Draft expert reports will no longer be discoverable
A year ago, BVWire™ reported on proposed changes to Rule 26 of the Federal rules of Civil Procedure that would apply the work-product protections of Rule 26(3)(A) and (B) to drafts of expert reports and expert-attorney communications. Exceptions would permit discovery of communications regarding expert compensation and the facts, data, and assumptions on which the expert relied in forming his or her opinions.
The most recent status update offers encouraging news: Encouraged by overwhelming support from trial lawyers and bar associations, the U.S. Judicial Conference approved and submitted the proposed rule changes (along with other amendments to civil, appellate, and bankruptcy rules) to the Supreme Court. "Lawyers and experts take elaborate steps to avoid creating any discoverable record and at the same time take elaborate steps to attempt to discover the other side’s drafts and communications," the Judicial Conference explained in its report to the Supreme Court. "The artificial and wasteful discovery-avoidance practices include lawyers hiring two sets of experts—one for consultation, to do the work and develop the opinions, and one to provide the testimony—to avoid creating a discoverable record of the collaborative interaction with the experts." The Supreme Court will most likely ratify the amendments by May 1st and submit them to Congress. Unless Congress rejects the rules, they will take effect on Dec. 1, 2010.
Med practice valuations still plague appraisers—and
A trio of new divorce cases highlights the constant challenge of appraising medical practices, everything from doctors who won’t disclose their finances to those who insist their opinions should determine value. In Garcia v. Garcia (Fla. App., Jan. 20, 2010), the husband’s expert argued for a strict application of the buy-sell agreement, which would have limited his share in a successful hematology practice to a mere $45,000—compared to the wife’s expert, who used a net asset value to appraise it at $900,000. At the very least, the husband argued, the restrictive buy-sell should considerably discount the NAV (but he lost both arguments on appeal).
Or consider Amaraneni v. Amaraneni, (La. App., Feb. 12, 2010), in which the doctor claimed his interest in an urgent care clinic had no value apart from goodwill attributable to his professional qualities. But he failed to provide any financial documentation to the court-appointed expert; at deposition, he was similarly “vague” and un-responsive. His name was on the wall but the clinic wasn’t named after him. A manager supervised all the operations and staff—and the expert apportioned all goodwill to the enterprise, also confirmed on appeal.
Finally, in Dickert v.Dickert, (S.C., Jan. 11, 2010), the trial court valued the husband’s successful dental practice at $360,000, including over $255,000 of “enterprise goodwill.” In an expedited appeal to the S.C. Supreme Court, the husband argued that state law precluded any consideration of goodwill in a professional practice, due to its speculative nature. The wife claimed the current majority rule on enterprise values was the better law, but the court disagreed, finding the goodwill asset “too intangible” to support an accurate valuation. (All three case digests will appear in the April 2010 Business Valuation Update™.)
What do you think? What weight should appraisers give a restrictive buy-sell when valuing medical practices? How do you handle a doctor who won’t provide adequate disclosures or who boasts that all value is personal? And how do you go about convincing a court that any goodwill value is accurate and credible? For the answer to these and more questions—including the impact of current healthcare reform, coding and regulatory updates, and the constant question of reasonable compensation—turn to BVR’s just-released Guide to Physician Practice Valuations, by Mark Dietrich and other leading experts in the field.
FASB/IASB may now require sensitivity analysis
In their meeting last Wednesday (Mar. 24), the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced it will consider a requirement to provide sensitivity analysis about Level 3 fair value measurements at a future meeting. The IASB outlines their current position on sensitivity analyses here.
As Josh Cashman (Intrinsic Valuation) wrote in the BVUpdate™ (Jan 2010), valuation reviewers can use sensitivity analysis as they attempt to establish the materiality of fair value issues in financial reporting.
Here are two examples illustrating the use of a sensitivity analysis from Josh:
- Valuation reviewers asked Intrinsic to create a traditional data table in their Step 1 goodwill impairment analysis using a discounted cash flow approach. Intrinsic identified widely disparate values based on slight adjustments to discount rates. Ultimately, they found the impact of minor adjustments resulted in far-reaching outcomes, such as impairment or no impairment.
- A Monte Carlo analysis was performed to highlight the relative impact of assumptions about contingent liabilities associated with anti-dilution provisions attached to series preferred shares under EITF 07-5.
