BVWire Issue #156-1 | September 2, 2015


Valuation is neither art nor science, Damodaran tells new class

The first thing Professor Aswath Damodaran (New York University Stern School of Business) does when school is back in session is give his big-picture view of valuation. Many valuation professionals say that valuation is both an art and a science. But, in Damodaran’s mind, valuation is neither.

Valuation is a craft: “Unlike physics and mathematics, indisputably sciences with immutable laws, valuation has principles but none that meet the precision threshold of a science,” he writes in his blog. “At the other extreme, valuation is not an art, where your creative instincts can guide you to wherever you want to go and geniuses can make up their own rules. I believe that valuation is a craft, akin to cooking and carpentry.” Damodaran contends that you learn what works in valuation—and what does not work—by doing it.

Each week in his class, he posts his valuation of a company along with a Google shared spreadsheet. Everybody does their valuation of the same company and compares their valuation to his. The experience of actually doing valuations is a big part of his class.

Want to attend? You don’t have to be a registered student to attend Damodaran’s valuation class—he makes all class sessions available via his website, iTunes U, or YouTube.

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Key ruling on loss of beer franchise contracts

What is the best way to calculate the loss of well-known beer brands to a distributor whose franchise contract was lawfully terminated? This question, implicating Ohio’s Alcoholic Beverage Franchise Act, recently produced an important ruling on beer brand valuation.

‘Labattomy’: The supplier of Labatt and a host of other brands ended its franchise contracts with two distributors under Ohio’s “successor manufacturer” provision. The court found the terminations lawful and held a hearing to determine the “diminished value” of the business “that is directly related to the sale of the product or brand terminated or not renewed.” Under the statute, the value of such a business includes, but is not limited to, the “appraised market value of those assets … principally devoted to the sale of the terminated or nonrenewed product or brand and the goodwill associated with [it].”

Both sides presented opinions from experts with deep industry knowledge. The distributors’ expert performed a discounted cash flow (DCF) analysis that he applied to the businesses with the brands and without the brands. In addition, top executives of both distributors testified that they regularly negotiate brand values based on multiples of gross profits. Transactions might occur within a range of multiples of 1x and 6x gross profits, they suggested. For the subject brands, a multiple of 6x to 7x gross profits was appropriate given the volume and profitability of their sales.

The defendants’ expert argued there were not enough transactions with which to compare the subject brands. In general, he said, he considered using multiples to value brands a “short cut approach to calculating discounted cash flow.” He said that, although he intended to value the businesses in their entirety, the evidence failed to show that the termination had a noticeable effect on the distributors’ other assets. Therefore, he only conducted a DCF analysis for the value of the lost brands.

Hybrid approach: The court said it would use a “hybrid” approach to determine the diminished value in this case. This meant determining the fair market value of the franchise contracts using a DCF analysis and adding on any loss in the fair market value of other tangible or intangible components of the distributorships “directly resulting from loss of the Brands.”

The experts’ DCF models diverged on a few key components, such as the capital structure to use to calculate WACC and the cost savings input. The court said the valuation of the suppliers’ expert overall was more persuasive. Valuing the businesses in their entirety, as the distributors’ expert had done, “adds unnecessary complexity to what is a much more straightforward determination.”

Although the court rejected a comparable transactions approach, it paid some mind to the industry’s approach to beer brand valuation. It said it used the “collective testimony regarding gross multiples” as a check on the supplier expert’s DCF and concluded that the DCF-based results were “discordant” with market conditions. But, said the court, by adjusting the discount rate and cost savings inputs, the court was able to achieve a DCF-based outcome that was 3.25x gross profits for the first plaintiff and 3.47x gross profits for the second plaintiff. These figures fell within the industry average, the court noted.

Takeaway: This is a must-read case for valuators practicing in the alcoholic beverage industry. Only one other case with similar facts has dealt with the same Ohio statutory provision. There, the court was unable to make a definitive ruling on the proper methodology because one side’s valuation model was so defective as to compel the court to deem the opposing side’s approach the only rational one available in the case.

