Often-overlooked angle in divorce valuations
Valuation experts could be overvaluing a business caught up in a divorce, according to Alan Zipp in the article "In Divorce, Who Owns the Goodwill?" At issue is the personal goodwill that belongs to a person other than the divorcing parties of a business that is being valued as part of a marital estate. Zipp points out that, under generally accepted BV methods using an income approach, personal goodwill of the other owners may be included in the valuation of the business. Therein lies the problem.
Back it out: “In states where personal goodwill has been determined not to be marital property, it is incumbent on the appraiser to identify and value the personal goodwill of all individuals [italics added] and to exclude that personal goodwill value from the marital property value of the enterprise,” he writes in the December 2014 issue of Business Valuation Update, which is devoted to valuations in a divorce context.
Interestingly, Zipp presents the concept from the legal perspective of property ownership. That is, the value of personal goodwill should not be part of the marital estate because neither the business entity nor the divorcing spouse has a legal property ownership interest in the personal goodwill of the other owners of the business.
What do you think? We’d like your comments on this different perspective on personal goodwill in divorce.
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Fee dispute puts appraiser in the hot seat
Valuation experts receive a lot of advice on how to guard against an attack from the opposing side, but sometimes an attack can come from the expert’s own client. A recent case shows how an appraiser who sued a client over unpaid fees was put on the defensive.
Costly divorce: The client hired an accounting firm for his divorce case and wanted to show that the value of his real estate business had declined during the marriage and there was no appreciation subject to division. He signed an engagement letter that specified the hourly rates for the partner in charge and staff members. The letter promised the firm would provide valuation services in compliance with the AICPA’s Statement on Standards for Valuation Services #1 (SSVS #1). The partner said that his staff reviewed more than 25 boxes of documents containing information on the client’s personal and business finances covering over 12 years. At the request of the client’s attorney, the expert prepared three reports: a valuation of the client’s interest in the businesses, an income- and cash-flow analysis, and a labor-intensive “tracing” analysis to show the client’s premarital portion of the assets. When he began to realize that most of the properties the business held were underwater, he asked counsel whether the costly additional analyses were necessary. He was told to go ahead with the work because it was critical to making a case for the client’s retention of ownership in all of his assets.
In the divorce trial, the wife’s attorney challenged the appraiser’s valuation, specifically the methodology of valuing the real estate. The expert explained he used the capitalization of earnings method to determine the fair market value of the property owned by the businesses. It required him to forecast the annual earnings from the property and determine the appropriate capitalization rate, which he said he calculated considering, among other things, the appraisal report the wife’s expert had prepared. He admitted that the report included a “restrictive use” provision. Subsequently, the wife’s attorney asked the court to exclude the testimony. However, before the court had reached a decision, the parties settled. The husband was able to hold on to all of his business interests.
Second-guessing: Fees for all appraisal reports and court testimony came to $166,000. The client only paid the initial retainer of $10,000 and an additional $12,000. The appraiser sued, prompting the client to file a counterclaim alleging accounting malpractice and professional negligence. He claimed the appraiser erred when he adopted the appraisal report the wife’s expert had submitted. When he could not find an expert to prove the malpractice claim, the client voluntarily withdrew it. During trial, the court allowed him to cross-examine the appraiser about the services the firm had provided but not about the applicable accounting standards. Regardless, the client launched into a host of allegations meant to show the appraiser breached its promises in the engagement letter. Although the accounting firm prevailed, it was exposed to public second-guessing from the client. The client appealed the $166,000 fee award, claiming the trial court erred when it barred him from showing the appraiser’s work failed to comply with the professional standard. Again, the appraiser’s divorce work came under intense scrutiny in a setting that had nothing to do with the divorce. Ultimately, the appeals court affirmed the award.
Takeaway: Watch your back at every turn. Be clear about the engagement, communicate with counsel and the client regularly, and document concerns related to the scope of the work, fees, and other potentially damaging issues. Finally, know that, even if you have a good case, litigation exacts its own price in the form of unwanted attention.
Find an expanded discussion of Cohen & Company v. Breen, 2014 Ohio App. LEXIS 3847 (Sept. 11, 2014), in the January issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.
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Trial needed to determine Madoff account value
The Tax Court refused to grant summary judgment to the IRS on an estate’s valuation of its account managed by Madoff Investments. The issue is whether the account or its claimed holdings are considered to be property included in a gross estate and whether a willing buyer or seller of the account could reasonably know or foresee before its collapse that the account was part of a Ponzi scheme. These are disputed material facts that should be determined at trial, the Tax Court ruled in Estate of Kessel, T.C. Memo. 2014-97.
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Taking the mystery out of embedded brand values
How do you value a brand that’s intertwined with all of the other assets of the company? This is a phenomenon that’s not well understood. Fortunately, there is research that reveals how brands are valued in an actual acquisition.
