BVWire Issue #174-2 | March 8, 2017

DLOM ruling renews interest in New Jersey statutory appraisal jurisprudence

Last week, we reported on a recent forced buyout case out of New Jersey in which the trial court said it was “fair and equitable” to apply a marketability discount in determining the fair value of the oppressing shareholder’s interest in a company in which he owned 50%. The oppressing shareholder must not benefit from his actions, the court said, referencing precedent.

Michelle Patterson, an attorney and frequent commenter on valuation issues, is one of the readers troubled by the New Jersey courts’ use of carefully developed valuation concepts and measures as tools of punishment or reward in fair value litigations. She believes that the use of the DLOM as a legal penalty voids a long-thought-out valuation measure of its meaning and separates it from its economic basis. The DLOM application should not become contingent on the character of the parties but be based instead on the actual value factors of marketability. She says: "We can understand and sympathize with a court's desire to pursue equity in these forced buyout situations. We also can agree that the party who oppresses or coerces should not gain a windfall. However, a profession cannot support the attainment of a worthy goal by allowing the misuse of its practitioners’ hard-thought-out and developed concepts. The objective, both noble and necessary, of the evolving profession of business valuation is to develop measures which are accurate, consistent, and appropriate in order to assess an economic entity as it is at a given point in time."

Patterson adds: "We may do the courts and the profession a favor by paying attention to Chris Mercer’s view that accurate valuators take account, within their value determination, of the entity’s economic metrics, which ordinarily include factors of marketability. If the valuation accounts for those factors and a later DLOM is applied—whether for advocacy, valuation, or, worst of all, for inherently unrelated economic variables such as bad behavior—the validity of the valuation is being undermined."

Patterson and her frequent collaborator Gil Matthews (Sutter Securities Inc.) expect to expand on this topic in a forthcoming issue of Business Valuation Update.

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Snap IPO sparks questions during webinar

Shortly before the Snap IPO, audience members at a webinar on valuing social media asked several good questions. Just a few big players dominate the market for online advertising, so how can Snap capture enough? Are we in another “internet bubble” that may burst? Mark Zyla (Acuitas), who conducted the webinar, remembers back in 1999 doing valuations for internet firms with no revenue, but he says it’s a different situation today because they’re banking on advertisers. The new technology allows for target marketing, and advertisers are willing to pay for that, he says. He was certainly right about that: Snap’s IPO exceeded expectations and was the largest since the Alibaba IPO in 2014.

Extra: Prior to the IPO, Aswath Damodaran (Stern School of Business, New York University) did his valuation of Snap in his blog, backed up by his narrative of the company. Speaking of which, the professor just released his newest book, Narrative and Numbers: The Value of Stories in Business.

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Comments wanted on TAF’s exposure draft on earnouts

The deadline for comments is April 28 on the Valuations in Financial Reporting (VFR) exposure draft Valuation of Contingent Consideration. The Appraisal Foundation’s Work Group 4 in the “Best Practices for Valuations in Financial Reporting: Intangible Asset Working Group” series issued the exposure draft. It contains detailed discussions of the typical structures of contingent consideration, key valuation issues, valuation techniques deemed to represent best practice, methods for assessing the reasonableness of contingent consideration fair value estimates, and issues at subsequent measurement dates.

Extra: Contingent consideration represented 21% of purchase consideration in 2015, according to a report from Houlihan Lokey on purchase price allocations.

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Fama doubts modern finance, cost of capital estimates

The “Father of Modern Finance,” Nobel laureate Eugene Fama (University of Chicago), known for his efficient markets hypothesis and empirical work related to asset pricing, says most asset‐pricing models have failed empirically. In a conversation with Joel Stern, chairman and CEO of Stern Value Management, Professor Fama says that estimating something as apparently simple as the cost of capital remains fraught with difficulty. He dismisses betas for individual stocks as “garbage,” and even industry betas are said to be unstable, “too dynamic through time.” What's more, he says that the wide range of estimates for the market risk premium—anywhere from 2% to 10%—casts doubt on their reliability and practical usefulness. He continues to defend the concept of “efficient markets,” while noting that empirically based asset pricing models such as his (and Ken French’s) “three‐factor” CAPM have produced much better results than the standard CAPM.

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ASA eyes entire globe

“We’re putting ourselves in a position to be a global leader,” says Susan Golashovsky, international president of the American Society of Appraisers, in a YouTube video. The ASA’s international presence has grown, and she’s looking forward to developing it further. “It will happen sooner rather than later.”

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2017 Oscars: celeb value and scandal

One of the issues in the Michael Jackson estate valuation case (see prior coverage) is the effect of scandal on celebrity value. The 2017 Oscars highlight the phenomenon that, even though a star may have been shunned (and devalued) because of scandal, a big hit can help erase those nasty memories. Hacksaw Ridge, one of the Best Picture nominees, saw director Mel Gibson being welcomed back with open arms after years of being on the outs because of controversial statements he made after a DUI arrest in 2006. In the audience, he was basking in the glow of his resurrected value. Of course, the Jackson scandal is different because it involved allegations of child molestation.

