BVWire Issue #169-4 | October 26, 2016

Defense expert opinion bolsters stock valuation in key ESOP case

In a notable ESOP case, the court recently dismissed allegations that the defendants had committed breaches of fiduciary duties and engaged in a prohibited transaction. The defense expert made a persuasive showing that “no more than fair value market value was paid for the non-ESOP shareholders’ stock,” the court decided.

Here’s the deal: At issue was a 2003 transaction by which the subject company (Antioch) bought all of the outstanding shares of its stock held outside its employee stock ownership plan. The purchase was part of a tender offer transaction that left the company 100% ESOP-owned. The defendants, who then served on the company’s board of directors and/or the internal ESOP advisory committee, held non-ESOP shares and initiated the transaction. In late 2008, the company declared Chapter 11 bankruptcy.

The plaintiffs were plan participants who claimed the defendants’ actions ultimately caused the ESOP’s shares of Antioch stock to become worthless. To distance the defendants from the process, the company had retained an independent trustee that relied on opinions from Duff & Phelps as to whether the transaction was fair to the ESOP from a financial point of view.

At trial, both parties presented high-caliber experts to assess D&P valuation-related work, including analysis of the company’s financial position, industry research, and discounted cash flow analyses. In terms of the latter, sticking points were D&P’s financial forecasts and its accounting for company-specific risk.

The plaintiffs’ expert asserted D&P overvalued the company. In contrast, the defense expert said his independent analysis showed that all aspects of D&P’s work were “sound and customary.” He presented a detailed critique of the opposing expert’s opinion, noting it ignored the strength of the company and failed to indicate in the record where D&P’s projections were unreasonable.

Crediting defense expert testimony, the court ruled D&P’s fairness and valuation opinions were “reasonable and appropriate” and absolved the defendants of any liability. The opposing expert’s valuation opinions were unsound and driven by hindsight, the court concluded.

The case is Fish v. Greatbanc Trust Co., 2016 U.S. Dist. LEXIS 137351 (Sept. 1, 2016). A case digest and the court’s opinion will be available at BVLaw soon.

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Last chance to add to deluge of comments re: 2704 regs

Next week is the deadline for submitting comments regarding the controversial IRC Section 2704 regulations. The due date is November 2, and the IRS website has a tally of over 4,000 comments so far. Yes, this is a lot, but it’s important that everyone put in his or her two cents because the more the comments, the less likely the Treasury will be able to finalize the proposed regs as written.

Wide array: While a lot of the comments are long on emotion and light on substance, others are very comprehensive. For example, The S Corporation Association submitted formal comments (available here) that do a great job at laying out the problematic issues. Also, the group has spent the month of October on the Hill building support for the two bills introduced in the House and the Senate to block the proposed regs. “With Congress coming back in mid-November, the challenge will be to build sufficient support on this issue to compel the House and Senate to take action before the end of the year,” the association says in a blog post.

The American Society of Appraisers has released talking points and a template comment letter (a prior issue of BVWire with the links is here). The ASA has also posted a video in which valuation expert Bruce Johnson (Munroe, Park & Johnson) gives a succinct explanation of the proposed regs. Johnson is part of the ASA task force assembled to study the regs and submit formal comments.

Voices still need to be heard on this matter, and you can submit comments by clicking here. A public hearing will be held at the IRS on December 1, and BVWire will be there.

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New survey suggests more CPA firms now offer BV

Over a third (36%) of CPA firms say they now offer business valuation services, up from 22% last year, reveals a new survey. Valuation was among the top seven most popular services (all up from last year), along with audit, business consulting, estate planning, payroll, tax planning, and write-up, according to the Third Annual Accounting Firm Operations and Technology Survey. A concern over income and estate taxes could be driving some of the interest in valuation services, says the survey.

Survey respondents include solo practitioners (12%), small firms with up to 10 employees (43%), medium-size firms with 11 to 50 employees (30%), and large firms with 51 employees or more (15%). We should point out that the number of total respondents is down significantly from last year (273 in 2016 versus 632 in 2015).

Other findings include:

  • The top three challenges are attracting new clients (cited by 38% of respondents), managing workflow (31%) and identifying opportunities for practice improvement and cost savings (26%);
  • The most common channels for new client referrals are current clients (97%), referrals from other professionals (80%), professional partnership referrals (e.g., financial planners, law firms, etc.) (59%), and their firm website (50%);
  • To generate revenue, somewhat effective or effective methods include upselling existing clients (56%), raising fees (53%), adding services (51%), and teaming up with another business (43%); and
  • Acquisitions, while less popular (28%), were used by more firms in 2016 as compared to 2015, and, overall, firms found them to be more effective than in the prior year.

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Damodaran tosses some dynamite about fairness opinions

“Are you kidding me?” an incredulous Aswath Damodaran (New York University Stern School of Business) asked about the fairness opinions issued by bankers Lazard and Evercore regarding the Tesla/SolarCity deal. In a blog post, he says he was later taken “to task for not understanding the context for these valuations.” A Bloomberg column points out that a fairness opinion is not a real valuation, so the bankers’ job is “plugging in discount rates into preset spreadsheets—not in knowing the future." Damodaran responds that, if this is correct, “the problems run deeper than the bankers in this deal, raising questions about what the purpose of a ‘fairness opinion’ is and whether it has outlived its usefulness (assuming that it was useful at some point).”

