BVWire Issue #177-3 | June 21, 2017


Minnesota court rejects DLOM in major buyout case

A Minnesota district court recently ended (at least for now) a minority owner’s long struggle to sell her interest in a well-known Minneapolis family business. The case featured prominent valuators and a judge well versed in valuation jurisprudence, and it adds another jurisdiction’s view on the use of the marketability discount in fair value proceedings. This is a major opinion in terms of appraisal jurisprudence.

The flashpoint was three Lund entities, including a chain of upscale grocery stores operating in the Twin Cities’ area under “Lunds & Byerlys,” a related management company, and a real estate holding company. Kim Lund, one of the founder’s four grandchildren, filed suit in 2014 against her brother Tres, the only family member directly involved in running the business, as well as the Lund companies. (All siblings own a 25% interest in the family fortune.) In October 2016, the court issued a buyout order. The latest stage was a trial to determine the fair value of the three companies.

‘Tailored’ valuations: Most of the value was in the grocery-related businesses. Both experts used income and market approaches for their calculations. The court said the discounted cash flow analysis was the only appropriate method. In what has become a familiar scene, the opinions produced a significant value gap even though the appraisers applied a similar analysis to the same data. According to the court, the experts’ disagreements as to almost every input and assumption made it “abundantly clear that their valuations are tailored to suit the party who is paying them.” Both opinions were compromised, the court decided, and performed its own DCF. The plaintiff expert’s analysis suffered from the expert’s focus on national trends and his ignoring the Lund entities’ unique challenges, including the local competition and opportunities. The result was an overly optimistic view of the companies’ future, the court said. The plaintiff’s expert determined the Lund companies were worth $321.6 million, which ultimately left $76 million for the plaintiff’s share.

The court criticized the defense expert for undervaluing the companies by factoring certain estate tax and pension fund liabilities into the cash flow projections, thereby “dramatically deflating available cash during the projection period.” The analysis also did not give due consideration to a hypothetical sale, and the expert understated the company’s ability to hold up against increasing competition, the court said. He arrived at a combined value of $91.3 million, which put the plaintiff’s interest at $21.3 million.

The defense expert also applied a 10% DLOM, ostensibly to prevent an unfair transfer of wealth to the plaintiff. Minnesota law allows a DLOM “in extraordinary circumstances.” The court rejected the claim, noting there was no evidence that the plaintiff would receive a price above what the market would pay for her interest. The court further pointed out that all along the plaintiff had been open to selling to an outside buyer and had tried to “engage in meaningful dialogue about an exit strategy.” She should not be penalized for her siblings’ unwillingness to do so.

‘Prevailing party’: The fair value of all three Lund entities was $191.5 million, and the plaintiff’s share was worth $45.2 million, the court found. In concluding, it mentioned the costs of this long dispute to the parties but said it would “not attempt to divine or explain the complex family dynamics at play here.”

Considering past history, a challenge to the decision seems very likely.

Janel Dressen (Anthony Ostlund Baer & Louwagie P.A.), the attorney for the plaintiff, noted that the court expressly found Kim Lund to be the "prevailing party" in awarding her over $45 million, plus court costs for her ownership in the Lund companies. The award is $24 million more than the companies claimed Kim’s interest was worth, Dressen points out. Just as important, the court removed Tres Lund as Kim’s trustee. The outcome confirms Minnesota’s long-standing protection of family business owners from unfair treatment, Dressen states.

The case is Lund v. Lund, 27-CV-14-20058 (J. Bernhardson) (District Court, 4th Judicial District, Hennepin County, Minnesota) (June 2, 2017). A digest of the decision and the court’s opinion will be available soon at BVLaw.

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Different BV standards do not conflict

A casual observer may look at the various business valuation standards different organizations issue and get the idea that they are at odds with each other. But that is not the case.

