BVWire Issue #178-2 | July 19, 2017


Advanced techniques for selecting comps from BIZCOMPS data

By way of macroanalyses of the entire BIZCOMPS database, Toby Tatum (Alliance Business Appraisal) demonstrates in a recent BVR webinar the ideal minimum number of comps to use in a valuation engagement (30). He also reveals that the use of comps from anywhere in the country is acceptable as is the use of comps from past years.

He explains why it is necessary for the analyst to make subjective adjustments to the comparable transaction's initial selling price (SP)-to-seller’s discretionary earnings (SDE) multiple to reflect the subject company's superior or inferior value relative to the theoretical average company and to adjust for the size effect. He presents five acceptable methods to calculate the average SP-to-SDE multiple from an array of comparables and three ways the analyst should never use.

Eliminate outliers: Tatum emphasizes that comparable transaction data should be adjusted to eliminate statistical outliers along with various other ways he uses inferential statistics when using the BIZCOMPS database. According to him, it is safe to assume that extremely high selling prices are not representative of transactions that reasonably comport with the definition of fair market value and, therefore, it is appropriate to eliminate them from the analysis. In his valuation reports, he includes this quote from Gary Trugman’s book, Understanding Business Valuation: “Just keep in mind that the market [i.e., comparable transactions] should represent a rational, knowledgeable buyer and not the biggest sucker who will pay the most for the property. Suckers don’t count!”

Tatum introduces Tatum's Law of Market Multiples and thereby provides mathematical proof that the selling price-to-sales revenue market multiple never yields a valid indication of a subject company's value.

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Court in Brundle case sticks to earlier ESOP liability and damages rulings

Three months after ruling the ESOP trustee was liable for causing the plan to overpay, the court had a chance to revisit its decision in the context of the trustee’s motion for reconsideration. While the court admitted to some valuation-related errors, it concluded those were nonconsequential. The most recent opinion does, however, suggest that a stronger trial presentation on the trustee’s part might have made a difference.

In late 2013, the owners of a private security company sold their company stock by way of an unusual ESOP that allowed them to buy back equity in the company and keep control of it. The independent trustee and valuator had extensive ESOP experience. The transaction has come under investigation by the Department of Labor. Two individuals filed their own suits. Only one of those suits survived.

Beta error: In its March 2017 opinion, the court agreed with the plaintiff that the trustee had engaged in a prohibited transaction by causing the plan to pay more than fair market value for the stock. Had the trustee performed a more thorough review of the financial advisor’s valuation, it would have questioned parts of the analysis and the value conclusion. The trustee should have picked up on red flags related to the reliability of management projections and the valuator’s risk assessment, reflected in the 0.7 beta, as well as the use of a control premium in its guideline public-company analysis, the court said.

Only the plaintiff’s expert had provided a comprehensive damages calculation, the court said. Lacking an alternative methodology from the trustee, the court adopted the plaintiff’s calculation with modifications. It awarded the ESOP nearly $30 million in damages.

In its post-trial motion, the trustee assigned errors to the court’s liability and damages findings. One error centered on the concept of beta, which the court initially took to mean a method “to assess the risk of [the company] relative to that of the industry overall.” The trustee pointed out that three valuation experts at trial had explained beta measured the risk of a particular industry relative to the risk of the market as a whole.

The court conceded error. At the same time, it noted its own understanding of beta was based on testimony by one of the trustee’s key people, the person “most intimately involved” in the ESOP. He had said beta was “a measure of a company’s volatility compared to the market.” That this witness had not known any better “reinforces the Court’s conclusion on liability, rather than undermining it,” the court said. The trustee was equally unsuccessful in challenging the court’s damages calculation. The trustee belatedly tried to introduce a new theory on damages that would result in a methodological dispute that should have played out at trial, “rather than afterwards,” the court said. To explore this dispute at this late stage in the litigation would require the court to reopen the fact-finding process, which it declined to do. Stay tuned.

The case is Brundle v. Wilmington Trust N.A., 2017 U.S. Dist. LEXIS 97752 (June 23, 2017) (Brundle II). A digest and the court’s opinion will be available soon at BVLaw. An analysis of the earlier decision, Brundle v. Wilmington Trust, N.A., 2017 U.S. Dist. LEXIS 35811 (March 2017), as well as the court’s opinion, is already available at BVLaw.

