BVWire Issue #145-5 | October 29, 2014


Global BV standards, education in the spotlight in Toronto

BVWire was on the scene in Toronto, Canada, last week as international BV players gathered for significant discussions on global valuation standards and education.

Landmark MOU: During its annual general meeting, the International Valuation Standards Council (IVSC) announced the signing of what they call a landmark memorandum of understanding (MOU) designed to boost confidence in the valuation process. The MOU, signed by some of the world’s largest valuation professional organizations (VPOs), represents a commitment to comply with a single global set of standards for valuing assets. The organizations have committed to comply with the IVSC standards within the next three years. Among the groups that have signed the MOU are the American Society of Appraisers (ASA), Canadian Institute of Chartered Business Valuators (CICBV), China Appraisal Society, and the Royal Institution of Chartered Surveyors (RICS).

“Variation of international standards for valuing assets represents a potential problem for global markets and economies, and it has to be in the public interest to bring the various nationally based standards together to create a single set of globally accepted principles,” Sir David Tweedie, chairman of the IVSC Trustees, said in a statement. “This is a landmark achievement and represents a major step towards getting global adoption of international valuation standards,”

Education debate: Following the IVSC meeting, this editor moderated a panel discussion on global BV education that was webcast live (recording available free if you click here). “The question is not what we should do, but what is the right thing to do,” said Mary Jane Andrews, chair of the International Institute of Business Valuators (IIBV).

“There’s a global warming of the BV profession toward the ideas of valuation standards and education, and we need to be ready to respond to them,”said Bob Morrison, chair of the ASA Business Valuation Discipline Committee. “CICBV members are already asking for an international education and certification,” countered Pierre Maillet, who is with PwC in Montreal and is on the CICBV board. He warns that it takes years to develop these things, so the route is to support country-specific standards via the VPOs rather than a new international organization.

“Young people in our profession need a certification that’s global, portable, and recognized,” agreed Doug McPhee, global head of BV education at KPMG. “Otherwise, they’re struggling to align their training with their careers or with the regulators.” To prepare individuals as the profession changes, you need “entry education, continuing education, minimum work experience, standards probably around the IVS from the IVSC, and you need disciplinary procedures,” Maille says. Ben Elder, global director of valuation at RICS, points out that his organization takes a proactive approach to discipline by scrutinizing its members’ work and taking enforcement action where it sees fit.

“If external trends move faster than internal actions, you’re on the road to disaster,” says April Mackenzie, COO of the IVSC, quoting a business leader she’d heard earlier. “Education is what you have at a point in time, but competency is an ongoing commitment over time. What we need to do is find a way to recognize the right levels of competency. That’s where we have to start for the answer.”

The panelists agreed that, generally speaking, education should be standardized internationally. “But at the national level, and at the level of practicing internationally, you need to demonstrate an additional international competency,” said Morrison. “What good is the market approach in a local economy with no secondary market? Knowing that is a key part of international competency.” One route is for the IVSC to weigh in on whether VPOs meet the minimum standards of an international body for common, high standards.

While it’s unclear what tangible actions will be taken in the short term, it’s important to keep this dialogue going in order to move forward with a global unification of the BV profession.

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New York DLOM ruling has valuators abuzz

When it comes to valuing a closely held company, New York law allows for the use of a marketability discount, and many times courts have applied it. But is it mandatory? This was a key issue in a recent New York ruling in a fair value proceeding.

Backstory: Nahal Zelouf obtained a 25% interest in the family-run textile business from her husband after he fell into a coma. The other owners were her brother-in-law, Rony Zelouf, and her nephew, Danny Zelouf, who had a majority stake. In 2009, Nahal made a books and records request and subsequently sued Danny and Rony for waste and misappropriation, alleging that the two men plundered the company for their personal gain.

