Sound valuation principles are still at the center of LC and LLP estate planning
While attending a recent conference on estate tax planning, Bob Buchanan (PCE Valuations) noted numerous conversations on the use of LPs and LLCs--and valuation was regularly mentioned as a vital part of any planning that involves LPs and LLCs. “the change in the tax law does not impact the necessity of obtaining a well-reasoned, independent valuation,” says Buchanan. He also believes:
“Valuation of holding-type entities like LPs and LLCs is no longer simply an application of discounts based upon observed transactions of similar entities, as was common in 2001 when the last big tax act was passed. Valuation revolves around required rates of return more explicitly than ever before. Not that rates of return haven’t always been drivers of the “right answer.” But, today, the analysis of interests in these entities is much more clearly tied to market rates of return that reflect the risks of investing in such interests.
“When experts state that a strong valuation is vital to successfully implementing an estate plan, we can only assume that ‘strong’ means well-reasoned, independent and consistent with current financial theory. Just as the changes in the estate tax has many more features than those mentioned here, the valuation of the entities commonly used in effectuating sophisticated estate plans has many more facets.”
Bob’s point to the appraisal community: “Unlike the new estate tax rules, which are set to expire in two years, the financial theory behind the valuation principles is long-lasting.”
One firm’s model for valuing internally developed trademarks
Fernando Torres (IPmetrics), one of our favorite IP value analysts, proposes an intriguing econometric model of trademark values in the IPmetrics blog. Torres believes internally developed trademarks are frequently underreported in financial statements—and that they deserve a sound and consistent valuation solution. IPmetrics built a database of relevant transactions that allows them to perform empirical studies to support their model.
More problems using preliminary valuations in divorce
Divorce cases often catch an expert between a rock (limited client funds for valuing a smaller business) and a hard place (limited evidentiary weight accorded to a preliminary calculation of value). Sadly, parties and their attorneys frequently ask business appraisers to perform a preliminary valuation, “just for settlement purposes,” but as we noted in the recent Hagar case, courts are equally as likely to reject calculations of value because they lack sufficient professional judgment and financial review.
A new decision confirms this seeming double standard in divorce engagements. On their own, the parties agreed to split the value of the marital business, which they said was worth $60,000. The trial court adopted their agreement in its orders on divorce. Then, four months later, the wife returns to court—this time with an attorney and an appraiser, who says the business was worth $172,000 according to his “preliminary” valuation. The appraiser also admitted that he lacked the documentation with which he would typically perform a complete business valuation—such as aged accounts, payroll taxes, etc. Accordingly, the trial court refused to reconsider its prior orders, and on review, the appellate court confirmed. The preliminary valuation by the wife’s appraiser came with the specific caveat that it was incomplete, and because the parties could not establish a clear, alternative value for the business, the trial court did not err in adopting the parties’ original value and rejecting the wife’s request for reconsideration. Read the complete digest of In re Marriage of Cantarella, 2010 WL 86284 (Cal. App.)(Jan. 11, 2011) in the next (March 2011) Business Valuation Update; the court’s decision will be posted soon at BVLaw. In the meantime, we’re providing In re Marriage of Hagar as a free download here.
Bank valuations continue to be driven by credit quality
If you liked the movie Talladega Nights: The Ballad of Ricky Bobby, you’ll appreciate Ken Segal’s (Howe Barnes Hoefer & Arnett) current report on the community bank market, Today’s AFS Market Overview. Based on his analysis of SNL Financial data, Segal states that “for publicly traded banks less than $5 billion, valuations (and potential sale multiples) are highest for those banks with lower levels of non-performers relative to their peers. So while banks are rightfully concerned about GAAP book values of equity, they should also appreciate the positive impact to enterprise value by minimizing existing non-performers and originating fundamentally sound credits.”
Since we’re on the topic of banks, on February 17 expert appraiser Andrew Gibbs (Mercer Capital) and attorney Chip MacDonald (Jones Day) will share what every appraiser should know when appraising a bank today. In “Valuing Banks,” their 100-mintue webinar, Gibbs and MacDonald will discuss the present, recent past, and near future with a critical eye towards what banking industry changes mean for the valuation process. Click here for more information or to register.
GT on differences between business valuation and lost profits
In Grant Thornton’s recent Focus on Forensics newsletter, Neil Beaton and Michael Fahlman provide a foundation for understanding the differences between business valuation and lost profits damages calculation methods. “If a lost profits analysis is performed, can a business valuation analysis also be performed to measure the total damages owed?” ask the authors. “It can,” they respond, “as long as doing so will not cause duplicative damages.” Read their article, “Business damages measurement: Lost profits or business valuation?”to learn more.
