BVWire Issue #170-3 | November 16, 2016

Valuers and forensic experts make music in Nashville at AICPA event

BVWire traveled to Music City for the AICPA’s Forensic and Valuation Services (FVS) Conference. Welcoming the crowd of over 1,000 attendees were conference chairs Stacey Udell (Gold Gerstein Group LLC) on the valuation side and Annette Stalker (Stalker Forensics) on the forensics side. Randie Dial (CliftonLarsenAllen) conducted an early session designed to point attendees to specific sessions geared to top issues, including family law, fair value (particularly the new CEIV™ credential), DLOM, damages (including construction, an area ripe for damages claims), the proposed Section 2704 regs, and updates on case law.

Annual update: AICPA staffers from the FVS section, including vice president Jeannette Koger and senior manager Eva Simpson, gave an update on the year’s activities. Among other items, a Practice Aid on bankruptcy and reorganization services was added to the FVS resources library. In terms of the ABV credential, 164 new credential holders were added during the year and there was a 98% retention rate for existing credential holders. A major accomplishment was the development of the new credential for fair value for financial reporting for U.S. publicly traded companies, Certified in Entity and Intangible Valuations™ (CEIV™). The AICPA, ASA, and RICS have spearheaded this effort, and the credential will be made available as soon as the Mandatory Performance Framework is finalized, which is imminent. CEIV™ education and the exam have already been developed. A second credential, with the working acronym of FI (Financial Instruments), is also being developed and is “well underway,” the AICPA says.

The AICPA presented its Business Valuation Volunteer of the Year Award to Stacy Preston Collins (Financial Research Associates) and its Forensic & Litigation Services Volunteer of the Year Award to Scott Bouchner (Berkowitz Pollack Brant Advisors and Accountants LLP).

Then it was on to the regular sessions! Here are just a few takeaways we picked up during the three-day event:

  • Projections are valuation’s “dirty little secret,” said Jim Hitchner (Financial Valuation Advisers). Too many appraisers simply accept the projections the client provides, plug them into a discounted cash flow analysis, slap a discount rate on, and are done with the analysis. A conscientious appraiser examines the original projections and, if necessary, challenges the client on them.
  • An interesting session on detecting the truth in management interviews pointed out that Bill Clinton and Al Gore both had the same speechwriter, but Clinton was viewed as much more truthful. Reason: Body language. Pay attention to it when querying management.
  • An issue that comes up often but the valuation analyst does not always address is economic obsolescence, said Gary Trugman (Trugman Valuation Associates Inc.), who wrote an article on the topic in the September 2016 issue of Business Valuation Update.
  • When forecasting cash flow for a music artist’s work, make sure you ask about unrecouped advances—money the artist often receives upfront from his or her record label, said Roy Salter (FTI Consulting). If the advance is large, there may be no cash flow for a while.
  • The Mandatory Performance Framework for the new fair value credential (CEIV™) is not creating more work but rather making sure you adequately document your work and thought processes, said Mark Zyla (Acuitas).
  • All DLOM methods have "warts." Knowing what they are is key to supporting your opinion, said Jim Alerding (Alerding Consulting LLC) and Pat Rafanelli (Grassi & Co.).
  • Using an outside provider to do the industry analysis part of a report saves a lot of time. One provider is Blue Sage Research, and speakers presented an example of this provider’s work.
  • Social media could be the “big disruptor” in the FVS profession, but a lot of practitioners are not using it.

We’ll provide more coverage in a future issue. Next year’s FVS conference will be at Caesar’s Palace in Las Vegas.

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Senior IRS staffer comments on ‘organic’ Sec. 2704 proposed regs

A large crowd attended a session on tax valuations at the AICPA FVS Conference in Nashville, which included a panel with Leslie Finlow, a senior technician reviewer in the IRS Office of the Chief Counsel. Of course, she was there to talk about the controversial IRC Section 2704 proposed regulations designed to rein in estate valuation discounts for family-owned entities.

Work in progress: “The proposed regs have a very specific purpose: to eliminate the bells and whistles in family estate planning which have undermined the application and intent of Section 2704,” said Finlow, who was speaking for herself and not for the IRS. “The regs are still a work in progress and they are very organic and there is no rush to finalize them before the end of the year,” she noted, refuting reports that the government was trying to get them through as fast as possible. “We are anxious to review all of the comments we’ve received in order to get a better understanding of the public’s concern so we can improve this guidance. It is certainly not in the best interests of the Treasury or IRS to put out something that will get overturned by the courts and humiliate all of us.”

