January 5, 2011 | Issue #100-1  

Who should know the legal definition for standard of value - the attorney or the appraiser?

David Greene (Practice World LLC) recently posted two questions on LinkedIn’s BV Professionals Group that received almost two dozen responses:

“How do you go about finding the standard of value to be used and the exact legal definition in the relevant jurisdiction? 

Respondents agreed that there is really no standard legal definition of value. Michael Molder (Marcum LLP) says that the standard of value varies not only by jurisdiction but within a jurisdiction. “It can change depending on the nature of the claim,” he says. “The place to look for standards of value within a jurisdiction are the opinions of judges in other cases. This works best if you can find an opinion from the highest appellate court of a particular jurisdiction.”

Greene responded with another question:

“How do you deal with a divorce attorney who doesn't know or understand standard of value? Do you just make a 'legal interpretation' as a nonattorney and roll with that? Do you point the attorney to BVLAW? Do you provide selected articles and cases to the attorney?”

The answers varied, from those who are wary of working with attorneys who don’t know the definition, to those who think the valuation experts should know.

Email us with your thoughts, or join the LinkedIn group debate!

Damodaran’s website recommended for industry asset volatilities…but you may have to calculate debt volatility yourself…

The recent BVR webinar “The Use and Application of Option Pricing Modeling” elicited several questions from listeners, one of which was:

“What is the best resource of obtaining volatility for debt? CapIQ? Bloomberg? What do you do if public comps don’t have publicly traded debt?"

Presenters Jim Walling (Grant Thornton) and Scott Beauchene (Strategic Value Group) responded:

“Neither of those sources will provide debt volatility directly. You usually have to pull pricing for guideline debt securities and do the calculation. Industry asset volatilities are available on Damodaran’s website."

ASA training courses for the year kick off next week!

Our friends at the ASA wanted BVWire to remind every one of two top-tier CPE opportunities next week.

    • SEC Perspectives and Hot Topics - Jouky Chang from the SEC
    • FASB Projects Impacting Valuation -  Ben Couch from the FASB
    • AICPA IPR&D Practice Aid Update - Tony Aaron from E&Y
    • AICPA Impairment Practice Aid Update - Christopher Stephens from PwC's National Office
    • Contingent Consideration Valuation - Jeremy Krasner from Stout Risius Ross,
    • AICPA "Cheap Stock" Practice Aid Update - Travis Chamberlain from Clifton Gunderson
    • …and other sessions.

Key person discount central issue in NY trial court

Hat tip to Peter Mahler (Farrell Fritz PC) for an in-depth review of a recent NY trial court opinion in which a key person discount was a focal point. In his blog post “Key Person Discount Takes Center Stage in Stock Valuation Proceeding” Mahler writes:

“When the controlling shareholders terminate the employment of a minority shareholder who then petitions for dissolution, and whose shares are later valued in a contested "fair value" buyout proceeding, should the court apply a so-called key person discount reflecting the company's potential diminished value from the loss of the minority shareholder's services?”

This was but one of several, thorny issues confronted by Special Referee Louis Crespo, whose 50-page Report and Recommendation valuing at $3.2 million a 49% interest in a company that leases, sells and services office copiers and other equipment, was recently confirmed by Manhattan Commercial Division Justice Barbara R. Kapnick in a case called Matter of Abraham (Elite Technology NY, Inc.), 2010 NY Slip Op 33225(U) (Sup Ct NY County Nov. 10, 2010).

ASA approves add-on certification in intangible asset valuation

More ASA news: The International Board of Examiners has approved the Business Valuation Committee of the ASA’s proposal for a certification in intangible asset valuation.  BVC chair Bill Quackenbush (Advent Valuation Partners) tells BVWire that “we are now entering the implementation phase, and are working on developing the exams and process procedures for applicants.”

The designation will be an “add on” available to those who hold an ASA designation in BV. Requirements will include taking the two Intangible Asset courses already in place, passing exams on these courses (and we will make accommodations for those who have already taken the courses without the exams), and the successful peer review of an applicant’s work product.

Readers downloaded 14,671 free valuation resources from BVR in 2010

BVR provides over 100 free articles, papers and standards written by top experts in the field of business valuation at www.bvresources.com. Last year the top ten downloads were:

Reasonable Compensation Data Sources

Personal Goodwill: A Survey of Definitions

Reasonable Compensation: Can Your Opinion Survive this 12-point Checklist?

