BVWire Issue #141-3 | June 18, 2014


Court drills down on no-sale assumption for dental practice DLOM

A recent nasty divorce case centering on the husband’s dental practice offers up a number of interesting valuation questions, including whether the final valuation was subject to a marketability discount (DLOM) and whether there was enterprise goodwill.

The practice had two dentists—the husband and an associate dentist—as well as nine other full-time employees. In 2003, the husband received an offer for $913,000, but he declined to sell the practice, and in 2006 he signed a net worth statement that claimed the practice had a value of $1 million.

Serious noncompete adjustment: The wife’s expert used three methods—the summation of assets method, the gross revenue multiplier method, and the capitalization of earnings method—and averaged the resulting values to arrive at a recommended value. He then deducted the amount of goodwill belonging to the husband and concluded the practice was worth $678,179, not counting the entity’s debts, cash, or accounts receivable. The husband’s expert ultimately relied on an income-based approach and concluded the corporation was worth $50,000. At the same time, he explained it actually had a “deficit net worth” because debt exceeded assets. There was practically no enterprise goodwill because neither dentist had a noncompete agreement, he concluded. Moreover, based on various studies and factors specific to the practice at issue, he believed a 15% DLOM was appropriate.

The trial court said the husband’s expert supported his computation with “greater industry data” and more appropriate benchmarks and his valuation “takes into fuller consideration the debts of the practice and the value of the accounts receivable of the practice.” The wife’s expert risked overstating the goodwill of the practice “given the tenuous nature of the practice and the lack of an agreement not to compete with the other dentist in the practice.” The court gave little weight to the past offer. Interestingly, its starting point was $677,796, only $383 less than the value the wife’s expert proposed. But the court reduced the amount substantially to account for the noncompete attributable to the associate dentist: 12/21 of the total value. And, it also applied a 15% DLOM “via the Husband’s expert opinion.” By its calculation, the practice was worth $328,392.

The appeals court largely agreed with the trial court but said that under the applicable case law a DLOM was improper where there was no need or desire on the interest holder’s part to sell his interest. Since the husband expressed no intention of selling his interest in the practice, the lack of marketability did not affect its value. Consequently, it ordered that the 15% DLOM ($57,951) be added back into the value, bringing the total value to $386,343.

Splitting the baby? Jim Alerding (Alerding Consulting) points out that the value the trial court came up with actually was very close to 50% of the value the wife’s expert had determined. In fact, the court mentioned that it would try to “get as close to a 50/50 division as practically possible.” This, Alerding says, seems to be its way of doing it, and it’s not uncommon in divorce cases where courts tend to “split the baby.” He also finds the appeals court’s decision to eliminate the DLOM “interesting” because the court did not object to the DLOM percentage but only to the trial court’s failure to adhere to a “no-sale assumption.” Some states, such as Virginia, do not assume a sale but also state that the “value to the holder,” not the fair market value (FMV) standard, is controlling, Alerding explains. The trial court’s reduction in value for the noncompete attributable to the associate doctor is appropriate in a FMV setting because the buyer cannot obtain that value by purchasing the practice, Alerding adds.

Find a detailed discussion of Barnes v. Barnes, 2014 Tenn. App. LEXIS 200 (April 10, 2014), in the July edition of Business Valuation Update; the court’s opinion will appear soon at BVLaw.

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How a CEO’s divorce may affect company value

A renowned corporate governance expert, David F. Larcker, claims that, far from being a private matter, a CEO’s divorce may have a negative effect on company value. How? Larcker says the CEO’s influence may decline as a result of a divorce settlement that forces him or her to give up a substantial portion of ownership in the company. Less influence may mean less ability to make decisions. Also, a divorce is a distraction and may result in the CEO’s reduced productivity.

Most critical, “the situation” may affect his or her judgment when it comes to risk, especially when the outcome results in a sudden change in wealth. Even though boards may be reluctant to intervene barring some outrageous conduct from the CEO, they cannot afford to turn a blind eye to the situation, Larcker says.

What to do about it? Have the governing boards provide counseling or monitor performance for signs of slipping? The solution will depend on the facts and circumstances of the case, Larcker suggests, and it will involve the board and general counsel. One way to go is to be proactive and provide explicit guidelines for a CEO’s personal conduct.

Find out more about the Larcker survey here.

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Readers comment on Laidler v. Hesco

In last week’s BVWire, we reported on the Delaware Chancery’s decision in Laidler v. Hesco Bastion Environmental, Inc. The case arose out of a short-form merger (incorrectly identified as a “short-term” merger) and drew attention because of the court’s adoption of the DCCF analysis.

Readers’ comments: In its ruling, the court acknowledges its lack of familiarity with the methodology involved in a DCCF analysis. Jay B. Abrams (Abrams Valuation Group Inc.) points out that, even if the methodology is not familiar to the court, it is a familiar methodology. The DCCF “is merely a DCF with the assumption that growth in cash flow is a constant percentage after the year 1 forecast,” he says. “It is no different than applying the Gordon Model multiple to the year n forecast (where n is most often equal to 6) to calculate the PV of the reversion period, except that in the DCCF, the reversion period starts immediately. Thus, the DCCF is a DCF for an already mature firm, where there is no need to calculate the PV of Cash Flows of the first n years separate from n + 1 to infinity.”

