BVWire Issue #145-2 | October 8, 2014


Hidden jewels help value firms with real estate

Finding data for comps is difficult when you’re valuing a real estate-centered enterprise (RECE), that is, a firm that also owns its real estate, such as a restaurant, nursing home, hotel, and the like. A convenience store is especially challenging, according to Franz Ross (First Niagara Bank), one of few appraisers credentialed in both real estate and business valuation.

One source:Pratt’s Stats is an excellent source for this property type (and others) since none of the well-known real estate data sources publishes these data,” says Ross. “But the jewels in Pratt’s Stats are the comps where the real estate is known to have been acquired along with the business assets,” he says. In the “Asset Data” section, if the deal is checked to be a purchase price allocation and there’s a figure on the real estate line, that dollar figure is the allocated value of the real estate.

Most Pratt’s Stats transactions do not include real estate since usually only the business assets are acquired. But, even for these transactions, “Pratt’s Stats is an excellent source for adopting a capitalization rate for the equipment and the intangible assets acquired,” he says. Segmenting of EBITDA and cap rates by asset type is central to the excess earnings method (EEM) that Ross advocates for this type of assignment.

Adjustments needed: For the transactions with real estate included, you’ll have to make some adjustments. For example, you need to add the real estate price to the published MVIC price to get the total price of the RECE, advises Ross. “Also, if there was a rent (perhaps there is a related real estate holding company), the rent should be added back to EBITDA to create EBITDAR.” He also notes that other adjustments may need to be made to arrive at EBITDAR, such as for owner’s compensation.

Ross has developed a method for allocating total going-concern value into its components, including real estate, intangibles, and personal property. His model, known as the total excess earnings model (TEEM), is similar to other EEM models, except that it clearly shows where each value, income component, and cap rate were derived. He explains this and goes through an example in the September issue of Business Valuation Update. You can also read more about this method and the interaction between real property value and business value for going concern properties in BVR’s new special report, Valuing Companies with Real Estate:  Appraisal Experts Untangle the Issues

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Aggressive Daubert attack on veteran valuation expert

Litigation is a contact sport, as many appraisers serving as experts quickly learn. Even so, a recent case stands out for a litigant’s pit bull attack on a highly qualified expert.

Property tax dispute: The taxpayers owned a real estate company that developed a strip mall in Michigan, which turned out to have problems attracting tenants. Based on the city’s original tax assessment, the property had a true cash value of over $6.1 million in 2009 and $5.9 million in 2010. In contrast, the taxpayers claimed the property was worth $3.8 million in 2009 and $3.2 million in 2010. They appealed the city’s assessment to the Michigan Tax Tribunal (MTT).

During the MTT hearing, which was subject to the state’s Rule 702, both sides offered expert testimony. The taxpayers’ expert had worked as a real estate appraiser for nearly 40 years and had extensive experience with this type of property. Both he and the city’s expert agreed the property should be valued under the sales comparison and capitalization of income approaches, and both concluded the income approach was the more consequential method. The taxpayers’ expert found that the character of the property and its location resulted in a low valuation. The city’s expert disagreed, claiming the problem was poor management.

‘Lowball defective appraisal’? Before the hearing even got underway, the city urged the MTT to exclude the taxpayer expert’s “junk appraisal.” The issue was reliability, not the expert’s qualifications, said the city, insisting that the MTT had an obligation to review “the content of the particular opinion.” The city wanted “a full and throaty announcement to the tax bar that reliability standards will be actively enforced by the MTT as a pre-condition for expert opinions being admitted in evidence.” Such a statement would reduce the “perverse incentive for petitioners to submit ‘lowball’ defective appraisals,” the city claimed.

Later, the city claimed that in a third of the cases in which the expert had provided opinions his appraisals were found unreliable, and it accused him of advocacy. On cross-examination, the city attorney wanted assurances from the appraiser that under his methodology any qualified appraiser—no matter who—would come up “with the same result rather than a range of results.”