How to Use Transactional Databases for M&A, 2010 Update

FORM PREM14A EF Johnson Technologies, Inc. - EFJI

Does Black Scholes Overvalue Early Stage Company Allocations?

Control Premiums: Application & Analysis Special Report Excerpt

Goodwill Hunting in Divorce

Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals

It's Turtles all the Way Down

FASB makes tentative decision on Topic 820 relating to nonpublic entities

At its December 21, 2010 board meeting, FASB tentatively decided not to allow exceptions for nonpublic entities to the fair value principles and concepts applicable to the measurement of fair value in the amendments to Topic 820, Fair Value Measurements and Disclosures.  The amendments will require nonpublic entities to disclose the following:

  1. The current use when a nonfinancial asset is measured subsequently at fair value and the highest and best use of the asset differs from its current use as well as the reasons why the asset is being used in a manner that differs from its highest and best use. The Boards also tentatively decided to require that disclosure only when the asset is recognized at fair value in the statement of financial position, not when the fair value is disclosed.
  2. For assets and liabilities categorized within Level 3 of the fair value hierarchy that are measured at fair value in the statement of financial position on a recurring basis after initial recognition:
    1. A quantitative disclosure of the unobservable inputs and assumptions used in the measurement
    2. A description of the valuation processes in place.

Nonpublic entities will not be required to disclose the following:

  1. The level in which a fair value measurement would be categorized within the fair value hierarchy for assets and liabilities not recognized at fair value but for which disclosure of fair value is required
  2. Transfers between Levels 1 and 2 of the fair value hierarchy
  3. A qualitative discussion about the sensitivity of a Level 3 fair value measurement to changes in unobservable inputs and any inter-relationships between those inputs that magnify or mitigate the effect on the measurement.

“Obviously FASB has concluded to NOT make a major move toward private company GAAP, at least as it relates to this topic,” says Christine Baker (ParenteBeard). She adds:

Business appraisers can provide significant assistance to private company issuers as well as their audit team colleagues by identifying the unobservable inputs in Level 3 analyses, consulting regarding the ‘quantitative disclosure,’ and/or pointing to auditable data sources supporting unobservable inputs. In particular, business appraisers use data sources and publications in their routine daily work that auditors, and quite possibly management preparing the Level 3 analyses, are not aware of.  Not only can appraisers identify these sources, but also confirm the pervasive use of such data sources in the valuation profession.  These include not only transaction data but also credible industry and economic data, forecasts and so on that provide a backdrop for management projections which are inherently unobservable when prepared.

Cutting and pasting information into your reports?

In a recent post on the IBA Blog, Rand Curtiss (Loveman Curtiss) reminds valuation practitioners that simply cutting and pasting economic forecasts, industry analyses, and comparative financial data into report templates without additional consideration can be risky.

Curtiss recommends that appraisers:

  • Respect copyrights and obtain required permissions
  • Make sure the content is relevant: international capital flows do not affect the value of the local hardware store
  • Draw implications for the subject interest’s value: growth, profitability, financing availability and cost, business and financial risks
  • Read, edit, and are able to defend it against cross-examination

Butler Pinkerton Calculator passes a Daubert challenge

The BPC passed its first Daubert challenge in mid-December 2010 in Alamar Ranch, LLC v. County of Boise, a decision by the United States District Court (Idaho)(Civil Case No. 1:09-cv-00004 BLW).  In response to the challenge, Peter Butler (Valtrend) submitted an affidavit listing the numerous instances of independent peer comments, articles, speaking engagements as evidence of peer review.  In the Alamar Ranch case, trial testimony also highlighted positive endorsements of the BPC – some from Ph.D.s and finance professors - that recognize the model’s central technique stems from modern portfolio theory.

Kentucky adopts majority rule in statutory FV appraisals

Like many states across the country, Kentucky first enacted a dissenters’ rights statute in 1972 as part of its adoption of the Model Business Corporation Act (MBCA). The statute entitled dissenting shareholders to the “fair value” of their shares without specifically defining the term, and was silent regarding the application of minority and marketability discounts. A 1982 decision by the Court of Appeals permitted a trial court to apply a marketability discount to the net asset value of a closely held company, based on the facts and circumstances of the case. Because the state declined to adopt the 1999 amendments to the MCBA that specifically preclude discounts in statutory FV appraisals, Kentucky remained one of a handful of jurisdictions that permitted their application.

