November 6, 2013 | Issue #134-1  

Top BV issues in the eyes of CPAs

A recent Journal of Accountancy article includes thoughts of several practitioners with CPA and ABV credentials as to what they see as the top issues in terms of business valuation. According to Rosanne Aumiller (BBP Partners), Nathan DiNatale (SC&H Group), and Randie Dial (CliftonLarsonAllen), these are the most important issues:

  • Clients want more than just valuation services—they also want advice on how to create value;
  • Current proposals on fair value accounting for private companies could negatively impact the amount of business valuation work available;
  • Baby boomer business owners who are now—or will soon be—looking to exit their businesses present a great valuation opportunity;
  • Many clients and attorneys have not come up to speed on new technology, so valuation analysts must be able to work with those who are tech savvy as well as those who are not.

Are merger-related projections ever a valid starting point for the DCF?

The Delaware Court of Chancery prefers contemporaneously prepared management projections for cash flow in a discounted cash flow (DCF) analysis. But what if the only time management prepared a long-term forecast was in the context of merger talks and with an eye to the possibility of litigation? Are the projections automatically unreliable? A recent decision tackles this and other DCF issues and serves as a primer on valuation and the corresponding case law.

Suddenly, long-range projections: A profitable biometrics technology company that provided fingerprint identification technology to various government agencies went public in September 2004 and four years later retained Credit Suisse and Goldman Sachs to explore “strategic alternatives.” The future buyer was a conglomerate of global technology companies, which, in 2010, made a verbal offer to the company that prompted its CFO to prepare bottom-up five-year financial projections for 2010 through 2015. Until then, the company had only created projections for the current year. In December 2010, the target and buyer finalized the merger. The target’s shareholders challenged the transaction and requested a statutory appraisal from the Chancery to determine the fair value of their stock on the merger date.

Both sides presented experts who used the DCF to establish the target’s going-concern value at the time of merger. A major dispute arose between the parties about the reliability of the five-year projections. The petitioners asked the court to reject them and adopt their expert’s two scenarios: 1) an “industry growth scenario” that assumed an industry growth rate through 2015 of 17%; and 2) a “cash deployment scenario” that assumed the target would spend $396 million of its cash on acquisitions. The company’s experts advocated in favor of the court’s use of the projections, notwithstanding minor adjustments.

The Chancery acknowledged that its own decisions prescribed a skeptical attitude in circumstances in which “management had never prepared projections beyond the current fiscal year” and “the possibility of litigation such as an appraisal proceeding was likely.” Another factor to consider was whether the projections were the work of directors or officers of the target who risked losing their jobs if the transaction succeeded. These very circumstances were present here, said the court. On the other hand, in this case the CFO had no reason to fear for his job if the merger went through and also was not involved in an alternative bid. This last factor was significant, said the court, because neither the Chancery nor the Delaware Supreme Court ever adopted a bright-line test that declared projections created during a merger inherently unreliable. Moreover, the petitioner expert’s “cash deployment scenario” was too speculative and there was insufficient evidence for the expert’s “industry growth scenario.”

Another takeaway: Again and again, the court credits the expert who is able to provide a cogent explanation for his selections by reference to the prevailing valuation literature. 

Find a discussion of Merion Capital, L.P. v. 3M Cogent, Inc., 2013 Del. Ch. LEXIS 172 (July 8, 2013) in the December issue of Business Valuation Update; the court opinion will be available soon at BVLaw.

First-ever survey of A/E business valuation and
M&A data

A new survey by Rusk O'Brien Gido + Partners is gathering transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries. The questionnaire analyzes the valuations of stock from actual transactions, including those between employee-owners and in ESOPs and mergers/acquisitions.

The compiled data will include financial performance benchmarking data, valuation multiples for internal (minority interest) stock transactions, ESOP transactions, and merger/acquisition transactions. M&A data will include pricing data as well as data on transaction structures. This study is the first of its kind in this industry.

While the survey is designed to gather information on firms in the industry, valuation analysts and other advisers with industry clients can certainly participate with or on behalf of their clients. Survey participants will receive a discount on the completed study. For more information and to take the survey, click here.