Attack fizzles: The trial court rejected the city’s arguments. There was no question that the taxpayers’ appraiser was qualified to value the property and did so using reliable principles and methodologies, the court said. It adopted the expert’s valuation. On appeal, the city contended that the MTT had abdicated its role as gatekeeper. The appeals court disagreed. The city, it said, wanted the trial court to scrutinize the expert’s testimony before he was even able to give it. But all of the city’s objections went to weight not admissibility. For the purpose of admissibility, the taxpayers did not have to show their expert’s opinion was absolutely true and uncontested. The MTT was quite capable of deciding how relevant and credible the proffered valuations were, the appeals court concluded.

Takeaway: The appeals court confirmed that, under Rule 702, the trial court, in its role as gatekeeper, had no obligation to make a “searching” inquiry into the expert’s underlying data once it found he was qualified and used a reliable method.

Find an expanded discussion of B & L Development LLC v. City of Norton Shores, 2014 Mich. App. LEXIS 1488 (Aug. 14, 2014), in the November issue of Business Valuation Update; the court opinion will be available soon at BVLaw.

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More afterglow from Damodaran’s
special workshop

An especially resonant segment of the New York City workshop conducted by Dr. Aswath Damodaran (New York University Stern School of Business) dealt with the issue of “quality growth” and how analysts conclude that a company is, indeed, a true gem.

A rarity: Certainly beyond the world of finance, “rarity” is commensurate with the value placed on an object. And in the valuation realm “quality growth is a rare exception,” Damodaran put forth. He went on to define “quality growth” as a company’s success in reinvestment in itself as opposed to gains from short-term efficiencies or acquisitions, for example. He shared his view that the “narrative and the numbers” join together to tell the story behind any valuation because, he explained, scaling up is hard to do. Any “story” that culminates with truly high returns on capital is a riveting tale achieving elusive—and very rare—quality growth.

For an archived version of the webcast of the three-hour live session, “Price and Value: Discerning the Difference, an Advanced Workshop,” click here.

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Concise view of how health reform affects valuations

Health reform has resulted in a maze of new laws, regulations, and mandates that all have their effect on the valuation of healthcare providers, particularly hospitals. During a recent BVR webinar, Don Barbo (Deloitte Financial Advisory Services LLP) and Robert Mundy (Pershing Yoakley & Associates, P.C.) gave a rundown of the current status of the major healthcare reform measures and their potential impact on the value of various entities in this industry.

Free download: The presenters also provide a very interesting chart that examines various types of healthcare entities and the potential impact health reform has on the four key areas affecting valuation: profitability, growth, risk, and marketability. The entities covered include acute care hospitals, physician practices, rehab facilities, ASCs, imaging centers, and others. For a copy of this chart, go to BVR’s Free Resources page.

An archived version of Barbo and Mundy’s webinar, “Hospital Valuations,” is available here.

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Significant shift in fair value audit deficiencies

Auditors continue to stumble over fair value measurements, but they are now having trouble with different issues, a new report reveals.

Over 40% of all audits inspected by the Public Accounting Oversight Board in 2012 had deficiencies, and the number of fair value measurement (FVM) deficiencies made up about 25% of all audit deficiencies, according to the third annual “Survey of Fair Value Audit Deficiencies” from Acuitas, an Atlanta-based valuation and litigation consultancy firm.

New trends: The report notes that there’s a shift in the sources of FVM deficiencies. In 2012, insufficient testing of financial instruments caused 87% of FVM deficiencies, but that percentage dropped to 55% in 2012. Business combinations are now the source of 45% of FVM deficiencies in 2012, up from 9% in prior years. Also, failure to assess risk and failure to identify or test internal controls caused a significant increase of FVM and impairment deficiencies. Risk assessment and control deficiencies caused 41.2% of the FVM deficiencies and 50% of impairment deficiencies cited by the PCAOB in 2012.

