BVWire Issue #157-3 | October 21, 2015


‘Lively Debate’ in Paris over global BV standards

The International Institute of Business Valuers (IIBV) hosted a “Lively Debate” panel on October 14 to end a day of working sessions at the Paris annual meeting of the International Valuation Standards Council (IVSC). The debate, “Two Truths and a Lie About Global Business Valuation Standards,” discussed the considerations of new valuation professional organizations (VPOs) about appropriate levels of professional standards including education standards and quality initiatives. BVR CEO David Foster was on hand for the debate and provides BVWire with some of the many issues discussed.

Standardization goal: “In much of the world, anyone can put up a sign at any time with no review and call themselves a business valuator. It’s not a surprise that there are calls from outside the profession for standardization,” Adam Smith from PwC (on partial loan to the IVSC Standards Board). He points out that this is the reason the IVSC creates global standards. But the standards are flexible because “there’s no way now to have one size fits all,” he says.

Smith also said that “the intensity of the volunteer work is now supported by the direct financial support of large firms, VPOs, and others around the world, so we will make it to the finish line eventually.” Others agreed, particularly Doug McPhee, the global valuation director from KPMG. “The mood has changed hugely in the last 12 months. More people are involved, and more people are doing the hard work to take the business valuation profession to the next level.”

Smith pointed to the fact that he, in fact, is paid for his work on behalf of the profession. “It’s PwC who is footing the bill for my work,” he said. And McPhee referred to The Appraisal Foundation’s great BV Roundtable held recently in Washington, D.C. (see last week’s BVWire). “I travel the globe, and people are working hard at applying standards internationally everywhere I go. It’s exciting and very lively!”

High spirits: To make sure that the conversation was energetic, IIBV director Michael Badham offered a menu of valuation-specific opportunities to imbibe—a number of BV-inspired drinks. We like the concoction called “Discount for Lack of Control” described as a “balance of liquors and Bacardi that reduces the pain of any loss of value due to lack of control." Check out the entire BV drink menu and feel free to add your own suggestions!

For more on the debate and the IVSC meeting, see the BVWire News blog.

back to top

Watch lawyers argue EO in front of state Supreme Court

Who should decide how to perform an external obsolescence (EO) analysis? This is the key issue in a tax assessment dispute that recently ended up in front of the Minnesota Supreme Court. As we reported here last week, in Guardian Energy, the taxpayer, an ethanol plant owner, appealed the Tax Court’s EO analysis, which sharply deviated from the approaches and values the parties’ experts proposed and produced a valuation of the plant that exceeded all other valuations.

Recorded live: Both parties’ oral arguments were captured on video—and it makes for fascinating viewing. It shows members of the court wrestling with what is by all accounts a complicated valuation problem. The company’s attorney argues that the high-level analysis required for EO quantification should be left to experts. Here, appraisers for both sides reached strikingly similar EO-based reduction rates. Where the company’s appraiser proposed a consistent 33.3% reduction for the three valuation years, the county’s trial expert proposed a decreasing rate of 45% in 2009, 35% in 2010, and 25% in 2011. The county’s rates average a 35% reduction rate. This narrow difference in rates between the parties highlights the outlier nature of the tax court’s 16%, 8%, and 0% rates. The court’s rates are the result of a flawed EO calculation that has no support in the evidence, the company’s lawyer maintains.

The county’s attorney disagrees vigorously. For one, the Tax Court’s EO analysis is based on relevant data regarding federally mandated ethanol-blending requirements that appeared in the appraisal reports of both parties. The lawyer emphasizes that each of the county’s rates for the three valuation years represents a separate valuation. To average the three numbers, as the company tries to do, does not accurately convey the improvement in the market and industry the county’s decreasing reduction rates convey. In fact, there was trial testimony that sales of ethanol plants “clearly show[ed] an upward trend in prices after early to mid-2009.” The county’s lawyer also claims that the tax court’s analysis is not unreasonably narrow because the court did not only look at production capacity, but also considered demand for ethanol as impacted by the federal government’s Renewable Fuel Standard Program. The attorney concludes that it should be the judge who decides, not witnesses. Because in this case the judge made her EO determination based on data from the record, her findings both in terms of EO reduction and the property’s fair market values are not clearly erroneous.