New alliance between IACVA and NEBB

The International Association of Consultants, Valuators and Analysts and the NEBB Institute, comprised of Certified Machinery & Equipment Appraisers (CMEAs), have formed a new strategic alliance. Because business valuations often incorporate M&E valuations, this alliance is designed to strengthen the worldwide ties between these two groups of valuation experts.

"IACVA and NEBB together bring a unique ability to transfer knowledge and support relating to business valuation, fraud deterrence, and machinery and equipment appraisal disciplines among the international communities by drawing on the vast wealth of experience, best practices, and resources preserving the public trust," William A. Hanlin, Jr., president of IACVA, said in a release.

ASA BV committee update

At the recent ASA Advanced Business Valuation Conference in San Antonio, members of the BV Committee were introduced to attendees. The ASA BV area has released a new BV Marketing Toolkit, designed to help ASA members market their valuation practices. Also, a number of the BV courses used for certification purposes are being revised and rewritten to make sure they meet the educational needs of members.  

The latest roster of ASA BV committee members is:

Chair: Robert B. Morrison (Morrison Valuation & Forensic Services LLC)
Vice Chair: William A. Johnston (Empire Valuation Consultants LLC)
Secretary: Jeffrey S. Tarbell (Houlihan Lokey)
Treasurer: Raymond D. Rath (Globalview Advisors LLC)
Past Chair: Linda B. Trugman (Trugman Valuation Associates Inc.)
Member: James O. Brown (Perisho Tombor Brown PC)
Member: Chuck Faunce (Gorfine, Schiller & Gardyn)
Member: Erin D. Hollis (AIW LLC)
Member: Bruce A. Johnson (Munroe, Park & Johnson Inc.)
Member: Timothy J. Meinhart (Willamette Management Associates)
Member: Kenneth J. Pia Jr. (Meyers, Harrison & Pia LLC)
Member: Lee C. Russell (Ernst & Young LLP)
Member: David Smith (Hill Schwartz Spilker Keller LLC)
Member: Trey Stevens (Stevens & Greer LC)
Member At-Large: Gregory S. Ansel (Financial Strategies Consulting Group LLC)
Member At-Large: KC Conrad (American Business Appraisers)
Member At-Large: Susan M. Saidens (SMS Valuation & Financial Forensics)
Ex Officio: James M. Hill Jr. (Hill Schwartz Spilker Keller LLC)
Ex Officio: Scott A. Nammacher (Empire Valuation Consultants LLC)
Ex Officio: J. Mark Penny (Hempstead & Co LLC)
Emeritus: Jay E. Fishman (Financial Research Associates)
Emeritus: Shannon P. Pratt (Shannon Pratt Valuations LLC)
HQ Liaison: Stacey J. Talbot (American Society of Appraisers)

Two strong CPE training events

BVR has two excellent webinars on tap:

The Implied Private Company Pricing Line (November 7): Learn how the new Implied Private Company Pricing Line (IPCPL) seeks to resolve flaws of widely used cost of capital models through an examination of its theoretical development and underpinning and its underlying data composition. Featuring: Robert Dohmeyer (Dohmeyer Valuation Corp) and Rod Burkert (Burkert Valuation Advisors).

Goodwill in Physician Practice Valuations (November 19): Determining and apportioning personal and entity goodwill is a challenge made more difficult with the inclusion of medical regulations and reimbursement schemes. Learn how to properly dissect medical practice incomes when determining goodwill. Featuring: Stacey D. Udell (Gold Gerstein Group) and Stacy Collins (Financial Research Associates). Part 11 of BVR’s 2013 Online Symposium on Healthcare Valuation.

Free webinar on BizMiner’s new offerings

On November 15, get an exclusive tour of BizMiner’s new features during a free webinar, BizMiner: A Guided Tour of New Offerings, hosted by BizMiner principal Jon Brandow. The new Local Industry Financial Reports (available separately or included with a Suite subscription) will be highlighted.

BVR training goes mobile

Now you can take BVR’s training programs with you wherever you go. Live webinars and our Desktop Learning Centers are now mobile-compatible. Attendees at live webinars and workshops will be prompted to download the free Webcast Studio app when signing in. Once the app is installed, simply follow the usual access instructions.


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