During pretrial proceedings, in 2013, the parties jointly hired a neutral appraiser to perform a valuation of the company for mediation purposes. However, instead of settling the case, Danny and Rony pursued a freeze-out merger, forming a new company for the purpose of buying out Nahal and rendering her unable to pursue her derivative claims. Ultimately the court allowed the merger on condition that the court would rule on Nahal’s derivative claims as part of an appraisal proceeding and would allow for additional damages and legal fees if she won on those claims.

Probability of sale: Nahal rejected the company’s $1.5 million buyout offer, and the appraisal proceeding went forward. Both sides agreed that the neutral valuator’s appraisal should serve as the starting point of their analyses of what the fair value of Nahal’s shares was. At trial, the parties’ own experts focused on critiquing and adjusting the neutral appraiser’s report.

The appraiser used the capitalization method under an income-based approach to determine the company’s fair value as a going concern on a controlling, marketable basis. After making normalizing adjustments to the company’s net income, he arrived at a value of approximately $8.9 million. In the alternative, he calculated the value on a controlling, nonmarketable basis, using a 30% DLOM, to arrive at a $6.2 million valuation.

The DLOM became a flashpoint. According to the neutral appraiser, “typically, a [DLOM] is usually only applicable for valuations of minority interests in closely-held companies under the assumption that a controlling owner would be able to force the sale of the company.” It was inappropriate in this case, he said, but he applied it at the direction of counsel. The parties’ experts argued over its application and the percentage it should take. In essence, Nahal’s expert maintained that under case law a DLOM was never applicable in this scenario; however, if the court allowed for one, it should not be more than 15%. The company’s expert contended New York law required a DLOM.

The court found Nahal’s expert cited the wrong case, but it agreed that a DLOM was inappropriate here. The idea underlying a DLOM is that the recovery of a frozen-out, minority shareholder should be less to account for the difficulty of selling a closely held company, especially in a niche business, as compared to a publicly traded company, the court explained. This rationale did not apply here, the court found, agreeing with the neutral valuator. It was unlikely that the company would or could ever be sold. A liquidity risk in this instance was “more theoretical than real,” said the court. Risk was “a function of probability times the threatened harm.” Here, although there would be harm in the form of a lower net purchase price, the probability that it would actually occur was “negligible.” In the absence of a risk, a DLOM was inappropriate. Although many courts have applied a DLOM, “no New York case stands for the proposition that a DLOM must be applied to a closely-held company,” the court said with emphasis. Based on the neutral appraiser’s valuation, it awarded Nahal $2.2 million for her 25% interest in the company and another $2.2 million based on her derivative claims.

Takeaway: The court in this case hitches the application of a DLOM to the probability of a sale. In his analysis of the case, Peter Mahler, a close observer of New York business divorce cases, raises important questions about the wider implications of the court’s rationale for DLOM. Does it undermine the use of a DLOM in instances where a company is not for sale in the foreseeable future? As he sees it, “[s]uch a conclusion would rule out DLOM in most if not all fair value cases.”

Find an extended discussion of Zelouf v. Zelouf, 2014 N.Y. Misc. LEXIS 4341 (Oct. 6, 2014) in the January issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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New mortality tables could affect
pension valuations

The Society of Actuaries (SOA) is expected to finalize a new set of mortality tables by the end of this month, according to a report from PwC. “Because mortality is a key assumption in developing actuarial estimates, this could significantly impact the valuation of pension and other postretirement benefit (OPEB) obligations,” says the report. According to ValueWalk, when pension funds make the switch, they will see their expected liabilities rise by as much as 7%.

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The past can haunt expert witnesses

Understanding the cross-examiner’s objectives can help an expert witness prepare to take the stand, according to an article by Gary Birnbaum, J.D.(Dickinson Wright PLLC),and Vail Cloar, a law clerk with the Arizona Supreme Court. The article, “Seven Tips for Surviving Cross-Examination,” warns expert witnesses not to underestimate the cross-examiner.

Prior statements: A skilled trial lawyer will review an expert’s written work and prior testimony to find inconsistencies. “Electronic databanks and public records requests make it quite easy to see what an expert has said in the past,” says the article. Therefore, do not assume that this will slip under the radar.