Now comes a new case in which a father and son disputed the statutory fair value of their respective majority/minority interests in a closely held furniture manufacturing company. The company’s appraiser applied a 30% unspecified discount, based on certain risk factors that a hypothetical buyer would consider, including declining revenues and liquidation costs. The son’s appraiser believed discounts were inappropriate, and the trial court resolved the dispute by adopting a 20% discount. On review, the Court of Appeals reviewed the “plethora” of decisions by other states during the last decade and ultimately found “no facts to justify a deviation from the rule prohibiting a marketability discount in a dissenters’ rights action in a closely held corporation,” except in extraordinary circumstances.

Dissent continues controversy. Four judges on the panel dissented, based on the facts of the case—in particular, the trial court’s application of a marketability discount at the enterprise rather than shareholder level, due to the inherent risks of the business. The case is ripe for appeal to the state Supreme Court; read the full digest of Brooks v. Brooks Furniture Mfgrs., 2010 WL 4290068 (Ky. App.)(Oct. 29, 2010) in the current Business Valuation Update. The court’s decision is posted at BVLaw.

Keynes better than Einstein at BV, redux…

A few weeks ago in BVWire, Raymond J. ("RJ") Dragon (Rotenberg Meril Solomon) presented two views of the power of time in financial economics: , as he compared the two, “Einstein’s rumored fascination with BV compared to Keynes’ believe that  ‘in the long run, we are all dead’.”

More seriously, Dragon performed an experiment which looked at the present value of a cash flow in perpetuity, “assuming it was a reasonable proxy for the cash flow from a business.” Dragon used the inverse of the future value formula, where PV(CFn) =CFn * 1/(1+r)^n, - taking a $1 cash flow in period n to determine its present value. The results?

The use of a 3% or 6% long term growth rate in a small, privately-held company valuation model, if appropriate to the individual circumstances of the company, does not seem to present business valuation experts with an extraordinarily long time horizon for the business to exist to realize most of the value.  It can, however, have a significant impact on value.  On the other hand, the use of  a 10% long-term growth rate, selected because the industry is a “high tech growth industry”, may present issues of whether it is realistic to assume a small, privately-held business will exist the 30 or more years needed to realize most of its value.  However, it may be appropriate for valuing certain types of venture capital investments using appropriately high venture capital discount rates. 

For Dragon’s complete article and analysis click here.

Advanced Webinar Series on Lost Profits Damages kicks off this Friday

Join us this Friday for the first of our four-part Advanced Webinar Series on Lost Profits Damages. “Discounting Lost Profits: Case Law & Methods – A Legal Perspective.”  In this two-hour presentation, BVR welcomes Robert Lloyd (University of Tennessee College of Law) and Michael Crain (The Financial Valuation Group), both contributing authors to The Comprehensive Guide to Lost Profits Damages.  Through their presentation, Lloyd and Crain will discuss the most fundamental obstacle to quantifying a lost profits award or claim: its value – or rather, its present value.  Discounting for past and future damages claims will also be discussed, as well as how recent case law has come to impact these considerations.  For more information on this and all other programs in our Advanced Webinar Series on Lost Profits Damages, click here.

Pepperdine 2011 economic forecast survey participation requested

Pepperdine Private Capital Markets Project seeks your input for its economic forecast survey. Survey results “will be considered by policy-makers as they contemplate our economic health, particularly with regard to small- and medium-sized businesses,” says John Paglia (Pepperdine University). The survey, which takes about ten minutes, closes on Tuesday, January 11th at midnight EDT. Access the survey here.

And last but definitely not least:  12-part healthcare valuation CPE series

You won’t find better guidance to navigate any healthcare valuation assignment than BVR’s Online Symposium on Healthcare Valuation.  Running throughout 2011, this twelve-part series features contributing authors to The AHLA/BVR Guide to Healthcare Valuation discussing the most relevant and changing topics in the industry.  Join us for part one, “One Year Later: Assessing the Impact of Healthcare Reform on Value” on January 25 with Mark Dietrich CPA, ABV, Don Barbo (Deloitte Financial Advisory Services LLP), and Carol Carden (PYA). 



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Discounting Lost Profits: Case Law & Methods - A Legal Perspective
January 7, 2011
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Damages in Patent Infringement Lawsuits
January 14, 2011, 10:00am - 12:00pm PT
Featuring: Rick Bero and Robert A. Surrette



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