April 13, 2011 | Issue #103-2  

Partner earnings decreased in 2010 for a quarter of business valuation firms

The economic downturn has had an impact on distributions to owners and partners, as reported in the 2011 BV Firm Economics and Best Practices Guide, available later this month. Perhaps nowhere else is the evidence of the downturn reflected as strongly as in the two tables below.  The increasing presence of low-quality competitors, web sites that purport to value businesses, and other marketplace threats has also contributed to the harsh fact that just more than a quarter of all firms in the business valuation profession increased partner compensation in 2010.

And, one in four reported lower earnings. 

The highest increase in partner earnings reported was 50%; the largest reduction was 32%.  The mean change in partner distributions for all firms that answered this question in the Survey was +4.4%. (Nearly 500 firms providing business valuation services answered this year, making this the largest survey of the profession.)

Compared to ’09, were 2010 distributions:






The same






The news regarding equity distributions in ’10 hasn’t discouraged firm leaders. Over half anticipate a better year this year, and less than one in twenty anticipates a reduction, as shown below.  Let’s hope so!

Compared to ’10, will estimated 2011 distributions be:



The same




Mark Zyla on the revised “cheap stock”
practice aid

There has been a flurry of comments on LinkedIn about the revised “cheap stock” practice aid (Valuation of Privately-Held-Company Equity Securities Issued as Compensation) recently released by the AICPA. BVWire asked Mark Zyla (Acuitas, Inc.) to comment on the draft.

There are many features of the AICPA Working Draft of the Cheap Stock Practice that will be helpful to practitioners. One of the important accounting issues that is addressed in the AICPA Working Draft is the interaction between ASC Topic 718 (FASB 123(R) Share Based Payments), and ASC Topic 820 Fair Value Measurements (SFAS 157). While Topic 820 specifically “scopes out” Share Based Payments from Fair Value Measurements, the Working Draft advises following Fair Value Measurements, where possible.

Another extremely useful addition in this Working Draft is the detailed illustrative examples of PWERM and OPM methods.  These examples should provide additional guidance where there have been advances in practice in recent years. The illustrations include a proper application of the “back solve method” which uses recent transactions of rounds as an indication of value of the entity.  The examples in the Working Draft should be very helpful in clarifying situations where there has been diversity in practice with each of these methods.

BVWire readers are encouraged to review the new working draft and submit their informal feedback by May 31, 2011.  Send comments by email to Yelena Mishkevich by May 31, or by regular mail to: Yelena Mishkevich, Accounting Standards, AICPA, 1211 Avenue of the Americas, 19th Floor, New York, NY 10036.

Maturing ambulatory surgery center environment provides opportunities for BV practitioners

During last week’s BVR webinar, Ambulatory Surgery Centers: Current Valuations, Benchmarking & Forecasting, Todd Sorensen and Kevin McDonough (VMG Health) identified an overall maturation of the industry. Over the past two to three years the economic downturn has had a negative effect on ASC volumes and overall financial performance, and managed care and Medicare reimbursement pressures have increased.  However, while “there is a little bit of an unknown right now, the good thing for those of us in the appraisal industry is that any time there is uncertainty, there is increased transaction activity and consulting opportunities,” McDonough remarked.

In the recent issue of the ASCReview, Rob Kurtz asked Stephen Rosenbaum (Interventional Management Services)why would an ASC management and development company prefer either a majority stake or minority stake in an ASC?” In the article “Why Surgery Center Management Companies Purchase Majority vs. Minority Stakes” Rosenbaum provides answers for both minority and majority interest acquisitions.

Valuing any type of healthcare entity is challenging in today’s changing economic and regulatory environment. Join James Pinna and Matthew Jenkins (Hunton & Williams) for  “The Anti-Kickback Statue and Stark Law: Avoiding Valuation of Referrals” webinar on April 26.  The two attorneys will discuss pertinent healthcare regulations and provide insights on how to avoid the valuation of referrals.

Benefits of calculating lost asset value vs. lost profits

Proving lost profits to the required degree of “reasonable certainty” can be problematic, especially for fledgling businesses without a proven financial track record. One plaintiff may have recently circumvented the “assumption” minefields that accompany lost profits damages by asserting a lost asset value instead.

