Goodwill may still be on the menu at some restaurants

Last week’s item on the Mistretta case generated some immediate feedback. “I’d like to congratulate Gary Trugman on Mistretta and don’t doubt his finding minimal goodwill in that restaurant, but I would suggest you can’t automatically dismiss the element of personal goodwill in others,” says Michael Molder (Marcum LLP). “There are dozens of restaurants with national followings based on the owner/chef. A couple hours of Food Network will introduce you to some, but TV celeb chefs are only the icing on the cake. Consider, for example, the Quilted Giraffe opened by Berry Wine in New York during the mid-70s, which turned the tables in American luxury dining. If Wine had sold the restaurant for its enterprise goodwill value (instead of closing it in 1992) it might still be around today.”

Consider this excellent source. The just-published BVR's Guide to Restaurant Valuation, by Ed Moran, discusses when “the chef is famous”—or when the restaurant is simply known for grandma’s special pie. In a franchise situation, however, "simply stated, the franchisor does not attribute any personal goodwill to the operating franchisee,” Moran says. “It is not Jim Marinara's Pizza Hut. Pizza Hut allows Jim to operate the restaurant according to its established franchise standards. You seldom (if ever) see a sign saying ‘Under New Management’ in a franchise—the franchisor normally never allows this.” Similarly, the Mistretta case concerned a Louisiana Cajun franchise, which most likely led to the conclusion of little or no personal goodwill.

BVR’s Restaurant Guide also discusses the asset approach, seldom used in the industry, and devotes an entire chapter to fixed assets, including depreciation and amortization. "In the near future, we’ll provide a fair value update to the restaurant industry,” Moran says. Sample the current table of contents.

The bar to testify in court is rising

Linda Dakin-Grimm, the victorious attorney in the 2006 bankruptcy case In Nellson Nutraceutical and others, recently shared her insights on expert business valuation testimony with BVUpdate™. Dakin-Grimm, a partner with Milbank Tweed Hadley & McCloy, reminds appraisers:

  • As an expert you are hired to assist the judge or jury to understand something that's really complicated and specialized.
  • You can only testify as an expert if you use the generally accepted methodologies.
  • Before going to court as the expert you need to look at your expertise, describe it fairly and carefully, and don't overstate it. 
  • Do not leave the task of gathering all of the data and materials you need to the lawyer that hired you.

Look for the complete interview in the May issue of BVUpdate.

Pepperdine private capital markets survey updated

In Rob Slee and John K. Paglia’s article “Private Cost of Capital Model,” recently published in the March/April issue of the Value Examiner, the authors describe their use of private capital market return data captured by the ongoing Pepperdine private cost of capital survey. 

“Business appraisers employ public securities data as a surrogate for private return expectations.  This is inappropriate, as the public and private markets are not substitutes; they are driven by different, unrelated factors,”  Slee and Paglia say.  In Slee’s worldview, public and private capital markets are not comparables because their risk/return is different, liquidity is different, and management involvement is different.

More information about the model and the Pepperdine private capital markets survey is available here.

AICPA rates valuation and damages calculation skills as most essential for forensic accounting engagements

The AICPA’s Forensic and Valuation Services Center just released “Characteristics and Skills of the Forensic Accountant,” a report commissioned to determine the essential traits and core skills forensic accountants should possess to be effective investigators. Based on a survey of attorneys, academics and CPAs, the report results indicate economic damages calculations and valuation were two of the top four specialties required for a forensic accountant. 
The research also revealed that the top five most frequent reasons why forensic accountants are ineffective:

  • Inability to simplify the information
  • Ineffective oral communication
  • Inability to understand the goals of a case
  • Inability to identify key issues
  • Lack of investigative intuitiveness

Debate on private company financial reporting
standards formalized

Members of NASBA, AICPA, and TAF’s “blue-ribbon” panel met this week to discuss a topic that has been debated for years: the future of accounting standards for private companies.   During this first meeting most members agreed on one thing: U.S. GAAP is considered a “gold standard in financial reporting, and that consistency of GAAP is key,” according to the Journal of Accountancy. Members also emphasized that financial statements are only a starting point. “The real issue is how do we get the right set of standards for users,” said Rick Anderson, CEO of Moss Adams and the panel chair. 
Representatives from the International Accounting Standards Board and the Canadian Accounting Standards Board will address the panel at their next meeting on May 14th.

Factset/Mergerstat summarizes dealflow for 2009

After declining 26% in 2008, the number of mergers and acquisitions announced in the U.S. decreased only 13% in 2009. “The market, it seems, had nowhere to go but up.” says Factset. On the bright side (if there is one) dealflow has increased each quarter in 2009, the longest such trend since 1995-1996.

In addition to providing individual deal data, such as payment methods and premiums, the Review also indicates which industries are most active and how their premiums, TIC/EBITDA, TIC/EBIT and P/E averages, compare to the market as a whole. In 2009, the top seller industry, with respect to the number of announcements, was Computer Software, Supplies & Services.  The top seller industry with respect to the dollar value of announcements was Drugs, Medical Supplies & Equipment.

The 2010 edition – which is available exclusively through BVR – now includes the Mergerstat Monthly Review, a monthly summary (in PDF) of deals, trends and industry spotlights for anyone who purchases the Review.  To order click here.



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