BVWire asked Chris Mercer (Mercer Capital), who was on the panel, if anything Finlow said changed his interpretation of the proposed regs or their potential impact. “No,” he said. Mercer and Curtis Kimball (Willamette Management Associates) conducted a recent webinar to explain the valuation implications of the proposed regs. BVR also has a new special report, Proposed IRC Section 2704: Potential Impacts on Estate and Gift Valuations.

A public hearing is scheduled for December 1 at the IRS. Witnesses will urge the Treasury to withdraw or substantially revise the proposed regs.

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Key things testifying experts need to know

A number of great workshops at the recent AICPA FVS Conference in Nashville focused on the challenges financial professionals will encounter when serving as testifying experts.

Seth Fisher and Saleema Damji (PricewaterhouseCoopers) presented findings from an impressive 16-year PwC study that examined post-Kumho Tire cases involving attacks on financial expert testimony.

  • In 2015, accountants faced the highest number of Daubert challenges and had the highest exclusion rate. Appraisers and economists were in second and third place.
  • Plaintiff experts are challenged twice as often as defense experts, but defense experts are excluded at a slightly higher rate.
  • Most of the time, appeals courts affirm lower court rulings. (This is not surprising considering the high standard of review.) Interestingly, appeals courts are more likely to agree with the trial court when the trial court admitted the testimony than when it excluded the expert.
  • Failure to meet Daubert’s reliability requirement is the most common reason for excluding financial expert testimony. But how to assess reliability is a tricky question: Does an opinion qualify as reliable because the expert uses a generally accepted method or is it a matter of how the generally accepted method was applied?
  • Under Daubert’s generous admission standard, courts prefer to allow the expert to testify and leave it to cross-examination to test for reliability; courts also have been willing to allow experts a second bite at the apple.

Laurin Quiat (Baker Hostetler), Jason MacMorran (Postlethwaite & Netterville), and Jim Koerber (The Koerber Co. PA) provided strategic advice to experts working in the litigation arena in their presentation, “Responding to Challenged Opinions.”

  • A good expert report does not preclude a Daubert challenge.
  • It’s fair to assume attorneys know the applicable practice aids, professional standards, and other forensic and valuation guidance materials and want to know the expert they look to hire knows them.
  • Attorneys place value on an expert’s credentials and proof of continuing education.
  • The rise in Daubert challenges is partly a function of the attorneys’ increasing knowledge of what makes for good expert testimony and increasing comfort level about staging a Daubert challenge.
  • An expert needs to know the applicable case law. If a court’s ruling flies in the face of accepted valuation principles, prepare two valuations: one in compliance with the ruling and an alternate one in compliance with the valuation standards. A valuation that simply ignores case law may mean the expert never gets to testify.
  • Courts and litigation participants increasingly hire experts to review the work of the primary experts, particularly in complex cases. If you are the primary expert, consider this a nudge to up your game.

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Do you suffer from GPC phobia?

At the AICPA FVS conference in Nashville, BVWire spoke with Linda Trugman (Trugman Valuation Associates Inc.) who gave a presentation. We talked about the guideline public company (GPC) method for valuing private companies, which is the subject of a webinar she will present on November 17 along with Rob Schlegel (Houlihan Valuation Advisors).

High anxiety: “In general, people are afraid of the GPC method,” says Trugman. “There’s a great deal of analysis necessary in order to do it right, so a lot of experts do not consider it. But valuation standards, and of course IRS Revenue Ruling 59-60, say you have to consider all approaches so you can’t avoid it. During our webinar, we will explain it in such a way that people will not be afraid of it.”

The webinar, Using Guideline Public Company Data for Private Company Valuation, also present the various sources for GPC data and examples of how to adjust for size and growth differences.

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IRS opens up its tax data to outsiders

The Internal Revenue Service will allow the use of tax microdata by qualified researchers who don’t work for the U.S. government. The agency issued a Call for Proposals application (due Dec. 31, 2016) for its Joint Statistical Research Program. The IRS puts out its own research, such as the Statistics of Income bulletin, and some academic groups and think tanks also work with IRS data.

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Global BV News
Brand values for large home appliances

In some industry sectors, the branding strategy is the most important element of competitive strategy. One such example is the home appliance sector, where profitability depends a lot on the branding strategy. While large parts of this sector follow a mass market and large-scale production approach, some players follow a niche and premium strategy.

