BVWire Issue #147-1 | December 3, 2014


‘Absurd CAPM’ paper reinforced after a barrage of comments

After the release of his paper CAPM: An Absurd Model, Pablo Fernandez (University of Navarra, IESE Business School) received 233 comments, so he has issued a revised version. The paper skewers the capital asset pricing model (CAPM), saying its “assumptions and its predictions/conclusions have no basis in the real world.”

Most agree: Over three-quarters (78%) of the commenters agree with the term “absurd” to describe CAPM. I thank them all very much,” Fernandez writes. “I have learned a lot reading (and thinking about) their opinions: real opinions of real persons that know finance and have thought about the CAPM, the market return, the beta, the market risk premium.” He collected the comments, criticisms, and suggestions and published them as a separate paper.

What do you think? Join the lively discussion in the LinkedIn Business Valuation and Advisory Network group.

back to top

Pit beef figures into Chief Justice Strine’s advice to M&A advisors

What does a pit beef sandwich have to do with the rising litigation trend involving M&A deals? Delaware Supreme Court Chief Justice Leo Strine makes the connection in a new paper that gives some solid advice for legal and financial advisors in M&A transactions.

Today, it’s almost a certainty that an M&A deal will trigger a lawsuit by shareholders. Recent lawsuits (most notably the Rural Metro case, available at BVLaw) stress that reliable valuations and fairness opinions are critical in today's M&A deals. Boards of directors, bankers, and their advisors are all under intense scrutiny for potential conflicts of interest and the integrity of the financial analysis underlying the deal.

Listen up: Chief Justice Strine’s paper addresses what legal and financial advisors can do to conduct an M&A process in a manner that: (a) promotes making better decisions; (b) reduces conflicts of interests and addresses those that exist more effectively; (c) accurately records what happened so that advisors and their clients will be able to recount events in approximately the same way; and (d) as a result, reduces the “target zone” for plaintiffs’ lawyers.

For example, he says independent directors should examine red-lined versions of the financial adviser's PowerPoint presentations to be aware of changes that are often overlooked. However, he says he is told that the U.S. does not have the technological capacity to produce a legible PowerPoint redline version. “Count me as patriotic,” he writes. “If this is the only hurdle, I believe our nation is capable of vaulting it. Only someone who does not like hot dogs, hamburgers, cheesesteaks, lobster rolls, clam chowder, shrimp and grits, jambalaya, pit beef sandwiches, brisket, barbecue ribs, Good Humor ice cream bars, spaghetti and meatballs, fish tacos, Kentucky Fried Chicken, or things fried at state fairs could question our nation’s ability to do this; in other words, only someone who despises America itself.”

BVWire applauds Chief Justice Strine for his sage advice—and his selection of food items. To download his paper, click here.

back to top

Court chastens expert over ‘severely’ deficient valuation

Sometimes courts face a hard choice, having to decide between equally compelling and competent valuations. Not so in a recent fair value proceeding in which the skills gap between the testifying experts made it easy for the court to pick the winner.

Biz divorce: The petitioner and the respondent were the two owners of a New York company that installed solar energy panels on buildings. Business boomed, and the company enjoyed an 80% market share until competition increased, cutting that share to 11%. Also, there was uncertainty over the fate of federal and state tax incentives offered to users of the panels.

The owners began to argue over the direction of the business. The respondent submitted a strategic growth plan to the board of directors that proposed expanding into new markets. The board approved it over the petitioner’s objection, who then filed for dissolution of the company. The respondent opted for a buyout of the petitioner’s shares. Both sides presented expert testimony about the fair value of the petitioner’s interest.

Growth issue: Both appraisers calculated the value under the income and market approaches but used different methodologies. Under the income approach, the petitioner’s expert performed a discounted cash flow (DCF) analysis. He used the five-year projections the management board had approved but applied a company-specific risk premium to account for “forecast risk.” At the end of the forecast period, he reduced the growth rates during the remainder of the 10-year discrete forecast to only inflationary growth in the terminal value. He studied the company’s financials and corporate structure and assessed the recently adopted business growth plan. He also researched the industry and found that New York State had extended the tax credits through 2016 and had started another program to incentivize consumers to install the panels. Greentech Media, a leading source of news and analysis of green technology, forecast 60% annual growth in the industry over the next three years. Also, the company’s 2013 revenue exceeded that of the previous year by 35%. The final value, weighting results from the income and market approaches, was $3.8 million, he concluded.

The respondent’s expert, on the other hand, used the capitalization of weighted earnings method. The court noted that this approach assumes that a company has long-term stable cash flow but that the expert conceded that the company’s cash flows and earnings were not consistent during the preceding four years. He also said that the DCF was his preferred method. The court discredited his valuation. It pointed to multiple flaws, including the expert’s failure to include either a growth rate or management projections.

