January 19, 2011 | Issue #100-3 Forward to a Friend

Divorce court rejects CPA’s ‘calculation of value’

Remember the heated discussion in the BVWire regarding when, if ever, CPA experts could submit calculations of value in divorce cases? Well, a recent decision may have just proved that analysts such as Gary Trugman (Trugman Valuation Associates), Ron Seigneur (Seigneur Gustafson), and Stacy Collins (Financial Research Associates) were right all along. In a case concerning the husband’s interest in a small chain of family-owned dry cleaning stores, the family’s CPA estimated the businesses were worth anywhere from $71,000 to a negative $120,000. His calculations were based on industry “rules of thumb” that were commonly used, he said, but that didn’t require the same professional judgment as a complete valuation. After the trial court valued the businesses based in large part on the CPA’s figures, the wife appealed—and the appellate court agreed, finding “we do not use [the CPA’s] calculations because he admittedly did not “use judgment.”  The CPA’s calculations also failed to account for the effect of family ownership on the business value—which were “paramount” in this case.

Read the complete case digest of In re Marriage of Hagar, 2010 WL 4807559 (Iowa App.)(Nov. 24, 2010) in the Feb. 2011 Business Valuation Update; the court’s decision will be posted soon at BVLaw.

Zyla’s step-by-step approach to goodwill impairment testing under FASB ASC 350

The fair value of a reporting unit is determined in accordance with guidance in paragraphs 22-24 of FASB ASC 350-20-35 and in FASB ASC 820. There is significant diversity in practice about the appropriate interest to be measured when comparing the carrying amount of reporting unit to its fair value under step one of goodwill impairment testing.

So, take note of this great post on the CPA Insider from the AICPA. In the article, Mark Zyla (Acuitas Inc.) points out that consistency is the most important principle in Step 2 valuation analyses (conducted only when the first analysis concludes that the business unit’s fair value is less than its book value).

Zyla’s point is that in most cases either of the following approaches work, as long as the analyst doesn’t change mid-stream:

  1. Many valuation specialists believe the appropriate interest to be measured is the invested capital of the reporting unit (equity plus interest bearing debt). The supporters of this approach argue that measuring invested capital eliminates any issues related to how debt is allocated to the reporting unit or how the entity actually financed it.
  2. Other valuation specialists take the position that the appropriate interest to be measured is the equity of the reporting unit. This belief is often based upon FASB ASC 350-35-22 and its reference to quoted market prices.

Join Zyla on February 24 for a special one-of-a-kind interactive web workshop, “Advanced Workshop on Option Pricing Modeling.”  Over the course of his intensive four-hour workshop, Zyla will guide attendees through hands-on examples, case studies and tutorials to show the proper implement, utilization, and application of option pricing analysis.  Participate from the convenience of your home or office with our BVR’s industry-leading interactive web service.  Register by February 1 and receive a special early-bird discount. 

Uniloc/Microsoft case brings Entire Market Value Rule to the forefront

Last week during the BVR webinar Damages in Patent Infringement Lawsuits Rick Bero (The Bero Group) remarked that the recent Uniloc/Microsoft case brought the Entire Market Value Rule (EMVR) to the forefront. Citing the case:

“The entire market value rule allows a patentee to assess damages based on the entire market value of the accused product only where the patented feature creates the basis for customer demand or substantially create[s] the value of the component parts.” Uniloc USA, Inc. v. Microsoft Corp. (Fed. Cir. 2011) citing Lucent Tech., 580 F.3d at 1336; Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995).

“There has been a particular amount of focus on the Entire Market Value Rule in the past two years that has come out of computer and software cases,” says Bero. “It is easy to understand because products that have such a large number of technologies. It can be a concern that each of those technologies contributes to the value, and the EMVR would not be necessarily applicable.”

