BVWire Issue #158-1 | November 4, 2015


AriZona case insider offers fascinating analysis

The AriZona case—the largest corporate dissolution case ever in New York—is the subject of an extensive and engrossing analysis by Z. Christopher Mercer (Mercer Capital). Mercer was a valuation expert in the case and is one of the top thought leaders in the profession. While the matter was pending, he was unable to write about it. But now that the parties have privately settled the matter, he is free to discuss it. The case incorporates many valuation issues and demonstrates the often bewildering decisions made by the individuals in black robes.

A puzzlement: The New York Supreme Court had to determine the fair value of a combined 50% interest in AriZona, a private company known for its iced tea and other beverages. The two parties at odds were the founders of the company and each owned half of the firm. The court concluded that the company should be valued using the “financial control” level of value, even though seemingly clear guidance in the Beway case (case citations are included in the article) indicates that the strategic control level should be used. The court’s conclusion “is not reconciled with the plain language of Beway,” Mercer writes. Using the financial control level of value, Mercer’s side came up with $2.4 billion versus the opposing side’s $426 million using a “business as usual” standard (which the court rejected).

The decision over the level of value was the first in a series of what some may see as baffling decisions. For example, the court focused solely on a discounted cash flow valuation, even though Mercer’s side felt that there were a number of comparable public companies to support a valuation at the financial control level. The difference was relatively minor (Mercer’s side weighted the DCF at 80%), but the court disagreed that the companies were comparable. In focusing on the DCF method, the court examined the DCF components: revenue, costs, terminal value, tax amortization benefit, tax rate, key man discount, discount rate, outstanding case, nonoperating assets and debt, and—last but certainly not least—discount for lack of marketability.

No sense: The position of Mercer’s side was that a 0% DLOM was applicable, citing a number of New York cases in support. The opposing side argued for 35%, citing the Longstaff model (ignored by the court) and the Silber study, as well as several minority interest studies. In the end, the court used a 25% DLOM. Its treatment of the DLOM “does not make sense from my perspective as a business valuer and a businessman,” Mercer writes.

One factor in support of a zero DLOM—and there are others discussed in Mercer’s article—was that there were several interested and capable buyers (including Coca-Cola and Nestlé) who made informal offers (prior to the valuation date) ranging from $2.9 billion to more than $4 billion for 100% of the company. The court’s 25% DLOM lowered the value by $478 million, a “tremendous price for so-called lack of marketability” given the “obvious” existence of suitors who wanted to buy the company.

Mercer provides a substantial amount of additional analysis on these and other valuation issues—we urge everybody to read it. BVR’s legal analysis of Ferolito v. AriZona Beverages USA LLC, 2014 N.Y. Misc. LEXIS 4709 (Oct. 14, 2014), along with the court’s opinion, is available at BVLaw.

Extra: The AriZona case highlights the fact that New York is the only state that allows DLOM at the shareholder level in fair value cases. This “obsolete” position “harms dissenters by transferring value to continuing shareholders,” writes Gil Matthews (Sutter Securities) in an article that examines New York’s DLOM situation in the upcoming December issue of Business Valuation Update.

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More takeaways from the ASA conference in Las Vegas

Last week’s BVWire presented some golden nuggets from the Las Vegas annual Advanced Business Valuation Conference of the American Society of Appraisers (ASA). Here are a few more:

  • A vital element of successful networking is the follow-up, advises keynote speaker Dr. Bill Saleebey, and the quicker the better—but don’t be too aggressive.
  • In the works for several years, a new DLOM toolkit is scheduled to be launched March 2016, according to co-developer Jim Hitchner (Financial Valuation Advisors).
  • Using an option model to value the common stock of emerging growth firms is the subject of a new paper that was presented by John Finnerty (Alix Partners). 
  • Craig Ter Boss (Eisner Amper) says the ongoing scrutiny on fund valuations by the PCAOB and SEC means opportunities for third-party fund valuation experts hired by fund managers.
  • Don’t abandon the market approach, advises Linda Trugman (Trugman Valuation Associates Inc.)—the literature and all BV standards say to at least consider it.
  • Lots of interest from the audience in a session on personal goodwill by Bob Morrison (Morrison Valuation & Forensic Services LLC) about the MUM method of splitting out personal and enterprise goodwill—some say “the courts love it.”
  • A well-prepared appraisal may be a necessary element in the taxpayer shifting the burden of proof to the government, as seen in Estate of Adell, says attorney Robert Hamilton (Hamilton Thies & Lorch LLP).
  • When selecting comparable royalty rates, eliminate anomalous observations that cannot be normalized or adjusted, advises Robert Reilly (Willamette Management Associates), but don’t automatically eliminate ones that fall outside of the typical range.

More details and takeaways from the ASA conference will be in the December issue of Business Valuation Update

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One valuation size does not fit all oncology centers

The appropriate valuation approach for an oncology center (a medical practice that treats cancer) depends on the type of center it is, say Tynan Olechny and Will Hamilton (both with Pershing Yoakley & Associates). The two were speaking during a recent BVR webinar.

Three types: The oncology center could be a surgical center (e.g., removes a tumor), a medical center (one that administers drug treatments), or a radiation center (for radiation treatments). For example, the cost approach—and most commonly the net asset value (NAV) method—is most appropriate for medical oncology centers, they say. Insufficient cash flow for this type of practice makes the income approach challenging, and a lack of transaction data for similar entities makes the market approach a difficult one to rely on.

