Takeaways from the ASA’s annual conference
BVWire attended the ASA Advanced Business Valuation Conference in Boca Raton, Fla.—it was loaded with interesting topics and excellent speakers. Here are just a few takeaways (more next week):
- Keynote speaker economist Bernard Baumohl (The Economic Outlook Group) believes there will be stronger economic growth next year once uncertainty subsides over the presidential election.
- Companies on the block that are represented by an investment banker command a 20% premium when sold, so take that into account when looking at multiples in transaction data, advises Michael Poole (PCE Investment Bankers Inc.).
- Rajiv Gokhale (Compass Lexecon) presented an enhanced multiple corporate valuation model—not a replacement for CAPM, but it adds another point that’s “worth testing.” He co-wrote a paper on this method that’s available here. The authors are looking for feedback.
- There was a mock trial session that was excellent! All six disciplines were put on the “stand,” and the mock trial demonstrated how skilled opposing counsel can skewer even the best valuation report in court. Attorney Peter L. Gladstone (Gladstone & Weissman, P.A.) played the role of counsel for both sides, first eliciting direct testimony and then putting on his other hat to do the cross of each of the six expert witnesses. He succeeded in poking holes in all of their reports. His advice: Tell your attorney about weaknesses that could undermine your report in order to prepare for the witness stand. “Don’t keep it to yourself,” he says.
- Company-specific risk premiums range from 30% to 40% for firms in the legal marijuana industry, reports Ron Seigneur (Seigneur Gustafson LLP).
- For sports franchises, broadcast rights are now just as valuable as box-office ticket sales, says Drew Dorweiler (Dartmouth Partners Limited).
Next week’s BVWire will have some more takeaways. We congratulate the conference planning committee for an excellent event: conference chair Gary Trugman (Trugman Valuation Associates Inc.), Hernando Gomez (Morrison, Brown, Argiz & Farra LLC), Tracy Lamb (PCE Companies), Adam McArthur (CBIZ Inc.), Susan M. Saidens (SMS Valuation & Financial Forensics), and Jeffrey S. Tarbell (Houlihan Lokey).
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Trial court bungles valuation of key marital asset
If the takeaway from last week’s profiled case is that courts have a hard time trusting expert valuations, a recent Mississippi divorce ruling sends the opposite message: It takes an expert to value even a small family business.
Court plays appraiser: The couple’s dispute revolved around a fitness training company the husband had set up before the marriage, but which the court classified as marital property because of the wife’s contribution to building the business. The company was comprised of the husband, his car to get to client sites, and a few pieces of transportable equipment. Income fluctuated from year to year.
At trial, there were scant financial data and no expert testimony. The trial court decided the income approach was the only viable method to value the company. The valuation was complex, it said; and, to “properly value the company … the Court would need a valuation expert to review the historic earnings, and after adjusting the income to reflect normalized earnings, multiply the normalized earnings by a capitalization factor.” However, the court did not appoint an expert or even ask for further financial evidence. Instead, the court based the entire valuation on the company’s profit and loss statement for one year, subtracting liabilities from income and the value of the business’s few assets.
Not good enough: On appeal, the husband successfully opposed the valuation. The appeals court noted the parties’ failure to provide valuation evidence. It also said the trial court “did the best [it] could with the information available.” However, in terms of ensuring an equitable distribution, the company was too important an asset for the trial court simply to wing it. The appeals court expressed concern over the fluctuating income and the likelihood that the income was “intertwined” with the husband’s goodwill. It remanded for an “adequate valuation.” The trial court had the authority to appoint an independent valuation expert should the parties fail to offer a valuation or expert testimony, the appeals court pointed out.
The case is Lacoste v. Lacoste, 2016 Miss. App. LEXIS 460 (July 19, 2016). A case digest and the court’s opinion are available at BVLaw.
Extra: BVR’s “Charting Goodwill Jurisprudence” (January 2016) provides a state-by-state breakdown of goodwill jurisprudence and is available here.
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BV firms report revenues from litigation-related work
Almost nine out of 10 (86%) business valuation firms we polled say they do litigation-related engagements. About a quarter of firms report that more than half of their business valuation revenue comes from such work. For the others, 22% say it makes up from 26% to 50% of their BV revenue and the rest (40%) say it represents up to 25% of their BV revenue.
This is according to preliminary results from BVR’s Firm Economics Survey conducted this summer. About 170 BV firms, sole practitioners, CPA firms, and other entities with business valuation practices responded to the survey. The responses reveal how firms stack up in terms of performance, compensation, billing rates, marketing and practice development, and more. Responses are being analyzed, and a full report and executive summary will be available soon.
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Help needed on new average-strike put option DLOM model
John Finnerty (Alix Partners) tells BVWire that he would like to find some data to test a new version of his average-strike put option DLOM model, which can be generalized to accommodate a restriction period of any particular fixed length. He recommends that his old model be used for restriction periods of up to one year, but his new version should be used for restriction periods of more than two years (either model can be used for periods of one to two years). Finnerty also developed an extension of the new model that will accommodate situations where the length of the restriction period is uncertain, as, for example, when it is unclear when a private company might achieve a liquidity event.
