BVWire Issue #142-3 | July 23, 2014


Damodaran asks: Are you valuing or pricing?

The terms “valuing” and “pricing” mean very different things but, in a recent interview with BVWire, Dr. Aswath Damodaran (Stern School of Business, New York University) points out that they get used almost interchangeably. “I think when we do that we misstate two very different concepts.” This difference is often highlighted by the sale of a recently appraised business at a price far from its assessed value.

Join the discussion: Dr. Damodaran will join BVR for an exclusive special event, Price and Value: Discerning the Difference, an Advanced Workshop, on September 10 in New York City. He will give his overview of the valuation process, but then he’ll focus on “something that we don’t spend enough time on—the pricing process.” What is it that drives the pricing process? How does this differ from the valuation process?

“I’ll use the companies I’ve been valuing for the last few years because they’re the lab experiment to show how value and price can diverge,” he said. He’ll focus on factors that affect price and how this creates a gap between price and value. “There is no question there’s a gap,” he says. “This is the core of the problem. If you are doing the wrong thing given your mission for the valuation, then you’ll come up with the wrong number.”

Your homework: In preparation for his “class,” he suggests that you review the last five valuations you did. “Think honestly about what your mission was with each of them,” he says. Were you doing a valuation for a transaction? A legal setting? Goodwill amortization? Outline the motive you had when you did the valuation. Then ask yourself: Was my mission—given that motive—to price the company or to value the company? “Look at the actual valuation that you did and see if it was consistent with your mission—and whether your mission was consistent with what you started off doing.”

Bring this all with you to his session to stimulate the discussion. “I’m not saying that everybody has the same mission,” he says. “But each of us has a mission and what I’m pushing for is to be honest about what the mission is before we start putting numbers down and drawing on rules about the right things to do.”

Space is limited: Exclusive premium seating is available on a limited basis for a select group to attend this presentation live in New York while it’s being webcast worldwide. For those who attend the live event, there will be a pre-event luncheon with Dr. Damodaran and an extended 30-minute live Q&A session. You’ll also receive a complete recording and transcript of the event.

To reserve your spot to attend in-person, contact BVR today:; (503) 291-7963 ext. 2.

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How Rule 26 protects expert draft reports in federal court

Last week’s BVWire covered a controversial Canadian ruling that curtailed counsel’s review of expert draft reports. It raises the issue of Rule 26 of the Federal Rules of Civil Procedure, applicable in U.S. federal courts. How does it protect draft reports and expert-attorney communication?

Rule 26 was amended in 2010 to simplify discovery obligations, limit disclosures, and protect the attorney’s thoughts, opinions, and mental impressions (work product). The prior version of Rule 26(a)(2) required full disclosure of “the data or other information” “considered” by the expert. Many courts interpreted that language very broadly, finding that conversations between experts and attorneys—as well as the expert’s draft reports—fell under the category of “other information.” The amendments require only disclosure of “facts or data” considered by the expert. But courts have been slow to provide guidance as to the scope of protection, leaving experts and attorneys with a sense of confusion.

Expert reports: Rule 26 (b)(4)(B) protects drafts of expert reports “regardless of the form in which the draft is recorded.” But commenters point out that there is no consensus among courts about what constitutes a nondiscoverable draft expert report. Some courts have ruled that an expert’s notes, memos, lists, and outlines are discoverable because they are not strictly speaking “draft” expert reports. Others have considered them parts of the draft, which can be in any form, and protected them. Or they have said that discoverable “facts or data” do not mean everything the expert needs to do his or her analysis.

Expert-attorney communication: The rules now protect all communication between counsel and testifying experts, “regardless of the form of the communication.” But they still permit discovery of: (1) communications related to the expert’s compensation; (2) communications that "identify facts or data that the party's attorney provided and that the expert considered"; and (3) communications that "identify assumptions that the attorney provided and that the expert relied on."

It’s clear that there is no protection for communications in which the attorney identifies facts or data the expert later relies on in forming his or her opinion. However, the rules do shield conversations about the potential relevance of those facts/data. Also, there is no protection for communications in which the attorney provides certain data or assumptions for use in the actual valuation to the extent the expert actually relied on them in preparing his or her opinion. Communications in which the attorney and expert discuss general hypotheticals using the assumptions are protected. The rules don’t protect communication between the testifying expert and someone other than counsel—e.g., communications with party employees or consultants.

Gray areas: Questions remain. For example, how much work product can the expert put in the draft? What happens when the attorney conveys facts, data, or assumptions that the expert already knows? Is this protected communication? What about an expert’s notes of communication with the attorney? Under the rules, the communication itself is protected if it doesn’t fall within one of the three exceptions, but a court may find the notes are discoverable.

What to do: Given the lingering uncertainties, experts want to be careful in their collaboration with attorneys.