New data: In 2013, a consortium of Berkshire Hathaway and 3G Capital acquired H.J. Heinz. The brand value was reported as worth $12.1 billion, which represented 40.5% of enterprise value, according to a new report, “Global Top 20 Brands in 2013,” from Markables. The rankings in the report represent brand values that follow international accounting and financial reporting standards. Plus, they were calculated by independent certified appraisers, audited by CPAs, and now appear on the balance sheets of the acquirers. Some of the other famous brands in the Top 20 list include:
|| Brand Value
|% of Enterprise
|Crown (Corona beer)
|Saks Fifth Avenue
Key ratios: The 2013 Top 20 brands accounted for 34.3% of all assets of these enterprises (including other intangibles, goodwill, plant and equipment, inventory, and receivables). The figure is in line with previous years. The average brand premium of the Top 20 was 8.0% of net revenue in 2013. That is, 8% of revenue represents profit directly attributable to the brand. This figure is lower than in 2012 but higher than it was in 2010 and 2011.
Markables (requires login) has a database of over 5,000 trademark valuations published in financial reporting documents of listed companies from all over the world. The database reports value solely for the use of trademarks (not bundled with other rights). It also contains trademark assets that have longer lives than is typical.
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Illustrative examples highlight revised book on valuing intangibles
A comprehensive resource for valuing intangibles has been revised and is now available. Robert Reilly and Bob Schweihs, Willamette Management Associates managing directors, wrote this new 700-page book, Guide to Intangible Asset Valuation. The authors take a broad approach, so the book is a valuable resource for novice and seasoned expert alike. They go through the basics of valuing intellectual property and intangible assets, and they provide detailed examples for each generally accepted valuation approach.
The book also covers topics such as due diligence procedures and measurement methods for economic damages; allowable intercompany transfer price analysis methods; intangible asset fair value accounting valuation issues, and much more.
The book is available from BVR. For more details, click here.
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Holiday half-price sale on electronic USPAP
For just $30, you can have an electronic copy of USPAP, thanks to the Appraisal Foundation’s special holiday half-price sale. The sale price is only available through the website, and the product is delivered in an automatic electronic download. This offer is limited to one order per person and is not available for previous purchases. To order, click here.
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New resource for auto dealership valuations
At the AICPA Forensic & Valuation Services Conference in New Orleans, Timothy W. York (Dixon Hughes Goodman LLP) mentioned a new resource for experts valuing automobile dealerships. The Automotive Buy Sell Report follows industry trends and news about the purchase, sale, and valuation of automobile dealerships. For example, its “Transaction News” section reports that a Detroit-area Hyundai dealership recently sold its real estate for $3.13 million and an undisclosed amount for the franchise. The 28,000-square-foot dealership sits on 4.5 acres.
If you don’t have it already, Key Trends Driving Auto Dealership Value: A BVR Special Report is a perfect companion to the Automotive Buy Sell Report.
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BV movers . . .
People: Sarah Jennings, James Meyer, and Keith Pfeifle have been promoted to principals at the Lansing, Mich., firm Maner Costerisan PC … The National Academy of Public Accounting Professionals has selected John Parsley, partner and senior manager at Rives & Associates, LLP, as one of 2014’s "Top 10 Public Accounting Professionals" in North Carolina … Matt Ringwelski is now a partner at Abdo, Eick & Meyers LLP in Mankato, Minn. … Michelle Sullivan is the first woman ever elected to the executive committee of the Buffalo, N.Y. firm Freed Maxick, an achievement the company described as a “milestone” … Alan Whitman, office managing partner in Detroit, is now CEO of Baker Tilly and will assume this role in June 2016 when current CEO Timothy Christen becomes the vice chair of the AICPA.
Firms: The Louisville, Ky., firm Deming Malone Livesay Ostroff CPAs (DMLO) acquired Healthcare Practice Consultants LLC, expanding its niche services into the medical and dental community … North Carolina firms Haynes Strand and Co. and LB&A have merged and will be known as LBA Haynes Strand PLLC. They will have offices in Greensboro, Mount Airy, and Matthews and will continue to serve small and middle-market businesses … The international law firm McDermott Will & Emery LLP has been awarded national Tier 1 rankings across 22 practice areas in the 2015 “Best Law Firms” by U.S. News Media Group and Best Lawyers. Also, McDermott has received the prestigious recognition of “Law Firm of the Year” in the area of trusts and estates law, an honor that the firm also received in 2011 … Two Illinois firms, Porte Brown LLC and Brown, Kaplan + Liss (BKL), will merge and operate under the Porte Brown brand …Testone, Marshall & Discenza (Syracuse, N.Y.) says its merger with Bonadio Group will wrap up by January 1. McGladrey LLP has agreed to acquire the Philadelphia accounting and advisory firm Fesnak LLP effective January 1.
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Valuing Sports Franchises (December 11), featuring Drew Dorweiler (Dartmouth Partners Limited). From the big leagues to independent teams, sports franchises share the same value drivers. Learn how business appraisal methodologies can be applied to any franchise with one of the foremost experts in sports valuations.
Understanding Work RVUs, Collections, Hours and Other Data That Impact Physician Compensation (December 16), featuring Alan Simons and Curtis Mayse (CliftonLarsonAllen). The Online Symposium on Healthcare Valuation concludes with a look at how appraisers can best use the large amount of data available for physician compensation measurements, comparables, and benchmarks.
Business Valuation in the Federal Tax System in 2014 (December 18), featuring John Bogdanski (Lewis & Clark Law School). BVR’s 2014 webinar series comes to a close with a review of the business valuation cases that were decided in the federal tax system during the year with attorney and tax expert Bogdanski.
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