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New CVFI credential framework red-flags PFI

More attention needs to be paid to prospective financial information (PFI), according to David Dufendach (Alvarez & Marsal), speaking at the ASA 12th Annual Fair Value Conference in Los Angeles. In the past, appraisers have often included language in their valuation reports stating that management projections have been accepted as provided without review—something auditors have expressed concern about. Appraisers should not simply accept the projections the client provides, plug them into a DCF, and then merely apply a discount rate, he says.

Dufendach is the technical author of the financial instruments framework underlying the new Certified in Valuation of Financial Instruments (CVFI) credential from the AICPA. The “application” document for the framework includes a blue-shaded sidebar—the only one in the entire document—that states:

Important: Valuation professionals who obtain management’s PFI for use in their valuation procedures must review the PFI with the appropriate level of professional skepticism (see DF-FI sections 2.16-2.18).

The reference is to a section in the disclosure framework document that talks about having “an attitude that includes a questioning mind and critical assessment of valuation evidence.” The valuation analyst “should not presume management is biased” but shouldn’t simply accept management’s information because of that presumption. Although not completely spelled out in the document, factors and procedures to consider when preparing an assessment of a company’s PFI include, but are not limited to: a comparison of prior forecasts to actual results, a comparison of PFI to industry expectations, checking PFI against other internally prepared financial information for consistency, a comparison of entity PFI to historical trends, an understanding of who prepares the PFI and how often is it prepared, and the performance of mathematical and logic checks.

The CVFI disclosure framework has been issued in the form of an exposure draft, and comments are due Sept. 26, 2017.

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Help needed with new survey on financial instruments

Researchers at the University of Wisconsin-Madison are conducting a survey on the complexity of financial instruments and would like the input of valuation experts. Because assessing the level of complexity of various financial instruments is highly subjective, this study is designed to help researchers categorize various complex financial instruments according to both valuation and structural complexity. Please fill out the Valuation Specialist Survey, which will take between five and 25 minutes depending on the number of categories of financial instruments that you value. Your responses are strictly confidential. When you complete the survey, you will receive a $10 Starbucks gift card. The full title of the survey is The Effects of Valuation and Instrument Structural Complexity on the Preparation and Assessment of the Reasonableness of Fair Value Measurements for Complex Financial Instruments. Thanks in advance for your help!

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Senior healthcare M&A surged in 2Q17

The dollar volume of publicly announced seniors housing and care acquisitions in the second quarter of 2017 surged to $9.7 billion, a nearly 600% increase over the first quarter’s volume of $1.4 billion. This is according to new data from Irving Levin Associates. The number of announced transactions in the second quarter (75) was basically even with the first quarter (76). The dollar volume is the highest since the second quarter of 2014.

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TAF elects new BOT members

During its recent meeting, the Board of Trustees of The Appraisal Foundation elected three at-large trustees for three-year terms beginning Jan. 1, 2018: Leila Dunbar (Leila Dunbar Appraisals & Consulting), Lisa Hobart (Lisa A. Hobart LLC), and Robert W. Taylor (Virginia Commonwealth University). The Appraisal Foundation is also looking for qualified candidates to serve on the Appraiser Qualifications Board (AQB) and the Appraisal Standards Board (ASB). The deadline for filing an application is Aug. 21, 2017.

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Global BV News

Call for comments on IFRS 13—Fair Value Measurement

IASB has issued a request for comments for appraisers’ experience with IFRS 13 in order to evaluate whether the standard is working as intended and its effect on how information about fair value measurements is used. The deadline for submitting responses is Sept. 22, 2017. The board is focusing this post-implementation review (PIR) on the following areas:

  • Making disclosures more effective. This is a key area of review, in particular for fair value measurements that require significant judgement (so-called “Level 3 measurements”). Although information about Level 3 measurements is important to users of financial statements, the disclosures have often been generic and too aggregated, thus reducing the usefulness of information.
  • Prioritizing the use of quoted prices in an active market or the unit of account with regard to investments and cash-generating units required to be measured at fair value. The board is seeking additional information to supplement the work it did on the subject since the publication of IFRS 13.
  • Applying the highest and best use concept when measuring nonfinancial assets, particularly property and biological assets, at fair value. In this area, the board is seeking to understand related issues and their pervasiveness.
  • Using judgement when determining whether a market is an active market and identifying significant unobservable inputs in the fair value measurement. In this area, the board is looking to assess the challenges faced and whether further support could be helpful.

