BVWire Issue #148-2 | January 14, 2015


Zelouf court stands firm in controversial DLOM ruling

Only a few months after it issued its controversial opinion in a fair value proceeding, the Zelouf court offers a crisp and unequivocal defense of its earlier decision, saying the guiding standard was fairness, not “formalistic and buzzwordy principles.”

No DLOM: Among the New York fair value cases that transfixed the valuation community late last year was the court’s ruling in the Zelouf case, which centered on a family feud over the management of a very successful textile business in New York. The controlling shareholders orchestrated a freeze-out merger to render the minority shareholder, Nahal, powerless to pursue derivative claims against them, alleging corporate waste and self-dealing. When Nahal rejected the company’s buyout offer, a statutory fair value proceeding went forward.

What created buzz was the trial court’s ruling that the facts of the case militated against the application of a discount for lack of marketability (DLOM). If the reasoning behind a DLOM is that the recovery of a frozen-out, minority shareholder should be less to account for the difficulty of selling a closely held company as compared to a publicly traded company, it did not apply here because it was unlikely that the company would or could ever be sold, said the court. A liquidity risk in this situation was “more theoretical than real.” Applying a DLOM would “artificially depress Nahal’s recovery due to a hypothetical sale that will never occur,” the court found.

The parties swiftly filed post-trial motions seeking to modify or vacate aspects of the decision. The controlling shareholders particularly objected to the court’s no-likelihood-of-sale rationale. New York appellate courts have regularly applied DLOMs even where there is little likelihood of sale, they claimed. “This is because New York law is unambiguous in requiring the appraising court to assume a hypothetical sale; the willingness of the owners to sell is irrelevant.”

No retreat: The court did not retreat from its earlier position. First, it said with emphasis, “no New York appellate court has ever held that a DLOM must be applied to a fair value appraisal of a closely held company.” It reiterated that to apply a DLOM in this case would be the economic equivalent of imposing a minority discount, which New York law prohibits.

Indeed, it is the tension between the application of a DLOM, which is done in most cases but is not legally required, and the practical effect of a DLOM here serving as a minority discount, repugnant to New York courts and never allowed, that drives the court’s ruling.

According to the court, its ruling did not mean that a DLOM was never legally acceptable, which would contravene existing precedent. Rather, the decision of whether to apply a DLOM depended on what was fair under the unique facts of a case. Sound valuation principles ought to guide the court’s analysis and in this case did, but “the gravamen of the court’s valuation is fairness, a notion that … requires contextualizing the applicable valuation principles to the actual company being valued,” the court emphasized.

The question of whether there was a rationale for DLOM in fair value proceedings has become “an area of heated debate in the legal and valuation communities,” the court observed. “[M]ore compelling appellate resolution of these issues would surely be welcomed by all.”

Takeaway: This decision shows how much New York trial courts are engaging in an internal debate over the justification for a DLOM in fair value proceedings. For example, the court in Zelouf uses the AriZona ice tea case to say that liquidity risk concerns do inform a court’s DLOM analysis in contrast to what the controlling shareholders say. In AriZona, the court, in turn, used the Zelouf case to distinguish the facts of the case in front of it and justify the use of a DLOM by pointing to evidence of the company’s illiquidity illustrated by two prior expressions of interest from potential buyers.

Find an extended discussion of Zelouf International Corp. v. Zelouf, 2014 N.Y. Misc. LEXIS 5595 (Dec. 22, 2014), in the February issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw. The earlier decision, Zelouf International Corp. v. Zelouf, 2014 N.Y. Misc. LEXIS 4341 (Oct. 6, 2014), is also available at BVLaw.

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More thoughts on the BV outlook for 2015

In last week’s BVWire, we presented thoughts from some members of the editorial advisory board of BVR’s Business Valuation Update. Here are a few more comments looking back at 2014 and looking ahead to the rest of 2015.

Cost of capital: “The most significant new thought developments that caught my attention are both related to cost of capital,” says Christine Baker (Meyers, Harrison & Pia LLC). “First is the work done by Nancy Fannon and Keith Sellers,Valuation of Pass-Through Entities: Looking at the Bigger Picture,’ regarding the impact individual tax rates have on equity rates of return. I acknowledge the paper wasn’t new this year, but certainly has been getting a great deal of media time. Second is the IPCPL/IPCPM, the implied private company pricing line/model. This too has received a fair amount of attention.”

