BVWire #44-2



May 31st, 2006	Issue # 44-2

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New Court Cases

Koblick v. Internal Revenue Service, 2006 Tax Ct. Memo LEXIS 63 (April 3, 2006). Judge Goeke. Contemporaneous, aggregate transfers of minority interests reduce—but do not reverse—minority discounts.

The Rockies Fund, Inc., et al. v. Securities and Exchange Commission, 2005 U.S. Dist. LEXIS 24521 (November 15, 2005). Judge Heartfield. Court finds that mutual fund directors—including independent directors—showed “extreme departure” from duty of care by failing to assign fair value to funds’ holdings.

Q International Corporation v. Smoak, 2006 U.S. App. LEXIS 6835 (March 20, 2006). Judge Shedd. Is the valuation appraiser liable for a client’s bad faith use of the appraisals?

NEW! Click here for your complimentary case abstract of Koblick v. Internal Revenue Service.

These cases and more are available to subscribers to the BVLaw database at BVLibrary.com. Abstracts will be available in an upcoming issue of Business Valuation Update® at BVLibrary.com.

BVMarketData Update

We’ve now posted the 1st Quarter 2006 update to the Mergerstat® / Shannon Pratt's Control Premium Study™ online. This new posting includes 150 new transactions and the corresponding summary documents to this database. The Mergerstat® / Shannon Pratt's Control Premium Study™ contains transaction details on over 5,010 public companies with a median revenue of $92 million and a $121 million median selling price.

These databases and more are available at BVMarketdata.com.

BV Q&A

Start-up valuations: the pros and cons of having a strategic investor

Question: What are the advantages/disadvantages of having a strategic investor (or investors) in place when an early stage company is seeking external funds?

Answer: The advantages to a strategic investor include the following, non-exhaustive list:

Getting the advice/expertise that strategics inherently possess (and usually share).
The ‘brand name’ goodwill created by being associated with a big/reputable strategic firm. For example, ‘Motorola is an investor and plans/is using our solution’ can open a lot of doors.
The market opportunities to sell directly to the strategic itself, or simply leveraging the existing distribution channels of the strategic to push your own product through.
Often there is a perceived ‘exit’ opportunity to ultimately sell the company to a strategic, though this is far less common than most people think.

The disadvantages to taking on a strategic investor include:

‘Contamination’ of the strategic limiting the available market. An example would be that Motorola is invested in and perhaps purchasing or utilizing the technology of a start-up. There is a real risk that Motorola’s competitors will not do business with the company because of the Motorola relationship, thereby reducing the TAM.
Sometimes dealing with corporations versus a pure VC fund can cause additional complexity in the legal aspects (time, cost). The issue from a strategic perspective is that there are liability concerns to a corporation that are not significant to a pure VC, so there can be minor differences in approach to legal documentation, negotiating points, etc.
Some corporations simply move slower than a very small investment firm.

Chris Kutsor (Motorola Ventures)

Source: BVR’s May 23, 2006 teleconference, “Early Stage Company Valuations.” Copies of the conference and transcripts available at www.bvresouces.com.

BV Definition of the Week

Valuation engagement

The AICPA has just released its “final” public exposure draft of the Proposed Statement on Standards for Valuation Services (Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset). One of the newly-proposed definitions is for the all-important term “valuation engagement,” which the Standards define as referring to:

…an engagement, or any part of an engagement (for example, a tax, litigation, or acquisition-related engagement), that involves determining the value of a subject interest. A valuation engagement culminates in the expression of either a conclusion of value or an indication of value. A member who performs a valuation engagement is referred to…as a valuation analyst.

Thus, under this new definition, if a CPA is preparing a tax return, part of which includes the valuation of a closely-held business interest, the new Standards will apply to the valuation portion, but not to the tax return. For more information—and to send in your comments by the September 30, 2006 effective date, go to: http://bvfls.aicpa.org.

Source: BVR Staff

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