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Full BVR library now available in
digital form

BVR has created a new Digital Library that gives you full online access to all 50-plus BVR books, guides, and special reports (except third-party titles). Plus, whenever a new BVR title is released, you get immediate access to it with your annual subscription. BVR’s publications are written and edited by renowned experts including Nancy Fannon, Mark Dietrich, John Stockdale Sr., and many more.

The Digital Library offers you significant savings off the retail price of publications. Also, you’ll save time with online access, regular updates, and advanced search capabilities. You are guaranteed to have the most up-to-date references in your library by subscribing to the Digital Library today.

For details and to subscribe, click here. Multiuser pricing is available.

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Wanted: financial damages pros

Meyers, Harrison & Pia LLC is seeking experienced financial damages professionals to join their firm, which performs work on a national level. The firm may consider opening new locations so that the right individual or group can join its team. For details, see the ad at right. Send your curriculum vitae and a summary of your qualifications to Erica Marcantonio, PHR.

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BV movers . . .

People: Tommye Barie, partner with Mauldin & Jenkins LLC, is the new chair of the board of directors of the AICPA … Kerry Buchan joins Windham Brannon as principal in the firm’s Atlanta office … Tamir Dardashtian was promoted to principal and Christopher Noble and Yair Holtzman were added to the partnership of Anchin, Block & Anchin LLP in New York City … Rebecca Fuller joins American Appraisal’s UK team as head of business development and marketing … Nicholas Harrison joins the Richmond, Va., office of Dixon Hughes Goodman LLP as partner to lead the Virginia tax advisory services practice group … Duff & Phelps adds three managing directors: Richard Newby and Shiv Mahalingham in the London office and Christopher Newman in the Silicon Valley, Calif., office … Leigh Ann Schultz was named managing director at MorganFranklin Consulting in Washington, D.C. … Colleen Vallen, partner at the Philadelphia office of Citrin Cooperman, received The Philadelphia Business Journal's "2014 Women of Distinction" award.

Firms: The American Society of Appraisers (ASA) has formed a training partnership in aviation valuation with two of the top aviation and aerospace educators, Embry-Riddle Aeronautical University and Jet Support Services Inc. (JSSI) … The western New York-based firms, Bonadio Group and Bevilacqua & Co., will merge on November 1 and increase staff to about 500 employees … Carr, Riggs & Ingram LLC has merged with the Alabama firm Boohaker, Schillaci & Co. and will retain current personnel and partners and operate under the Carr, Riggs & Ingram name … The Hancock Firm is now in the Texas Lawyers Hall of Fame after being voted the No. 1 litigation valuation provider in Houston for the past five years … New York City-based O’Connor Davies LLP will merge with nearby Purchase, N.Y., firm Perl & Asch CPAs, P.C. on January 1 … The International Society of Business Appraisers (ISBA) awards its “Gold Seal of Trust in Business Valuation” to the Minneapolis firm of Shenehon Co.

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CPE events

The Best Way to Work With Your Client's Auditor (November 4), featuring: David Dufendach, Lisa Iizuka, and Jenetta Mason (all Grant Thornton). In Part 10 of BVR's Online Symposium on Fair Value Measurement, experts Dufendach, Iizuka, and Mason act as hypothetical appraisers and auditors in case studies that reveal the best way to navigate audits for business combinations, equity-based compensation, and other common fair value scenarios.

Preferred Stock: Valuing Multiple Layers of Equity Securities in Venture-Backed Companies (November 6), featuring: Joel Johnson (Orchard Partners). Compared to more traditional firm structures, legal, regulatory, and financial matters play a much larger role in the determination of value of equity securities for venture-backed companies. Expert Johnson dissects the determinants to equity value in venture-backed companies to show how to properly assess the value of both preferred and common shares.

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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:

Global BV efforts

Key NY DLOM case

Pension valuations

Expert witness tip

BVR Digital Library

Damages experts needed

BV movers

CPE events








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