July 27, 2011 | Issue #106-3  

'Minority premium’ model may not comply with FMV standard

The recent BVWire item, “New model says any fractional discount above 30% merits serious consideration and support” inspired Robert Buchanan (PCE Valuations) to write: “‘Minority Premium’?  Really?” in PCE’s newsletter All About Value. “Much of the logic behind the model and the theory are valid in a world where one considers specific buyers,” says Buchanan. “However, when applying Fair Market Value (FMV), the theory quickly disintegrates into an attempt to ignore the proper standard of value.

“Even without exploring the empirical market data which suggest fractional interest discounts are very real, the ‘minority premium’ theory is only possible by ignoring the FMV standard of value,” Buchanan adds. But, “because we can’t ignore the FMV standard, there is no ‘minority premium’ outside of a "strategic transaction,’” he concludes.

Look for continued discussion of the minority premium model as related to the determination of fractional interests in a future Business Valuation Update. In the meantime, add to the debate and send your comments to the BVR editor.

Dental practice valuations get drilled in court

Over the past few months we’ve added a surprising number of cases involving the valuation of dental practices to BVLibrary and BVLaw. The courts have considered the value of goodwill, the requirements of qualifying a small dental practice ESOP, and an appraiser’s credentials and credibility in cases such as:

  • In re Marriage of Bruns, 2011 WL 237969 (Iowa App.)(Jan. 20, 2011)(unpublished):
    • Divorce court confirms value of dental practice, excluding goodwill, is midway between a broker’s value and a BV expert’s.
  • Hollen v. Commissioner, T.C. Memo. 2011-2 (U.S. Tax Ct.)(Jan. 4, 2011):
    • Tax Court confirms disqualification of small private practice ESOP for failure to qualify with certain administrative regulations, including appraisal by an "independent" and "qualified" appraiser.
  • Rhodes v. Rhodes, 2011 WL 80222 (Miss. App.)(Jan. 11, 2011):
    • Appellate court confirms "bright line" rule that all goodwill, whether enterprise or personal, is excluded from the valuation of a dental practice (and any other business) in divorce.

Be prepared to defend your value: Pre-order BVR’s Guide to Valuing Dental Practices by Stanley Pollock (National Business Valuation Group) and other top experts. Scheduled to ship in August, the Guide details the mature, multi-method process of dental practice valuation and the qualitative factors that go into the appraisal. 

Has the Tax Court become too valuation-savvy?

An estate reported its 41.1% limited partnership (LP) interest in a family owned, timberland holding company at just over $12.6 million; the IRS said it was worth closer to $36 million. In finding that the “correct” value of the LP interest was roughly $27.5 million, the U.S. Tax Court (J. Morrison) held:

  • The discounted cash flow (DCF) analysis by the taxpayer’s BV expert was better overall, because he extrapolated cash flows from the five prior years instead of the most recent and he pointed out the internal inconsistencies in the IRS expert’s DCF. But he also tax-affected the projected cash flows while also using a pre-tax rate of return to discount them to present value, an inconsistency the court found “problematic.”
  • Three out of the four components that the taxpayer’s expert used to build a discount rate were good (risk-free rate, beta-adjusted ERP, small stock ERP), but his partnership-specific risk premium was too high, given standard portfolio investment theory, resulting in a “correct” rate of 16.25%, the court said. This nearly equaled the 16.22% rate posited by the IRS expert, but the court expressly rejected his method (risk-free rate plus small stock ERP).
  • Since the taxpayer’s expert failed to rebut the IRS expert’s contention that pre-IPO studies overstated the discount, the court accepted the latter’s 25% DLOM (versus 35% for the taxpayer).
  • Yet, even though the experts differed by only 10% on weighting the cash flow method (30% for the taxpayer vs. 20% for IRS), the court more than doubled the weighting to 75%, based on a 75% probability that the partnership would have kept going rather than liquidating. The only cited authority: a 1995 law review article that states “the entire valuation process is a boundless subjective inquiry,” requiring the court to make numerous “guesses or assumptions about the future.”

The court also rejected the guideline public company method used by both experts (for poor comparables) and three hybrid methods used by the taxpayer’s expert, giving only their net asset values (NAV) the remaining 25% weight. Read the entire digest of Estate of Giustina v. Commissioner, T.C. Memo. 2011-141 (June 22, 2011) in the September BVUpdate; the Tax Court’s opinion will be posted soon at BVLaw.

Very short holding periods could support substantial DLOM, new study says

In his article “Should Substantial Discounts Apply to Very Short Holding Periods?” (Trusts & Estates, July 2011) Aaron M. Stumpf (Stout Risius Ross) describes his firm’s (SRR) proprietary Restricted Stock Study and how it can reasonably support applying substantial discounts for lack of marketability (DLOM) to investments that lack liquidity over a relatively short holding period. (Note: subscription required to access full article.) The study involves transactions from September 2005 through February 2010— the years before and after the most recent changes to Rule 144.  

SRR studied this period “to quantify how this change impacts discounts as well as to analyze the effect of certain company-specific factors on discounts,” explains Stumpf.
“We think that a discount study involving short holding periods is useful in the context of valuing closely held minority interests in which a liquidity event is imminent, such as a sale of the company or a pending initial public offering.” In addition to Stumpf’s article, read “A Preliminary Look at SRR’s Restricted Stock Study” on the SRR website.