New analysis: All of the standards are essentially addressing the same issues and do not conflict with each other, according to a new side-by-side analysis of the five sets of North American and three sets of international standards. A chart that compares the North American standards was presented at the annual conference of the National Association of Certified Valuators and Analysts (NACVA). The authors of the chart are Mark Hanson (Schenck SC), Mark Kucik (The Kucik Valuation Group LLC), and Carl Steffen (WSRP LLC). Hanson is the incoming chair of NACVA’s standards board, and Steffen is the outgoing chair.

Of course, the standards have some subtle differences, but the principles are very close. Where the chart shows differences, it can be interpreted as being covered in one of the other standards but worded a little differently. Because of these nuances, practitioners still need to read and interpret what the different standards say about a particular aspect of practice in order to be in compliance.

The Business Valuation/Appraisal Standards Comparison Chart compares the standards NACVA, IBA, AICPA, ASA, and USPAP promulgated. The authors are finalizing a similar chart of the international standards (IVS, Canada, and RICS).

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Avoid the hindsight trap in a bankruptcy valuation

The use of hindsight is an issue with most all valuations, but it’s particularly controversial in a bankruptcy context. This is because everybody knows what actually happened to the debtor company (it filed for bankruptcy protection), so the tendency to use hindsight is quite common, points out Robert Reilly (Willamette Management Associates). He cautions that valuation analysts who do bankruptcy-related assignments should expect their work to come under a great deal of scrutiny because most of these engagements are done within a litigation or some other adversarial context. One area of potential trouble is the use of hindsight.

What to do: Most bankruptcy valuations use a retrospective valuation date because a specific historical event triggered the distress, such as a dividend payment or a financing transaction. There is usually controversy over when the actual debtor company events would have come to light. The courts seem to adopt the known or knowable rule, Reilly says. Therefore, the analyst should consider only that information that was known or knowable as of the time of the valuation date.

Other issues have emerged that analysts will encounter when performing a valuation in a bankruptcy context. They include income tax effects on debtor company value, the cash flow test within a solvency analysis, using the market approach in an inactive market, and more. During a recent BVR webinar, Reilly offered his advice on how to handle these issues.

Extra: Two new resources of note: A Practical Guide to Bankruptcy Valuation, 2nd edition, by Reilly and Dr. Israel Shaked, and Admitting Expert Valuation Evidence Before the U.S. Bankruptcy Courts,by Stan Bernstein, Susan H. Seabury, and Jack F. Williams.

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BV firms increase billing rates

Six in 10 business valuation firms have raised their billing rates, according to The BVR Business Valuation Firm Economics & Best Practices Guide, which is based on a 2016 survey. Of all firms (including those that did not raise fees), the business valuation profession increased its rates 5.2%.

The guide is the most comprehensive analysis of business valuation firm best practices in financial management, marketing, human resources and compensation, and professional and ownership standards found anywhere. Some specific questions answered include:

  • What are the top specialty valuation areas?
  • What is the median salary for staff at business valuation firms?
  • What is the median revenue for business valuation practices?
  • What is the most popular private-company transaction database?

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Damodaran talks to Google about BV

A very interesting and entertaining video of Professor Aswath Damodaran (Stern School of Business, New York University) giving a talk to the folks at Google is about the value of storytelling when constructing valuations. “In a good valuation, the numbers are bound together by a coherent narrative, and storytelling is kept grounded with numbers,” he says. This is such an important topic that he devoted his last book to it: Narrative and Numbers: The Value of Stories in Business.

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DLOM for controlling interests at ASA’s 2017 Advanced BV Conference

Do you take a discount for lack of marketability (DLOM) for a controlling interest in a private company? Some do, and some don't. There continues to be a debate over whether a 100% equity ownership interest in a privately held company is less liquid than the underlying publicly traded stock data upon which the value is calculated.

Learn more: BVWire will be attending ASA’s 2017 Advanced BV Conference in Houston October 7-10, and one session on our radar is Evidence of DLOMs for Controlling Interests, to be presented by Ronald DiMattia (Corporate Value Partners Inc.). He has found that empirical research related to merger arbitrage could be helpful in assessing a DLOM associated with controlling ownership interests. Will this settle the debate over this issue? We’ll see!