Neil Beaton is also a contributing author to the recently updated Comprehensive Guide to Lost Profits Damages for Experts and Attorneys, edited by Nancy J. Fannon.
PitchBook receives CODiE award for best financial/market data information source
PitchBook Data, Inc. won two CODiE awards earlier today from the Software & Information Industry Association—the first recognizing their financial research products as the best on-line Financial/Market Data Information Source. The SIIA’s CODiE awards are the highest honor bestowed by the software industry to its member firms.
PitchBook’s second award compared the private-equity focused firm to software providers for other industries—and again they came out on top with the Best Vertical Market Business Content Solution.
BVR, which strives to bring best-in-class research tools to the business valuation professions, is proud to be PitchBook’s exclusive partner for appraisers. We’ve worked closely with PitchBook in particular on the Pitchbook/BVR Guideline Public Company Comps Tool. For more information, contact Shelly Seger or your BVR account rep.
Number of deals, deal values and multiples increase in pharma and healthcare industries
Investment bank Berkery Noyes released its Pharma & Healthcare Information and Technology Industry M&A Trends Report. Both reports include analysis of merger and acquisition activity in 2010 and comparisons with activity in the three previous years. According to the investment bank:
- Total transaction volume increased by 13 percent over 2009, from 199 in 2009 to 224 in 2010.
- Total transaction value increased by 81 percent over 2009, from $6.43 billion in 2009 to $11.62 billion in 2010.
- Both the median EBITDA and revenue multiples have increased from 2009, with the EBITDA multiple rising 36 percent from 8.1 to 11.0 and the revenue multiple rising 50 percent from 1.2 to 1.9.
Cap rate limit discussion continues
In his response to last week’s BVWire item “is there a cap rate limit?” Ted Norbert Jr. MAI, SRA offered the following reminder that can’t be repeated often enough:
“I believe that every investment’s value is largely about the comparison of typical investors alternatives. The overall rates of return have to relate to other risk/reward combinations, and usually 'fit' somewhere within the risk and return spectrum.”
BVR continues to add expert insights on healthcare reform
We’ve just posted numerous new articles from Insights, the esteemed valuation quarterly published by Willamette Management Associates and provided exclusively to subscribers of BVResearch. The new content includes special-focus articles on healthcare reform. A sample of the new articles includes:
- “Key Considerations in Market-Driven Collaborative Medical Services Arrangements,” by Charles Wilhoite (Willamette Management Accociates)
- “Joint Ventures Between Tax-Exempt Health Care Organizations and For-Profit Parties: Avoiding Federal Tax Law Traps,” by Laverne Woods and Thomas C. Schroeder (Davis Wright Tremaine LLP)
- “Valuation of Ownership Interests in Health Care Entities for Charitable Contributions— Insights from Recent Tax Court Precedents,” by Hestian Stoica and James Rabe (Willamette Management Associates)
- “CMS Proposes Medicare and Medicaid Reimbursement Rules for Earning Incentive Payments for Meaningful Use of Certified Electronic Health Record Technology,” by Daniel F. Gottlieb (McDermott Will & Emery, LLP)
- “From Fact to Fiction—A Brief Review for the Layman of the Quirky World of “Fair Market Value” in Physician-Hospital Transactions and Regulatory Compliance,” by Paul M. Torgerson(Dorsey & Whitney, LLP).
Blue Ribbon Panel issues final report on Standard-Setting for Private Companies (BRP)
Last week, AICPA/FAF/NASBA’s Blue Ribbon Panel on Standard-Setting for Private Companies (BRP) issued its report and recommendations to the Financial Accounting Foundation. The executive summary states:
“This report proposes major and other enhancements aimed at fostering an accounting standard-setting system that would seek to maintain a high degree of financial reporting comparability for business entities, regardless of capital structure, but also significantly increase the chances of effecting potential differences, where warranted, in measurement, recognition, and presentation, and not just disclosure.”
For a summary and additional materials check the recent article in the Journal of Accountancy and Financial Executives International’s Highlights of Recommendations Made by Blue Ribbon Panel on Private Cos.
Zyla shares his expertise on option pricing
Don’t forget to register for the “Advanced Workshop on Option Pricing Modeling” taking place Thursday, February 24. Featuring Mark Zyla, this intensive four hour workshop will include case studies and hands-on examples on applications such as:
- Employee stock option analysis
- Intangible asset analysis
- Discounts for lack of marketability
- Contingent considerations
As this critical valuation technique continues to gain importance and scrutiny appraisers can’t miss this opportunity to acquire and hone their skills in Black-Scholes, binomial lattice and other option pricing models. Click here for more information or to register.
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