He was unaware of the board’s growth strategy plan and did not know that the board had decided to reinvest dividends in the company to stimulate growth. According to the court, he “severely underestimated even his client’s own projections.” The court’s verdict regarding the respondent expert’s market-based analysis was even harsher. It had “severe deficiencies” that prevented calculating a credible fair value for the company, the court said. Except for a slight adjustment for the marketability discount, the court adopted the petitioner expert’s $3.8 million value.

Takeaway: In reflecting on the testimony, the prevailing expert, Greg Scheig (ValueScope Inc.), points to a few things that resonated with the court. He says the judge really responded to his industry research and knowledge of details crucial to the case: the federal tax credits and the New York State-specific initiatives. He notes that in court he discovered there was an unnecessary EBITDA adjustment in his market-based analysis due to a misunderstanding on the client’s part regarding the financial statements. What saved the opinion, he says, was his immediately admitting the erroneous adjustment and his being able to redo his conclusions, calculator in hand, on the stand. It was important to provide the court with a revised, conclusive answer, he says, rather than leaving the valuation with a huge question mark and an opening for attack from the opposing counsel.

Find a full discussion of Wright v. Irish (Hudson Valley Clean Energy, Inc.), 2014 N.Y. Sup. Ct. Index No. 2111/2014 (Nov. 7, 2014) in the January issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

back to top

Worried about valuing a cannabiz?

Valuation experts may have second thoughts about accepting an engagement involving a marijuana business that’s illegal under federal law but legal under state law. A key advisory group to the IRS urges that there should be no worry about this, at least with respect to tax pros.

High ground: Tax professionals who give advice to marijuana firms in the states where marijuana is legal should not have to suffer adverse consequences because the businesses are illegal under federal law, recommends the IRS Advisory Council in a report. The council suggests that the IRS publish formal guidelines for accountants and tax pros to clarify that they won’t be audited by the federal government or face other sanctions for working with cannabis companies.

For a rare chance to learn about valuing sellers and dispensaries of medicinal and newly legalized cannabis, listen to a webinar, Valuing Marijuana Dispensaries, conducted by Ronald Seigneur (Seigneur Gustafson LLP) and Jim Marty (Jim Marty and Associates LLC), two Colorado-based financial experts.

back to top

Cap rates down in senior healthcare market

Capitalization rates have decreased significantly for each segment of the senior care M&A market since 2013, according to recent data in The 2014 Senior Care Acquisition Report, published by Irving Levin Associates.

Bull market: For the four quarters ended Sept. 30, 2014, assisted living cap rates were down 70 basis points, from 8.7% to 8.0%. They were down 60 basis points, from 8.5% to 7.9%, for independent/assisted living. Also, they were down 70 basis points, from 13.0% to 12.3%, for skilled nursing.

“The availability of equity and cheap debt, plus an influx of new buyers, has been driving prices up and cap rates down in a seniors housing bull market that is seeing more M&A transactions than ever before,” says the report. The average price per unit for assisted living facilities is up 30.5%, from $150,600 to $196,600; 28.8%, from $164,000 to $211,300 per unit, for independent/assisted living; and 7.0%, from $73,300 to $78,400 per bed, for skilled nursing.

back to top

Appraisal Foundation seeks members for its BV Resource Panel

The Appraisal Foundation is seeking qualified candidates to serve on its volunteer Business Valuation Resource Panel that will report to the board of trustees. The term will last up to three years and will begin in January 2015. To fill out an application, click here (deadline is December 15).

back to top

Online Winter Summit examines advanced BV topics

Take a deep dive into your BV training this month by attending the NACVA-CTI Online Winter Summit, taking place December 1-13. The Online Winter Summit is a series of webinars and broadcasts specifically designed for valuators who want to advance to more nuanced topics rather than those professionals who need fundamental or intermediate training. You can pick and choose from 31 different sessions.

The Online Winter Summit will feature real-time webcasts from back-to-back live events, the Advanced BV Symposium (December 9-11) and the Advanced Healthcare Valuation and Consulting Symposium (December 12-13). Take a look at invitation videos from the Advanced BV Symposium co-chairs, Peter Butler and Nancy Fannon, and Advanced Healthcare Valuation co-chairs, Richard Romero and Tim Smith.