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Judges to tell all at NACVA confab

A panel of judges will present a keynote session at NACVA and the CTI's 2017 Annual Consultants' Conference in Chicago June 8-10. The session, Experts Sabotaging Themselves in Court—The Judges Tell All, will be moderated by Michael Kaplan (Kaplan, Abraham, Burkert Associates) and will include Honorable Judge Elizabeth Gonzalez, Honorable Judge Steven I. Platt (Ret.), and Honorable Judge Christopher P. Yates.

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Global BV News

iiBV joins IVSC, premieres IVS 2017 course

The International Institute of Business Valuers (iiBV) has become a member of the International Valuation Standards Council (IVSC) and is launching its first course in international business valuation standards. The course will be offered immediately in an in-class format and will be available online as a self- study course. The Canadian Institute of Chartered Business Valuators will host the first in-class offering in Toronto on March 31, 2017. The online version of the course will be available through the iiBV, Business Valuation Resources (BVR), iiBV members, and the IVSC starting in April 2017. Course materials will consist of presentation slides, participant manual, a case study, the IVS 2017 book, and a 25-question multiple-choice exam. Successful participants will receive an iiBV certificate of completion. More details will be forthcoming.

Extra: The IVSC has released a Basis for Conclusions document that explains the rationale behind certain changes made within IVS 2017.

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Ipse dixit OK in U.K. courts

In the U.S., the days are gone when a valuation expert could put forth an opinion in court without having to substantiate it. Not so in the U.K.—for now, anyway. “There is a willingness to accept professional opinion, without the need necessarily for this to be supported by external authority,” says Andrew Strickland, veteran valuation expert and longtime staffer at U.K. firm Scrutton Bland who is now a consultant to the firm. Strickland gives his insights into other aspects of BV practice in the U.K. in the April issue of Business Valuation Update.

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BV movers . . .

People: Business brokerage firm Murphy Business & Financial Corp. of Clearwater, Fla., announced the appointment of Tom Coba as CEO … Stephanie Kenny has joined Arlington, Va.-based Valuation Services Inc. as a manager … Bethany Novis has been named business consulting services group leader at Lancaster, Pa.-based RKLCBIZ Tofias of Boston named Scott Wragg senior managing director.

Firms: Portland, Me.-based BerryDunn opened an office in Phoenix, its first in Arizona … Blue & Co. of Carmel, Ind., was named one of the “2017 Best Places to Work in Indiana” in the large employer category, the eighth time the firm has received this award … Enterprise, Ala.-based Carr, Riggs & Ingram has added Babush, Neiman, Kornman & Johnson of Atlanta. BNKJ’s employees will move to CRI’s existing Atlanta office … Michelle Gallagher announced that Gallagher Valuation & Forensics has become a strategic partner of Adamy Valuation. Gallagher will lead Adamy’s family law practice group in Grand Rapids, Mich., and will continue to work at her office in Lansing, Mich. New York City-based Kessler International announced the results of its study, which show significant growth in the demand for forensic accounting services over the past 40 years … Providence, R.I.’s Restivo Monacelli announced a new brand identity, logo, and redesigned website at … Chicago’s Stout Risius Ross has completed the purchase of Irvine, Calif.’s FMV Opinions. The initial agreement was mentioned in “BV movers” in BVWire Issue 173-2Whitley Penn of Dallas added Houston-based OverMont Consulting, effective March 1, marking Whitley Penn’s third merger deal in Texas this year.

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Special workshop on goodwill toplines CPE events

FOUR-HOUR WORKSHOP: Enterprise vs. Personal Goodwill: Case Studies with Legal Insights (An Advanced Workshop) (March 9), with R. James Alerding (Alerding Consulting LLC), Ronald Seigneur (Seigneur Gustafson LLP), Harold Martin (Keiter, Stephens, Hurst, Gary & Shreaves PC), and Michael Berger (Berger Schatz).

Valuing Hedge Funds (March 14), with Vladimir Korobov (Meyers, Harrison & Pia, LLC) and Peter Rahe (Meyers, Harrison & Pia, LLC). Part 4 of BVR's Special Series on Banking and Financial Services.

Valuing Undivided Interests in Real Estate (March 30), with Ted Israel (Israel Frey Group LLP).

Monte Carlo 101: Start Modeling in Excel (New Date - April 11), with John Elmore (Willamette Management Associates).

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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In this issue:

DLOM concerns

Snap IPO

TAF draft

Fama’s qualms

ASA’s sights

The Oscars

Judges speak

Global BV news

BV movers . . .

CPE events

LinkedIn discussions



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