BVWire Issue #166-3 | July 27, 2016


Call for action over discounts prompts a response

There has been a call for action for the profession to speak with one voice and eliminate the confusion over the use of discounts (see prior coverage here). One valuation expert offers up some nomenclature and—more importantly—a framework that he hopes will help in developing a common language that could be used in valuation reports.

Map it: One way to make sense of discount adjustments is to provide a road map describing the adjustment process/method used, according to Mike Smith, a senior manager in the valuation department of Baden, Gage & Schroeder LLC (Fort Wayne, Ind.). “This mapping of the adjustment process would clearly show others where the valuation practitioner made the adjustments and the extent of each adjustment. Any factor the analyst feels requires an appropriate adjustment should be listed as one of the forces impacting value.”

Many valuation reports fail to include a discussion of adjustments. Valuation standards require that the base value to which a discount or premium is applied must be specified and defined. “Unfortunately, not all business valuation practitioners take heed,” says Smith. Also, one of the complaints of using discounts is that many factors presumably represented in the discount are already accounted for in the risk, cash flow, or growth assumptions. “Adjusting the three income approach model variables is likely the purest form of adjustment and should be the first place to turn when addressing an adjustment,” he says. “But we still need a way to understand how all adjustments are knotted together.”

Smith observes that discounts have a “warm place” in the hearts of many practitioners, “but I would submit that the valuation community is doing a disservice allowing such a wide diversity of practice regarding documentation of discounts and adjustments in general,” he says. “Business valuation is a complex endeavor indeed, but a little transparency regarding all adjustments would go a long way toward educating each other, our clients, and the courts.”

Smith demonstrates his approach in an article “Adjustment Mapping and the Public-vs.-Private Company Discount Debate,” which appears in the August issue of Business Valuation Update. What do you think about this issue? We’d love your feedback.

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Delaware Supreme Court dissent blasts Chancery in option valuation case

Last year, the Delaware Court of Chancery issued a memorable ruling over a company’s valuation of options to buy some spinoff subsidiaries. The court ruled in favor of the option holders and criticized the company and its valuation experts over a “new low” in terms of “motivated” valuations. The company appealed.

Blistering dissent: The Delaware Supreme Court has affirmed the decision, but one judge has given an equally memorable dissenting opinion and did not mince words about her disapproval of the Chancery’s factual findings (Cdx Holdings, Inc. v. Fox, 2016 Del. LEXIS 334 (June 6, 2016)).

More details of the case will appear in the September issue of Business Valuation Update. An extended discussion of the case and the full court opinion will be available at BVLaw in September as well. For a digest of the Chancery’s decision, Fox v. CDX Holdings, 2015 Del. Ch. LEXIS 194 (July 28, 2015), click here.

Extra: Speaking of options, there will be a webinar today, July 27, Valuation of Options and Option-Like Instruments, with Oksana Westerbeke and Jared Hannon, who are both with Grant Thornton.

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New Delaware appraisal rights law kicks on August 1

New provisions designed to curtail the use of the appraisal remedy by dissenting shareholders in Delaware will apply to all M&A agreements entered into on or after Aug. 1, 2016. Appraisal rights will be limited to holders of $1 million or more of a company’s stock or 1% of the outstanding shares, whichever is less. Also, companies will be able to prepay the acquisition amount to dissenters and stop the interest accrual clock.

Will it work? Research reveals that the new $1 million/1% limit could reduce appraisal actions “by about one-quarter.” The new prepayment provision “is also likely to greatly reduce appraisal filings.” However, some observers believe that the new prepayments will actually spark more appraisal actions because it will solve the liquidity problems of investors who weren’t able to bring such actions before.

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Watch out for tough expanded HIPAA rules

When doing a valuation of a healthcare entity, you may receive protected patient information. When that happens, you face exposure to tough rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA)—and the penalties for violations are severe. Changes in the law have expanded the requirements for maintaining the security of patient data, which means that valuation experts are now more likely to face exposure.

Caught in the net: The Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH) significantly expanded the law to impose privacy rules beyond traditional entities such as healthcare providers and health plans (“covered entities”). Regulations under HITECH were published in January 2013, and certain provisions became effective later on. The rules now apply to a healthcare entity’s “business associates,” which can include you as an appraiser, according to Mark Dietrich, editor and contributing author to The BVR/AHLA Guide to Healthcare Industry Finance and Valuation, Fourth Edition. Dietrich wrote a new chapter in the book devoted to HIPAA and medical records in the context of valuation and litigation.

Dietrich’s analysis of how this affects valuation practices is a “must-read” for any analyst involved in healthcare valuations or litigation support, says Nancy Fannon (Meyers, Harrison & Pia Valuation and Litigation Support LLC). “The draconian penalties assessed for failure to follow HIPAA’s mandates should induce most appraisers to work their way through the complexity of these rules, and develop appropriate engagement practices involving the use of so-called protected health information (PHI) in any valuation engagement.”

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No surprise that fair value is still on PCAOB’s radar

The PCAOB has issued a staff inspection brief detailing the scope, focus, and objectives of its ongoing 2016 inspections of auditors of public companies and other issuers. Not surprisingly, fair value measurements are one of the key areas of inspection focus for the rest of 2016.

