March 26, 2014 | Issue #138-4  

BV continues positive trend at Top 100 accounting firms

Three-quarters of the Top 100 accounting firms report increased growth in their business valuation services for 2013. BV is No. 4 in the rankings of the fastest-growing niche services, up three percentage points over the previous year. This is according to the latest study, “Top 100 Firms,” by Accounting Today (free registration required).

Biggest leap: The top two spots are held by tax services in the international and state/local tax fields, respectively, with these areas maintaining their positions over the previous year. Notably, the year’s “biggest leap” came in estate/trust/gift planning, which jumped into the No. 3 spot. This area is up nine percentage points and three spots over 2012, with 78% of firms reporting growth in this area. In the No. 5 spot is litigation support, up seven percentage points and two spots, with 74% of firms reporting growth in this niche.

Rounding out the top 10 are attest services, forensics/fraud, industry specializations, nonprofit organizations, and mergers and acquisitions. All of these areas reported slightly lower gains, except for industry specialization, which was an area of growth for 62% of firms (same percentage as the previous year).

The uncertainty surrounding the fate of the estate tax exemption and lifetime gift tax exclusion laws was a likely cause of the increased growth in the estate/trust/gift area. As for the big jump in litigation services, the report notes that one firm, Eisner Amper, attributes its 10% growth in litigation services to several areas (all good news for valuation analysts), including breach of contract disputes, intellectual property and patent infringement cases (particularly in the pharmaceutical industry), divorce, and bankruptcy litigation.

Pratt’s Stats analysis reveals significant trends

Recent analysis of 2013 data from Pratt’s Stats, the leading private M&A transaction database, reveals several notable trends.

Business values are on the rise: The median selling price-to-EBITDA ratio for all major sectors was 2.96x in 2013, up slightly from 2.88x in 2012 but down from a 10-year high of 6.16x in 2006. In 2013, the major sector with the greatest median selling price-to-EBITDA ratio was manufacturing, at 5.69x, and the sector with the lowest was retail trade, at 2.01x. The tech sector, which Pratt’s Stats classifies as a subsector under the major industry sector “services,” had a median selling price-to-EBITDA ratio of 12.98x in 2013.

Companies pay more: The median selling price-to-EBITDA ratio in 2013 for public companies acquiring private companies was 9.55x, significantly more than that of individuals buying companies, which was 2.78x.

Size does matter: The median selling price-to-EBITDA ratio in 2013 corresponds positively with firm size. When transactions are sorted by those with the largest revenues to those with the smallest and are then divided into five equal-sized quintiles, there is a general decline from 6.02x to 3.13x to 2.63x to 2.45x to 2.00x, respectively. This shows that companies with the highest net sales tend to have a larger median selling price to EBITDA ratio than the companies with lower net sales.

Stay tuned for more: As business intermediaries continue to submit deal information, we will further analyze the data and publish them here. Please email us your wish list of specific analysis you’d like to see from Pratt’s Stats, and we’ll address it in future issues of BVWire.

Pratt’s Stats contains transactions submitted by business intermediaries and M&A advisors where a person buys a private business, as well as transactions that have been researched at the U.S. Securities and Exchange Commission website where a public company buys a private business. Unless otherwise noted, this analysis contains all transactions.

Valuation expert witnesses should ‘stay in their sandbox’

At the recent ASA workshop in San Francisco for expert witnesses, James J. Mangraviti (SEAK Inc.) gave this piece of advice: “Stay in your sandbox.” Repeatedly, he cautioned participants in his two-day workshop, “How to Be a Successful and Effective Expert Witness,” not to testify outside their true area of expertise because the proposed testimony risks being found incompetent and inadmissible. When experts fail to heed this note of caution, it can spell disaster, as a recent Daubert case illustrates.

Case in point: A manufacturer of a medical system entered into a distribution agreement with the representative of various medical suppliers. The manufacturer subsequently accused the rep of engaging in unfair competition by exploiting the relationship to develop and market a similar system. The rep and the medical supply companies countered by claiming that the manufacturer committed breaches of warranty and contract. The manufacturer presented expert testimony from a CPA to support its lost profits claims, and the rep and medical suppliers offered a rebuttal expert. Both sides filed Daubert motions.

What ‘reliable business principles’? The court admitted the manufacturer’s expert but not the rep’s rebuttal expert. In his deposition, the latter admitted that he did not “understand what unjust enrichment is” or “what disgorgement is.” He said he did not know what the proper measurement of damages for unfair competition was. When asked whether lost profits represented a correct measurement, he replied: “I do understand that lost profits are a piece of the puzzle for such claims.” He admitted he did not interview the representative or any of the accountants and in his report repeated legal conclusions that the retaining counsel made to him in conversation, including calling certain determinations of the opposing expert “inappropriate and unfounded.” He also repeatedly said he based his opinions and assumptions on “reliable business principles.”

The court found that the testimony was fatally flawed. He never explained the “reliable business principles” underlying his testimony. Without specifying what methodology he used to form his opinion, his testimony was subjective belief or unsupported speculation. Also, “an expert cannot forgo his own independent analysis and rely exclusively on what an intended party tells him.” Here, the plaintiffs failed to disprove the allegation that they merely called the expert to synthesize their arguments and present them under the cloak of expert opinion, the court concluded.

Find an extended discussion of Orthoflex, Inc. v. Thermotek, Inc., 2013 U.S. Dist. LEXIS 174670 (Dec. 10, 2013), in the April edition of Business Valuation Update and at BVLaw.

FASB to reach out on fair value measurement

Although it doesn’t plan on a comprehensive review of FASB Statement No. 157, Fair Value Measurements, the U.S. Financial Accounting Standards Board has decided to reach out to its stakeholders about certain aspects of the standard that some call “challenging.”

