BVWire Issue #152-1 | May 6, 2015


IRS S Corp Job Aid now available

An internal IRS document is now available that reveals the agency’s most current thinking on the valuation of S corps, one of the hottest topics in business valuation. The document was written to help IRS professionals who are examining S corp valuations—and it presents a wealth of information for valuation analysts.

How to get it: The 33-page Job Aid, entitled The IRS Valuation of Non-Controlling Interests in Business Entities Electing to be Treated as S Corporations for Federal Tax Purposes, is posted on several websites, including the website of Jim Hitchner’s Valuation Products and Services. It is included on a dedicated web page created by Business Valuation Resources that also includes articles, videos, and other resources devoted to S corp and other pass-through entity valuations. Michael Gregory (Michael Gregory Consulting), while working at the IRS, was a champion of the IRS internal team on valuing S corps. Gregory will host a webinar on June 16 for BVR and  he will give his unique insights on the Job Aid. 

BVR’s new S corp webpage also includes information on a new book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle, which is a major advance in thinking about S corp valuations. A special 4-hour workshop that will reveal a new approach to PTE valuations will be held on May 20. The workshop will be conducted by the new book’s authors, Nancy Fannon (Meyers, Harrison and Pia LLC) and Keith Sellers (University of Denver).  

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Pressure grows on stand-alone PE firms regarding independent valuations

Many stand-alone private equity managers are wondering whether they will be required to use independent valuation firms for determining the value of holdings, according to a memorandum from Willkie Farr & Gallagher LLP. Investment managers who handle publicly traded companies are now generally using independent firms to help with valuations, but neither U.S. GAAP nor industry guidelines require it.

More scrutiny: PE valuations have come under increasing review by both investors and regulators, according to the memo, for the following reasons:

  • More frequent fundraising cycles, requiring the presentation of interim performance data and IRR of “active” funds;
  • Continued focus on valuation practices in SEC examinations conducted by the Office of Compliance Inspections and Examinations (OCIE);
  • Prevalence of sponsor-to-sponsor sales of portfolio companies, which can highlight the variance in valuations; and
  • Institutional investors continuing to have exposure to portfolio companies through more than one private equity firm and seeking consistency across their various managers.

PE fund managers who use independent valuation firms typically have them assist with the valuation of Level III assets (assets for which pricing inputs are unobservable and there may be little, if any, market activity), says the memo. They’re also engaged to support Sarbanes-Oxley compliance and demonstrate that there are strong internal controls.

Extra: The AICPA has a task force working on a practice aid that focuses on valuing holdings of PE and venture capital funds. Look for a draft later this year.

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How the aging population will affect healthcare cash flow

Over the next five years, the increase in age of the U.S. population will have positive and negative effects on the bottom line for both profit and nonprofit hospitals, according to the latest Healthcare Quarterly (purchase required) from Moody's Investors Service. In 2010, 13% of U.S. residents were age 65 or older. By 2030, that percentage will increase to 20%, says Moody’s.

Counteracting forces: An older population increases demand for medical services, which will be a positive. As utilization increases, hospitals can leverage their existing resources and spread their fixed costs, which benefits earnings and cash flow, says the report. However, the revenue mix will change because, as baby boomers retire and leave the workforce, a higher percentage of the population will be eligible for Medicare. "This shift away from commercial, employer-based insurance to Medicare will be detrimental to hospital earnings as reimbursement from government programs is usually lower than that realized from commercial insurers," according to Moody's.

Overall, U.S. healthcare expenditures will increase by 25% by 2030 due to the higher cost of caring for those age 65 or older. That increase will cause Medicare and private payers to put pressure on providers to cut costs.

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Financial experts spar over ‘market efficiency’ in Groupon litigation

The market efficiency theory has sparked a lively debate among financial experts and plays a critical role in securities fraud litigation. A Daubert ruling in the Groupon class action suit discusses what’s required to show a company’s stock traded in an efficient market.

Bad deal: Groupon, the deal-of-the-day company, went public in November 2011. Investors subsequently sued under Section 10(b) of the Exchange Act and Rule 10b-5, alleging harm from the company’s misrepresentations. Under the efficient market hypothesis—increasingly under attack by economists—the market price of a company’s stock embodies all public information about the company. In litigation, this means investors do not have to show direct reliance on the misstatements but can proceed on the automatic assumption that significant misstatements caused share prices to fall.

Detractors argue that many investors do not rely on the integrity of the market at all. What an investor is willing to pay for a company depends on a host of other factors (and may not reflect the value of a company at all, as Professor Aswath Damodaran has shown).

Unexpected earnings news: Here, the investors retained an experienced expert who performed an event study to show cause and effect between unexpected company events and movement in the stock price. He said he looked for "big news days" during the relevant period by identifying significant, unexpected earnings-related news. He concluded that only two dates met his objective criteria. Admittedly this was a low number, he said, but one that was not uncommon for a class period that was only seven weeks. Further, he used a one-year period to control for standard volatility. However, changing the length of the control period would not affect the results, he said. He concluded that Groupon’s stock traded in an efficient market.