The plaintiff entered a development option agreement (DOA) with a local municipality to develop an RV park and golf course. By the time plaintiff secured the necessary permits and approvals, the defendant had signed a contract with another developer to build out the land. At trial, the plaintiff recognized the inherent risks of claiming lost future profits and asked its expert to value the “bundle of rights” acquired in the assignable DOA (a 50-year lease, shoreline permit, etc.). Relying on the plaintiff’s projections used during the development proposal, the expert concluded that an investor would pay $2.5 million to $3 million to acquire these rights. The jury awarded the plaintiff $3 million and the defendant appealed, claiming that damages for the “hoped for” venture were too speculative.

The expert’s approach to calculating lost asset value parallels the method by which he could have calculated lost profits, “to be sure,” the appellate court observed. But unlike a lost profits claim, a lost asset value “exists in a market, at a known point in time,” and could be explored on cross-examination. The defendant did not have to challenge “facts hypothesized to exist decades after trial,” the court explained, but could challenge whether a market for the specific development opportunities existed at the time of the breach, and, if so, whether investors would accept the projections by plaintiff’s expert as a sufficiently reasonable and reliable basis for arriving at a proposed price of $3 million. Read the complete digest of Columbia Park Golf Course, Inc. v. City of Kennewick, 2011 WL 450704 (Wash. App.)(Feb. 10, 2011) in the May 2011 Business Valuation Update; the court’s decision will be posted soon at BVLaw.

Increases in Exhibits A, B & D Smoothed Premiums in 2011 Duff & Phelps Risk Premium Report sparks question

BVR received the following question from a 2011 Duff & Phelps Risk Premium Report buyer:

Has anyone commented on the notable increases in the Data in Exhibits A, B & D Smoothed Premiums over the 2009 results? I am looking at 25th ranks and see many 1 to 2 percentage point increases over last year's comparable numbers.  I understand things changed a bit and I do not know the details.  But comparing 2010's Exhibit A-3 for 25th of 13.5% to 2009's Summary Schedule 1, 5 year average net income of 11.4% for the 25th rank by size is a whopping 18.4% increase year over year. Similar increases can be seen in most of those rank level changes from 2009. Did I miss an explanation somewhere? Year over year differences are typically pretty small.

Jim Harrington (Duff and Phelps) responded:

Customer is correct. Risk premia increased year to year. But the higher risk premia may be what one would expect. Average return of the portfolios has been up significantly recently, while the average bond (income) return has been mildly trending downward (but mostly static).

Even “large company stocks,” as measured by the S&P 500 index in the SBBI (which we would expect to have lower returns than the smallest stocks) have gone from an average return of 10.9% to 11.3% as measured over the 1963 to present historical period in just a few years. That is indeed a big bump considering we are measuring an AVERAGE annual return over 48 years (as of the 2011 Report). But, considering that S&P showed a total annual return of negative 37.00% in 2008, and then two years of very strong returns (26.46% in 2009 and 15.06% in 2010), it is not unexpected that we see this “tail wagging the dog” effect of the last few years’ volatility

The 2011 Duff & Phelps Risk Premium Report is now available, along with two free videos:  James Harrington's live tour of the Duff & Phelps Risk Premium Calculator from his February 18, 2011 webinar and Roger Grabowski's presentation of the 2011 edition of the Duff & Phelps Risk Premium Report from his March 3, 2011 webinar, and extensive documentation – all available here.

LinkedIn BV-forum update

LinkedIn’s business valuation-related groups are increasingly popular forums for questions—though as with any social media, skill is required to sort through the best thoughts. Here’s a sampling of current questions posted during the past week:

  • Business Valuation Professionals group
    • “How does utilizing a mid-year convention change the build-up of a capitalization rate? What would the calculation be? What adjustments would I make to my cap rate to properly reflect a mid-year convention?”
    • “What are you doing with respect to adding a premium to the cost of debt (in a WACC calculation) for the purpose of estimating the cost to the principal(s) for providing their personal guarantees? Pratt, Hitchner, and Trugman all mention this, but there is little/no empirical evidence to support the amount of the premium.”
  • Business Valuation & Advisory Network group
    • I've heard that several methods exist in current appraisal practice: type of treasury method, assume conversion at current price, etc. In the OPM method, specifically, when allocating the value to common equity shareholders, how is the option pool to be granted handled (that is, how are the un-granted shares which will be granted over the horizon to the liquidation event included in the model)?