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Mark Zyla comments on new role at IVSC

In an interview with the iiBV’s Ray Moran (MG Valuation LLC), Mark Zyla (Acuitas) talked about his new role as chairman of the IVSC’s Standards Review Board. He commented on the IVSC’s plan to engage VPOs globally for increased awareness and adoption of IVS 2017. “The IVSC consists of nearly 100 member organizations from around the world,” Zyla says. “Each of our Standards Boards is active in creating awareness of IVS 2017 as well as the recently issued Agenda Consultation document. The Membership & Standards Recognition Board has taken the lead in securing the recognition of IVS 2017. Additionally, the IVSC has a very active Advisory Forum Working Group consisting of representatives of members of various VPOs who assist in creating awareness of our standards.”

Zyla also mentioned that public feedback is wanted by August 15 on an Agenda Consultation Paper on future revisions to IVS. This is part of the IVSC’s new efforts to continually evolve IVS instead of issuing completely revised standards every few years.

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Preview of the August 2017 issue of Business Valuation Update

Here’s what you’ll see:

  • Dual Valuation/Forensic Experience Is Best for Litigation Engagements (Pasquale Rafanelli, Grassi & Co.). When performing services for a litigation action, valuation experts are often called upon to perform forensic analysis as well. While many valuation professionals will decline and require the attorney to hire a separate forensic expert, it begs the question of whether or not this is in the best interest of the client.

The issue also includes:

  • Regular features: “BV News At-a-Glance/Global Perspective,” “Ask the Experts,” and “Tip of the Month.”
  • BV data spotlight: “Pratt’s Stats MVIC/EBITDA Trends,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and “Cost of Capital Center.”
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the August issue of Business Valuation Update.

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BV movers . . .

People: Jacob Adams is now a financial analyst in Valuation Research Corp.’s Chicago office … Savannah, Ga.-based Hancock Askew & Co. has admitted Allen Akins as a partner … Thomas Bailey has been promoted to principal at Bethesda, Md.-based Councilor, Buchanan & MitchellSteven Krug has joined Atlanta-based Acuitas as senior director … The Phoenix office of BeachFleischman has appointed Christopher Lutes managing shareholder … Seth Turner, supervisor at Hall, Kistler Co., in Canton, Ohio, received the Canton Regional Chambers Ystark! “Twenty Under 40” Award.

Firms: The Philadelphia Business Journal named Baker Tilly one of the “2017 Best Places to Work in Philadelphia” in the large companies category … EKS&H moved its headquarters to the six-story Denver Tech Center in Denver, joining the firm’s other offices in Boulder, downtown Denver, Fort Collins, and San Francisco … EY will add Sewickley, Pa.-based Headwaters SC … Topeka, Kan.-based Mize Houser & Co. announced the creation of the Mize Restaurant Group brand to serve the firm’s specialty of restaurants and breweries … Marks Paneth celebrated the opening of an expanded location in Parsippany, N.J., the seventh location for the New York City-based firm … Nashua, N.H.-based Melanson Heath added LaPointe, Torrisi, Stanley & Co., and LTS’s affiliate J.C. Driscoll & Co., effective July 1 … Plante Moran launched a new, Americans With Disabilities Act-compliant website at It includes all of the Southfield, Mich.-based firm’s affiliated entities … Sedgwick LLP has initiated a Securities Litigation Practice Group, to be led by partner Kendra S. Canape, at its Irvine, Calif., office … Newport Beach, Calif.-based Squar Milner will combine with Sobelman Cohen Moss & Associates of Woodland Hills, Calif. The combination date will be November 1.

Please send your professional and firm news to us at

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CPE events

Calculation or Full Valuation? What You Need to Know Now (July 20), with Jim Alerding (Alerding Consulting, LLC).

Are you preparing calculations for some clients? Jim Alerding will provide an update on the current thinking related to calculations and their place in your practice.

Quantifying Illiquidity Discounts Using Put Options: New Developments (July 26), with Stillian Ghaidarov (Houlihan Lokey).

Walk through a methodology for the application of put option models and learn how to apply your chosen model to produce consistent results in a focused session.

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In this issue:

Better comps

ESOP case


FI survey

Healthcare M&A

TAF boards

Global news

BVU preview

BV movers . . .

CPE events

LinkedIn discussions

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