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January Telephone Conference
Calculating Goodwill: What is Personal and What is Professional?
January 18, 2006
10am to 11:40am Pacific Time
Moderator: Ron Seigneur
Speakers: R. James Alerding, Mark Dietrich, and Kevin Yeanoplos
More information on current and future telephone conferences is available at BVResources.com
Objectivity and Credibility as a Valuation Expert , Richard M. Wise, Business Valuation Review, June 2005, pp.82-86.
As we all know, a valuation expert will face a barrage of attacks during cross-examination. Such attacks will call an expert’s objectivity and credibility into question. The expert’s demeanor and responses may be subject to scrutiny by the judge. It is not enough to simply give expert evidence; conduct builds believability.
It is the counsel’s job to be an advocate, not the expert. Today, the courts tend to reject the evidence of the seemingly non-credible expert in favor of the other, compared to the past where the decision was the midpoint somewhere between the extreme positions of the two experts.
Although it is clear how the judges feel about certain expert-witness testimony, it is also useful to understand the jurors’ perspective. A survey was conducted where more than 150 cases were researched and 1,000 jurors were interviewed. The following ten mistakes were identified as being made most often: Arguing or being defensive during cross-examination, giving over-rehearsed testimony, delivering mistaken or self-contradictory testimony, testifying unenthusiastically, explaining in too technical detail, appearing to testify more than practicing their specialty, being unprepared for testimony, acting like a hired gun, making witness fees a negative issue, and stretching their expertise.
At the end of 2005, the Pratt’s Stats™ database contains 7,811 transactions of privately-held businesses. 1,328 transactions were added in 2005 with an average of 110 new transactions added per month. The transactions in Pratt’s Stats™ have a median revenue of $1.6 million and a $1.5 million median selling price.
The Public Stats™ database now contains 1,914 transactions of public companies. 534 transactions were added in 2005 with an average of 45 new transactions added per month. The transactions in Public Stats™ have a median revenue of $48.1 million and a $109 million median selling price.
Here are the current transaction counts of the other databases available at BVMarketData.com:
- BIZCOMPS® (now has 8,063 count)
- Mergerstat® / Shannon Pratt's Control Premium Study ™ (now has 4,711 count)
- FMV Restricted Stock Study™ (now has 430 count)
- Valuation Advisors’ Lack of Marketability Discount Study™ (now has 2,950 count)
These databases and more are available at BVMarketdata.com.
Q: It is our understanding that the SEC has always taken the position that restricted stock of public
companies, including unregistered shares, are valued differently if facts and circumstances would warrant a lower value than the otherwise freely traded shares. We are getting some inconsistent feedback under audit from the national firms.
Our position is that they should be valued differently, which in some cases is going to result in a lower purchase price. We have had a national firm come back to us and say no they won’t accept anything but those shares valued at the equivalent freely traded price. You can clearly see in the deal that the deal value would not have been looked at that way. Obviously from a seller’s perspective they don’t see it as dollar for dollar.
A: Obviously, restricted stock is different from freely tradable stock. That is a fact situation. The SEC may have its own views, but at the end of the day, it’s not our financial statements and it’s not the
auditing firm’s financial statements. I think that auditing firms tend, on balance, to run scared of the SEC. If the client feels that a discount for the restrictions on the stock are appropriate and you support them in terms of valuation theory and valuation practice, my suggestion is that you tell the
client, “We’ll back you up. The auditing firm thinks this is how the SEC is going to react, but let’s go to the SEC and get their view.” Certainly, if you talk to the people in the chief accountant’s office who attend our AITF meeting they’ve said, if you have a valuation problem, come to see us. And, there’s no onus on the registrant. They’re not discriminated against because they bring up an issue, and I think that there is an unwillingness on the part of many companies to bring up issues such as this with the SEC staff, but at least the words that the SEC staff repeatedly say – and if you go to some of these conferences, you hear the same thing, “Come and see us. We’re here.” I’d take them up on it.
Alfred King, CMA, CFM
This is an excerpt from the August 31, 2005 telephone conference on Allocation of Purchase Price: The Old Rules and the New FASB Proposal.
BV Definition of the Week
“A fraction in which a value or price serves as the numerator and financial, operating, or physical data serves as the denominator . ”
Business Valuation Resources, LLC
The American Institute of Certified Public Accountants (AICPA)
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