Forecasting and unreliable projections continue to present problems in business valuation

In her NY Daily Record article “Keeping Your Balance: Forecasting in business valuations,” Kristin S. Coffey (Mengel, Metzger, Barr & Co) wrote there are many warning signs of unreliable projections provided by management that BV professionals should look for, some of which include:

  • Forecast results are significantly different than past results
  • Forecast was prepared by the CEO/CFO without input from other areas of the business
  • The terminal value makes up a significant portion of the resulting value and/or the resulting value is not consistent with the values from other valuation methodologies used
  • Forecast that is not achievable without additional financing

There is perhaps no set of data more universally useful to valuation analysts than management projections and forecasts.  Regardless of the purpose or target or appraisal, projections and forecasts can provide invaluable insights. Join Christine Baker (ParenteBeard) on May 5th for BVR’s “Advanced Workshop on Management Projections & Forecasts.” Using hands on examples and case-studies in this interactive web-workshop, Baker will show what every analyst should know when working with projections, regardless of their state of completion or the valuation assignment. CPE and CLE credits are available.

Proposed SEC move might expand options for private company stock transactions

Mary Shapiro (Chairman, SEC) has forwarded a letter to Representative Darrell Issa (R. CA) (Chairman, House Oversight Committee) detailing SEC plans to expand the availability of capital to start-up companies through private sales of stock that do not require full disclosure. Oddly enough, though there will be less obvious transparency (including more private buyers without requiring SEC reporting), private companies soliciting more buyers through small exchanges will yield more publicity, and perhaps more data for valuators.

The SEC is responding to a dramatic drop in IPOs. See more on the rule-changing plan in Jean Eaglesham’s article in the WSJU.S. Eyes New Stock Rules” (subscription required).

BV newsletters can be an effective vehicle to share expertise

Bill Quackenbush’s (Advent Valuation) recently released quarterly newsletter Valuation Developments provides valuable insight on the following topics:

  • Subprime Fraud Focuses on Fair Value for Financial Reporting Standard
  • Amendments to FRCP 26 Re: Draft Expert Reports Could Contain Traps
  • FAS 141 Valuations an Essential Tool in Patent Litigation Discovery Statutory Fair Value: Family Relationships Can Affect Appraisal Value

Private equity-sponsored transactions offer value in their comparability

For three years GF Data Resources has been collecting detailed valuation, volume and leverage data on private equity-sponsored transactions in the $10-to-$250 million value range. In his recent article “Key Deal Points: Beyond Comparison?” just published in Private Equity Professional Digest (subscription required), Andy Greenberg discusses the comparability of the data they’ve collected. For more information on the article contact Bob Wegbreit.

Learn how the experts value a business worth less than $2 million

You may know how to value a business, but knowing how to value the small business presents its own unique challenges, particularly in today’s economy. Join Ron Seigneur (Seigneur Gustafson), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos), and Michelle Gallagher (Gallagher & Associates CPAs) for their in-depth examination of the obstacles and pitfalls inherent in small company valuations on April 28. CPE credits are available.

2011 Business Reference Guide updated

Business Valuation Resources has just posted the first online update to BBP’s 2011 Business Reference Guide. The BRG, one of the most widely used references in the business, includes sections on rules of thumb, general information, expert ratings and comments, pricing tips, benchmarks, expenses as a percentage of sales, industry trends, advantages, disadvantages and more. BBP launched the online version with BVR last year to provide more current updates for the annual book.
Click here to review the 59 new updates that have just been posted or here to purchase the book with online updates.  


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BVR Education
and CPE
View Complete Calendar

The Anti-Kickback Statute and Stark Law: Avoiding Valuation of Referrals
April 26, 2011
10:00am - 11:40am PT
Featuring: James Pinna and Matthew Jenkins

Valuing A Business Worth Less than $2 Million
Thursday, April 28, 2011, 10:00am - 11:40am PT Time
Featuring: Ron Seigneur, Kevin Yeanoplos, and Michelle Gallagher


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