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RECE valuations at center of property tax storm

During his conference session on real estate-centered enterprises (RECEs), Rob Schlegel (Houlihan Valuation Advisors, Indianapolis) mentioned a property tax case in California involving a luxury hotel that had its assessed value include the value of nontaxable intangible assets (click here for more details). “This is big stuff,” he said, referring to a growing trend by assessors of struggling to assess taxable assets and understand intangible assets, which are not subject to property taxes in some jurisdictions. They ignore the fact that a RECE, such as a hotel, gas station, or restaurant, is not just “dirt and buildings” but a combination of real property and intangibles. The intangibles need to be identified and valued so they can be adjusted for the property tax assessment. There are a variety of methods used by real estate appraisers with assumptions that are often questioned.

Schlegel made his remarks at a two-day conference in Atlanta co-sponsored by the Southeast Chapter of Business Appraisers (SECBA) and the International Association of Consultants Valuators and Analysts (IACVA).

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Small firms scramble for working capital per latest Pepperdine report

While businesses continue to report steady increases in access to credit and an increase in demand for credit, small businesses are still looking to secure working capital, according to the Third Quarter 2016 Private Capital Access (PCA) Index report by Dun & Bradstreet and Pepperdine Graziadio School of Business and Management.

AR woes: Both small (less than $5 million in revenue) and midsized ($5 million to $100 million in revenue) businesses combined reported a 7.8% increase in access to capital and a 3.1% increase in demand for capital year-over-year. However, about 2% more businesses than a year ago reported that they are seeking financing for working capital fluctuations. Small businesses reported that a slowing of accounts receivable is aggravating the situation.

This report is part of Pepperdine’s Private Capital Markets Project, which conducts ongoing research to understand the true cost of private capital across market types and the investment expectations of privately held business owners. Some valuation experts are not comfortable with the standard practice of converting measurable public-market data into proxies for private-company valuation. They feel that a private-company cost of capital method should emerge to eliminate the need to adjust for different risks and returns, liquidity, access to capital, pricing mechanisms, holding periods, and transaction costs.

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Reminder: Take our DLOM survey

Our thanks to those who have responded so far to our survey designed to narrow down the methods most frequently used for determining a discount for lack of marketability (DLOM). We’d love more responses, so please take a few minutes to take the short survey (click here). We will compare the results to the last surveys we did on this issue and will present the results here in BVWire.

On December 8, BVR will present a special four-hour DLOM Day: An Advanced Workshop. Don’t miss it!

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Global BV News
IFRS adoption to trigger valuation demand in India

BVWire attended a New York City chapter meeting of the American Society of Appraisers (ASA) last week, which featured an interesting panel discussion about the valuation profession in India. Ray Moran (MG Valuation LLC) moderated the panel that included Aroop Cherian, founder of Cherian Advisors, Bharat Kanodia, founder of Veristrat, and Pankti Shah, director of business development for Aranca who recently relocated to the firm’s New York City office.

IFRS in the wings: Panel members see a significant increase in demand for valuation services in India and believe that the BV market will grow at a rate of 20% to 25% over the next five years. Valuation professionals are being exposed to a wider variety of opportunities, which enhances their professional and career growth chances, according to Cherian. One of the demand drivers is the adoption of IFRS, which the Indian government is expected to require of companies within the next three to four years, according to Shah. This will, for example, trigger more fair value work (e.g., purchase price allocations, mark-to-market).

Shah also pointed out that the profession is highly fragmented in India and is dominated by the Big Four. However, there are opportunities for smaller valuation firms, she said. For example, while large family-owned businesses tend to go to the Big Four, the work may be outsourced to smaller firms. There are also growing cross-border opportunities for valuation work related to 409a, private equity and hedge funds, and providing back-office operations for U.S. firms (research, modelling, full support).

In terms of credentials, there are no valuation professional organizations in India, so valuation credentials are not widely known. The CFA designation is the most recognized in India, according to Kanodia, and the CPA credential is also well known, along with the Chartered Accountant (CA) designation issued by the Institute of Chartered Accountants of India (ICAI). Moran believes the new CEIV designation for fair value will eventually go beyond U.S. registrants and will gain favor in India. Kanodia agrees and feels that the CEIV credential would be more acceptable and widely leveraged in India because there is no requirement to submit a report, just a showing of experience and an appropriate recommendation.

An attendee asked the panel about developing the cost of equity for a company in India. Cherian, who is currently working on a valuation of a pharmaceutical company, says the procedure is much the same as in the U.S. One main exception is that there are no available data on the size premium in India, so the risk associated with size is incorporated into company-specific risk.

ASA chapter meetings such as these offer very informative discussions, and you don’t always have to be a member to attend. To check out a chapter in your area, click here.

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BV movers . . .

People: After over 20 years leading all business valuation and M&A activities at Cassady Schiller CPAs & Associates, David Lingler has joined the Cincinnati firm Black Dog Valuation to head up its business valuation and consulting services … Daniel Van Vleet has joined The Griffing Group as managing principal based out of Chicago.

Firms: Armanino LLP, one of the largest valuation firms based in San Francisco, announced its intention to merge with the Dallas-based Travis Wolff, effective Jan. 1, 2017 … Baldwin CPAs, a regional firm based in Kentucky, is merging with Humphrey & Co. PLLC of Lexington, adding all employees to the firm.

Please send your professional and firm news to us at

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Upcoming CPE events

Fair Value Valuation: Takeaways from SEC Comment Letters (November 1), with Lisa Swanson (Blue Abaco Consulting Inc.). This is Part 6 of BVR's Special Series on Fair Value.

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).

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:

Big ESOP case

2704 deluge

CPAs grow BV

Damodaran dynamite

RECE valuations

Private capital access

DLOM survey

Global BV news

BV movers

CPE events

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