BVWire Issue #147-3 | December 17, 2014


Latest transaction multiples from Pratt’s Stats

Private companies in the mining and finance/insurance/real estate industry groups have the highest values relative to their revenues, according to the latest quarterly Pratt’s Stats Private Deal Update (available with a subscription to the Pratt’s Stats deal database). These industry groups have a median selling price/revenue valuations multiple of 1.84 and 1.13, respectively. At the low end are firms in the retail (0.37) and construction (0.41) industries. The table below presents the total count of transactions in Pratt’s Stats by major industry group as well as median valuation multiples. The data below include private companies purchased by public and private companies. There are now over 22,000 private-company transactions in the database.

SIC   Industry (transaction count)  MSP/Rev
0111-0971  Agric./Forestry/Fishing (531) 0.57
1011-1499  Mining (202) 1.84
1521-1799  Construction (802)   0.41
2011-3999 Manufacturing (3,786) 0.78
4011-4971  Transport./Public Util.(1,091) 0.81
5012-5199   Wholesale (1,210) 0.45
5211-5999 Retail (5,912)   0.37
6011-6799   Finance/Ins./Real Estate (883)  1.13
7011-9999  Services (7,781)  0.69
0139-9999 All Industries (22,198)   0.56

Free download: BVWire provides an excerpt from the 4Q2014 issue of Pratt’s Stats Private Deal Update, which summarizes and analyzes private-company acquisitions by private and public buyers. It also includes industry and economic forecast information. Click here for the free excerpt.

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Valuation practices revealed in new Pepperdine report

Over the past year, business appraisers saw an increase in the number of engagements, higher fees for services, and more competition, according to the “2015 Capital Markets Report from Pepperdine. This annual report surveys business appraisers, brokers, banks, private equity groups, business owners, and investors in order to benchmark the current climate and projected outlook for lending, investing, and acquiring capital.

Appraisers say that domestic economic uncertainty is the most important issue facing privately held businesses today. Other interesting findings include:

  • The most popular methods used to value a business are the discounted future earnings method (37%), capitalization of earnings method (24%), and guideline company transactions method (17%);
  • Recast (adjusted) EBITDA multiple is the most popular when using the multiple valuation method; and
  • Appraisers use an average risk‐free rate of 3.4% and a market (equity) risk premium of 6.1% Average long‐term terminal growth is estimated at 3.3%.

Small businesses and investors predict improved business conditions and an increased demand for capital in 2015, says the report. But the lack of access to funding will remain a challenge to business owners, which will hinder growth.

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AriZona case sparks discussion of value of S corp versus C corp

In a previous BVWire, commenting on the AriZona business dissolution case, Gil Matthews (Sutter Securities Inc.) made the statement that “a company structured as an S corp cannot be worth less than it would be if it were a C corp.” This is due to the different tax structures and excess compensation issues.

“He's wrong with the blanket statement that there's no logical way that an S corp can be worth less than a C corp,” says James B. Lurie (CapVal-American Business Appraisers LLC). “It may be true for very large corporations, but where the company is smaller, compensation is legitimately high so it can absolutely be true. This can be the case particularly in states with very low C corp taxes. Generalizations are dangerous.”

Matthews responds: “When S corporations are being valued in oppression or fairness cases, earnings must be normalized, so that excessive compensation must be adjusted. In any event, any buyer of an S corp will consider normalized earnings, not reported earnings impacted by excess compensation,” Matthews points out. “When earnings are appropriately normalized, a business must be worth more as an S corp than as a C corp. The difference is minimal for very small corporations that are subject to low marginal corporate tax rates. Mr. Lurie is correct if the context of the valuation does not require normalization, such as valuing a minority interest in an S corp for tax purposes, since an S corp is not limited by the taxes on excessive compensation that affect C corp distributions.”

Lurie picks up on this point: “This is also true in the case of smaller S corps in certain states,” he says. “In Ohio, there's no effective income tax on C corps. When you have a C corp that makes less than $50K pretax, the federal tax is only 15%. If taxed as an S corporation, the income could be passed through at the shareholder's personal rate, which might well approach a combined rate of 40%. Bingo! Disposable cash flow from the C corp is greater than the S corp. So it depends, and, as I said, generalizations are dangerous.”