For more details, including an agenda and registrations options, click here.

back to top

Divorce valuation is the focus of the December 2014 issue of Business Valuation Update

The December 2014 issue of Business Valuation Update is devoted to valuations in a divorce context. Here’s what you’ll see:

  • In Divorce, Who Owns the Goodwill? A New Analysis and Approach (Alan Zipp). A legal argument for the exclusion from the marital estate of personal goodwill that belongs to a person other than the spouse/owner of the business being valued.
  • In Divorce, Who Owns the Goodwill? A Response (R. James Alerding, CPA/ABV, ASA). Comments and a response to the Alan Zipp article on personal goodwill and the marital estate.
  • 10 Time-Tested Ways to Build a Defensible Divorce Valuation (BVR Editor). Practical pointers all valuation analysts should know when engaged to do a valuation for divorce.
  • Fingertip Guide to State-by-State Divorce Valuation Issues (BVR Editor). The rules are different for every state. This chart covers valuation standards, treatment of goodwill, and the basis for the valuation date in each state.
  • Shannon Pratt Receives ASA’s Highest Honor (BVR Editor). ASA’s Lifetime Achievement Award bestowed on a legendary figure in the BV profession.
  • Mining Valuation Data From Trust and Estate Returns in a Divorce Case (BVR Editor). A wealth of information is buried in IRS returns that can be a big help to valuation analysts—but you have to know where to look.
  • Trade Associations Can Be Excellent Sources of Compensation Data (BVR Editor). Reasonable compensation is often the most contentious issue in the valuation of a business caught up in divorce, so finding good data is crucial.

To read these articles—as well as digests of the latest court cases—see the December 2014 issue of Business Valuation Update (subscription required).

back to top

BV movers …

People: Casey Ballard and Wayne Wilson, both formerly of UHY Advisors Inc., have joined the Houston firm Hill Schwartz Spilker Keller LLC, with the intent of expanding HSSK’s energy and international arbitration group … Michael Balter is the new partner-in-charge of Marcum LLP’s Florida region … George Hawkins, ASA, CFA, president of Banister Financial Inc., based in Charlotte, N.C., was recently admitted as a charter member of the American Academy of Matrimonial Lawyers (AAML) Foundation’s Forensic & Business Valuation Division. This is an elite group of 28 charter members, selected from across the U.S. on the basis of their national reputation and achievements in business valuation, litigation support, and forensic accounting, their history of serving AAML members and their clients in complex financial matters during divorce proceedings, and their commitment to integrity in this process … Larry Levine joins the Valuations & Opinions Group as a managing director in the Chicago office … Michael Moore, CPA, CVA, CM&AA, CGMA, joins the South Carolina firm Moyer, Smith and Roller PA CPAs as manager … Jan I. Sylvis, the chief of accounts for the Tennessee Department of Finance and Administration, has been named by the Financial Accounting Foundation as vice chair of the Governmental Accounting Standards Board … Brian Sipes, formerly of Houlihan Lokey, joins the Dallas office of Duff & Phelps as managing director … Terry Whitehead has returned to the Portland, Ore., office of Willamette Management Associates as manager and office director.

Firms: BDO USA LLP has acquired UHY Advisor's Texas practice … The Michigan firms Maner Costerisan and McCartney & Co. P.C. merged on December 1 and will operate under the Maner Costerisan brand … McGladrey LLP has announced that it is acquiring the Oklahoma City-based firm Cole + ReedPorte Brown LLC has merged with Bloomingdale, Ill.-based Katzenbach & Associates Ltd. and is now operating under the Porte Brown brand … The Houston Chapter of the American Society of Appraisers has received the Outstanding Chapter Education Event for its Energy Valuation Conference (EVC) … Generational Equity, a Dallas-based adviser for privately held, middle-market businesses, was recognized as "Valuation Firm of the Year" by the M&A Advisor at its 13th annual awards gala in New York City.

back to top

CPE events

Business Valuation for Banks (December 4), featuring Franz Ross (First Niagara Bank). Expert appraiser Ross joins BVR for a look at the opportunities and challenges that lie with any valuation engagement performed to help a bank assess the appropriateness of a proposed loan.

Valuing Sports Franchises (December 11), featuring Drew Dorweiler (Dartmouth Partners Limited). As record-breaking sales of sports franchises make headlines, they draw into question the exact values of these businesses and the valuations of teams in the minor and independent leagues.

Understanding Work RVUs, Collections, Hours and Other Data That Impact Physician Compensation (December 16), featuring Alan Simons (CliftonLarsonAllen). It is both a blessing and a challenge that physician compensation arrangements are built on a wealth of data. Learn how to maximize these benefits while minimizing their risks.

We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963
Share on LinkedIn



Not a BVWire subscriber?
Get on the list today!

In this issue:

'Absurd' CAPM

Strine's advice

Court slams expert

Valuing cannabiz

Cap rates in healthcare

TAF needs volunteers

Online winter summit

December BVU

BV movers

CPE events








Copyright © 2014 , All rights reserved.

Business Valuation Resources, LLC

1000 SW Broadway, Suite 1200
Portland, OR 97205
P: (503) 291-7963