The IASB assumes that a sensitivity analysis disclosure, at least for financial instruments, will be proposed. What the boards must decide is whether the disclosure requirement will be converged with the fair value measurement standard or in a different standard.
Join the debate: Free webinar on the
Butler Pinkerton Calculator
In business valuation, innovation often breeds controversy. Such is the case with the Butler Pinkerton Calculator (BPC), a powerful tool for determining company-specific risk premiums (CSRPs) and total costs of equity (TOCEs) for guideline publicly traded companies through empirical data. In a letter to the editor of BVUpdate (Feb. 2010) Gary Trugman remarked: “I do not recall ever seeing so much controversy as I have seen written about the [BPC]. Where would we be today as a profession if such controversial topics and theories did not emerge regarding treatment of built in gains taxes, pass-through entity taxation, guideline company-control or minority, etc.?”
Trugman and BPC creator Peter Butler will address these controversies head on in “The Butler Pinkerton Calculator: Come and See What All the Hoopla is About,” a free, hour-long webinar hosted by BVR on Wednesday, March 31. In their presentation, the two experts will showcase the proper use of the BPC and discuss the current major concerns about total beta and its applications.
For those on either side of this issue or even the curious, the presentation begins at 10am PT/1pm ET. Click here to learn more or to register for free.
Expert insights on valuation and bankruptcy
We’ve just posted numerous new articles from Insights, the esteemed valuation quarterly published by Willamette Management Associates and provided exclusively to subscribers of BVResearch. The new content includes special-focus articles on bankruptcy and reorganization analyses by noted Willamette experts Robert Reilly, Charles Wilhoite, and:
- Financially Troubled Company Purchase/Sale Transaction Structure Issues by Scott Cobb and Nguyen “Wen” Ho.
- Financial Adviser Procedures Related to Bankruptcy-related Solvency Opinions by Katherine Gilbert.
- Debt is the New Equity: How Private Equity Funds Will Sponsor Buyouts Through Chapter 11 by Jonathan S. Henes, Esq., Kirk A. Radke, Esq., and Christopher T. Greco, Esq.
- Bankruptcy-related Valuation and Financial Advisory Services by Nguyen “Wen” Ho and Scott Cobb.
- Ponzi Schemes and Clawbacks: Investors Pay Twice for the Crimes of Others by John J. Monaghan, Esq., Richard E. Lear, Esq., and Diane N. Rallis, Esq.
- Section 409A Considerations Related to the Grant of Closely Held Corporation Employee Stock Options by Robert F. Reilly.
- Valuation of Debtor Corporation Intellectual Property During a Distressed Economy by Robert F. Reilly.
- Income Tax Issues Related to the Financially Distressed S Corporation by Jin Wang.
Finding comparable public companies just got faster
The guideline public company method takes time—sorting companies from Yahoo! Finance or other sources, building spreadsheet templates that need to be adjusted and quality checked, and studying each comparable to make sure they match your target company. BVR recognizes that appraisers need to save time on this approach to keep their engagements profitable, so we’ve partnered with PitchBook to create the PitchBook/BVR Guideline Public Company Comps Tool.
The tool allows appraisers to quickly identify comparable companies from the EDGAR database based on the full range of criteria, such as SIC and NAICS codes, keywords, size, profitability, comparable financial ratios, and financial data. Single companies can be added and deleted from the set as further research is completed. Easy coefficient of variation and other ratio analyses highlight which metrics are the best indicators of value. The PitchBook/BVR Guideline Public Company Comps Tool matches these most current SEC financial statements with market data for your valuation date.
“The PitchBook data is complete, well designed, and gives you a pointer to gather 10Ks or 10Qs if you want. It is quick, simple, and a good data source for preparing guideline public information,” says Rob Schlegel, who teaches GPCM for ASA, BVR, and others, and who provided help to BVR in reviewing the product.
For information on the PitchBook/BVR Guideline Public Company Comps Tool call Linda Mendenhall, Shelly Seger, or Joe Marasco at 503-291-7963.
At a loss for the definition of a BV term?
BVWire received many comments about definitions after our recent articles on personal goodwill and control premia. If you’re ever at a loss, remember BVR's Glossary of Business Valuation Terms - 2010 Edition, available as a free service here.
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