March 28th, 2006
Issue #  42-2

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The BV E-Update is your complimentary source for the latest valuation court cases, plus timeless tips, information, and definitions.

April 5, 2006 Telephone Conference:

Mastering Your ESOP Valuation

Featuring Jared Kaplan , Richard May, and Robert Socol

ESOP valuations are a rich and growing area for business valuation analysts to mine. In this 100-minute telephone conference, the three expert panelists will share their years of experience in performing ESOP valuations, which hold the possibility for exceptional client service and technical development if you know the pitfalls to avoid. Participants will come away from the conference with the unique understanding when and why ESOP valuations are necessary, and how to perform them. Key topics include:

  • Who is capable of performing an ESOP valuation?
  • What elements should the appraiser always consider?
  • What drives an ESOP valuation, and how do these key drivers interact?
  • How should you memorialize the ESOP valuation?
  • Who should be responsible for the valuation?
  • What are the most frequent problems that an appraiser will encounter in ESOP valuations?

You will not want to miss this important session! Earn two interactive CPE credits for participating.

Wednesday April 5, 2006
10:00am-11:40am PST/11:00-12:40MT/12:00-1:40CST/1:00-2:40EST

For more information on this and future telephone conferences, please visit


New Court Cases

    • Tribune Co. v. Commissioner of Internal Revenue , 2005 U.S. Tax Ct. LEXIS 28; 135 T.C. No. 8 (Sept. 27, 2005)(Judge Cohen). Court weighs complex expert valuations versus “commonsense” to determine value of parent company common stock uncoupled from management authority.
    • Susan Fixel, Inc. v. Rosenthal & Rosenthal , 2006 Fla. App. LEXIS 11011 (February 1, 2006) (Judge Rothenberg). Future forecasts alone are not sufficient to support market value calculations.
    • Heaton & Eadie, P.S.C. v. Corneal Consultants of Indiana, P.C. , 2006 Ind. App. LEXIS 168 (February 8, 2006) (Judge Robb). Do claims against business appraisers fall within the statute of limitations for accountants and accounting firms?

    NEW! Click here for your complimentary case abstract of Tribune Co. v. Commissioner of Internal Revenue .

    These cases and more are available to subscribers to the BVLaw database at . Abstracts will be available in an upcoming issue of Business Valuation Update® at

BVMarketData Update

New updates to the Pratt’s Stats™ database have been posted online. 106 new transactions of privately-held businesses have been added to the Pratt’s Stats™ database, which now contains 8,330 transactions. The transactions in Pratt’s Stats™ have a median revenue of $1.63 million and a $1.60 million median selling price.

In addition to the Pratt’s Stats™ update, we have also added new transactions to the following database since the last E-Update:

  • Public Stats™ (now has 1,953 count)
  • Valuation Advisors’ Lack of Marketability Discount Study™ (now has 3,063 count)

These databases and more are available at



Fair value of customer lists common to all industry participants

Question: In the context of “fair value” for financial reporting, how do you value a customer list that contains customers that everyone has—i.e., every company within that industry has the same general customers?

Answer: This question hits a raw nerve. The SEC has recently taken an “unofficial” position that you should value all customers that are purchased based on their incremental revenue-generation capability, and you should likely look at income approaches as opposed to cost approaches.

The debate is still ongoing, however, and requires further guidance. For example, let’s say you have two apparel companies, which both sell to the same retailers. Apparel company “A” buys apparel company “B,” and in reality, the former is merely adding new brands to its portfolio. Should Company A be valuing just these added brands—or should it be valuing the customer relationships that it already has?

Generally, if you capture the brand’s intangible value, then you’ve really captured all of the income-producing capability, and the customer relationship value pales by comparison. But if you don’t have a dominant asset like a brand or a technology, but instead the purchase involves publicly available technology, for example—then your value is in your customers; and what you’ve purchased is the intangible, incremental ability to sell to these customers—even if they are the same one you’ve already got.

In sum, until the SEC changes its “unofficial” position, many analysts believe that you need to value overlapping customers if they lead to incremental revenue; after all, why would one company purchase another if it didn’t lead to incremental revenue?

Tony Aaron, ASA (Ernst & Young, Los Angeles)

Source: BVR’s February 23, 2006 teleconference, “Fair Value in Financial Reporting.” Copies of the conference and transcripts available at


BV Definition of the Week

Excess earnings method

The excess earnings method originally came about in the 1920s to compensate the owners of breweries and distilleries for the loss of goodwill that resulted from the passage Prohibition laws. Since then, the concept has grown to encompass the idea that a business may be worth something more than the replacement value of its assets, at least to the extent that it can earn more than a reasonable return on the asset value. That is the principle behind the excess earnings method, where the capitalized value of earnings over a reasonable return on assets is added to the asset value.

Source: Jones, Jeff and Trugman, Gary, Valuing the Very Small Company, presented at AICPA/ASA National Business Valuation Conference (November 2005); and Pratt, Shannon, The Market Approach to Valuing Businesses, 2d Ed., John Wiley & Sons, Inc. (2005).


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