Got data? Finnerty is looking for comments and suggestions—and would also like some real data for testing purposes. “If anybody has a sample of private company data, I would love to test this model,” he says. Anyone who provides the data will be listed as a co-author of the paper Finnerty will write on the new model. You can contact him at email@example.com.
Extra: Learn more about his new version in a webinar, Discount for Lack of Marketability for Any Restriction Period—Mastering the Average-Strike Put Option DLOM Model, which can be acquired if you click here.
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Healthcare M&A in year-end rush
There will be a race to finalize healthcare transactions before the end of the year, with over 100 deals likely to be done between now and then, according to an article from Bloomberg BNA. This activity will be in all three “core” sectors: long-term care, health information technology, and physician practices. Will the outcome of the presidential election affect the pace of M&As? No, says the article, because the “systemic changes wrought by Obamacare that are some of the main drivers of health-industry consolidation aren’t likely to go away.”
Sector to watch: Experts say that urgent care will be “huge,” the article reports. This form of healthcare delivery is convenient and less expensive than an emergency room visit. Plus, it’s attractive to investors because of relatively low startup costs and quick profitability.
Extra: A revised chapter on valuing urgent care centers is in The BVR/AHLA Guide to Healthcare Industry Finance and Valuation, 4th edition.
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Fries with that? Wonder Woman and Whataburger
Warner Bros. and Whataburger are in a “friendly” discussion over the similarity between Wonder Woman’s “stacked W” logo and the logo of the burger chain, according to a report in the Houston Chronicle. Warner owns DC Comics, which started using the logo in 1982. Whataburger’s logo was first used in 1972, so it has the edge in case of a trademark dispute.
Why wait over 30 years to address this? Next year, Warner will release a Wonder Woman film, so a potential blockbuster raises the stakes.
Of course, just because logos are similar doesn’t mean there’s a trademark infringement and damages. You have to satisfy “likelihood of confusion” tests, which vary by jurisdiction. One way to show this is through the use of consumer surveys. For more information on this, BVR recently conducted a webinar, Damages Estimation and Valuation: How to Use Survey Research, with Leon Kaplan (Princeton Research & Consulting Center) and Larry Chiagouris (BrandMarketing Services).
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Global BV news:
Redlined IVS 2017 due in Bali
Sources tell BVWire that a redlined version of IVS 2017 should be available at the meeting of the International Valuation Standards Council in Bali October 10-12. Comment letters on both sets of exposure drafts issued were “90% positive,” so it does not look like there will be a second go-round. The comment letters for the first group of exposure drafts are available here and include feedback from the AICPA, The Appraisal Foundation, Duff & Phelps, RICS, the Russian Society of Appraisers, and others. Comment letters on the second group of exposure drafts have yet to be posted. For more information on the Bali meeting, click here.
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New Resource: Thompson’s Guide to Private Equity Regulatory Compliance and free webinar
BVR is proud to offer Thompson’s Guide to Private Equity Regulatory Compliance, the celebrated new resource covering all aspects of the complex web of regulatory requirements for private equity firms. We also invite you to a free, 45-minute webinar on September 29, hosted by Scott Gluck. Gluck will update the audience on new compliance concerns arising under Dodd-Frank, the Consumer Protection Act and federal securities laws—including regulations that could hinder the ability to raise capital. Sign up today as a BVR guest to learn where to find the compliance pitfalls and how Thompson's Guide to Private Equity Regulatory Compliance can help navigate around them.
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BV movers . . .
People: Justin Boyd, who leads Eliot David Decosimo’s Charlotte, N.C., valuation practice, was admitted as shareholder … Sean Saari and Dan Golish, partner and principal, respectively, at Skoda Minotti, were awarded the 2016 AICPA’s “Forensic and Valuation Services Standing Ovation Recognition,” which recognizes professionals 40 years old or younger who have exhibited exemplary professional achievement.
Firms: The Michigan Business and Professional Association honored Baker Tilly Virchow Krause as one of Metro Detroit’s “101 Best and Brightest Companies to Work For” … The Des Moines Register named Honkamp Krueger & Co. as a “2016 Top Workplace” in Iowa … Padgett Business Services, now with over 300 offices across the U.S. and Canada, is celebrating the 50th anniversary of its founding … In a move to increase its government contracting practice in the southeast U.S., the Birmingham, Ala.-based Warren Averett will merge with the Huntsville firm Beason & Nalley on November 1.
Please send your professional and firm news to us at firstname.lastname@example.org.
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Upcoming CPE events
The IRS’ Proposed Section 2704 Regulations: The Impact on and the Future of Estate and Gift Valuation (September 29), with Curtis Kimball (Willamette Management Associates) and Z. Christopher Mercer (Mercer Capital).
Manufacturing Companies: Assembling the Valuation Components (October 4), with Kevin Janke.
Valuing Trained and Assembled Workforces in Healthcare Provider Entities: A Deep Dive (October 13), with Timothy Smith and Angie Smith. This is Part 6 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.
Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist email@example.com.
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