Olechny and Hamilton indicated that mergers and acquisitions, along with joint ventures, are being eyed by many oncology centers. They cited recent research from the State of Cancer Care in America 2015 (American Society of Clinical Oncology) that finds:

  • 25% of oncology practices signaled they were likely to pursue hospital affiliations within the next year.
  • 18% of oncology practices signaled they were likely to pursue affiliations with other private practices within the next year.
  • 17% of oncology practices signaled they were likely to pursue affiliations with academic medical centers within the next year.

For more information, you can access a recording of the webinar, Valuing Oncology Centers, if you click here (purchase required).

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Get certified in exit planning at NACVA San Diego November 16-18

A certificate in exit planning—a growth area for valuation experts—will be offered as part of the National Association of Certified Valuators and Analysts (NACVA) regional specialty conference in San Diego November 16-18. The conference will also have separate tracks for transaction advisory services and healthcare valuation.

In addition to a one-day certification program for exit planning, there will be several breakout sessions on this topic, according to Scott Snider, vice president of the Exit Planning Institute. One breakout session is designed to show “how to effectively begin to set up a practice in exit planning and explain the tools and resources that are available in the market today,” Snider tells BVWire. Another breakout session will build on this idea and show how to add “value growth services” to your practice. For more information, click here.

NACVA will hold another regional specialty conference this year in Fort Lauderdale on December 6-9. For more information on that conference, click here.

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Global BV news:

Accounting for currency risk is ‘all about perspective,’ advises Grabowski

It was standing room only in the session conducted by Roger Grabowski (Duff & Phelps) on International Cost of Capital at the ASA’s Advanced Business Valuation conference in Las Vegas. He was his usual erudite self, but was also especially passionate about “our job as valuators doing international work.” He spoke with clear instructions to the valuation community, saying: “Stop thinking in terms of U.S.-centricity; instead ask ‘Who is the investor and what is his or her perspective?’”

Common flaw: Grabowski provided fascinating insight into the major—and very common—flaw of using currency spot rates without projecting for currency risk in the process of corporate budgeting and the erroneous conclusions that follow those calculations. He cited one source that Duff & Phelps uses for currency forecast data: Consensus Economics. Other sources are Economist Intelligence Unit (EIU), IHS Global Insight, and Bloomberg Consensus.

He also encouraged everyone in the audience to send feedback on D&P’s International Valuation Handbook – Guide to Cost of Capital in the spirit of “improving the publication every year.” Email him at  

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IFRS ‘Blue Book’ of standards

The IFRS Foundation will soon publish the 2016 International Financial Reporting Standards Consolidated without early application (Blue Book). This updated edition includes the latest consolidated versions of all standards (including IFRSs, IASs, and IFRIC and SIC interpretations) as approved by the International Accounting Standards Board that are effective as of Jan. 1, 2016. This volume is available to purchase as a PDF download or as a bundled product (PDF download plus printed version). To pre-order it or sign up to receive a notification when it’s published, click here.

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BV movers …

People: David Ethridge is a new managing director in PricewaterhouseCoopers’s deal practice group in New York City and will be developing strategic and capital-raising plans for private and public companies … Alex Krasnomowitz joined Smolin Lupin to support the firm’s strategy for continued growth in its Forensic and Litigation Support practice.

Firms: BizEquity was recognized as one of the “Best Entrepreneurial Companies in America” by Entrepreneur magazine’s inaugural Entrepreneur 360 Awards … CliftonLarsonAllen acquired the Pittsburgh, Pa., firm KFMR Katz Ferraro McMurtry PC on November 1 … The Miami firm Kabat, Schertzer, De La Torre, Taraboulos & Co. merged with Roth, Jonas and MittelbergMarcum merged with Illinois-based accounting firm Frost, Ruttenberg & Rothblatt PC on November 1 … The Louisville, Ky.-based Mountjoy Chilton Medley announced its intention to merge in the Cincinnati firm Cooney Faulkner & Stevens, effective Jan. 1, 2016 … Quad-C Management, a middle-market private equity fund, has invested in VMG Health, a Dallas-based financial valuation and advisory firm for the healthcare transaction market. According to the Wall Street Journal, this investment is based on the “belief that the increasingly complex regulatory environment for health care heightens the need for the company’s financial valuation and advisory services” … In the annual Texas Lawyer magazine’s “Best of” poll, Houston-based The Hancock Firm was voted No. 1 Business Valuation Firm and End-to-End Litigation Firm in 2015. And, for the second consecutive year, the firm also was welcomed into the Hall of Fame.

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New DLOM series in November CPE events

During November, the first two parts of a new series on DLOM will be presented. Here is the entire slate of CPE events for the rest of November.

Valuing Clinical Co-Management Arrangements (November 5), with Gregory Anderson and Schaeffer Smith (both with Horne LLP). This is Part 7 of BVR's 2015 Special Series on Healthcare Valuation.

DLOM: Volatility Models and Restricted Stock Discounts (November 10), with John Stockdale (John Stockdale Business Valuations). This is Part 1 of BVR's 2015 Special Series on Discounts for Lack of Marketability.

Advanced Risk Issues in Business Valuations (November 17), with Mark Gottlieb (MSG Accountants).

How to Prepare a Discount for Lack of Marketability for the IRS (November 18), with Michael Gregory (Michael Gregory Consulting, LLC). This is Part 2 of BVR's 2015 Special Series on Discounts for Lack of Marketability.

Treasonable Compensation? The Continued Misapplication of the Excess Earnings Method (November 19), with Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC) and Ronald Seigneur (Seigneur Gustafson LLP CPAs).

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

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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:

AriZona insights

ASA takeaways

Oncology centers

Exit planning

Global BV news

BV movers

CPE events












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