Hot seat: At the recent 11th Annual Fair Value Conference sponsored by the American Society of Appraisers and the University of Southern California Leventhal School of Accounting, George Wilfert, deputy director at the PCAOB, said that, while the number of audit deficiencies have recently decreased overall, the number of audit deficiencies regarding auditors’ testing of fair value measurements associated with business combinations has increased. Plus, there have been frequent deficiencies in evaluating impairment analyses for goodwill and other long-lived assets.

In 2016, the PCAOB plans to inspect approximately 210 registered firms that audit public companies, of which 10 are subject to annual inspection. Among the 210, approximately 60 are non-U.S. firms in 25 different countries.

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New report discusses valuation of alternative asset managers

Valuation experts are all familiar with the need for fair value measurements of the investment of hedge funds and private equity funds. But what about the valuation of the actual management entities that run these funds? That’s the topic of a new report from Houlihan Lokey, a global investment bank. The authors say: “This is likely to become a more pressing issue in the future, as the frequency of events driving the need for valuations of managers has increased—events like changes in senior members, succession planning, raising new capital at the manager level, attracting and retaining talent through equity ownership, or the outright sale of an equity stake in the manager.” The report discusses certain unique industry attributes that can have a significant impact on the valuation, such as the nature of the assets under management and the relative contribution of management and performance fees.

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Last chance to help with research on fair value estimates

The University of Wisconsin-Madison is in the final stages of conducting a survey on the role of specialists in developing and evaluating the fair value estimates used in audited financial statements. This research may help in the PCAOB’s standard setting in this regard. When you complete the survey, you will receive a $10 Starbucks gift card. Plus, you’ll be entered into a raffle for a four-night stay at a selection of top hotels and resorts.

This study is supported by a grant from the International Auditing & Assurance Standards Board (IAASB), Institute of Chartered Accountants of Scotland (ICAS), and International Association for Accounting Education & Research (IAAER) and has been approved by the Institutional Review Boards at the researchers’ home institutions.

You can take the survey if you click here. Thanks for your help with this important research!

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Global BV news:
IVSC and TAF bridge gaps in standards

The International Valuation Standards Council (IVSC) and The Appraisal Foundation (TAF) have harmonized any remaining differences between the IVSC's International Valuation Standards (IVSs) and TAF's Uniform Standards of Professional Appraisal Practice (USPAP). This is an important step toward establishing globally accepted valuation standards.

A bridge not too far: Last year, the two groups met to establish joint objectives and a long-term plan to collaborate and execute upon a memorandum of understanding (MoU) signed in October 2014. The result: A Bridge From USPAP to IVS, a newly released document that connects the two sets of standards. Appraisers using this "bridge document" will be able to develop appraisals that are compliant with both the IVSs and USPAP, keeping the core principles intact.

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Behairy brings ‘unique’ BV training to New York City August 22-25

Hamed Behairy of Dubai will conduct a four-day business valuation training course in New York City on August 22-25. The course, Company Valuation Modeling (CVM), is described as “unique,” and we asked him to tell us why. “It is unique in terms of the depth of the material, the practicality, and the usefulness,” says Behairy. “I pride myself in being able to bring all participants with different specialization and experience on a par by the end of the event. It is not easy to have a portfolio manager, a lawyer, an accountant, and even a doctor attending this program to end up at the same level by the end.”

Behairy has presented this course to hundreds of professionals in many different countries, including Hong Kong, Singapore, Malaysia, South Africa, United Arab Emirates, and Saudi Arabia. He is a CVA and a CFA charter holder who worked in the asset management industry for many years before becoming a global financial consultant, modeler, and trainer. You can read the full interview with Behairy, in which he discusses the state of the valuation profession in Dubai here.

For more information on the CVM course in New York City on August 22-25, click here.

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BV movers . . .

People: Brandon W. Harlan was elected partner at Arnett Carbis Toothman in the firm’s Health Care Services Team and is based out of the New Castle, Penn., office … Steven A. Wolf was named partner at the Virginia-based Cherry Bekaert LLP in the firm’s Litigation Support Practice.

Firms: In August, RSM US LLP will acquire Padgett Stratemann, the fourth largest CPA firm in Texas, and will increase its staff in the Lone Star State to over 700 employees and four offices … The readers of the Corridor Business Journal named the largest Iowa-based CPA firm, Honkamp Krueger & Co., as “Best Accounting Firm in Iowa’s Creative Corridor.”

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CPE events

Valuation of Options and Option-Like Instruments (July 27), with Oksana Westerbeke (Grant Thornton) and Jared Hannon (Grant Thornton).

Goodwill: Let's Get Personal (August 9), R. James Alerding (Alerding Consulting LLC) and Harold Martin (Keiter, Stephens, Hurst, Gary & Shreaves PC).

Personal Injuries: Valuing the Impact (August 10), with Jonathan Brogan (Norman, Hanson & DeTroy LLC) and Joseph DeCusati (Meyers, Harrison & Pia). This is Part 5 of BVR's Special Series presented by The Comprehensive Guide to Economic Damages.

Early Stage Companies: Mastering Valuation from Start-Up to Success (Advanced Workshop) (August 18), with David Dufendach (Alvarez & Marsal), Jason Andrews (Alvarez & Marsal), John Sawyer (Alvarez & Marsal), and Tommy Tu (Alvarez & Marsal Valuation Services).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

Discount map

Chancery blasted

Appraisal rights law

HIPAA trap

PCAOB inspections

Valuing asset managers

Fair value survey

Global BV news

BV training

BV movers

CPE events

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