“The recent decrease in FVM audit deficiencies relating to the pricing of financial instruments is likely the result of audit firms’ responses to PCAOB inspection reporters, auditors having more experience dealing with FVM audit issues, and an improvement in economic conditions,” says Mark Zyla, managing director of Acuitas. “As economic recovery has increased, the pace of merger and acquisition activity and the number of deficiencies noted by the PCAOB relating to business combinations have increased.”

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Are the stars aligned for global BV standards?

Is now the time for the BV profession to pull together and establish global BV standards? Can it be done? What are the obstacles? The global standards conundrum is just one of the issues that will be discussed during the “Lively Debate on Global Business Valuation Education” on October 23 in Toronto, Canada. A panel of global BV educators will debate the issues and challenges in the design of a global BV designation and accreditation system. The session will take place immediately following the annual general meeting of the International Valuation Standards Council (IVSC).

Panel members include April Mackenzie, CEO of the IVSC; Ben Elder, global director of RICS Valuation and EQS; Bob Morrison, chair of ASA Business Valuation Committee and chair of IIBV Education Committee; and Doug McPhee, global head of KPMG BV education.

Hosted by the International Institute of Business Valuators (IIBV) and Business Valuation Resources (BVR), this event is free. If you can’t make it in person, the event will be webcast live. For details, click here.

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BV movers . . .

People: Brad Hale joins the Tampa Bay, Fla., office of CBIZ & Mayer Hoffman McCann as a managing director … O’Keefe & Associates of Bloomfield Hills, Mich., has announced the promotions of Susan Koss, Russell Long, and Andrew Malec from managing directors to partners … Daniel Kittlauss and Dr. Timo Willershausen have been named managing directors and will jointly lead the new Duff & Phelps Corp. office in Frankfurt, Germany … Eide Bailly’s business valuation group has promoted three staff members to manager: Erica Bjerrum, Erik Gilbertson, and Jay Fullerton.

Firms: Honkamp Krueger & Co. has acquired the Moline, Ill.-based firm Crippen, Reid & Bowen LLC … The International Society of Business Appraisers (ISBA) announced the award of its prestigious Business Valuation Gold Seal of Trust to Shannon Pratt Valuations Inc. of Portland, Ore. … Muckel Anderson CPAs of Reno, Nev., will merge with Eide Bailly LLP on November 3 … Reinsel Kuntz Lesher merged with the Pennsylvania-based firm Darkes, Peachey & Wilbert on October 1.

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Fall harvest of CPE events

An array of excellent BV webinars is on tap for this month.

International Cost of Capital: Practical Applications (October 9), featuring Nancy Czaplinski and Linda Sweet (both American Appraisal). Determining cost of capital is challenging in the best of times. Beyond the U.S. border, considerations of currency, risk, and other economic indicators in the rapidly changing global economy exacerbate these challenges. Learn how to overcome such obstacles in this must-attend webinar.

The Market Participant Acquisition Premium (October 16), featuring Travis Harms (Mercer Capital). In April 2013, the Appraisal Foundation introduced a new term to the business valuation vernacular, the market participant acquisition premium (MPAP), created to "emphasize the importance of the market participant perspective when measuring fair value, and to distinguish this premium from the more general (and occasionally controversial) notion of the control premium." Part 10 of the Online Symposium on Fair Value Measurement addresses the latest BV term, its use, and conceptual basis.

Valuing Covenants Not to Compete in Healthcare (October 21), featuring Jason Ruchaber (Berkeley Research Group). In healthcare transactions, the already difficult task of assessing compensation is compounded by noncompete agreements. In Part 10 of BVR’s Online Symposium on Healthcare Valuation, expert Ruchaber discusses the structure, valuation, and analysis of these common—but challenging—agreements.

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

Comps for a RECE

Hostile Daubert attack

Quality of growth

Impact on health reform

Fair value slipups

Global BV standards

BV movers

CPE events








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