Will either of these developments gain long-term traction? “Who knows?” says Baker. “But both are based on real data that has not previously been considered in the same manner.”

Early-stage, high-tech firms: Neil J. Beaton (Alvarez & Marsal Valuation Services) offers thoughts from his perspective, which is performing valuations for early stage, high-tech companies, “The two big developments shaping valuations for these firms were new platforms for funding companies and a significant increase in the ability of founders and early employees to sell their shares before the company has a liquidity event,” he says. He’s referring to the crowdfunding platforms that emerged through the Jumpstart Our Business Startups (JOBS) Act. He’s also talking about new mechanisms for the sale of ownership interests created by some innovative law firms.

As for his outlook for 2015, he observes: “More of the same! IPOs are on the rise, oil prices are dropping, and we have a new Congress and Senate.” He continues: “China is taking off as a start-up mecca and the newly minted Alibaba billionaires can be expected to plow that new-found wealth back into new companies like we see in Silicon Valley all the time. The Indian start-up scene is also heating up as the tech economy has matured significantly into a business base of its own versus the ‘offshore, cheap labor source’ India was known for in previous years. I expect to see a lot more IPOs in India, which, of course, will spill over into the U.S. markets as competition for dollars heats up. I’m already seeing increases in average pre-money valuations (see PitchBook’s 2014 VC Overview), and that trend can be expected to continue through 2015 if the economy stays on track.”

More next week!

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Can’t find data for figuring reasonable comp? Try this.

Determining reasonable compensation for business owners can be tricky, and often you simply can’t find the data. What to do? In a recent interview, compensation consultant Mark Lipis (Lipis Consulting) gives some advice.

Good idea: “We try to find some data that is usable even if it's not perfect,” says Lipis. “We often try to come at it from several directions. For example, in one of the cases I'm involved with, we were able to find some data from a trade group.” While not perfect, it's better than nothing, he points out. “We were able to find some companies that were sort of in the same NAICS industry code that are publicly traded, so we looked at proxy data. And, because we needed to look at the compensation in context, we found some general manufacturing surveys put out by a trade association in Southern California, which has both a manufacturing cut of data and a private company cut of data. We performed three different analyses based on the best data we could find.”

The full interview with Lipis, who was the expert retained by the IRS to testify in the Aries case (Aries Communications Inc. v. Commissioner (2013 Tax Ct. Memo LEXIS 111)), appears in the January 2015 issue of Business Valuation Update (subscription required).

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BV’s Top 10 leaders

BVWire congratulates the following individuals recognized by as the Top 10 Leading Professionals in Forensic Accounting and Business Valuation for 2015-2016. They are:

  • James A. Andersen (Hemming Morse LLP);
  • Donald J. DeGrazia (Gold Gerstein Group LLC);
  • Mark S. Gottlieb (Mark S. Gottlieb, CPA, PA);
  • Roger J. Grabowski (Duff & Phelps);
  • Michael G. Kaplan (Kaplan Forensics);
  • W. James Lloyd (Pershing Yoakley & Associates PC);
  • Z. Christopher Mercer (Mercer Capital);
  • Ronald L. Seigneur (Seigneur Gustafson, LLP);
  • Kevin R. Yeanoplos (Brueggeman and Johnson Yeanoplos PC); and
  • Mark L. Zyla (Acuitas Inc.).

BVR is proud to have three of these individuals, Mercer, Seigneur, and Yeanoplos, on the editorial advisory board for its Business Valuation Update publication. Way to go, guys!

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International cost of capital data re-emerge bigger and better

It’s always been a challenge to estimate the cost of capital in non-U.S. markets because of a lack of data and tools. When Morningstar discontinued its international cost of capital products, the task got even tougher. Fortunately, there’s now a replacement resource—and it provides even more material than was available before.

Three resources in one: The 2014 International Valuation Handbook - Guide to Cost of Capital from Duff & Phelps gives you all the data that were in three separate reports now discontinued by Morningstar/Ibbotson: the International Cost of Capital Report, International Cost of Capital Perspectives, and the International Equity Risk Premium Report. Plus, the data have been enhanced, according to D&P’s Jim Harrington. “In the 2014 International Valuation Handbook - Guide to Cost of Capital, we calculate country-level cost of equity capital from the perspective of investors based in 55 countries investing into 179 countries,” he says. The old Morningstar products provided the data from the perspective of investors in only six countries, so this is “much more powerful” than what was published before.
Another step up from the old reports is that data in the D&P book are reported for all four quarters of the year. In the prior Morningstar products, data were reported as of December and March but then only for certain models. The D&P hardcover book has data for all models through December and March—plus optional semiannual updates that include data through June and September.

