

Growing pains: New York state senators Diane Scavino and Liz Krueger talked about the regulatory hurdles legal marijuana businesses face. In her keynote address, Scavino said many problems stem from the fact that the drug remains on the federal government's Schedule 1 status as a dangerous substance that has no accepted medical treatment use. Therefore, there is no insurance coverage for medical marijuana, banks will not open accounts for these firms, they cannot pay tax with marijuana proceeds, and they are not allowed to deduct normal business expenses. For the industry to truly thrive, marijuana must be descheduled, she said. Kreuger agreed and noted that criminalization has already done too much damage to New York communities. The state has some of the most “draconian” drug laws in the country. “It's time to legalize, tax, and regulate,” she said.

There is also a great concern that the nominee for U.S. attorney general, U.S. Senator Jeff Sessions, who has come out heavily against marijuana legalization, for both medical and recreational use, will crack down and stifle industry growth.

Amid all of the political and economic challenges, panel moderator Debra Borchardt (Forbes) asked whether there was anything positive about going into this business. Hillary Peckham (Etain Health) is one of five licensed operators in New York for medical marijuana and struggled to get her business up and running. But financial success is not the primary reward. “We now have about 50 children who used to have 100 seizures a day and after using our product are now down to about one seizure a month,” she said to an audience that burst into applause.

Valuation nuances: “In my 30 years of doing business valuation, I thought I had seen everything until I got involved in this industry,” says Ron Seigneur (Seigneur Gustafson LLP), calling the appraisal of a legal marijuana firm the “ultimate challenge.” His practice is based in Colorado, one of the first states to legalize adult recreational marijuana, and he has done about 20 valuations so far. Of course, risk is a major factor, he pointed out, with company-specific risk premiums ranging from 30% to 40%. He also advised that, when valuing a cannabis firm, focus on the “four L’s”: license rights, lease, location, and legislative environment.

A dearth of comparable transactional data from the market means that appraisers must rely on the income approach. Revenue projections can be especially tricky, but Seigneur uses management interviews and site visits to examine the size of the facility and the nature of the technology in use. Drawing from his experience in this industry, Seigneur is then able to estimate potential production. Using third-party resources, such as Cannabis Benchmarks, which tracks national prices, and the number of harvests (average of 5.5 per year), you can project out the revenue side.

Seigneur is a contributor to a BVR special report, What It’s Worth: Value and Business Challenges in the Budding Cannabis Industry, where you will find a much more detailed explanation.

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One way to help clients boost their damages claims

Either damages analysts or lawyers do not generally appreciate the notion of compensation forfeiture—but it could apply in many cases, according to attorney George Roach. It is not difficult or expensive to prove, and it can be piled on top of other remedies, he said during a recent webinar, Measuring Unjust Enrichment. He also pointed out that, in some cases, compensation forfeiture may end up being the only form of damages that can be proven with reasonable certainty.

Unfaithful servant: Compensation forfeiture is based on the doctrine that dishonest or disloyal employees or agents should not be compensated for any service after the wrongdoing first occurs. This is generally true even though the individual was not 100% corrupt. Any benefits the wrongdoer’s service triggered generally do not offset the amount of compensation to be disgorged. In other words, there’s no credit for any good deeds. However, the treatment of this matter varies by jurisdiction. In any event, Roach says it “represents an opportunity for a damages analyst sometimes to suggest an enhancement to the client’s claims that can be made at a small increase in professional fees.”

Extra: Roach contributed three chapters to the newest edition of The Comprehensive Guide to Economic Damages, available here.

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Pointers for success in divorce valuations

The headlines are filled with news of high-profile marital breakups, but those are just the very tip of the iceberg. U.S. divorces and annulments now top 800,000 per year, according to an article in AICPA Insights by valuation expert Neil Beaton (Alvarez & Marsal Valuation Services LLC). Beaton provides six tips for valuation experts in a high-stakes divorce engagement.

Network target: One tip he offers for boosting engagements in this area is to focus on your networking skills. “Divorce valuation is a unique niche, and those who are successful develop and maintain strong relationships with legal professionals in the same field and at the same level,” Beaton writes. The family law attorneys on the cases pick valuation experts, and, once you’re hired, “you will start to get referrals for other cases.”

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Results of the Fifth Annual Business Valuation Challenge

Created by Professor Herbert Kierulff of Seattle Pacific University, this year’s Business Valuation Challenge was proudly hosted by the J. Mack Robinson College of Business and Department of Finance at Georgia State University (GSU). It took place November 11-12 at GSU.

Teams from 18 colleges and universities participated, and judges chose six to go to Atlanta for the finals along with two invited teams from GSU. The results from the competition:

  • GSU (Honors);
  • GSU (Panthers);
  • Mississippi College;
  • University of Tennessee; and
  • Seattle Pacific University.