Find an extended discussion of Tri Cnty. Wholesale Distribs. v. Labatt USA Operating Co. LLC, 2015 U.S. Dist. LEXIS 81914 (June 24, 2015), in the October issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

Extra: BVR recently conducted a webinar titled Valuing Beer, Wine and Alcohol Distributors, which was conducted by Timothy Lee (Mercer Capital). Also, there’s a webinar coming up on September 8, Valuing Craft Breweries, with Courtney Sparks White (Clarus Partners).

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S corp valuation in response to recent research

How are you handling the valuation of S corps based on the research in the new book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle, by Nancy Fannon (Meyers, Harrison and Pia LLC) and Keith Sellers (University of Denver)? When asked about applying a premium to account for differences between the data on C corps and a subject S corp, one valuation expert tells us: “We used to apply a premium, but we now plan to adjust the discount rate based on [the new book’s] research."

Give us your thoughts: Help us examine this issue by taking a short survey. Your responses will be confidential, and we’ll report the results in a future BVWire. In exchange for your response, you will receive a free issue of Economic Outlook Update. Thank you in advance for your help! To take the survey, click here.

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Mercer releases valuation perspectives on the insurance industry

Specialty insurance companies continue to outperform standard lines, according to Mercer Capital’s latest issue of Value Focus: Insurance Industry, which covers valuation issues pertinent to insurance brokers, underwriters, and other industry professionals. The publication provides sector commentary and a recap of public market performance, including market pricing, financial performance, and growth rates. It also covers insurance industry M&A activity and points out that deal volume in the first half of 2015 could be on track for a new record.

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Healthcare services sector multiples

The S&P Healthcare Services Index has increased by 12% over the last three months, outperforming the S&P 500 (a 0.9% increase over the same period), according to the August 2015 Healthcare Sector Update from Duff & Phelps. The best performing sectors were emergency services (up 29.7%) and specialty managed care (up 18.3%). The worst performing sectors were diagnostic imaging (down 20.2%) and care management/TPA (down 10.6%).

The current median LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 1.7x and 12.6x, respectively. The sectors with the highest valuation multiples include: consumer-directed health and wellness (4.2x LTM Revenue, 23.5x LTM EBITDA), HCIT (3.7x LTM Revenue, 21.7x LTM EBITDA), and emergency services (3.5x LTM Revenue, 25.5x LTM EBITDA).

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IPCPL session at NACVA’s Pittsburgh event September 14-16

An alternate approach to estimating the cost of capital for a privately held business will be presented at NACVA’s conference in Pittsburgh September 14-16. Bob Dohmeyer will conduct a session on the implied private company pricing line (IPCPL), which is designed to eliminate the inherent problems in comparing public and private data. Dohmeyer is one of the developers of IPCPL, along with Pete Butler and Rod Burkert.

Dr. Herbert Kierulff, Snellman Professor of Entrepreneurship and Finance at Seattle Pacific University, recently commented on the new method. “IPCPL represents a groundbreaking advance in valuation and should be a part of the curriculum of every valuation course,” says Dr. Kierulff. “It has significant research potential with far reaching implications for pass through tax problems, company specific risk, capital structure decisions, and liquidity issues."

The Pittsburgh conference will focus on business valuation, including valuing family limited partnerships, BV foundations, and BV leading-edge topics. There will be two keynotes: one on growing your practice (by Lee Frederiksen) and one covering updates of industry standards (by Robert Grossman and Mark Kucik). For more information and to register, click here.

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Global BV news:

Advice for dealing with low or negative interest rates

Many valuation analysts are struggling with low or negative interest rates on sovereign debt for their risk-free rates in their models. In a recent interview, Michael Crain (Financial Valuation Group) asked Pablo Fernandez (University of Navarra) for some advice on this. Fernandez conducts global surveys every year about the risk premium. This year, he did the risk premium plus the risk-free rate.

Think total return: “Instead of thinking about the risk-free rate or the market risk premium, the more important thing to think about is the total required return,” says Fernandez. “That’s the number I’d spend my time on. That is, if you invest in some asset, what is your required return in order to compensate you for the risk that you foresee in holding the asset.”

“For example, in my survey I found that some people used the market short-term risk-free rate and some use negative figures, especially in Germany, for the risk-free rate,” he points out. “But others consider that we’re in an exceptional time so they don’t want to use the current market rate. On average people use a much higher number than the current risk-free rate. I think the historical average rate for Germany was about 2%, the current 10-year German government bond yield is near zero or even negative.”