Mature market: This month’s peer group analysis from MARKABLES examines brand and enterprise value multiples for 26 home appliance businesses (“white goods”) acquired between 2001 and 2015. The peer group includes brands such as Indesit, Hotpoint, Sanyo, Enodis, Amana, ProLine, US Craftsmaster, GSW, ATAG, and others. Operating in a rather mature and competitive market, these businesses are valued at an average of 1.0 times revenues. Brand accounts for approximately 25% of enterprise value, and the median trademark royalty rate is between 2% and 2.5% on revenues. This is not really impressive considering the brand awareness and marketing spend in this sector.

A few brands stand out from the pack, however. These are niche brands following a premium strategy, such as premium cooking ranges, wine coolers, or luxury outdoor grills. Despite their disadvantages in scale, they show higher profitability and brand value multiples. Their trademark royalty rates are above 5%, and the brand/enterprise value ratio is 35% and above. Not surprisingly, profitability of these businesses is twice as high, with enterprise value at 2.0 times revenues. Premium branding can help to increase value, but it is restricted to the smaller volume in the niche.

MARKABLES (Switzerland) has a database of over 8,200 global trademark valuations published in financial reporting documents of listed companies.

(Click image to view full size)

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Preview of the December issue of Business Valuation Update

Here’s what you’ll see:

  • “Exclusive BVR Survey Examines BV Firms' Mix of Practice Revenue” (BVR Editor). Results from BVR’s Firm Economics Survey conducted this summer. Experts indicated where the largest percentage of revenue comes from, the most profitable practice niche, the fasting growing specialty area, and other information.
  • “Cultures and Continents Clash in High-Stakes Divorce Valuation” (Andrew Strickland). Valuation experts from the U.S. andthe U.K.square off in a case of a jet-setting couple calling it quits.
  • “Social Media, Sec. 2704 Regs, New Fair Value Credential Highlight IACVA/SECBA Conference” (BVR Editor). Coverage of Business Valuation in an Upside Down World, a conference in Atlanta co-sponsored by the Southeast Chapter of Business Appraisers (SECBA) and the International Association of Consultants, Valuators and Analysts (IACVA).
  • “Special Considerations in Valuing Wealth Management Firms” (Patrice Radogna). Wealth management firms come in many shapes and sizes and vary widely in terms of the key components that drive value. Includes a case example of two firms.
  • “Transaction Valuation Tips From an Investment Banker” (BVR Editor). An interesting perspective on valuation for mergers and acquisitions from Michael Poole (PCE Investment Bankers Inc.), who spoke at the 2016 ASA Advanced Business Valuation Conference.

The issue also includes:

  • Regular features: “BV News At-a-Glance,” “Ask the Experts,” “Tip of the Month.”
  • BV data spotlight: Pratt’s Stats MVIC/EBITDA Trends, ktMINE Royalty Rate Data, Economic Outlook for the Month, and Cost of Capital Center.
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, see the December issue of Business Valuation Update.

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BV movers . . .

People: Michael A. Crain, consultant and senior advisor to Miami-based Kaufman Rossin, and Nancy Hyde, president of Hyde & Company CPAs of Oklahoma City, have been honored with the AICPA’s “Sustained Contribution” Award, which recognizes CPAs who have contributed measurably to the accounting profession through volunteer service. ... Jim Lewis, managing shareholder at Springfield, Mo.-based KPM CPAs & Advisors, was named to Biz 417 magazine’s “Biz 100” list of influential business leaders.

Firms: BDO USA has added wealth management specialists The LBA Group and their Jacksonville, Fla., office. It’s BDO USA’s seventh M&A deal in the past year … Eide Bailly of Fargo, N.D., is adding consulting firm JW Advisors and CPA practice Bryce Wisan, both of Las Vegas … New Philadelphia, Ohio-based Rea & Associates has merged in Friel & Associates of Chardon, Ohio … Accounting firm Sutton Frost Cary has added business valuation expertise by merging with Greene & Ruggeberg, which moved into its Arlington, Texas, office … UHY Advisors and UHY LLP have acquired two firms in West Hartford, Conn.: valuation firm Brentmore Valuation Advisors and professional services firm Pratesi, Salemi & Co. LLC.

Please send your professional and firm news to us at

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Upcoming CPE events

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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Holiday Break

BVWire will be taking a break to enjoy the U.S. Thanksgiving holiday next week. We will resume publication on Wednesday, November 30. We wish you a very happy holiday!

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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:

AICPA conference

Sec. 2704 regs

Witness tips

GPC insights

Tax microdata

Global BV news

BVU preview

BV movers

CPE events

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