As host of the event, GSU was not eligible for prizes, so Mississippi College won the cup, UT was first runner-up, and SPU was second runner-up. BVR congratulates these teams—and all of the teams that participated.

The BV Challenge is an extraordinarily unique opportunity and learning experience for the students—and judges—involved. It is a “real world” competition during which teams of students value an actual company and present their results. BVR provides data, resources, and other materials for the Challenge, and GSU worked with the AICPA to coordinate industry mentors for each of the teams. “We had tremendous support from the AICPA and will expand this relationship going forward,” said Dr. David Beard of GSU.

University faculty members who wish to register a team of students for the 2017 competition can contact Dr. Beard at Business valuation practitioners please pass the Challenge info and website along to your alma maters! The Challenge is also a great chance for BV firms to attract new talent—contact Dr. Beard at the above address for sponsorships and ways to get the word out on your firm.

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Elevate your valuation analyses with Monte Carlo simulations

If you want to improve your valuation analysis for complex assignments, check out Monte Carlo Simulations: Advanced Techniques, 2nd edition. This new report takes simulations out of the laboratory and into practical application. A number of experts explain Monte Carlo simulations and how they can be applied to real-life valuation problems. You’ll learn when and how to use Monte Carlo simulations, as well as be able to identify pitfalls and avoid potential problems.

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Global BV News
Global brand acquisition values up for 2015

After a long-term downward trend, brands seem to be back in the focus of M&A investors, according to a new report. The year 2015 could mark a turning point,” says the report, MARKABLES Global Top20 Brands. Some highlights of 2015:

  • The top two most expensive brand acquisitions of all times were transacted: Kraft Foods (by Heinz) and Newport (by Reynolds American);
  • The average value of the Top20 brands increased to $5.6 billion, up from $2.1 billion in 2014;
  • Top20 brands account for 41% of the value of the enterprises to which they belong, up from 34% last year; and
  • The year 2016 could be an even better year for brands in M&A, with some landmark acquisitions (SABMiller, Time Warner, LinkedIn, Monsanto, Chubb, Starwood Hotels, and other).

The report’s data come from public-company financial statements, and the amounts reflect what an acquirer or investor is willing to pay for a brand. Real transactions of brands give a unique insight into the understanding of what drives value.

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Pratt’s Stats Hall of Fame for 3Q16

BVR wants to recognize business intermediaries who have continued to submit to the Pratt’s Stats database over the years, so we have created the Pratt’s Stats Hall of Fame. We would like to thank and recognize the following intermediaries who have contributed the most transactions to Pratt’s Stats during the third quarter of 2016:

  • Lance Schmidt, National Business Appraisers (Mission Viejo, Calif.);
  • Russell Cohen, Murphy Business & Financial Services (Davie, Fla.); and
  • Trevin Rasmussen, Bristol Group (Boise, Idaho).

BVR extends its sincere thanks to these and all of the individuals who have helped build Pratt’s Stats into the trusted and reliable data source that it is today.

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BV movers . . .

People: Fred Berk and Harriet Greenberg, co-managing partners at New York City-based Friedman, will now run day-to-day operations … Ken Stalcup has joined the Indianapolis office of Houlihan Valuation Advisors as senior director.

Firms: St. Cloud, Minn.-based BerganKDV has acquired Carlson Hartsock & Guither of Iowa City … Corrigan Krause of Westlake, Ohio, has acquired Solon, Ohio-based Klinc & Associates … South Bend, Ind.-based Crowe Horwath was ranked No. 20 on the Fortune “50 Best Workplaces for Parents” list … EisnerAmper has added the professionals of Alan L. Goldberg, CPA, to its Personal Wealth Advisory practice … PKF O’Connor Davies has added Scialo, Reimann & Varley of Suffern, N.Y., effective January 1 … Porte Brown of Elk Grove Village, Ill., has added Elgin, Ill.-based firm Borhart Spellmeyer & Co. … Albuquerque-based REDW is acquiring the Edelman Co., an accounting firm in Phoenix that specializes in servicing physicians and medical practices … Whitley Penn is adding fellow Dallas firm Wagner, Eubank & Nichols, effective January 1.

Please send your professional and firm news to us at

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Ring in 2017 with these CPE events

How to Measure Anything: Keynote Quarterly (Jan. 12, 2017), with Douglas Hubbard.

Valuation of Small and Medium Sized Software Companies (Jan. 19, 2017), with Hans Schroeder and Greg Carpenter.

The Double Dipping Debate (Jan. 25, 2017), with Donald DeGrazia (Gold Gerstein Group), Robert Levis (Levis Consulting), and Kim Willoughby.

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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Holiday break

After taking time off for the holidays, BVWire will be back on Wednesday, January 11. We wish you a safe, joyful, and prosperous holiday season!

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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:

Marketing success

Deal price not FV

Cannabiz symposium

Damages idea

Divorce tips

BV Challenge

Monte Carlo

Global BV news

Pratt’s Stats HOF

BV movers

CPE events

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