BVWire Issue #162-4 | March 23, 2016


Current ERP at 5.5%, says new Duff & Phelps recommendation

Duff & Phelps regularly reviews fluctuations in global economic and financial conditions that warrant periodic reassessments of the equity risk premium (ERP) used for developing discount rates. Based on current market conditions, Duff & Phelps has just increased its recommended U.S. ERP to 5.5% for use as of Jan. 31, 2016, and thereafter, until further guidance is issued. This implies a 9.5% (4.0% + 5.5%) “base” U.S. cost of equity capital estimate as of Jan. 31, 2016. The previous Duff & Phelps U.S. ERP recommendation was 5.0%, established as of Feb. 28, 2013. Both of these ERP estimates were measured relative to a normalized yield of 4.0% on 20-year U.S. Treasury bonds. To read the full D&P report, click here.

Note: For valuations performed as of Dec. 31, 2015, the Duff & Phelps U.S. ERP recommendation remained at 5.0%, matched with a normalized risk-free rate of 4.0%.

D&P is the author of The 2016 Valuation Handbook – Guide to Cost of Capital (now available), which includes both the ERP data available in the Duff & Phelps Risk Premium Report and picks up where the old SBBI Valuation Edition left off.

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Main trouble spots with a damages analysis

An interview with Nancy Fannon (Meyers, Harrison & Pia) and Jonathan Dunitz, Esq. (Verrill Dana), in the April issue of Business Valuation Update takes up, among other issues, problems that can develop when preparing a damages analysis or report. Fannon and Dunitz are editors of the just-released fourth edition of the book The Comprehensive Guide to Economic Damages.

Trouble spots: The difference between preparing an economic analysis that will be used in court versus one that will not is one issue, according to Dunitz. "A valuation report written by an expert who does not have experience with litigation may be found not admissible," he says. "There are certain things the expert needs to understand to help make the analysis admissible, including the amount and types of evidence needed. Preparing a report for a damages analysis for litigation is not necessarily the same as doing one for a company’s internal use or some other purpose." The book also describes the different methodologies, the different types of damages, and how to calculate them. “It also describes the procedural rules and presents the problems that may arise and how to address them.”

“I see two main issues that cause problems with a damages analysis,” adds Fannon. “One is that experts often do not understand the appropriate remedy for a particular action. The book contains a great deal of guidance as to when to use one remedy versus another. The second main issue is how to calculate the damages. There are a lot of nuances that some experts are not aware of, including those with respect to the jurisdiction you’re in or the particular remedy that is appropriate. The book is invaluable in this regard.”

Greatly expanded: This new edition is greatly expanded from the last one, with nine new chapters from 14 new contributors. In addition, previous chapters have been revised and updated. Some of the new chapters deal with compensation forfeiture, fraudulent transfer, the use of surveys in trademark litigation, personal injury and wrongful termination, the use of statistics in damages claims, and the use of event studies in securities litigation. Some 100 cases were added to the case law section (Volume Two), many of which are related to the new chapters.

To see the table of contents for the book and an excerpt, click here.

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Florida court revisits active-passive appreciation issue

The issue of active and passive appreciation of business assets in a divorce context is growing in prevalence. A noteworthy Florida ruling further explores the scope of appreciation: Does a nonowner spouse have a claim to the increased value of all nonmarital assets without showing marital effort or the use of marital assets to achieve the appreciation?

‘Middle manager’ in a company: In this case, the husband did not own a business. Instead, before the marriage, he began working for a company and, at that time, also bought a large number of company stock by way of a bank loan. During his tenure at the company he had some supervisory responsibility, but also had a couple of demotions. When he was terminated, his stock was liquidated. The shares sold for substantially more than the outstanding balance on the loan used to buy them.

The trial court determined the stock was separate property and its increase in appreciation was passive; it was, therefore, not subject to marital distribution. The wife appealed the ruling. It seems she asked the appeals court to adopt a rule “that all appreciation of the stock of a company for which a spouse works is a marital asset.” The Court of Appeal rejected the proposition.

Under the existing analytical framework, the court said, the increased value of stock from a company for which the owning spouse works can be a marital asset and subject to distribution. But, it can also be a nonmarital asset. The crux of the matter is "whether the husband exerted the sort of ‘effort’ required to move the appreciation value from the nonmarital category to the marital one,” the court explained.

Cases that have found the appreciation was a marital asset typically involve a family-owned business in which the stock-owning spouse holds a significant position. Here, neither of these “key features" was present, the court found. The company the husband worked for was not owned or operated by his family. He held no significant managerial position in the company; at most, he was a “middle manager.” He did not contribute to the appreciation in the value of his stock, and his wife had no right to any part of the stock’s increased value.

Takeaway: Under Florida law, whether the appreciation in the value of nonmarital assets, particularly stock in a company, qualifies as a marital asset depends on both the nature of the company the stock-owning spouse works for and the position he or she holds in that company. In other words, the issue is whether the owner spouse can switch the appreciation from the passive to active column.