“The Damages in Patent Infringement Lawsuits” webinar was the second in BVR’s Advanced Webinar Series on Lost Profits Damages. The series continues on January 21 with “Lost Profits in Trademark and Copyright Cases,” featuring John Pilkinton (Lone Peak Valuation Group) and John Slafsky (Wilson Sonsini Goodrich & Rosati).  The webinar provides an in-depth examination at the ins-and-outs of patent and trademark damages cases, claims, analysis, and restitutions.

The final webinar of the series is “The Latest on Motions to Exclude Financial Experts: The Now-Routine Trial Tactic that Works” on January 28 with Jonathan Dunitz (Friedman Gaythwaite Wolf & Leavitt) and Robert Lloyd (Univ. of Tennessee College of Law). 

Damodaran updates The Data Page

Aswath Damodaran (Stern School of Business, NYU) updated and expanded his detailed financial Data Page. Some of the data sets the professor provides include:

  • Discount rate estimation
  • Performance measures
  • Cash flow estimation
  • Growth estimation
  • Multiples
  • Option pricing models

“I continue to use Value Line for the US data updates, but I have switched to a combination of Bloomberg and Capital IQ data for non-US firms, with an overlay of my own modified industry categories,” he says.  The next update will be in January 2012.

Do you know what your family-owned clients are planning for 2011?

The PWC Family Business Survey 2010/11 indicates family business owners are exhibiting “post-crisis wariness” and are “waiting for greater market certainty” before implementing new business plans. Nevertheless, the survey shows family businesses are poised for growth.

The top 5 areas family businesses plan to invest in to improve productivity and competitiveness are:

  1. IT infrastructure
  2. HR/training
  3. Sales activity
  4. Marketing
  5. Web/e-enablement

Pepperdine releases 2011 Economic Forecast Report

John Paglia (Pepperdine University) and the Pepperdine Private Capital Markets Project just released the results of its 2011 Economic Forecast Survey. Some highlights of the survey, based on 1,224 participants from privately-held businesses, private capital providers, investment bankers, business appraisers, and business service providers affiliated with privately-held companies, include:

  • GDP seen at 1.98% with probability of recession at 28.43%.
  • Compared to one year ago, respondents more likely to invest in US, Brazil, India, Canada, Australia, and China. Less likely to invest or expand in Japan, EU, Mexico, and Russia.
  • Most participants ‘somewhat more confident’ in U.S. economic growth in 2011
  • Most participants more incentivized to innovate today

Which law firm participated in the most private market deals in 2010?

Skadden Arps wins–or so reports the Mergermarket Group.  They’ve also issued a 2010 summary that joins the ranks of very optimistic analyses of the return of the merger and acquisition marketplace.

Highlights of their data include:

  • Global M&A up 25% from 2009
  • Strongest year for private equity buyouts since 2007
  • Cross-border deal flow up 73% from 2009
  • Most active year by value for emerging markets M&A
  • Average EBITDA multiples highest since 2008
  • Drop in mega deals in 2010
  • European M&A up 41% by value reaching $645.7bn in 2010, up from $459.4bn in 2009
  • US M&A reached $72.9bn in 2010, a 4% increase from the $695.1bn recorded in 2009
  • M&A reached $396.6bn in Asia-Pacific in 2010, the highest value on record for the region

BVWire remains a bit skeptical, but let’s hope the purchase price allocation and deal analysis part of the business valuation marketplace continues to improve in 2011!

The Appraisal Foundation looks to fill Trustee vacancies

The Appraisal Foundation seeks qualified candidates to fill three At-Large Trustee seats available as of December 31, 2011.  Click here for details. Application deadline is April 1, 2011.  This is an essential opportunity to make sure that the voice of the BV profession is heard during this challenging time of standards review.

