March 16, 2011 | Issue #102-3 Forward to a Friend

The tax-effecting discussion continues

In response to last week’s item on tax-effecting (BVWire #102-2), Nancy Fannon (Fannon Valuation Group) responded:

If attorneys (or analysts) are taking the position that S corp. earnings should not be tax-affected, it is because they do not really understand the difference between corporate level taxes and personal level taxes, and how each of these different taxes affect shareholder returns (value) in the public and private markets.  Some analysts and courts (Delaware and Massachusetts most notably) have taken a “short-cut” method to recognition of the benefit of avoidance of dividend (personal) taxes by reducing the amount of corporate income tax recognized.  When this is done, analysts should realize that doing so is ONLY a short-cut method for realizing the benefit of avoided dividend tax (by the S corporation investor) that they are accomplishing. 

Further, the benefit that an S corporation shareholder receives for avoiding such dividend tax compared to a publicly traded C corporation investor (whom we compare the S corporation investor to, as that is the source of our rate of return—public markets) is likely not nearly as much as we have presumed years ago as this debate developed.  Ask yourself:  How much dividend tax do institutional investors pay? (Institutional investors who have taken over the market since the 1960’s).  How much have dividend rates changed over the last forty years?  How have holding periods changed? 

Do ALL forms of entities engage in tax avoidance behavior?  Of course! S-corporation investors are not the only investors who seek to avoid taxes; it is the composition of the market, combined with the tax-saving mechanisms that all types of firms and all types of investors engage in that make this issue far more complex than simply “not deducting income tax.”  That doesn’t mean our methodology needs to be more complex—but what it does mean is that we need to recognize the effects of these market realities on the magnitude of any “premium” one would ascribe to the income approach of any pass-through entity.

Join Fannon and Keith Sellers (University of North Alabama) on May 26 for the BVR webinar Pass Through Entity Valuation Update: The Significant Impact of Academic Research on the Debate. CPE credits are available.

How big is the business valuation profession? New data from the 2011 BV Firm Economics Guide

The total business valuation revenues earned by firms participating in this year’s 2011 BV Firm Economics & Best Practices Guide was $685 million.  The editors project, based on participation rates, growth rates, and market demographics, that the business valuation profession earned the distinction of becoming a $1 billion annual business sometime in 2007, and, despite the downturn, has grown to nearly $1.6 billion now. 

Total business valuation revenues generated by the respondent’s firms appear in the table below–and it points out the fact that the business valuation profession is comprised of widely divergent practices.

A clear migration to larger practice units. Just over 30% of the firms brought in less than $100,000 in BV revenues two years ago; only a quarter did in 2010.  These small practices are often associated with CPA firms, where one BV partner does valuations “part-time,” sometimes at fees below market. 

Largest firms. At the other end of the spectrum, seven responding firms who reported usable data now claim over $10 million in BV revenues.  In this “biggest BV firm” group were two of the Big 4, two non-Big 4 national CPA firms, two international valuation firms, and one “other prime business” firm.

What were your total business valuation
for the last year available?




< $100K


























The Guide will be available next month.

Can the IRS subpoena your work papers, even after the taxpayers have paid the deficiency?

An Idaho couple claimed nearly $1.5 million as a charitable contribution deduction on their federal tax returns relating to the granting of a conservation easement. The IRS summoned the taxpayer’s appraiser to provide evidence related to the easement valuation, including all his work files. Based on advice of the taxpayer’s attorney, the appraiser refused the summons, asserting the attorney-client privilege and work-product protections. The IRS petitioned to enforce the summons and issued a deficiency against the taxpayers, who paid the assessment and then intervened on behalf of the appraiser. According to an IRS internal manual, once a taxpayer agrees to an assessment, the Service “must” close the case, the taxpayers argued, including its investigation of any underlying documents. The federal district court agreed and the IRS appealed to the 9th Circuit, arguing that a good faith summons did not “transmorgrify” into one issued in bad faith simply upon the taxpayer’s consenting to a deficiency. 

