BVWire Issue #170-1 | November 2, 2016


DLOM survey: Preliminary results and comments

Restricted stock studies and pre-IPO studies remain the most cited methodologies for quantifying a discount for lack of marketability (DLOM) according to preliminary results of our DLOM survey. Other early results:

  • Nearly all of the respondents quantify separate discounts for a minority interest and lack of marketability when the valuation requires both.
  • The vast majority of participants say that they “routinely” consider the 10 Mandelbaum factors in determining DLOM. Of all the factors, “restrictions on transferability” and “dividend policy” are the two that nearly all respondents consider. The factor least cited was “costs associated with a public offering.”

The overall results so far are very close to the results from the last survey we did (in 2013). But compared to our 2009 survey, slightly fewer respondents now cite restricted stock and pre-IPO studies and more say they use other methods, such as options modeling. Again, these are preliminary results, and we’d like to get some more responses before closing the survey.

Good insights: We also asked respondents for some general remarks about DLOM, and here is a sampling of their comments so far:

  • “You should always use two methods to determine DLOM. Moreover, you should always ask yourself after you determine the post-DLOM price per share if the value is too high or too low.”
  • “I don’t agree that a DLOM applies automatically to a controlling interest in an unlisted company, especially a 100% interest. Some argue that you can’t convert to cash in three days hence a discount applies—but if the company is profitable and cash flow positive you do get some liquidity via the return on investment to offset the time delay.”
  • “I believe more focus should be put on rates of return for fractional interests and not just rely on what some studies say the discount should be. Many analysts just quote studies without understanding the effect of the size of the discount on the rate of return.”
  • “Despite all these methods, application of DLOM is still a very subjective thing.”

If you haven’t yet taken the short survey, please do so by clicking here. The survey will remain open a short while longer, and then we will present the full results. Also, on December 8, BVR will present a special four-hour DLOM Day: An Advanced Workshop.

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Court discredits yardstick analysis and nixes lost profits award

After more than a decade of litigation, a damages case featuring an upstart sportswear company that portrayed itself in the same league with the leading brand ended with a whimper. The court first struck down a multimillion-dollar lost profits award. And, even though it acknowledged the plaintiffs’ business had lost value because of the defendant’s conduct, it later also walked back its order for a new trial on lost value damages because the plaintiffs had no “non-speculative” evidence to prove the loss.

This case first attracted attention when the court admitted the testimony under Daubert even though the expert analysis might contain “seemingly improbable” damages conclusions.

No comparison: The plaintiffs, the founder and his “Sunday Players” company, sued the defendant for breaching an exclusive licensing agreement to manufacture, market, and promote sports apparel, specifically compression sportswear. The defendant allegedly told the plaintiff that MTV was interested in partnering with Sunday Players. An MTV sublicensing agreement would result in hundreds of millions in product sales. No deal between the defendant and MTV ever happened, and the defendant abandoned its agreement with the plaintiffs. The defendant was unable to make a single sale even though it had pitched the Sunday Players brand to many large retailers and spent about $220,000 in marketing. The defense expert calculated that total sales—made by the plaintiffs’ sales team—during the license agreement period were less than $150,000.

The plaintiffs’ damages expert performed a yardstick analysis to determine lost profits and lost business value. He used “Under Armour,” the market leader in the compression sportswear industry, as a benchmark, claiming it and Sunday Players sold similar products and were on a similar trajectory. Just as Under Armour experienced significant growth owing to its promotion agreement with ESPN, a deal between the defendant and MTV would have led to similar success for Sunday Players. Ostensibly to account for increased competition in the compression apparel market, he reduced the comparative figure he derived from Under Armour's sales history by 50%.

The analysis triggered a harsh reproof from the defendant’s expert, a leading valuator. The two brands were “so dissimilar as to render [the expert’s] selection of Under Armour laughable,” the defense said. The court admitted the testimony under Daubert. Based on expert testimony, a jury awarded the plaintiffs $4.35 million in lost profits, or, alternatively, $500,000 in lost business value.

In ruling on the defendant’s post-trial challenges to the award, the court (a different judge) agreed the plaintiffs had failed to prove their “new and untested business” would have achieved the vast success their expert predicted but for the defendant’s breaches. “The yardstick comparison can show the profits a company could have expected if it had maintained its market share; it cannot establish that a company without market share would have become an overnight success.” The court dismissed the proposition that Sunday Players was comparable to the market leader as nothing more than “the entrepreneur’s cheerful prognostications.”