Some difficulties: The chairman of the FASB has submitted a letter to the Financial Accounting Foundation’s (FAF’s) Standard-Setting Process Oversight Committee acknowledging the results of the FAF's post-implementation review of the standard. The review team had concluded that the standard generally achieves its purpose and provides investors with decision-useful information. However, it also noted that some investors had difficulty understanding fair value information provided in financial statements. Also, some investors felt that the volume and extent of fair value disclosures were excessive, while others felt there were not enough. Also, some found it difficult to apply certain requirements of the standard for employee benefit plans, not-for-profit organizations, and private companies.

Therefore, the FASB has decided to reach out to its stakeholders on these aspects and will give consideration to the issues identified in the context of other initiatives of the FASB.

Slight increase in valuation multiples for healthcare

Marginally increasing valuation multiples for the healthcare provider industry reveal that the sector is regaining investor confidence, says a new analysis of healthcare M&A activity from Frost & Sullivan. The healthcare industry sees M&A as a key means to reverse the trend of declining profits and operating margins caused by the economic downturn and tougher regulatory environment.

"The full-fledged implementation of the Affordable Care Act—that aims to improve access to healthcare among U.S. citizens—is expected to drive consolidation in the healthcare provider industry over the next 12 months," says Dr. E. Saneesh, a Frost & Sullivan analyst. In particular, the post-acute care, surgical, and emergency center segments are expected to drive M&A activity.

The new report, Analysis of Mergers and Acquisitions Trends in the United States Healthcare Provider Industry, also points out that, while deal activity has increased, there has not been a relative increase in deal value, indicating the increase of deals with a low average deal value.

In the April issue of Business Valuation Update

Here’s what you’ll see in the April 2014 issue of Business Valuation Update:

  • Fannon and Dunitz Discuss Lost Profits and Other Commercial Damages (BVR Editor). Interview with Nancy Fannon (Meyers, Harrison & Pia) and Jonathan Dunitz, Esq. (Verrill Dana), editors of the newly updated and expanded edition of The Comprehensive Guide to Lost Profits and Other Commercial Damages.

  • Seven Takeaways From Recent Business Valuation Cases (BVR Editor). BVR’s legal editor, attorney Sylvia Golden, and business appraiser R. James Alerding (Alerding Consulting LLC) discuss the main points that valuation analysts can gain from recent court cases.

  • Can Regional Data Be Used to Determine Reasonable Compensation Anywhere? (Stuart Weiss, CPA/ABV). When valuing small private companies, consider a regional survey to support an adjustment for reasonable compensation.

  • 10 Current—and Controversial—Issues in Bankruptcy Valuations (Robert F. Reilly, CPA). Current hot-button issues valuation analysts need to be aware of in order to be able to defend their work in bankruptcy engagements.

  • Inside Look at a Post-M&A Damage Valuation and Settlement (BVR Editor). Jeff Litvak (FTI Consulting), who testified in the Valassis M&A case, reveals how damages were valued due to the seller’s misrepresentations.

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

BV movers . . .

People: Capstone Advisory Group LLC, a national financial advisory services firm, announced the addition of Nathan Klatt as a managing director in its New York City office Valuation Practice … Mark Hanson, a shareholder at Schenck of Wisconsin, has been appointed to the business valuation panel at The Appraisal Foundation, a nonprofit organization headquartered in Washington, D.C., that is dedicated to the advancement of professional valuation. Directed by a board of trustees, it is authorized by Congress as the source of appraisal standards and appraiser qualifications … The International Society of Business Analysts (ISBA) in Irving, Texas, announced that Dr. Shannon P. Pratt, CFA, FASA, ARM, ABAR, MCBC, CM&AA, has become a member of the Business Certified Appraiser (BCA) board of advisors. Dr. Pratt is the foremost authority in the field of business valuation and has written numerous books that articulate many of the concepts used in modern business valuation around the world.

Firms: InformationWeek magazine recognized Crowe Horwath LLP as one of the nation’s top 500 innovative business teams that take unconventional approaches in the use of new technology and models to capture business opportunities and solve complex business problems … The Managing Partners' Forum, an independent panel of subject matter experts, has named Grant Thornton “Best Managed International Firm” … WithumSmith+Brown PC is celebrating the firm’s 40th anniversary this month. Incorporated in 1974, WS+B originally started with six employees in a small Milltown, N.J., office; today, it has over 500 staff members in 13 offices across six states.

CPE events blooming in spring

BVR has a good crop of CPE events on a variety of interesting topics.

Valuing Franchises (March 27), featuring Theresa Zeidler-Shonat and Bill Pellino (both Smith & Gesteland LLP). As surreptitiously complex as they are ubiquitous, franchisee and franchisor businesses represent both tremendous opportunity for appraisers and tremendous peril for those unaware of how nuanced franchise agreements and operational considerations affect value. Learn how to prepare for the best and worst of franchise valuations in this 100-minute webinar.

Proper Use of the Multi-Period Excess Earning Method (April 1), featuring Anthony Aaron (Ernst & Young). Aaron, an expert appraiser and vice chair of The Appraisal Foundation Board, joins BVR for Part 4 of the 2014 Online Symposium on Fair Value Measurement to examine the proper implementation and interpretation of the multi-period excess earnings method.

The Duff & Phelps Risk Premium Calculator: Utilizing New Data and Features for 2014 (April 17), featuring James Harrington (Duff & Phelps). With the release of the new Valuation Handbook, the Duff & Phelps Risk Premium Calculator is getting even better, incorporating new data and features to continue its evolution as one of the best resources for determining defensible cost of capital measures. In this free one-hour webinar, James Harrington, co-creator of the Calculator, joins BVR for a guided tour of these new enhancements and how they make the process of cost of capital determination more reliable than before.


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