Although the issue was one of first impression, the 2nd and 7th Circuits have held that the IRS has not acted bad faith by issuing a summons “unless there has been a predicate, final, irrevocable determination of the taxpayer’s liability,” the 9th Circuit court noted. Persuaded by this reasoning, it confirmed the continued enforcement of the IRS summons when the taxpayers’ liability had not been “finally determined” and there was no evidence the IRS acted improperly. In fact, at the time of the IRS petition, the taxpayers’ deadline for appealing the deficiency had not yet expired and they were likely to seek a refund. The court also found the appraiser’s files were not protected by the attorney-client privilege or the work-product doctrine, because they were prepared primarily to comply with IRS regulations concerning charitable deductions and not in advance of litigation. For the complete digest of U.S. v. Richey, 2011 WL 182313 (C.A.9)(Jan. 21, 2011), see the April 2011 Business Valuation Update; the court’s decision will be posted at BVLaw.

Comparable third-party license agreements often aid in IP due diligence

During last week’s BVR webinar “Finding & Analyzing Royalty Rates” David Jarczyk informed listeners that the Uniloc/Microsoft ruling emphasizes the need for valuation practitioners to do their due diligence rather than relying on rules of thumb.  “Appraisers will need to perform more stringent analysis and documentation to develop a position that can withstand the new precedent and a higher level of scrutiny set by Uniloc,” says Jarczyk.  

“A more defensible approach for determining reasonable royalty rates for infringement damages, for intercompany licensing, and for the transfer of intangibles may involve the examination of third-party license agreements that are sufficiently similar to the subject situation or tested transaction,” Jarczyk adds. One aspect of that research when valuing an intangible asset is to consider comparable royalty rates.  Some of the factors of comparability are:

  • Being used in connection with similar products or processes within the same general industry/market
  • Have similar profit potential (this is difficult to quantify)
  • Terms of transfer
  • Stage of development
  • Rights to receive updates, revisions, modifications
  • Uniqueness of the property
  • Duration of the license/contract/agreement
  • Risks assumed by the transferee (i.e. economic and/or product liability)
  • Existence/extent of any collateral transactions
  • Functions and/or services to be performed by each party

ktMINE is the only interactive IP database that provides direct access to royalty rates, source licensing agreements, and detailed agreement summaries. For more information on ktMINE’s direct access to royalty rates, source licensing agreements, and detailed agreement summaries from over 13,000 public royalty rate, licensing, and lump sum agreements—contact Randy Cochran.

All the top 2010 public company transactions in
one place

After large declines in the activity of mergers and acquisitions in 2008 and 2009, the soon-to-be-released 2011 Mergerstat Review reports that the number of mergers and acquisitions announced in 2010 was 9,116. This represents an increase of about 34% from 2009. The total value of announced mergers and acquisitions that disclosed a purchase price increased by about 24%.

In 2010, there were 364 acquisitions of publicly traded companies at an average dollar value offered of $713 million.  For comparison, there were 292 acquisitions in 2009 with an average dollar value offered of $991 million.  In addition to providing individual deal data, such as payment methods and premiums, the Review also indicates which industries are most active and how their premiums, TIC/EBITDA, TIC/EBIT and P/E averages, compare to the market as a whole.

BVR has created a free download that contains an excerpt from the 2011 edition featuring historical merger and acquisition information and a table containing summary data on the number of completed or pending acquisitions in 2011.

The 2011 edition – which is available exclusively through BVR – now includes the Mergerstat Monthly Review, a monthly summary (in PDF) of deals, trends and industry spotlights for anyone who purchases the Review.  To order, click here.

60% DLOM or more? Look at Valuation Advisors’ new long pre-IPO timeframe data

Last Monday Valuation Advisors released a major additional dataset for transactions where the pre-IPO timeframe is two years or longer.  “The idea behind capturing discounts beyond two years was to give analysts another source to use in determining a lack of marketability discount based on their professional judgment of the likely timetable to liquidity,” says Brian K. Pearson(Valuation Advisors, LLC).If you believe a likely timetable for liquidity is very long or possible never, discounts beyond two years will be relevant to your work.”