“Accelerating the inevitable,” the court decided to close the case by awarding the plaintiffs one dollar in nominal damages.

Gary Trugman (Trugman Valuation Associates Inc.), the expert for the prevailing defendant, sums up the outcome this way: “It was an interesting case on what an expert should never do. The judge got it right.”

The cases are Washington v. Kellwood Co., 2016 U.S. Dist. LEXIS 92309 (July 15, 2016) (Kellwood II), and Washington v. Kellwood Co., 2016 U.S. Dist. LEXIS 136612 (Sept. 30 2016) (Kellwood III). A digest for both cases and the court’s opinions will be available soon at BVLaw. BVLaw subscribers can find a digest of the court’s earlier Daubert opinion here.

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Today’s the deadline for comments on controversial proposed regs

You have until the end of the day today (November 2) to add to the almost 7,000 comments the IRS says it has received over the IRC Section 2704 proposed regulations. Designed to rein in valuation discounts for family-owned businesses and other entities for transfer tax purposes, the proposed regs have created a firestorm of protest.

New report: Proposed IRC Section 2704: Potential Impacts on Estate and Gift Valuations, A BVR Special Report is now available. The report sheds light on the proposed regulations and helps appraisers navigate the possible implications on the valuation of private-business entity interests for transfer tax (estate, gift, and generation-skipping) purposes. With your purchase of this special report, you will receive special news updates via email as events unfold. A public hearing is scheduled for Dec. 1, 2016, which will decide the fate of the proposed regs.

In the meantime, if you have not yet submitted comments, you can do so here. Voices still need to be heard!

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New paper discusses valuations of digital assets

An interesting new paper examines estate planning and valuation challenges posed by various types of digital assets, such as social media, audiobooks, music and video files, bitcoin, and the like. The paper also includes a handy checklist that helps to identify these types of assets. Written by Elizabeth Ruth Carter, a law professor at Louisiana State University, the paper, “Estate Planning for Digital Assets: Assigning Tax Basis and Value to Digital Assets,” was prepared in conjunction with the LSU 46th Annual Estate Planning Seminar held a few weeks ago.

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Ex-Tax Court judge’s prior ruling challenged

Former U.S. Tax Court Judge Diane L. Kroupa pled guilty in federal court to conspiring with her husband to cheat on their taxes over a 10-year period. A party to one of the judge’s prior cases has sought to revisit the ruling on the ground that Kroupa was facing criminal tax evasion charges, according to a report from BNA. Was the judge deliberately ruling in favor of the IRS to gain its favor while she was under audit? Will other taxpayers seek to have the court reconsider her prior adverse rulings? Stay tuned! 

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Trump’s woes highlight human risk to brand values

If a human being is part and parcel of a brand, there’s a great deal more risk potential in terms of valuation. This is not a new phenomenon. Before World War I, Camel cigarettes were almost named Kaiser cigarettes! Recently, the Trump brand has taken a beating, according to a report from the Associated Press. A representative for Trump maintains the brand is “incredibly strong.” But some event planners are shunning Trump properties, travelers are preferring rival hotels, and consumers are staying away from Trump retail products.

Control issue: You never know what a human advertising mascot or spokesperson will say or do to impact brand value. But there’s no worry if a human is not part of the trademark. Was Speedy Alka Seltzer ever involved in a scandal? Was the Pillsbury Dough Boy ever caught in a love nest? No, they didn’t have morals clauses in their contracts. They stayed squeaky clean because they were controllable fictional characters. So maybe when valuing a brand tied to a living person you should consider a discount for lack of control?

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Healthcare settlement points up HIPAA trap to avoid

The Health and Human Services Office for Civil Rights recently announced a $400,000 settlement with Care New England Health System over the lack of an updated business associate agreement (BAA). This case brings to mind the exposure business valuation experts have to tough rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA)—and the penalties for violations are severe. This can happen if you receive protected health information (PHI) when doing a valuation of a healthcare entity.

Expanded law: The Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH) significantly expanded the law to impose privacy rules to a healthcare entity’s “business associates,” which can include you as an appraiser, according to Mark Dietrich, editor and contributing author to The BVR/AHLA Guide to Healthcare Industry Finance and Valuation, 4th edition. Dietrich wrote a new chapter in the book devoted to HIPAA and medical records in the context of valuation and litigation. This is a “must-read” chapter for valuation analysts with healthcare clients, and it explains the use of a BAA as part of a strategy to avoid exposure.

