‘Historic opportunity’ for the BV profession
BVWire was on the scene for the ASA’s scheduled Annual Fair Value Conference in New York City last week, but Mother Nature had other ideas and KO’d the event with a blinding snowstorm. Luckily, we caught up with two prominent speakers who were scheduled to talk about where the business valuation profession is headed.
Anthony Aaron (Ernst & Young) and John Glynn (PricewaterhouseCoopers) made observations on the current state of the BV profession, with its many professional organizations, sets of standards, multiple credentials, and varying levels of oversight. They endorsed the proposal that some sort of "unification" be created, at least around financial reporting, either through an alliance of existing organizations or the creation of a new "self-regulatory organization" (SRO).
“Such an alliance or SRO would focus on developing a unified credential, requiring the adherence to a unified body of standards, and developing a single oversight/disciplinary process,” says Aaron. Some method for extending the umbrella of oversight to all who measure fair value in financial reporting (e.g., management and nonappraisers) would make such an effort more inclusive and encompassing.
Of course, many stakeholders are involved, so efforts would need to be made to create buy-in among them all. This will not be an easy task. “I think that we have a historic opportunity to put the political challenges behind us and unite the profession behind a quality infrastructure as it relates to valuations performed in the ‘public interest’ arena,” says Glynn. “The term ‘public interest’ needs to be defined but clearly includes financial reporting valuations for public companies.”
Fair Value Symposium continues
Although bad weather put the kibosh on the ASA’s Annual Fair Value Conference, neither rain nor snow nor gloom of night will stop BVR’s 2014 Online Symposium on Fair Value Measurement, a series of 12 webinars (one per month) curated by expert Mark Zyla (Acuitas Inc.) that addresses what every appraiser needs to know in this rapidly evolving field. On February 4, Zyla will present Private Company Considerations in Measuring Fair Value, which will examine how FASB’s Private Company Council (PCC) is reshaping fair value and GAAP for private companies.
‘Trolls’ spark new avenue of interest in patent valuation
One of the new developments in the intellectual property (IP) marketplace that has had an impact on patent valuation is the rise of nonpracticing entities (NPEs). The pejorative term is “patent trolls,” and they have a brilliant, yet controversial, monetization strategy, says Mike Pellegrino (Pellegrino & Associates).
“These companies have an interesting business model,” he says. “They buy a patent from somebody else, but they are not making a product that uses the patent directly in the market. They have the rights to the patent, and then they go to companies and say, ‘You are using our invention without authorization, so we want a license fee.’ It might be based on historic damages plus future royalties and/or one-time payments.”
Pellegrino, speaking during a recent BVR webinar, gave several examples of NPEs: WiLAN, Mosaid Technologies, Rambus, InterDigital, Round Rock Research, and Intellectual Ventures.
No countersuits: An interesting aspect with NPEs is that there is no risk of a countersuit. That is, the companies they sue can’t turn around and claim the NPE is infringing on one of their patents. That’s because the NPEs don’t sell any infringing products. “In the old days, if IBM were suing Sun for patent infringement, Sun would go into their portfolio and look for things that IBM is doing where they are using Sun’s patents without authorization,” Pellegrino says. “At the end of the day, the large companies basically execute a cross license, but there are no damages that move one way or the other between the companies.” But cross-licensing isn’t an option when an NPE is involved, so the damages are still an issue.
“We find this creates a new avenue for interest in patents and the valuation of those patents,” he says.
Use recent settlement or dated buyout to value stock?
What’s more relevant and reliable in terms of valuing an interest in a closely held corporation: a 2004 stock purchase agreement or a 2012 settlement four owners of the company made with a fifth partner to conclude litigation? This was a central question in a recent appeal from a divorce settlement.
Nuisance value: In 2004, the husband and four colleagues bought a “manufacturer’s rep” company from its owner under a stock purchase agreement (SPA). Four of the new owners, including the husband, acquired a 23% interest each; a fifth person bought the remaining 8%. The husband served as the company president. Under the SPA, the former owner received 10% of the company’s annual gross receipts for a 10-year period ending in January 2014. At the time of trial, the husband’s share of past payments amounted to approximately $373,700. In 2012, four of the owners settled a lawsuit with the fifth—8%—owner, paying her $12,000 or $15,000 (there was conflicting testimony on the amount) in exchange for her surrendering her interest. The husband called the payment a “nuisance value.”
At divorce, the husband’s expert declined to consider the price the shareholders paid under the 2004 SPA, arguing that the buyout had occurred years ago and did not factor in the effects of the 2008 Great Recession. Instead, he relied in part on the amount the fifth shareholder received as part of the 2012 settlement; this arrangement, the expert said, represented an arm’s-length transaction. He calculated the company’s book value at $75,000 and its commission business at around $154,400. He applied a 35% discount for lack of marketability and the minority interest and a 25% discount to account for expiring client contracts and concluded that the husband’s shares were worth nearly $19,000. The wife’s expert used a capitalization of excess earnings approach. Because of a discovery dispute, she had no access to the company’s principals or financial statements and, therefore, relied on a review of the last five years of the company’s tax returns. She also considered the price per share resulting from the 2004 SPA. She applied a 28% DLOM and concluded that the husband’s shares were worth $324,000. The trial court found her calculations as to the total price paid under the SPA through the year 2012 “reasonable.” But it adjusted her projections for 2013 and 2014; after applying several discounts, it arrived at a total value of nearly $275,000.
On appeal, the husband, citing an older case, argued that the trial court should not have considered the 2004 SPA because “[u]nlike land, which has a fairly stable value, the value of stock fluctuates freely with the operation of the business.” The appeals court disagreed, noting that valuing a closely held corporation was by nature subjective; any evidence of a sale involving a willing seller and willing buyer was, therefore, relevant when setting the value of its stock. On the other hand, relying on the 2012 litigation settlement was problematic because the payment resulting from it did not accompany “a purely voluntary transfer of the shares.”