“As an investment banker for 55 years, my experience has been with larger companies,” says Matthews. “I can see where my generalization can break down for companies without seven figure earnings.”

A digest and the court's opinion for the case that sparked this discussion, Ferolito v. AriZona Beverages USA LLC, 2014 N.Y. Misc. LEXIS 4709 (Oct. 14, 2014), are available at BVLaw (subscription required).

Extra: Matthews will conduct a webinar on Jan. 13, 2015, How Courts View Cost of Capital in Appraisal and Fairness Cases, which will examine how cost of capital determinations should be performed for trial and deposition.

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Free source for closed-end fund data

We’re often asked for a source of closed-end fund data. A free source is CEF Connect, which identifies and evaluates closed-end funds.

Earlier this year, Ray Bratcher (Trugman Valuation Associates) wrote an article, “Using Closed-End Funds to Derive Discounts for Lack of Control,” which appeared in the Business Valuation Update. We are happy to offer that article as a free download. BVR also hosted a webinar on the topic with Bratcher and Tom Roseen (Lipper Inc.).

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RICS continues its push into BV credentialing

The Royal Institution of Chartered Surveyors (RICS) has been making a big leap into business valuation certification. Earlier this year, it launched its distance learning format for core BV techniques. Next up is its Certificate in Business Valuation Techniques course, which will begin April 15, 2015. This 300-hour course is an introduction to the BV discipline, and it can be taken over six months.

Help wanted: RICS is also looking for an international director for business valuation to develop a strategy to make its BV designation “the most sought after designation in the practice internationally,” according to a job posting on LinkedIn.

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Canadian interest in Delaware valuation cases

A well-attended session at the ASA-CICBV Business Valuation Conference in Toronto, “Valuation Hot Topics in a Dispute Setting," showed that there is definite interest in U.S. cases across the border. A discussion of Delaware Court of Chancery opinions pointed out that, even though the law or precedent may be different, the process by which the court decides is relevant for Canadian practitioners. Also, how to function as an expert witness in a court that tries the toughest BV cases is certainly relevant.

Do Canadian judges read the opinions of U.S. courts? Former Canadian Chief Tax Court Judge Donald Bowman said in the session that he often read U.S. Tax Court opinions while on the bench. It’s safe to assume that judges in Canada also read Delaware opinions in BV cases.

BVR’s Valuation Cases From the Delaware Court of Chancery Show How to Excel contains court opinions, case digests and articles that analyze the court’s view of BV techniques.

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Year-end wrap-up of 2014 accounting standards for private firms

PwC has issued a special year-end edition of its Private Company Reporter that provides a quick summary for select accounting standards that could affect 2014 financial statements of private firms.

Some of these standards are effective for calendar year-end companies for 2014, such as new presentation and disclosure for other comprehensive income (OCI) and pushdown accounting. Other standards are not effective until later but are available for early adoption in 2014, such as the simplified goodwill accounting alternative, the going-concern assessment, and the simplified intangible assets alternative.

Valuation experts need to be aware of these standards and their potential impact on any related analysis. For example, the revised standard for reporting discontinued operations (available for 2014 adoption) will result in fewer disposals presented as discontinued operations. This “may distort continuing financial trends and operating results,” says the PwC report.

Extra: The FASB may delay the 2017 effective date of the revenue recognition rules. Companies say they need more time to implement the sweeping changes, according to WSJ Online.

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Preview of the January 2015 issue of Business Valuation Update

Here’s what you’ll see:

  • Mean, Median, Harmonic Mean: Which is Best? (Bob Dohmeyer, ASA; Dr. Herbert Kierulff; Janae Castell, CVA). The authors make a case for which of these three measures is superior as an estimator of price.
  • Scrutiny Heats Up on Valuations and Fairness Opinions in M&A Deals (BVR Editor). How to avoid trouble spots in the wake of a rash of court cases.
  • New Research Into Private Company Multiples in the U.K. (BVR Editor). Excerpts of transaction data from 250 private-company transactions in over 40 industry categories.
  • Book Review: The 2014 Valuation Handbook - Industry Cost of Capital (R. James Alerding, CPA/ABV, ASA). New resource improves on what had been published in the past for developing an industry cost of capital.
  • Takeaways From Six Recent Business Valuation Cases (BVR Editor). BVR’s legal editor Sylvia Golden, Esq., and Jim Alerding, CPA/ABV, ASA, examine the main points from recent court cases.
  • Expert Shares His Approach for Determining Reasonable Compensation (BVR Editor). An interview with Mark Lipis (Lipis Consulting), the expert the IRS retained in the Aries case in Tax Court.
  • BVU Profiles: How Litigation Makes for a Better Valuator (BVR Editor). An interview with Nancy Czaplinski, CPA/ABV/CGMA, CFA, ASA (American Appraisal).
  • Top 10 Noteworthy BV Cases of 2014 (BVR Editor). A rundown of significant decisions from federal and state courts.