What publications do business appraisers read?

According to 2011 BV Firm Economics and Best Practices Guide, more BV appraisers read the BVWire than any other professional periodical (see table below). (However, since the BVWire distribution list was used to collect responses for the survey the results may be biased.) The leading paid periodicals are the ASA’s Business Valuation Review and BVR’s BVUpdate:

Which business valuation journals, publications, or blogs do you read?

BVR’s BVWire


Business Valuation Review


BVR’s Business Valuation Update


Value Examiner (NACVA)


ASA BV E-Letter


Valuation Strategies (Thomson Reuters)


Aswath Damodaran's Musings on Markets blog


This is by no means an inclusive list, and respondents mentioned many other informative publications: CPAExpert, WMA’s Insights, Financial Analysts Journal, Chris Mercer’s blog ValuationSpeak, Business Appraisal Practice (from the IBA), and many more.

Ten reasons why brand valuation is important to business owners

The corporate brand is probably the least understood asset in most companies, yet it can be one of the greatest tools to building corporate value,” says James Gregory (CoreBrand) in his article, “Ten Reasons Brand Valuation Matters for Boards.” Valuation practitioners can use his “Top 10” list to educate business owners on the potential value of their corporate brand(s), which can:

  • Legitimize investment
  • Provide an objective measure of effort
  • Create accountability
  • Align leadership
  • Identify growth opportunities
  • Predict market shifts
  • Identify competitive opportunity and advantage
  • Inform M&A or strategic alliances
  • Create licensing opportunities, and
  • Help define the value of other intangibles. 

Fine-tune your intangible value analysis:  On September 20th Mary Adams (I-Capital Advisors) will lead the BVR webinar “Analysis of the Intangible Drivers of Company Value.” In this 75-minute program, Adams will cover what every business valuation analyst needs to know in our increasingly knowledge-based economy.

Search over 20,000 M&A deals with one click

Subscribers to Pratt’s Stats and Public Stats have long been able to search private sold businesses and public sales without commingling the summary results: but now, with recent changes to the system, users can toggle back and forth between the two databases with one click.  For instance, if you’re looking for information for a company in the top seven industry subdivisions covered in Pratt’s Stats and Public Stats (business services, eating places, miscellaneous retail, personal services, depository institutions, chemical and allied products or measuring devices), you’ll be amazed at the number of results. You can also search by any criteria—keyword, revenue range, industry name, SIC code, profitability margins, company name (and more)—and instantly get:

  • Financial details on close to 20,000 closed business sales
  • 65-88 data points for every deal, including 13 financial ratios and 6 valuation multiples
  • Easy toggling between private and public targets
  • Complete income statements and balance sheets
  • Details on selling terms and non-compete agreements
  • Explanatory notes when available
  • Direct link to original source documents, for easy retrieval and verification of SEC filings (for all deals in Public Stats and SEC-sourced deals in Pratt’s Stats)

For more information click here; or contact a BVR sales team member at info@bvresources.com or 503-291-7963, ext. 2.

We’ve also just updated one of our most popular free downloads: How to Use Transactional Databases for M&A, 2011 Update, which provides exhibits that show:

  • How to prepare tables of valuation multiples and select multiples to apply to a subject company’s financial data
  • Equity and invested-capital multiples computed by each database
  • Quantity of transactions in each database, sorted by sale price
  • Sample transaction reports from each database

Click here for the free download.

A season filled with CPE Opportunities

Join Michael Crain (Financial Valuation Group) and William Kennedy (FTI Consulting) this Thursday, July 28th for “The Diminishing Size Effect and Link to Liquidity Risk,” a BVR webinar that addresses the observed evaporation of the size effect (based on empirical observations) and what its disappearance will mean for the valuation process.

Note the new date for “Lost Profits Damages in Medical Practices,” which will now run on Friday, August 5th.  The seventh installment of BVR’s Online Symposium on Healthcare Valuation will feature Mark Dietrich and Jim Lloyd (PYA) discussing the many challenges when compounding the calculus of lost profits damages with medical practice valuation.

BVR’s next Online Symposium series will focus on Litigation and Economic Damages, beginning September 13th with “Working with Financial Experts,” featuring Tim Devlin (Fish and Richardson) and William Marsden (Fish and Richardson. Curated by Nancy Fannon (Fannon Valuation Group) and Jonathan Dunitz (Friedman Gaythwaite Wolf & Leavitt), co-editors of The Comprehensive Guide to Lost Profits Damages for Experts and Attorneys, the Symposium will run through 2012 and feature the best intersection of BV and legal minds on determining patent damages, qualifying BV discovery and evidence, and more. For a complete listing, click here. CPE credits are available for all professional programming.


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Copyright © 2011 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by
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The Diminishing Size Effect and Link to Liquidity Risk
July 28, 2011
10:00am - 11:40am PT
Featuring: Michael Crain and William Kennedy

Lost Profits Damages in Medical Practices
Part 7 of BVR's Online Symposium on Healthcare Valuation
August 5, 2011
10:00am - 11:40am PT
Featuring: Mark Dietrich
and Jim Lloyd


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