Also, the point was made that there was no reliable market price because this was a short-form merger, but that’s not so. "There was no market simply because it was a private company,” says Gil Matthews (Sutter Securities Inc.). “In Glassman v. Unocal Exploration, it was a short-form merger squeezing out a 2% minority, but there was an active public market for the minority shares. Short-form mergers are frequently used to squeeze out publicly-traded minorities in second-stage mergers after tender offers.”

Matthews also says that “the court applied an industry risk premium in its discount rate calculation. I believe this is only the second time that the Court of Chancery explicitly used it—the other was in Del. Open MRI v. Kessler.”

The case digest, which appears in the July edition of Business Valuation Update, includes an extensive discussion of the parties’ and the court’s selection of the risk premia. The full court opinion will be available soon at BVLaw. The case is Laidler v. Hesco Bastion Environmental, Inc., 2014 Del. Ch. LEXIS 75 (May 12, 2014).

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ASB members wanted

The Appraisal Foundation is seeking candidates for vacancies on the Appraisal Standards Board (ASB). The ASB develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP). Members are appointed for three-year terms, and they may serve two consecutive terms. The deadline for completed applications is August 4, for a term that begins Jan. 1, 2015.

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Insights into valuing painting contractors

Valuation analysts who want an inside look at the painting contractor industry should read a new special report, Painting Companies: What’s Your Business Worth? The report is from BVR and American Painting Contractor magazine, a division of Columbia Books. Of particular interest to valuation experts is a discussion of the industry and company-specific factors that affect the value of a painting company. There’s also a description of three important earnings measures appraisers and business brokers consider when valuing a painting business.

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In the July issue of Business Valuation Update

Here’s what’s in the July 2014 issue of Business Valuation Update:
  • How Probability Affects Discounts for Lack of Marketability (Marc Vianello, CPA, ABV, CFF). The author presents a methodology for determining DLOM that combines probability-based time and price volatility variables in conjunction with the formula put forward by Francis Longstaff. Special: Subscribers have free trial access to a DLOM calculator that embodies this methodology.
  • Choice of Data Is Critical in Valuing Franchises (BVR Editor). Relying on rules of thumb is problematic when valuing franchises, so the selection of research data is critical. An example is given.
  • Current Valuation Trends and Data for the A/E Industry (BVR Editor). Latest M&A trends, new valuation research data, and a focus on a special risk element for firms in the architecture, engineering, and environmental consulting industry.
  • We Can Do the Work. The Question Is: Can We Get the Work? (Rod P. Burkert, CPA/ABV, CVA). Building the practice is the top challenge on the minds of business valuation and forensic litigation services experts.
  • A ‘’ Is a ‘’: What’s the Value of a Domain? (BVR Editor). Important factors that influence the value of an Internet domain name.

To read these articles—plus a digest of the latest court cases—see the July issue of Business Valuation Update (subscription required).

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BV movers . . .

People: Bruce Gold, a principal at Abrams Little-Gill Loberfeld PC, has been appointed as a member of the 2014-15 board of directors of the Massachusetts Society of Certified Public AccountantsJ. Michael (Mike) McGuire is the CEO-elect of Grant Thornton and will succeed Stephen Chipman on Jan. 1, 2015 … John Mlynczyk has been promoted to partner at Kernutt Stokes of Eugene, Ore.

Firms: CohnReznick LLP and Boston-based Ercolini & Co. will merge firms on June 30 … Kennedy and Coe LLC will merge with Chico, Calif.-based firm, Matson and Isom, scheduled to be complete by Jan. 1, 2015 … Ryan LLC of Dallas has acquired Altus International, a Dutch firm providing transfer pricing, business restructuring, and valuation expertise to companies around the world … Boyum & Barenscheer CPAs of Minneapolis has acquired Peterson, Peterson & Associates CPAs.

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CPE events

Valuing Urgent Care Centers (June 24), featuring Elliot Jeter (VMG Health). Find out where the opportunities and challenges lie when the fastest-growing segment of the healthcare economy inevitably meets the ongoing trend of consolidation.

Valuing Staffing Agencies (June 26), featuring Mandeep Sihota (Citrin Cooperman). With some of the lowest barriers to entry of any business and being highly susceptible to changes in the labor market, staffing agencies are particularly difficult to value.

Measuring Attrition in Estimating the Remaining Useful Life of an Asset (July 8), featuring Raymond Rath (GlobalView Advisors). Cash flows are immortal; underlying assets are not. Find out how to determine when intangible assets will stop contributing and how to measure their attrition.

The Advanced Webinar Series on Valuations for Business Transactions is coming. In July, this four-part series, curated by Craig Jacobson (Citrin Cooperman), addresses the appraisal opportunities and challenges that intersect with business transactions. Join our expert faculty in each of these webinars to learn how the economic, regulatory, and political environment is changing these common valuations.

Solvency Opinions (July 9), featuring Jacobson and Stephen Selbst (Herrick Feinstein).

Opportunities and Variations between Private Business Appraisal and Appraisals for Transactions (July 16), featuring Jeff Tarbell (Houlihan Lokey) and Jacobson.

Private Business Appraisal Opportunities with Private Equity Portfolio Companies (July 23), featuring Summer Parrish (Valuation Research Corp.).

Fairness Opinions (July 30), featuring John Ashbrook (FMV Opinions).

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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:

No-sale assumption

CEO divorce

Feedback on Laidler

Join the ASB

Painting value

July BVU

BV movers

CPE events




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