To read these articles—as well as digests of the latest court cases—see the January 2015 issue of Business Valuation Update (subscription required).

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BV movers …

People: Mary Hodgson is the new executive assistant to the Forensic Accounting, Litigation Support and Divorce Mediation Services team of the Fort Myers, Fla., firm Markham Norton Mosteller Wright & Co. … Kirk Jacobson and Chris Wilcox, two of the partners in the Las Vegas-based accounting and financial consulting firm Johnson Jacobson Wilcox, have created their own firm, JW Advisors … Chuck Landers has been elected to shareholder at Saltmarsh, Cleaveland & Gund in Pensacola, Fla. … Richard Lee joins the New York City office of Houlihan Lokey as a managing director in its Dispute Resolution & Financial Expert Opinions practice within Financial Advisory Services (FAS) … Patrick Russo joins the Los Angeles private equity firm Shamrock Capital Advisors as partner; he was with FTI Consulting in the valuation and financial advisory services group, focusing on entertainment and media … Marc Schwartz and Mike Hill, co-owners and founders of the Houston firm Hill Schwartz Spilker Keller LLC (HSSK), celebrate their 40th year of stalwart leadership and dedicated practice in the fields of business valuation, finance, and consulting. Congratulations! … Briggs Stahl, president of Stahl Forensic and Valuation Experts in Tampa, Fla., recently was admitted as a charter member of the American Academy of Matrimonial Lawyers (AAML) Foundation’s Forensic & Business Valuation Division, an elite group of 28 individuals selected on the basis of their national reputation and achievements in business valuation, litigation support, and forensic accounting in the context of divorce proceedings … Leah Wietholter and her company, Workman Forensics, have teamed up with ClearRidge, an Oklahoma investment banking and business advisory firm.

Firms: The Reno firm Kafoury, Armstrong & Co., with its 10 partners and 56 staff members, merged on December 15 with Eide Bailly LLP, expanding the firm to a total of 28 offices in 12 states … G. KIBRIA & CO. of Dhaka, Bangladesh, is the latest member firm to join BKR International.

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CPE events for the holidays

Take a break from all that holiday celebrating with these exciting CPE events:

  • Business Valuation in the Federal Tax System in 2014 (December 18), featuring John Bogdanski (Lewis & Clark Law School), an attorney and tax expert who will examine cases including Richmond, Adell, Cavallaro, Elkins, and Reri Holdings and how they affect valuations. Don’t miss this one!
  • Valuing Architecture and Engineering Firms (January 8), with Ian C. Rusk (Rusk O’Brien Gido + Partners LLC). Firms in the architecture, engineering, and environmental consulting field (A/E industry) have special elements of risk, irregular income streams, a lack of tangible assets, and specialized markets. Rusk is one of the foremost experts on valuation in this industry. His firm compiles theA/E Business Valuation and M&A Transaction Study. Join him for an examination of how appraisers can best overcome the obstacles posed by these unique businesses.

Free webinar: International Valuation Handbook: The Final Installment of the Duff & Phelps Trilogy (January 15), featuring James Harrington (Duff & Phelps). Get an in-depth look at what's included in the new 2014 International Valuation Handbook - Guide to Cost of Capital and how appraisers can put it to work. 

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Holiday break

After taking a break for the holidays, BVWire will be back on Wednesday, January 7. Have a safe, joyful, and prosperous holiday season!

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

Private firm multiples

BV practices

S corps vs. C corps

Closed-end fund data

RICS push into BV

U.S. courts and Canada

Accounting wrap-up

Preview of January BVU

BV movers

CPE events








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