Find an extended discussion of Witt-Bahls v. Bahls, 2016 Fla. App. LEXIS 1451 (Feb. 3, 2016) in the May issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Still time! Vote on the industries you’d like analyzed for passive appreciation

Last week’s BVWire included a link to a survey to gauge interest in seeing industry-specific analyses of causal factors and their elasticities in order to develop empirical support for isolating the passive component of a firm’s appreciation in value. Prof. Ashok Abbott (West Virginia University) will perform the analyses based on your preferences. We are keeping the survey open, so click here to vote on all of the industries you’d like to see. Dr. Abbott will address them in the order of preference.

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Update on efforts to ease SEC concerns over BV

Representatives from several VPOs, the Big Four accounting firms, and The Appraisal Foundation met last year with the SEC over the agency’s concerns about the state of the valuation profession. The SEC has criticized the BV profession as being too fragmented, with multiple credentials, different sets of standards, and a lack of consistency in qualifications and enforcement. A panel of key members of a working group dealing with this issue will give a progress update at the 2016 Summit of the Americas presented by the Royal Institution of Chartered Surveyors (RICS) in Washington, D.C., April 3-5. Paul Beswick, former chief accountant at the SEC and now with Ernst & Young, will moderate the panel.

Preview: One of the panel members, Leigh Miller (Ernst & Young), tells BVWire that in addition to meeting with the SEC, the VPOs also met with the FASB, PCAOB, and other stakeholders. The result was a “renewed interest” in developing a “mandatory performance framework” as well as education and quality assurance around a new credential for professionals involved in valuation for financial reporting purposes. Since last summer, “a tremendous amount of work has been done to bring us to the point where we can begin public exposure of the framework and standards,” says Miller. The panel is also expected to discuss the regulatory environment. “I think there have been some very productive conversations with the regulators over these matters,” he says. “They continue to be supportive of what the valuation profession has been doing.”

Other sessions of interest to business valuation professionals include valuing the White House; valuation standards and convergence; property taxes; and a discussion on key influential trends, such as data and metrics and international valuation and measurement standards.

For more information on RICS’s 2016 Summit of the Americas and to register, click here.

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Global BV news:
Ethics education key to future of the global BV profession

The United Nations-formed International Ethics Standards (IES) Coalition is a group of nonprofits from around the world that are developing and implementing global standards of ethics for the land, property, construction, infrastructure, and related professions—of which all of the appraisal disciplines are, of course, an essential part.

In an interview with the International Institute of Business Valuers, Tony Grant, deputy chair of the IES Coalition, talked about the importance of ethics education for the global business valuation community. He says there is a “substantial body of evidence to suggest that transparency and ethical conduct are becoming increasingly important for business everywhere. Responsibility to the wider community is regarded as not only a matter of integrity, but a key to long-term commercial success. It is clear, therefore, that ethics education is vital for the future of the valuation profession both in courses for initial qualification and on a continuing basis throughout one’s professional career.”

To read the entire interview, click here.

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How Friedman LLP encourages women’s professional development

About half of the 400 employees at Friedman LLP are women, which reflects the firm’s desire to recruit, train, and promote women professionals. Friedman LLP is an accounting firm based in New York City that also provides valuation services. Harriet Greenberg, co-managing partner, leads the firm’s Women’s Development Network (WDN), designed to encourage and mentor women at her firm. In a podcast, Greenberg stresses the importance of having a mentor, and says that all professionals at the firm—both men and women—have a mentor. But she says it’s often more critical for a woman to have a role model and be able to ask questions that “only another woman would understand.” In addition to mentoring, WDN offers help with networking, leadership, negotiating, and work/life balance.

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BV movers . . .

People: Eliott “Eli” Wilson, of the Huntington, W.V., firm Hess, Stewart & Campbell, was honored by the National Academy of Public Accounting Professionals as one of the 2015 “Top 10 Public Accounting Professionals” in West Virginia … Millard Martin has been named a partner at Shinn & Co., a firm based in Bradenton, Fla.

Firms: The Cleveland firm Cohen & Co. has been accepted as a member of the National CPA Health Care Advisors Association (HCAA), an association of CPA firms that provide specialized accounting, tax and consulting services to the health care industry … Lutz M&A, a subsidiary of the Omaha-based Lutz & Co., is opening an office in Lincoln, Neb., later in 2016 … Sikich LLP has been honored by the Indiana Chamber of Commerce as one of the “Best Places to Work.”

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Free cost of capital webinar coming up in CPE events

Business Combinations: Case Studies in Purchase Price Allocations (March 23), with Nathan DiNatale (SC&H Group). This is Part 1 of BVR's Special Series on Fair Value.

Business Combinations: Valuation of Intangibles (March 24), with Nathan DiNatale (SC&H Group) and Mark Zyla (Acuitas, Inc.). This is Part 2 of BVR's Special Series on Fair Value.

FREE WEBINAR: Valuation Handbook – Guide to Cost of Capital and the Risk Premium Toolkit: What you need to know in 2016 (March 30), with Roger Grabowski (Duff & Phelps).

ESOPs for Government Contractors (March 31), with David Bogus (Ellin & Tucker), Greg Wheeless (Bank of America Merrill Lynch), Peter Abrahamson (Verit Advisors), Jeffrey Kahn (Greenberg Traurig, P.A.), and Stanley Slabas (Verit Advisors).

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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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

D&P raises ERP

Economic damages

Divorce case

Passive appreciation

Easing SEC concerns

Global BV news

Women's initiative

BV movers

CPE events












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