When are discounts beyond two years more likely?Clearly, anything that makes a company, either a 100% interest or less, less attractive, increases the likely timeframe to liquidity,” Pearson says.  The following are just a few issues that may make the timetable to marketability longer:

  • lack of profitability
  • low margins
  • significant competition
  • low barriers to entry
  • little capital requirements
  • little knowledge required
  • no intellectual property or proprietary products
  • significant year to year financial variability
  • high employee turnover
  • poor industry conditions
  • significant legal risks
  • possible political regulation
  • lack of quality management
  • lack of pricing power
  • rapidly changing industry conditions
  • high annual capital expenditure requirements
  • rapid product obsolescence
  • no business succession plans, etc.

As the items in the list above grow, so does the likely timeframe to marketability.

For answers to other commonly asked questions about the “greater than two year data” click here.  On Friday, March 25 BVR is also offering a free one-hour webinar “Valuation Advisors DLOM Study: Using the Newest Lack of Marketability Discount Data,” during which Pearson will detail all of the new data, its analysis, and its application. CPE credit is available. To find out more or register for free, click here.

Marcellus Shale well values are often not as high as an owner may think

In a recent Pittsburgh Business Times article Anya Litvak quotedBrandon Otis (Alpern Rosenthal) from a legal seminar last week. “If you’re a landowner with the Marcellus Shale under your feet, maybe the last thing you want to hear from a valuation expert is ‘these wells aren’t worth as much as people think they are,’” Otis says.  In addition, the oft-cited Penn State study on the play’s economic impact includes ‘exaggerated or optimistic’ assumptions,” according to Otis.

For more insight read the complete article “Alpern tells lawyers how to value Marcellus reserve.” 

Pratt’s Stats nears a total of 20,000 deals

Pratt’s Stats, including Public Stats, will cross a major milestone later this year–20,000 deals.   As always, each transaction:

  • is peer reviewed (thousands of analysts use these transactions each month)
  • has a link to the source SEC documents if a public filing was completed
  • has complete financial statement information (as compared to Done Deals, for instance)
  • includes all footnotes and explanatory notes
  • includes information on employment contracts and non-competes, and
  • gives users access to analysis using all of the major (and not so major) financial ratios

Pratt’s Stats covers transactions where the target company was private; Public Stats provides the same financial and valuation metrics for deals where the target company was public (including over 800 transactions where the public company was not based in North America). 

In fact, Pratt’s Stats just added 70 Canadian transactions to the database, many of which have direct links to the Sedar filings, bringing the total number of Canadian transactions to 405 (as of March 8, 2011). The median selling price of the Canadian transactions is about $7M, with the average selling price being about $111M. The total number of transactions in the database is 16,554 (as of March 8, 2011). These transactions are data rich and include up to 88 data points each. The data can be accessed via a one year subscription or by purchasing a single search.

Watch for Business Valuation Review article on cost of capital changes

Rick Warner, the intrepid editor of the ASA’s Business Valuation E-letter, alerted his readers last week to an article from Roger Grabowski in the Business Valuation Review coming out soon. Rick’s analysis:

Roger Grabowski, ASA provided me with a draft of an article that is scheduled to appear in an upcoming issue of Business Valuation Review.  The article itself is an excerpt from discussions that appear in Chapters 7 and 9 of Cost of Capital: Applications and Examples 4th ed., by Shannon P. Pratt and Roger J. Grabowski (John Wiley & Sons, Inc., 2010) with an update through December 2010.

The article discusses the development of a cost of capital, in particular the choice of a risk-free rate of return and the estimation of a forward-looking equity risk premium during times of economic turmoil.  Roger focuses on the period from late 2008 and 2009, and also the summer of 2010 as periods characterized by a “flight to quality” by investors.