Number of deals, deal values and multiples increase in software and information industries

Investment bank Berkery Noyes released its 2010 Year Software M&A Trends Report and 2010 Information 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, “software saw a dramatic increase in both transaction volume and value in 2010.  Total transaction volume increased by 37 percent from 819 in 2009 to 1121 in 2010.  Total transaction value in 2010 increased by 103 percent from $38.29 billion in 2009 to $77.61 billion in 2010.” The report on the information industry shows “transaction volume in 2010 surpassed 2009 by 36 percent, climbing to 2,046 transactions.”
Mercer’s Buy-Sell Agreements webinar handouts available

If you missed Chris Mercer’s (Mercer Capital) webinar yesterday on buy-sell agreements, the handouts are available on the firm’s website. The detailed handout contains a review checklist that BVWire recommends in particular.

Trugman, Trevino and Jefferies advise on control premiums and discounts this Thursday

It has often been noted that discounts and premiums for control are often subject to the greatest “appraiser judgment” in the valuation process.  Yet too often the data used to justify these adjustments is used without question or complete understanding.  Tomorrow (Thursday) BVR hosts expert appraisers Linda Trugman (Trugman Valuation Associates) and Gene Trevino (Valuation Associates Inc.) for “The Use and Application of Data for Control Premiums and Discounts.”  In this webinar the two experts will examine the theoretical framework of control adjustments and discuss the sources and meanings of available underlying data.  Joining them will be Spencer Jefferies of Partnership Profiles to provide a more in-depth look at just one of the data sources available.  For more information click here.

Major year-end update for BIZCOMPS helps with current small business market approach analyses

Jack Sanders just finished his end-of-year update, adding recent deals to the BIZCOMPS database. There’s also a new and improved User’s Guide as well.

Improved cost of capital analyses: The Duff & Phelps Risk Premium Calculator set to go live

Last week BVWire announced the development of the Duff & Phelps Risk Premium Calculator.  This week we have the distinct pleasure of providing a few more details as well as the links to the product pages.  The web-based Calculator, designed by Roger Grabowski and James Harrington, returns four Cost of Equity computations (one that is unlevered) along with a 20+ page Executive Summary which can be included in your valuation report.  The Calculator features a built-in Risk Free Rate lookup based on your valuation date and makes an industry risk premium adjustment should you choose to account for it.  Grabowski and Harrington have also built functionality into the Calculator that analyzes and reports on high financial risk companies – one of many features never previously available in any risk premium tool on the market.
By far the most superior risk premium tool ever available to valuation practitioners, BVR offers two subscription levels of the Calculator: for $399/year the Calculator includes two years of data (including the most current year).  Or, there’s a new low-cost version of the Calculator that includes all historical data for valuation dates from 1995 to 2010 (the 2011 report is targeted for release on March 1). Both subscription options include a newly revamped and easy-to-use PDF of the most current year’s report.  

D&P users also get free registration for two exclusive webinars: Jim Harrington will demo the D&P Calculator on February 8 at 10 a.m. PT/1 p.m. ET and Roger Grabowski will discuss the 2011 D&P Risk Premium Report and its underlying data on March 1 at 10 a.m. PT/1 p.m. ET.  More information to follow…

Reminder: Healthcare Symposium kicks off next week

The market forces driving the healthcare industry continue apace with more prominent philosophical debates on the matter.  Throughout 2011 BVR will host experts and contributing authors to the BVR/AHLA Guide to Healthcare Valuation in the 12-part Online Symposium on Healthcare Valuation.  Don’t miss the first program on January 25, “One Year Later: Assessing the Impact of Healthcare Reform on Value,” featuring Carol Carden (PYA), Don Barbo (Deloitte Financial Advisory Services) and Guide editor Mark Dietrich

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Copyright © 2011 by Business Valuation Resources, LLC
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View Complete Calendar

The Use and Application of Data for Control Premiums and Discounts
January 20, 2011
10:00am - 11:40am PT
Featuring: Linda Trugman, Gene Treviño, and Spencer Jefferies

Lost Profits in Trademark and Copyright Cases
January 21, 2011
10:00am - 12:00pm PT
Featuring: John Pilkington and John Slafsky


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