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Global BV News
New IVSC board looks to emerging markets

The International Valuation Standards Council (IVSC) recently formed a Membership and Standards Recognition Board that will focus much of its efforts on the IVSC's objective to be seen and referred to as the global standard setter for valuation with international valuation standards. Among other activities, this board will play a key role in helping respond to requests to develop the profession in emerging markets. The new board’s chair is Eric Teo (IVAS, Singapore), and its members are: Aart Hordjik (NRVT, Netherlands); Allan Beatty (AIC, Canada); Eleanor Joy (CICBV, Canada); George Badescu (ANEVAR, Romania); Jeannette Koger (AICPA, U.S.); Jiang Wei (CAS, China); Ken Creighton (RICS, Global); Phil Western (API, Australia); and Shigeko Mizutani (JAREA, Japan).

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Brand valuation mandate in India sparks talk of new rules

Starting next year, new accounting standards in India will require publicly listed companies to disclose the value of brands they acquire, according to an article in the Hindu Business Line. This is in the wake of the Kingfisher Airlines fraud investigation concerning whether the company’s brand valuation was improperly inflated to get more bank financing.

Time is right: Experts think that brand valuation needs a new set of rules, and they point to the wide variations in brand values depending on which valuation consultant is used. The risk is that a company could cherry-pick the values it wants to use that may not be in the best interests of stakeholders or lenders, as the Kingfisher case illustrates. “Most brand valuation exercises that are put out in public are unsolicited, without access to most relevant data and information from the owners of the brands,” says Christof Binder (Trademark Comparables AG) in the article. “They are simply to create publicity and consulting engagements for the firms who release them. None of these values has traction with the real world when it comes to transactions. This holds true in particular for brands in banking, telecom, airlines, and others which are never acquired for their brand names.”

Binder’s firm maintains the MARKABLES database of trademark valuation comparables. He is the author of an article, “Debunking the Myth That Business Appraisers Lowball Brand Values,” that discusses brand valuation by financial experts versus marketers. The article appears in the July 2016 issue of Business Valuation Update.

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Applications still open for new BV Training Council

If you would like to make an impact on worldwide BV education, consider joining BVR’s new Training Council. You will help shape BVR’s educational training program for valuation experts around the world. Council members will serve a one-year term and, among other requirements, will be expected to participate in one speaking engagement during their term. In return for your participation, you will have complimentary access to all BVR training events via a Training Passport Pro (a $1,799 value). To join BVR’s Training Council, please complete this short application.

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BV movers . . .

People: Karl D’Cunha has joined CBIZ Valuation Group’s Chicago office as a managing director where he will provide valuation services for hedge funds and private equity firms. He was previously with Houlihan Capital and Madison Street Capital … Adriano José Ponciano has joined Alvarez & Marsal’s São Paulo, Brazil, office as managing director in the Transaction Advisory Group … Marshall Taylor has joined Houlihan Lokey’s Dallas office as managing director and national healthcare leader for Transaction Advisory Services.

Firms: BDO USA LLP announced its merger with the Norfolk, Va.-firm McPhillips, Roberts & Deans PLC, effective November 1 … Dixon Hughes Goodman was included on Fortune magazine’s “Great Place to Work” list … EKS&K of Denver also was honored as one of the best midsized workplaces in Fortune’s “Great Place to Work” list.

Please send your professional and firm news to us at

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Upcoming CPE events

Hospitality Valuation: Check In Time (November 10), with Scott Brush (Brush & Co.) and Art Marshall (BerryDunn).

Using Guideline Public Company Data for Private Company Valuation (November 17), with Linda Trugman (Trugman Valuation Associates Inc.) and Robert Schlegel (Houlihan Valuation Advisors).

MIPS and MACRA: What Healthcare Valuators Need to Know Now (November 29), with Joe Wolfe (Hall Render Killian Heath & Lyman). This is Part 7 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

Sell-Side Advisory Services: A Savvy Way to Excel in the ESOP Market (November 30), with Brian Bornino (GBQ Consulting) and Tracy Woolsey (Horizon Trust & Investment Management).

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 Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

DLOM survey

Yardstick KO'd

2704 deadline

Digital assets

Judge scandal

Trump value woes

Healthcare trap

Global BV news

BVR Training Council

BV movers

CPE events

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