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Explore the world of M&A July 19-21 in Chicago

Business valuators, attorneys, investment bankers, PE investors, and others will all come together in Chicago July 19-21 for the AM&AA 2017 Summer Conference. This is your chance to hear the insights of deal-makers and how you fit into the picture. The AM&AA is the Alliance of M&A Advisors, which will host its famous Deal Bash event on Wednesday July 19: three hours of networking tabled by screened middle-market intermediaries/investment bankers, all bearing deals and transaction opportunities.

Special discount: BVR has arranged a 10% discount for BVWire readers. Just use the code “BVR” when you register.

Extra: Before the conference, the AM&AA will conduct the first in a series of intensive day-and-a-half sessions it calls the M&A Practice Series. This first one will be Best Practices to Manage and Grow Your M&A Business, and it will be July 18-19 at the same location. (Note: The BVR discount code does not apply to this preconference event.)

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Global BV News

‘Unlocking the Investment in Intangible Assets’

This is the title of a new discussion paper from the European Commission designed to advance analysis and measurement of intangible assets for policy formulation. The paper argues that intangible assets are at the core of what makes firms competitive and are thus vital for productivity and economic growth. It notes that the investment gap between the EU and the U.S. may mask a higher underinvestment with regard to intangible assets in Europe. One of the recommendations to increase investment in intangible assets is to develop standards for the valuation of such assets.

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IVSC seeks board members re: financial instruments

Would you like to help guide the development of international valuation standards for financial instruments? The International Valuation Standards Council (IVSC) is taking applications for members for its new Financial Instruments Board, which will function alongside the Tangible Assets Board and the Business Valuation Board. The IVSC is also looking for supplemental members for its Standards Review Board. The deadline for applications is July 1, 2017.

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BV movers . . .

People: David Hern is now a director in Alvarez & Marsal’s Atlanta offices in the Valuation Services department … Houlihan Lokey announced several additions to its Tech+IP Advisory practice, with John Hudson joining as a director and Scott Womack and Brent Reynolds arriving as vice presidents. Hudson and Womack will work in Atlanta and Reynolds in Houston … Keith Farlinger will succeed Martin Van Roekel as CEO of BDO International, effective November 1 … Heather Meyer has joined Capital Valuation Group of Madison, Wisc., as an analyst … Jeffrey Weiner was named chairman and CEO of New York City-based Marcum. David Bukzin was named vice chairman.

Firms: The Kearney, Neb., office of McDermott & Miller will remain independent and operate under the name KSO CPAs + Advisors going forward. Three other McDermott & Miller offices in Nebraska have been merged into Lutz, as mentioned in BVWire’s BV Movers back in February … The New York State Society of CPAs announced the relaunch of, formerly limited to NYSSCPA members or subscribers but now open to all users … Owensboro, Ky.-based Riney Hancock CPAs received a 2017 When Work Works Award for workplace practices from the Society for Human Resource Management … The Indiana Chamber of Commerce named Sikich one of the best places to work in Indiana for the fifth consecutive year … Fort Myers, Fla.-based Wiltshire, Whitley, Richardson & English has added McGee-CPA, also of Fort Myers, effective June 1.

Please send your professional and firm news to us at

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CPE events

Restaurant Valuation: Industry Segments, Trends and the Impact of Real Property (June 22) with Franz Ross (KeyBank).

Tour de Value: 6 Experts Explore the Global Valuation Landscape (July 11) with John Barton, John Hawthorne, Raymond Rath (GlobalView Advisors), Andrew Strickland, Jeffrey Tarbell (Houlihan Lokey), and Mark Weston.

Valuing a Business with BIZCOMPS: Considerations, Tips and Advanced Methods (July 13), with Toby Tatum.

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

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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In this issue:

DLOM nixed

Standards update

Bankruptcy tip

BV fees up

Google learns

100% interest discount

Explore M&A

Global news

BV movers . . .

CPE events

LinkedIn discussions

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