September 21, 2011 | Issue #108-2  

BV appraisers see ‘bigger issues’ than competing credentials

Are competing credentials in the BV profession driving down fees as well as “dumbing down” the work? Last week’s item, “Does the BV profession suffer from ‘interservice rivalry’?” elicited these thoughtful responses:

  • Michael A. Gould (Hunter Group CPA):The bigger issue is the various standards that exist among the various organizations and USPAP; in particular, those that relate to development and reporting in litigation matters, calculation reports as allowed by SSVS, and review reports under Standard 3 of USPAP.”

  • Scott Leslie, CPA/ABV, ABV: “What I see as the elephant in the room is in the area of fees.  Fees for BV are in the tank when you have less qualified credential holders bidding down pricing and when the quality of work to the bill-payer is not that important. There are multiple regulators, each with different rules that dumb down the ultimate work quality, making competition a credibility- and a fee- destroying mechanism.”  
  • Jerry Karsh (Karsh Consulting, P.C.) says he doesn’t “knock the credentials but the people parading them.  Credibility comes from your work-product –not the initials after your name.”
  • Louis Pereira (Merrimack Business Appraisers) would like to see the various organizations (AICPA, NACVA, IBA, and ASA) strengthen the credentialing requirements with programs of testing, work experience, and peer review of actual multiple work products that demonstrate the full range of skills.

  • Bruce W. Thee (Bruce W Thee & Associates) would like to see “the development of a BV designation with high education, experience, and training requirements that didn’t dummy down its standards for the sake of larger enrollment and more money for the sponsoring organization.”
  • Leslie Avener, CPA*/ABV, ASA, CBA, CVA) notes: “It is also darned EXPENSIVE to have all those credentials!”

Check the November Business Valuation Update for more competing views on the always-provocative topic.

More evidence of economic rebound: new study analyzes earnouts as a portion of purchase consideration

“The mergers and acquisitions (M&A) market generally rebounded with more transactions and a higher median purchase price than in 2009,” says the latest (10th annual) Purchase Price Allocation Study by Houlihan Lokey (HL), the first time the study has analyzed earnouts, or contingent consideration (CC), as a component of purchase consideration (PC) under the requirements of ASC 805 and generally accepted accounting principles. “The turnaround was driven by stronger corporate and investor confidence, and aided by greater availability of debt financing with attractive terms,” says the report authors. “Companies also accumulated a record level of cash since the height of the financial crisis (2008-2009).”

In particular, the number of completed transactions increased by 54% from 2009 to 2010—as did the number of transactions (from 328 to 506) with sufficiently detailed disclosures regarding purchase consideration, including identifiable intangible asset fair values and goodwill. Approximately 19% of the studied transactions included earnouts, at a median fair value of $3.2 million and a mean of $18.7 million. Earnouts also represented 14% and 18% of purchase consideration when measured on the median and mean, respectively. In line with the study’s overall results, 10 of the 13 analyzed industries saw the number of completed transactions rise, with telecom, energy, aerospace & defense, and industrial posting the largest increases. Healthcare recorded the smallest percentage increase while the real estate and transportation sectors reported declines.

More confusion among courts when applying goodwill rules?

In Monaco v. Stewart, 2011 WL 1330851 (Ky. App.), the husband owned 25% of an anesthesiology practice, to which his expert applied a 45% marketability discount related to personal goodwill. After classifying all goodwill as belonging to the enterprise, however, the wife’s expert applied only a 5% marketability discount. The trial court disagreed with both experts, noting that the state’s “limited” case law at the time did not distinguish the components of goodwill. It settled on a 20% marketability discount—and the husband appealed.

Notably, by the time of the appeal, the state had adopted the majority rule among U.S. jurisdictions, requiring trial courts to distinguish between personal and enterprise components when valuing the goodwill of professional practices in divorce. Yet, the appellate court held that the rule didn’t apply in this case, essentially because the husband’s interest lay in a large, multi-center regional practice (instead of a solo or small firm) and the trial court had “clearly and thoroughly” found that any personal goodwill, separate from enterprise goodwill, was negligible. In fact, the trial court had considered the specific quandaries surrounding the valuation of medical practice goodwill:

In the case of professional service entities, a prospective buyer must ask what exactly he or she is buying. Take the case of a doctor for example. . . . Each patient has an inalienable right to see whichever doctor he or she chooses. Add to the fact that the law greatly disfavors non-compete clauses among professionals and you are left with little reason to buy at a premium. What would prevent the selling doctor from opening a new practice down the street? Furthermore and perhaps more importantly, why would a prospective buyer pay such a premium for something he or she is capable of starting from scratch for vastly less money?