The defendants’ expert attacked the study on numerous grounds, but his criticisms had no traction with the court. The investors’ expert “correctly analyzed ‘market efficiency’ from the perspective of whether unexpected information quickly affected Groupon stock price—not whether the price of Groupon stock accurately reflected all information,” the court determined. Although the defendants’ expert was “clearly an expert in efficient capital markets,” he failed to understand that the law did not require a perfectly efficient market to show fraud on the market.

Takeaway: Courts are reluctant to adopt the changing view on market efficiency coming from the academic community. Debates “about the degree to which the market price … reflects public information about the company” are “largely besides the point” in terms of determining market efficiency under legal precedent, the court in this case said.

Find an expanded discussion of In re Groupon Securities Litigation, 2015 U.S. Dist. LEXIS 27334 (March 5, 2015), in the June edition of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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TAF asks for your input on the BV profession

The Appraisal Foundation and its Business Valuation Resource Panel have asked BVWire and the valuation associations to distribute this survey of the business valuation community and its members’ areas of expertise, so that TAF can better "serve and inform the business valuation community."

If you have any questions about the survey (some of the questions are potentially confusing), you can contact TAF at 1-855-414-9332 (toll free) or via email at

TAF has notified us that the survey server has limited bandwidth, so try again if you can't get in the first time. The questionnaire is fairly short, and your answers are confidential.

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And the winner is … : The fourth annual Private Business Valuation Challenge

Smaller internationally accredited business schools dominated the fourth annual Private Business Valuation Challenge Competition in Seattle on April 24-25. The competition involves student teams from universities around the nation valuing an actual company provided by Moss Adams LLP. Teams of three to five students have access to data from BVR and volunteer mentors from the AICPA, ASA, and NACVA to assist them.

Teams create video presentations of their findings and upload them to the Internet. Panels of valuation professionals review the presentations and recommend which of the participating teams should be invited to a second face-to-face round in Seattle. The judges are drawn from a large pool of senior valuation professionals who volunteer their time to the program. Because the number of competitors grew significantly from the previous year, the second round of judging spanned two days instead of one and grew to nine teams.

Top teams: In Seattle, the teams made presentations to a panel of three judges who selected first-, second-, and third-place winners. These teams were awarded prizes of $5,000, $2,500, and $1,500, respectively. First place went to Southern Indiana University and second place to Northern Iowa University. Middle Tennessee State University and Lynn University tied for third.

The presenting sponsors of the challenge are BVR and Seattle Pacific University. Synergy Financial Management and the BV placement firm of Borrowman Baker are sponsors. A special attraction of the event was the presentation by John Borrowman titled "Business Valuation Careers: A 30,000-Foot View." He later did a webinar of this presentation.

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Global intangible values examined in 2015 GIFT Study

The advertising industry is the most intangible sector globally, with virtually all of its aggregate value coming from intangible assets, reveals the 2015 GIFT Study from BrandFinance. The study examines the portion of enterprise value that represents intangibles (brands, people, know-how, relationships, and other intellectual property).

Big picture: The study covers more than 58,000 companies quoted in over 120 countries and 120 stock exchanges. The total enterprise value of all entities studied was $71 trillion at the end of 2014. Of this value, $33.5 trillion represents net tangible assets. The rest is the value of disclosed intangibles ($11 trillion) and “undisclosed value” ($26.5 trillion).

In addition to advertising, sectors with the highest proportion of intangibles are pharmaceuticals (91% intangible value) and media (90%). At the other end of the spectrum are oil and gas (97% tangible), electric (79%), and banking (78%).

Extra: BVR has a new Global Business Valuation Resource Centre designed to deliver best-in-class news, training, research, and data tools to business valuation professionals around the world. If you have ideas on topics, products, and/or news items, we would welcome the chance to speak with you! Contact Lexie Gross at 617 861 7700.

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BV movers …

People: Steve Choi was appointed international director of business valuation at the New York City office of the Royal Institution of Chartered Surveyors (RICS). He will work within the International Standards team to ensure that policies, quality assurance, and strategies support global standards across the valuation profession … Steven Fisher was named managing partner of Reinsel Kuntz Lesher LLP’s Reading, Pa., office … Kaci Howell joins Weaver LLP as a director of valuation services in the firm’s Houston office … Jill Jacobs is the new chief marketing officer for the New York City firm Friedman LLP … Robert Morrison, president of the Orlando firm Morrison Valuation and Forensic Services, has joined Stetson University’s School of Business Administration as adjunct faculty and to develop and teach the first-of-its-kind “Principles of Business Valuation” course to undergraduate and graduate business students … Timothy Smith, co-author of BVR’s Guide to Healthcare Industry Compensation and Valuation, joins the Dallas-based Ankura Consulting Group, a boutique management consulting and expert services firm, as senior managing director.

Firms: Carr Riggs & Ingram has merged with the Woodlands, Texas-based CPA firms Oman Berry & Associates and BOI Consulting ... PBMares LLP of Williamsburg, Va., has merged with the Baltimore-based firm TMDG LLC, which will become a subsidiary of PBMares … Roever Broenner Susat GmbH, a Hamburg, Germany-based company is the newest member firm to join Mazars Worldwide, an international independent organization specializing in audit, accountancy, tax, legal, and advisory services.

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May kicks off with some terrific CPE events

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

IRS S Corp Job Aid

PE valuations

Healthcare cash flow

Market efficiency

TAF survey

BV Challenge winners

Global BV news

BV movers

CPE events










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