The high court rejected the county’s position and sent the case back to the Tax Court. To view the entire oral argument, click here. An extended discussion of Guardian Energy, LLC v. County of Waseca, 2015 Minn. LEXIS 437 (Aug. 12, 2015) appears in the November issue of Business Valuation Update; the court’s opinion is available at BVLaw.

back to top

Damodaran values effects of scandal on VW—then buys its stock

In the month following the Volkswagen scandal, the company lost almost 40% of its value. Of course, the consequences of the scandal will be dire—but will they be as dire as the market thinks?

Overreaction: In a blog post, Professor Aswath Damodaran (New York University Stern School of Business) did a valuation of Volkswagen pre- and post-scandal (his spreadsheets are included). His analysis draws parallels between the VW scandal and Toyota’s troubles in 2010 with faulty gas pedals that resulted in penalties, recalls, and lawsuits. He concludes that the market overvalued the effects of the VW scandal, and he bought shares in the company.

In terms of the loss in value with respect to VW’s reputation, Damodaran says the negative impact will fade over time, as it has for other “fallen sinners” in the automobile industry. Therefore, he estimated that the financial effects from the reputation loss will last five years, which he says is “conservative.”

back to top

BVR surveys the use of Monte Carlo in business valuation

Learn how your colleagues use Monte Carlo simulation in business valuation by taking a new Monte Carlo survey from BVR. There’s a lot of talk about Monte Carlo, so please take a few moments to share your experiences and thoughts—even if you don’t currently use the model. We’ll be collecting responses for the next week and all responses are confidential. All respondents have the option of receiving the final results as soon as the survey closes. Thank you in advance for your help!

back to top

New paper offers solution to problem of beta calculations

A new research paper puts forth a beta estimation model designed to eliminate the idiosyncratic noise and statistical chance with other calculations of beta. The paper has received enough interest to have it listed on a top 10 download list on the Social Science Research Network (SSRN).

Noise trouble: The abstract to the paper, Idiosyncratic Noise Filtered (INF) Beta, points out that making a reliable estimate of the beta of an individual stock has been elusive because price movements are a function of market/systematic movements and company-specific/idiosyncratic movements. “Since traditional beta estimation calculations make no attempt to minimize the impact of the idiosyncratic movements, the beta regression coefficient will be fooled to best fit both the desired market-based movements as well as the undesired idiosyncratic movements. If the idiosyncratic movements are not perfectly uncorrelated with market movements, the regression beta will be inaccurate.”

BVWire asked Mark Mitchell, director of valuation services at Peterson Sullivan LLP, to comment after reading the paper. “To my knowledge, the use of trading volume in the precise manner presented in the paper is a new concept that hasn’t been presented in other papers,” says Mitchell. “I think the paper advances the ball quite a bit in addressing some of the problems (which are well documented) with beta calculations. More importantly, a solution to the problem is offered and the results appear to be promising.”

Simple elegance: “The solution has a certain simple elegance to it and is intuitive inasmuch as even casual observation of the market (particularly as it relates to smaller stocks) suggests that price swings often occur around volume spikes due to company-specific news events,” adds Mitchell. “I believe the paper’s approach to include that data rather than simply eliminate it in estimating beta is also a unique take on the problem. In addition, the paper makes an effort to test the model against growth-adjusted P/E ratios, an easy-to-understand concept that supports the notions considered.”

The paper’s authors are Bob Dohmeyer (Dohmeyer Valuation Corp.); Igor Gorshunov, a business valuation and private equity professional; and Peter Butler (Valtrend LLC).

In Mitchell’s opinion, the paper addresses a topic that isn’t discussed as much as it should be in the business valuation literature. “CAPM is still a widely taught construct for estimating the cost of equity despite all of the literature devoted to pointing out its shortcomings,” he says. “At the very least, the paper’s ideas are a valuable basis for further discussion.”

back to top

Willamette examines rise of appraisal litigation

More shareholders than ever don’t believe they’re getting a fair shake in a merger transaction and are petitioning the court to appraise the fair value of their shares. This trend does not seem to show any signs of slowing down, according to the latest issue of Willamette Insights (complimentary access). The issue is devoted to dissenting shareholder appraisal rights and oppression litigation and includes related articles on entity-level versus ownership-level valuation adjustments, rescissory damages in Delaware, defining “value” in ownership agreements, fair value of banks, how to avoid intrafamily transaction shareholder litigation, healthcare entity transfers, and more.

back to top

Global BV news:

Why you should learn to speak both IFRS and U.S. GAAP

A new report from PricewaterhouseCoopers helps valuation experts to be financially bilingual by examining the major differences between U.S. GAAP and the International Financial Reporting Standards (IFRS). It also provides insight into the level of change on the horizon.