Learn how to answer these and more questions. On Tuesday, September 27th, the Online Symposium on Healthcare Valuation continues with Personal/ Professional v. Practice Goodwill in Medical Practice Valuations, featuring Mark Dietrich, Symposium curator and editor AHLA/BVR Guide to Healthcare Valuation.

‘Simplified’ FASB standard for goodwill impairment may lead to more complexities

FASB’s “new goodwill impairment testing standard may give companies more options and flexibility, but it also leaves some questions unanswered,” says a new article in Accounting Today. Adds Greg Forsythe (Deloitte Financial Advisory Services):

In terms of the literature that comes out from the FASB, we’ve had a lot of thick documents on fair value in recent years, but this one is pretty skimpy in comparison, because it is fairly simple in concept. However, what’s simple in concept may have some complexity and challenges around it. I think that’s where everyone is right now, sort of trying to think through what this might mean, and what auditors might need to do to audit this kind of qualitative data, which is…new in a fair value concept.

Read Brad Pursel’s analysis of the new standard and its qualitative requirements in the November BVUpdate.

Lance Hall responds to IRS’s DLOM criticisms

According to Lance Hall and Kyle Vataha (FMV Opinions, Inc.), the criticisms of The FMV Restricted Stock Study in the IRS DLOM Job Aid (available on BVR’s free download page) can be boiled down into three issues:

  1. IRS criticism:  You can’t reliably use a regression model to determine an accurate discount.

    FMV answer:  Correct.  You don’t use a regression model to determine your P/E ratio and you shouldn’t do it for your DLOM.

  2. IRS criticism:  The IRS cannot find any statistical relevance regarding the key comparative characteristics recommended by FMV

    FMV answer:  The IRS mixed registration rights data, step-premium transactions, with 6-month, 1-year and 2-year holding periods. No wonder they didn’t find a correlation.  However, at least 7 non-FMV academic and valuation professional statistical analyses did find statistical correlations with the recommended characteristics.

  3. IRS criticism: There is no statistical proof that large percentage blocks of stock have higher discounts than small percentage blocks.  

    FMV answer:  Wrong!  At least three academic studies and two valuation studies have found the percentage block to be statistically meaningful.  This is important because the large block discounts set a floor for the private company DLOM

On Wednesday October 12th, join Lance Hall for a special 100-minute webinar, FMV Responds to the IRS DLOM Job Aid, in which Hall will address the IRS Job Aid, what it means for business appraisers, and how to approach your DLOM determinations in light of this document.

The new healthcare ACOs may have hidden valuation issues

Networks of various healthcare providers are increasingly creating accountable care organizations (ACOs) to provide better quality and more cost-effective care. At the same time, “some concerns are emerging about the structure of these organizations,” notes Kevin Cope (LarsonAllen) in his article, “Fair Market Value and Regulatory Considerations for the ACO Model.” Some of the fair market value issues that might apply to an ACO include:

  • Provider compensation
  • Capital investment and asset contribution
  • Shared savings and income distribution

“Properly determining provider compensation models, valuing asset contributions and income distribution policies, and complying with regulatory requirements will be important considerations in forming successful ACOs,” adds Cope.

Learn more about ACO’s this December 6th in Accountable Care Organizations: What Are They and What Do You Need to Value?, Part 12 of BVR’s Online Symposium on Healthcare Valuation, featuring Mark O. Dietrich and Carol Carden (Pershing Yoakley & Associates).

AM&AA requests nominations for thought leader award

The Middle Market Thought Leader of the Year award, sponsored by the Alliance of Merger & Acquisition Advisors (AM&AA) and Grant Thornton, honors “individuals who have made significant contributions to the middle market M&A profession through the publication of works that promote research and higher standards of excellence.” Last year’s honorees: Chris Mellen (Delphi Valuation Advisors) and Frank Evans (Evans and Associates). Consider nominating executives, clients, professional advisors, or partners who have written research studies, white papers, articles, e-communications, or books that have been released or published between Sept. 2010 and Sept. 2011.

Cast your ballots by Nov. 18th here

BVR’s first-ever Online Tax Summit to feature top judges, lawyers, and experts

Beginning this October, BVR’s 2011 Tax Summit will deliver the same cutting-edge programming on the intersection of taxes and valuation in a new, interactive, online format. Sessions include:

A fourth webinar, focusing on IRS perspectives, is currently in development. Register for each program separately or at a discount rate for the entire Summit at BVR’s Training Page.


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