Roger’s discussion of the choice of a risk-free rate of return and the estimation of an equity risk premium covers concepts that are probably familiar to many of us, however it is a good review and in particular does a great job of discussing investor expectations and the relationship (if any) with realized risk premiums.

One new discussion point that I was not aware of that Roger introduces is the possibility of a WWII interest rate bias that has the effect of raising historical, realized equity risk premiums by perhaps as much as 50 basis points.

If you are looking for a concise discussion of these and other cost of capital concepts including an update on the expected equity risk premium as of December 31, 2010, keep your eyes open for this upcoming article, again in the Business Valuation Review.

Tweedie: U.S. must make decision this year regarding IFRS

Last week Sir David Tweedie, Chairman of the International Accounting Standards Board (IASB), told the attendees of the US Chamber of Commerce event, “The Future of Financial Reporting: Convergence or Not?” that there are two key activities coming to a head this year:

  • The IASB and the FASB are now nearing the completion of a nine-year program to improve International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP) and to bring about their convergence.
  • The US Securities and Exchange Commission (SEC) will make a decision on the use of IFRSs by US domestic companies.

In her analysis of Tweedie’s remarks, Edith Orenstein of the Financial  Reporting Blog saysTweedie gave three overarching reasons for the U.S. to make the decision to adopt IFRS this year:”

  • With over 100 countries having currently adopted or committed to adopt IFRS, it is in the United States’ economic interest to be part of the global system.
  • Delaying the adoption of IFRSs imposes unnecessary costs and risks on US companies.
  • The window of opportunity will close if a decision is delayed.

Orenstein also wrote:

I highly recommend direct reference to Tweedie's speech in its entirely; for observers of international accounting standard-setting, this is a seminal speech. (And, if you can listen to the webcast of the program, you'll receive the added bonus of hearing Tweedie's well-known sense of humor in some unscripted jokes. For example, you can hear about some concerns he had about what was growing in his garden, and his performance as a soccer player.)

Judge Halpern, IRS managers and BV practitioners unite in L.A.  May 18th

The Third Annual National IRS Symposium on Valuation Issues is scheduled for May 18th in Los Angeles.  The symposium features Judge James Halpern of the United States Tax Court, IRS managers and top valuation specialists presenting solutions to vexing tax compliance issues. The Los Angeles Chapter of the ASA “has been working with IRS to present current issues in a way that provides appraisers and tax practitioners the understanding and tools they need to make compliance work for the taxpayer.”

Pellegrino shares his expertise on internet company valuations this Thursday

On March 17 BVR welcomes expert appraiser Mike Pellegrino (Pellegrino & Associates) for a webinar focusing exclusively on these issues and how appraisers can overcome them.  In “Valuing Internet-Based Companies” Pellegrino will cover the myths and realities behind Internet companies and how to value any firm whose storefront can be described in zeros and ones.  CPE credit is available. For more information or to register, click here.

CICBV releases new simplified website

The Canadian Institute has refocused their website on two key constituents:  CBV’s or those looking to become a CBV, and those looking for business appraisals.   Take a look here

Ambulatory surgery center valuations demystified next Tuesday

On Tuesday, March 22 BVR’s exclusive and ground-breaking Online Symposium on Healthcare Valuation continues with “Ambulatory Surgery Centers: Current Valuations, Benchmarking & Forecasting.”  Part 3 of our series features experts Todd Sorensen, Elliot Jeter, and Kevin McDonough (VMG Health LLC) who will advise on what is becoming the most popular joint-venture relationship in the healthcare sector.  CPE credit is available. For more information or to register, click here.



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Valuing Internet-Based Companies
March 17, 2011
10:00am - 11:15am PT
Featuring: Mike Pellegrino

Ambulatory Surgery Centers: Current Valuations, Benchmarking, & Forecasting
March 22, 2011
10:00am - 11:40am PT
Featuring: Todd J. Sorensen, Elliott Jeter, and Kevin McDonough


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