Why it’s relevant: Currently, domestic public companies are neither required nor allowed to use IFRS. So why the focus on this? PwC explains: “IFRS requirements elsewhere in the world affect many U.S. companies—public or private, large or small—through cross-border, M&A activity, and due to the IFRS reporting demands of stakeholders outside the U.S. And the continued global adoption of IFRS means that the impact on multinational U.S. businesses will only grow stronger, as additional countries permit or require IFRS for statutory reporting purposes and public filings.”

back to top

AICPA will stream its FVS conference November 8-10

If you cannot travel to attend the AICPA Forensic & Valuation Services Conference 2015 in Las Vegas, November 8-10, you’re in luck. The sessions can be streamed directly to your PC, and you can earn CPE credits without leaving your office. Plus, you will be able to ask the speakers questions, and they will respond in real time.

Full program: Seven tracks, special training for fledgling valuation experts, and some excellent preconference workshops highlight this essential event. The tracks are: valuation case study, general valuation, general forensics, hands-on forensics, litigation, cutting edge, and industry. The preconference workshops are: Fair Value Workshop, Surviving Cross-Examination, and the NextGen FVS Professional Workshop (special training for individuals with fewer than five years of BV or forensic accounting experience).

Different online options are available so that you can customize your own program. For details about online attendance, go to the AICPA’s online conference Web page.

back to top

BV movers . . .

People: Christopher Daianu was promoted to valuation services leader at Bruner Cox of Canton, Ohio … Joseph M. Palmar was named director of the forensic accounting and litigation support division of Goldstein Schechter Koch in Miami … Sheri Schultz, director of litigation support and business valuation at the Plantation, Fla.-firm Fiske & Co., was honored as one of the "2015 Top 10 Public Accounting Professionals" for Florida by the National Academy of Public Accounting Professionals … Mark Shifrin joined the global customized research and analytics firm Aranca as vice president of valuation and advisory services … J. Wade Weeks was appointed managing partner at the Atlanta office of Grant Thornton LLP … Carrie Zhou was promoted to a director of the business valuation group at HA&W LLP in Atlanta.

Firms: HLB International added three new members in Costa Rica: D.T. Baltodano Coghi y Zayas, San José; Esquivel & Alvarez, Heredia; and J.C. & Asociados, San José and San Carlos … Postlethwaite & Netterville has been named by the Greater Baton Rouge Business Report, the Greater Baton Rouge SHRM, and Best Companies Group as one of the "2015 Best Places to Work” … Raiche & Co. CPAs has joined the Greater Rochester, N.Y., Chamber of Commerce … Santos, Postal & Co. is merging in Hildebrand, Limparis & Associates, adding an office in Frederick, Md., to the firm’s existing office in Rockville, Md.

back to top

CPE events

Case Studies in Purchase Price Allocations (October 22), with Nathan DiNatale (SC&H Group LLC).

Valuing Oncology Centers (October 27), with W. James Lloyd (Pershing Yoakley & Associates PC) and Tynan Olechny (PYA GatesMoore). This is Part 6 of BVR's 2015 Special Series on Healthcare Valuation.

BVLaw Case Update: A One-Hour Briefing (October 29), with R. James Alerding (Alerding Consulting) and BVR legal editor Sylvia Golden.

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

back to top

We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
Share on LinkedIn



Not a BVWire subscriber?
Get on the list today.

In this issue:

'Lively Debate' in Paris

EO on video

Damodaran on VW

Take a Monte Carlo survey

New model for beta

Appraisal litigation

Global BV news

IP benchmarking guide

AICPA streams FVS

BV movers

CPE events












Copyright © 2015. All rights reserved.

Business Valuation Resources, LLC

1000 SW Broadway, Suite 1200
Portland, OR 97205
P: 1-503- 291-7963