There are also more examples than in the old Morningstar reports. “We have lots of detailed examples in the book about how to use the data,” says Harrington, which is of “enormous importance” to appraisers. “The data is great, but appraisers need to know the proper way to use it.”

Free webinar: Join Jim Harrington on Thursday, January 15, for International Valuation Handbook: The Final Installment of the Duff & Phelps Trilogy, a free, one-hour webinar that provides a detailed look at what’s included in the new 2014 International Valuation Handbook and offers insight into how it can be leveraged by appraisers.Can't make it to the webinar? Register for it anyway and you'll receive the presentation materials and information on how to access a free recording.

For more details on the book and how to order, click here.

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Top speakers at OIV BV conference in Italy

A terrific lineup of speakers will be at the III OIV Business Valuation International Conference at Bocconi University (Aula Magna) in Milan, Italy, on January 19. The conference is brought to you by the Organismo Italiano di Valutazione (OIV), the Italian business valuation standard setter. Speakers are: Marianna Todorova (Duff and Phelps), Mauro Bini (OIV), Amanda Miller (E&Y), Mark Zyla (Acuitas), Travis W. Harms (Mercer Capital), Gilbert E. Matthews (Sutter Securities), and P.J. Patel (Valuation Research Corp.). Topics include: valuation of complex equity and hybrid instruments, quantifying the risk of illiquidity, the market participant acquisition premium, valuation of shares of dual class companies, and more.

For a copy of the program, click here. For more information, go to the OIV’s website.

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BV movers . . .

People: Cyndi Livermore joins William E. Howell, a Manchester, N.H., company, as director of business valuation … Gerald Borelli and Michele LiPuma join Lougen Valenti of Amherst, N.Y., as principals after their firms merged … Michael French is the new managing director of Wilmington, Del., firm Belfint, Lyons & Shuman, succeeding Barry Crozier, who led the firm for 21 years and will stay on as an advisor … Megan McFarland is the new office managing partner at the Hein & Associates Dallas location … Kent Reed, Murphy Business Financial Corp., was bestowed the Georgia Association of Business Brokers’ most prestigious award, The Multi-Million Dollar ClubDenny Schleper is the new CEO of CliftonLarsonAllen, succeeding Gordy Viere, who will remain as chief officer of wealth advisory … Larry Schultz is the new office managing partner at the Hein & Associates Orange County, Calif., location … Brad Shaw is the new managing director at Blue & Co. LLC and will be based out of Columbus, Ohio.

Firms: The Amherst, N.Y., firm Lougen Valenti Bookbinder & Weintraub LLP merged with Borelli & LiPuma LLPGrant Thornton UK acquired a boutique firm, Recovery Cost Auditing Group, based in Lancashire, which specializes in retrospective forensic audits in the energy and telecom industries … Two south Florida firms Mallah, Furman & Co. PA and Levin, Silvey, Zelko & Mackey PA merged on January 1 … The Long Island accounting, auditing, tax and business advisory services firm Nussbaum Yates Berg Klein & Wolpow LLP merged with a New York City practice focusing on high-net-worth clients, Want & Ender CPA PC … Two southern California firms, Vicenti, Lloyd & Stutzman LLP and Frankeberger Vausher + Co. CPAs have merged.

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CPE events

Valuations for Complex FLPs (January 27), featuring Bruce Johnson (Munroe, Park & Johnson Inc.). This is Part 1 of BVR's 2015 Special Series on Estate and Gift Valuations.

Using Regression Analysis to Value Small Controlling Interests (January 29), featuring Robert Dohmeyer (Dohmeyer Valuation Corp.) and Peter Butler (Valtrend). This is Part 1 of BVR's 2015 Special Series on Financial Modeling.

Advanced Lattice Modeling for Equity and Debt Securities (February 3), featuring Jason Andrews and John Sawyer (both with Alvarez & Marsal). This is Part 2 of BVR's 2015 Special Series on Financial Modeling.

Buy-Sell Agreements (February 12), featuring Brian Burns and Chris Mitchell (both with Dixon Hughes Goodman).

We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963
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In this issue:

Debatable DLOM

BV predictions

Reasonable comp woes

BV's top 10 leaders

International cost of capital

BV conference in Italy

BV movers

CPE events








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