Find an extended discussion of Hanusin v. Hanusin, 2013 Ill. App. Unpub. LEXIS 2618 (Nov. 20, 2013) in the March issue of Business Valuation Update; the court’s opinion will soon appear at BVLaw.
Global adoption of IFRS
The International Financial Reporting Standards are the “de facto” language for financial reporting, says Paul Pakter, former board member of the International Accounting Standards Board in an article, “Global Accounting Standards—From Vision to Reality.”
He states that, of the 122 jurisdictions profiled by the IASB, 115 have made public statements in support of a single set of global accounting standards. Many of the jurisdictions believe that IFRS should be the global accounting standard.
Inns and outs of hotel valuations
The hotel industry is approaching a crossroads in terms of valuation and transaction volume, according to the latest Hotel Valuation and Transaction Trends for the U.S. Lodging Industry report. Hotel values now exceed their 2006 peaks, and owners who were previously holding out can now sell, so look for a significant increase in transaction volume, says the report. The average value per room is expected to hit $122,000 in 2014, a 15% jump from 2013.
On January 30, BVR will present a webinar, Valuing Hotels, featuring Mark Dayman (CapVal-American Business Appraisers LLC) and Kari Lazarova (Valuation Aspects LLC), two of the foremost experts in the field. They will examine all aspects of hotel management, operations, and, of course, valuation.
BV Movers . . .
People: Cindy B. Carradine, CPA/CFF, has joined Hill Schwartz Spilker Keller as a managing director in litigation services at the Dallas office … James Schultz, CPA/CVA/CFF/MAFF, has joined Chicago’s Cambridge Partners & Associates Inc. as director of business valuation and litigation services … Eckhoff Accountancy Corp. (San Rafael, Calif.) has announced that Denise M. Frey, CPA/ABV/CFF, CVA, Janina C. Thomas, CPA, and Dashiell G. Thompson, CPA, have all been named shareholders effective as of January 1 … CBIZ Valuation Group LLC promoted the following professionals: Mary Dempsey, to director (Central Region); James Kelley, to director (Southwest); Caitlin Liguori, to senior consultant (Northeast); Todd Mitchell, to director (Northeast); Marc Richards, to manager (Southwest); Santo (Sam) Rizzo, to manager (Capital Asset Practice) … Gettry Marcus (Woodbury, N.Y.) named Gabe Shurek as director in the business valuation and litigation services group. Shurek began his career with Gettry Marcus as a junior accountant in 2001 … Michael Pendergast, principal at BlumShapiro’s litigation services and business valuation group, was promoted to partner. He provides expert business valuations and in-person testimony in cases such as divorce, shareholder disputes, and business acquisitions.
Firms: Smith, Goolsby, Artis & Reams and Kelley, Galloway & Co. have agreed to merge. The deal is expected to close on July 1. The combined firm—Kelley Galloway Smith Goolsby PSC—will have 52 employees, including 11 shareholders/directors. Offices will be in Ashland, Pikeville, Cold Spring (all Kentucky), and Cincinnati … WithumSmith+Brown has merged with Hutchins, Meyer & DiLieto PA, building WS+B’s presence in Toms River, NJ. The deal took effect January 15 and added 15 professionals to WS+B’s roster … Yeo & Yeo (Saginaw, Mich.) and Hungerford & Co. (Southgate, Mich.) have merged. The combined firm will operate under the Yeo & Yeo name and will give the firm the opportunity to extend its reach in the southeastern Michigan region.
Struggling to build your practice?
The first class of members in the new Practice Builder Academy met January 21 to kick off a 12-month program geared to BVFLS professionals who are struggling to establish or build a successful practice. Launched by Rod Burkert (Burkert Valuation Advisors) and Mel Abraham, a valuation and entrepreneur expert, the Academy’s tag line is: "Building your practice. Re-designing your life." Although the program launched last week, you can enroll at any time and take full advantage of the academy's materials and the community of practitioners it has created. You can access information about the program and receive free training at the link above.
Sharpen your reporting and testifying skills
Throughout February, the Advanced Webinar Series on Reporting & Testimony will examine the best practices of how to deliver written and oral presentations of valuation engagements. Join our experts to learn how to provide the clearest, most defensible reports and testimony for any assignment in any setting.
Step Up Your Game: Effective Business Appraisal Reporting
Friday, February 7. Featuring: L. Paul Hood Jr. and Timothy Lee
Report & Testimony for Litigation & Deposition
Friday, February 14. Featuring: Rebekah Smith
How to Succeed as a Jointly Retained Expert
Friday, February 21. Featuring: Jay Fishman
Omissions & Commissions: Errors, Challenges & Solutions in Business Appraisal Reports
Friday, February 28. Featuring: L. Paul Hood Jr. and Timothy Lee
Upgrades to BVR’s training websites
Two recent enhancements to the BVR webpage should make our webinars and training programs easier for participants to access and use.
Subscribers to BVR’s Training Passport, Passport Pro, and Online Symposiums on Healthcare and Fair Value Measurement can now log into BVR’s training websites to directly access webinar login instructions, reading pages, CE surveys, and other materials. To access these materials, follow the login link found in the top left corner of our navigation panel on any of our training pages.
BVR’s immense archive of training events is now even easier to use. To access any of our desktop learning centers (DLCs) or purchase any individual conference training pack, visit our new Event Archive page. Through this new resource, any of the 350-plus events BVR has hosted during the more than 10-year history of our training program can be accessed through a single training pack purchase or subscriber login.
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