  • Limit the number of draft reports. Fewer means less exposure.
  • Identify a document as a draft by stamping it “draft,” but don’t call everything a draft.
  • Limit communication with the attorney.
  • Assume all your work notes and papers will be discoverable, even if they summarize discussion with counsel.
  • Limit the need for counsel to provide facts, data, and assumptions.
  • As for written communication, encourage counsel to separate those items that simply restate facts from those in which counsel is analyzing the facts or discussing their significance.

Extra: A paper from the ABA’s litigation section provides a useful reminder of how attorneys may exploit the rules to achieve discovery. Click here for the paper.

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More scrutiny of private equity fund valuations

Expect a heightened focus on valuation practices and procedures of private equity funds, according to an article in the New York Law Journal. This is due to recent enforcement actions by the Securities and Exchange Commission, including an audit program and settlements with funds concerning alleged overvaluations. Also, investors are becoming more concerned about fund valuations.

Valuation op: For example, the article points out that institutional investors are putting more scrutiny on valuation of portfolio investments held by private equity funds in which they are limited partners. They now use interim valuations as a gauge for the fund manager’s overall selection and management of the portfolio’s investments. Also, they use these valuations in making asset allocation decisions, in co-investments by related funds, and in manager retention. Because of this, there is “potential increased interest in the retention of independent valuation firms to conduct annual or more frequent valuation of significant portfolio company investments,” says the article.

Extra: Attend a webinar, Private Business Appraisal Opportunities with Private Equity Portfolio Companies (July 23), featuring Summer Parrish (Valuation Research Corp.). This is Part 3 of BVR's Advanced Webinar Series on Valuations for Business Transactions and addresses the intersections of private business appraisal and private equity portfolio companies, including the valuation of share-based compensation granted to management in connection with a private-equity transaction and assignments related to financial reporting requirements.

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New edition of A/E valuation survey
now open

The second edition of a survey by Rusk O'Brien Gido + Partners is gathering transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries. The questionnaire analyzes the valuations of stock from actual transactions, including those between employee-owners and in ESOPs and mergers/acquisitions. The compiled data will include financial performance benchmarking data, valuation multiples for internal (minority interest) stock transactions, ESOP transactions, and merger/acquisition transactions. M&A data will include pricing data as well as data on transaction structures.

While the survey is designed to gather information on firms in the industry, valuation analysts and other advisers with industry clients can certainly participate with or on behalf of their clients. Survey participants will receive a discount on the completed study. For more information and to take the survey, click here.

Current study available: The first edition of the survey collected data from over 200 distinct stock transactions, which, along with supplemental data from publicly available sources, is now available in the A/E Business Valuation and M&A Transaction Study.

"As a third-party source of data, [the study] helped confirm that the proposed terms of our company's sale were reasonable,” says Michael S. Rolband, vice president of operations, Wetland Studies and Solutions Inc. (a Davey Company). “Having a data-driven independent assessment of the M&A marketplace was worth more than any financial analysis tool."

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BV movers . . .

People: Brent Sloan, senior director at Alvarez & Marsal Valuation Services LLC in Seattle, and Richard Eichmann, managing director of Forensic and Litigation at FTI Consulting Inc. in San Francisco, were honored with the inaugural "40 Under Forty Award" by NACVA—Consultants’ Training Institute … James Powers will succeed Charles Allen as Crowe Horwath LLP’s CEO effective April 1, 2015.

Firms: As part of Dixon Hughes Goodman’s GIVES initiative, the company recently donated over 430,000 pounds (215 tons) of food to communities in the 11 states it serves.

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CPE events

Here’s a solid lineup of BV-related CPE webinars.

The Advanced Webinar Series on Valuations for Business Transactions concludes on July 30 with Fairness Opinions, featuring John Ashbrook (FMV Opinions Inc.).

Using Closed-End Funds to Derive Discounts for Lack of Control (July 24), featuring Ray Bratcher (Trugman Valuation) and Tom Roseen (Lipper). In the January 2014 issue of Business Valuation Update, Bratcher explained how closed-end fund data can be used for minority interests in a fully marketable security. Find out more as he’s joined by closed-end fund expert Roseen. Click here for a free download of the article (login required).

Valuing Hospitals (July 31), featuring G. Don Barbo (Deloitte Financial Advisory Services) and Robert Mundy (Pershing Yoakley & Associates). In the ongoing consolidation trends in the healthcare sector, hospitals are functioning as both acquirer and acquired. Find out where the opportunities and challenges lie in this evolving segment of the healthcare market.

Advanced Workshop on Determining Volatility and Market Yield: Developing Inputs for the Valuation of Options and Debt Securities (August 7), featuring David Dufendach, Oksana Westerbeke, and Jared Hannon (all Grant Thornton). Step up your option pricing and debt appraisal games with this exclusive, intensive workshop.

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

Damodaran query

Rule 26 re: draft reports

PEF valuation alert

AE firm survey

BV movers

CPE events







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