Read the full interview: The full interview with Fernandez, which appeared in the July 2015 issue of Business Valuation Update, is now available at no charge on BVR’s Global Business Valuation Resource Centre.

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Are global BV standards possible in wake of FASB/IFRS setback?

Last week’s BVWire reported that FASB Chairman Russell Golden says that the U.S. is “unlikely” to adopt International Financial Reporting Standards (IFRSs). Golden pointed out that the differences between jurisdictions mean that there will be at least some variation in the way that accounting standards are written, applied in practice, and enforced. However, the FASB will continue to work toward the objective of producing more comparable standards that are truly global.

Chris Thorne (Valuology), former chairman of the International Valuation Standards Board, who also had a stint as its technical director, asks this question: Does this apparent setback in attempts to create a single set of accounting standards have implications for the stated objective of the IVSC to produce a single set of global standards for valuation? “I believe it has lessons that are relevant,” he says.

Focus on outcome: In an article, Thorne says a parallel can be drawn between the FASB/IFRS discussions and those that have taken place over a number of years between the IVSC and various national valuation standard setters. “Much time can be, and has been, wasted on debates about whether a particular word or phrase in one standard is preferable to the equivalent in another. However, it is a fact of life that in different jurisdictions and cultures words that are superficially similar may be interpreted in very different ways. The important thing to focus on at a global level is the outcome of applying different standards. Different standards can produce the same result using different words arranged in different ways. If a principle is globally accepted then it is desirable that national standard setters are free to choose the way of complying with that principle that is most effective within their jurisdiction. The alternative of trying to achieve global consistency by enforcing complete uniformity of language runs the risk of misinterpretation and misapplication in practice because of legal and cultural differences.”

He goes on to say that the FASB’s announcement does not diminish the importance of global standards. “However, it does highlight the need for efforts to be focused on agreeing the fundamentals that are truly global and recognize that below this different paths may be taken to achieve those fundamentals,” he says.

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BV movers . . .

People: Sonia Desai was named a director in the litigation consulting and business valuation practices at HSSK’s Austin, Texas, office … Anthony Marsala, co-founder and COO of Madison Street Capital, was named a “40 Under Forty” honoree by the National Association of Certified Valuators & Analysts (NACVA) and the Consultants' Training Institute.

Firms: Baker Tilly Virchow Krause has agreed to merge in SF&Company, whose multiple offices in Pennsylvania have over 100 employees. The merger will be completed by this November 1, and SF&Company will operate as Baker Tilly Virchow Krause LLP … The national firms Berkeley Research Group and Capstone Advisory Group merged earlier this summer and have incorporated the 60 employees including the Capstone leadership team … Citrin Cooperman has acquired the Bethesda, Md.-based regional accounting firm Regardie, Brooks & Lewis and will add 25 professionals and six new partners to Citrin Cooperman … CliftonLarsonAllen merged in the Washington, D.C.-based information security consulting firm TrustCC, a consulting and compliance firm that specializes in identifying security vulnerabilities for financial institutions and will add all 19 professionals to its staff, including TrustCC’s CEO Tom Schauer … New York City-based Prager Metis CPAs has merged in the London firm Peter Bryan & Co., a specialist firm that provides services to both U.K. and international high-net-worth individuals.

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September kicks off with some great CPE events

Determining Reasonable Compensation: How to Deal with the Data (September 10), with Mark Higgins (Higgins, Marcus & Lovett Inc.) and Mark Lipis (Lipis Consulting Inc.).

Forecasting Cost of Capital in Healthcare Valuations (September 15), with Carol Carden and Robert Mundy (both with Pershing Yoakley & Associates). This is Part 4 of BVR's 2015 Special Series on Healthcare Valuation.

SPECIAL FOUR-HOUR WORKSHOP: Advanced Workshop on Monte Carlo: From Classroom to Boardroom to Courtroom (September 29), with Michael Pellegrino (Pellegrino & Associates LLC) and Dave MacAdam (Novelis).

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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Holiday Break

BVWire will take a break for the Labor Day holiday next week. We will resume publication on September 16. Have a happy and safe holiday!

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

What is valuation?

Case on beer brands

S corp survey

Insurance industry

Healthcare multiples


Global BV news

BV movers

CPE events












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