April 10, 2013 | Issue #127-2  

FASB discusses relief from ESOP fair value disclosures

As we are going to press, the FASB is meeting to discuss whether to formally add to its agenda the issue of new disclosures with respect to the fair value determination for nontraded securities. This issue created an uproar in the ESOP community, which feels these disclosures would be harmful for ESOP companies, so an exemption is being sought (see the March 13 BVWire).

The disclosure requirement is contained in Accounting Standards Update Fair Value Measurement (Topic 820, formerly FAS 157), which became effective for nonpublic entities beginning in December 2011 and thus will impact ESOPs (those with December 2012 year-end plans) in the coming year.

In February, major players in the ESOP community—the National Center for Employee Ownership (NCEO), the ESOP Association, and the Employee-Owned S Corporations of America (ESCA)—submitted a letter to the FASB’s technical director voicing concern over the ASU requirements and their consequences on employee-owned companies. In response, FASB first planned to discuss the matter at its March 28 board meeting but rescheduled the discussion to the April 10 meeting.

Greg Klein, ESCA board chairman, told BVWire: “We are encouraged by FASB’s quick attention and dedication of resources to consider our concerns.”

Silver lining to tax cloud hovering over small
business values

Tax changes kicking in for 2013 have deflated small business values, but there are more transactions as buyers hope to get a good price, according to a new study from BizBuySell, the online business-for-sale marketplace.

More deals: Brokers surveyed say they are currently seeing an increase in the number of deals being completed, compared to the same time in 2012. What’s more, the rest of 2013 will be even more successful. In the survey, 54% of brokers expect slight to significant improvements, while only 13% expect no change from the activity so far this year.

In the wake of the presidential election and "fiscal cliff" worries, buyers and sellers are being proactive in the marketplace. “Owners finally feel their businesses are healthy enough to put on the market, and buyers are finding better lending options to fund their purchases,” says the study. With the economy improving and stocks at record highs, it isn't surprising to see the market growing more crowded.

In terms of tax effects, over 91% of brokers surveyed say that tax changes are either slightly or greatly deflating small business values. Continued uncertainty about tax changes is inducing many business owners to sell now rather than risk the possibility of even more detrimental tax changes in the future, says the study.

Health reform creates big problem with valuations

Thanks to health reform, a massive change is going on that can wreak havoc on attempts to value hospitals, physician practices, and other healthcare providers.

Here’s the deal: The traditional fee-for-service revenue model is giving way to one where revenue is based on the quality of care. Provider revenue will depend on the performance of a patient’s caregivers during his or her entire “episode of care.” For example, if a patient’s care after discharge is not up to par and the patient must be readmitted, the hospital would be penalized—and so would others in the chain of care, such as a rehab center. Provider payments from Medicare are already being affected, and private payers are following suit.

“We’re all struggling with this,” says Alan B. Simons (CliftonLarsonAllen), who spoke at a recent BVR webinar on valuing home health service providers.

In the new world of healthcare, providers will band together to monitor patient outcomes. “We’re clearly seeing all of this evolving into what is becoming known as the accountable care organization, or ACO,” says Gary R. Massey (also with CLA). An ACO is a group of healthcare providers that are accountable to patients and third-party payers for the quality of care they provide to a certain population of patients.

What to do: Valuation experts will have to rely less on projections based on historical results because of the new evolving payment models. Expected future patient volume will be relatively easy to forecast but not so with expected future reimbursement levels. As Simons observes: “No one is really sure how it will all play out.”

For more information on ACOs, see the Healthcare Intelligence Network's Essential Guide to Accountable Care Organizations.

Boom in value for oilfield services industry

Despite worldwide economic doldrums, the global oilfield services industry is forecast to jump in value by a massive 40% in just five years, reveals a new report from business intelligence company GBI Research. Oilfield services firms provide the infrastructure, equipment, technology, and services needed for companies that explore and extract crude oil and natural gas.

“Oilfield services companies are a crucial component of the rapidly growing oil and gas industry,” Brad Edwards (KPMG LLP) tells BVWire. Edwards is a contributing author to BVR’s upcoming special report on the oil and gas industry.

Of the three segments that make up the oilfield services industry—exploration and evaluation, drilling, and completion and production—it is the latter that generates the most substantial income. GBI Research forecasts revenue for the completion and production services portion of the industry to climb from $105 billion in 2012 to $148 billion in 2017.

Court says lone settlement agreement cannot support plaintiff’s damages theory

Game over? After AVM sued Intel for infringing on one of its patents on a feature in Intel’s microprocessors and its expert determined reasonable royalty damages between $150 million and $300 million “or more,” Intel filed a Daubert motion to exclude the testimony. Earlier, a federal court stated that it was inclined to rule in Intel’s favor but wanted to hear from the expert in person before issuing a final decision. (The digest of AVM Technologies, LLC v. Intel Corporation, 2013 U.S. Dist. LEXIS 1165 (Jan. 4, 2013) appeared in the March Business Valuation Update and the opinion is at BVLaw).

The court has now heard from the expert and issued a decision.

The expert initially relied on four Intel settlement agreements, but the court found three of them not comparable. This left him with only a single settlement agreement Intel reached with a third party in 2009 for a different patent to support his conclusion. In that settlement, Intel paid $110 million to end the litigation and obtain the license.

The expert admitted that he didn’t know anything about the agreement “other than [its] express terms and information from press releases.” But he believed it related to patented technology that was less important to “Intel’s commercial interests” than the technology at issue and that the royalty base for the former patent was “far less” than the royalty base for the disputed patent. The lump sum covering the patent-in-suit “should exceed” the payment under the 2009 agreement, he concluded.

His report lacked all analysis of factors that might affect the settlement amount, the court found. The conclusion did not rest on any methodology that explained why the 2009 agreement by itself could be the basis for an accurate conclusion about the value of the patent in issue. Recognizing that its decision eroded AVM’s evidentiary basis for its damages claim, the court vacated the trial date. But it also stated it could not at this time grant Intel’s summary judgment motion of no damages.

Read the complete digest of AVM Technologies, LLC v. Intel Corporation, 2013 U.S. Dist. LEXIS 23768 (Feb. 21, 2013) in the May Business Valuation Update; the court’s opinion will be posted soon at BVLaw.

How to get an edge in valuing a professional practice

In a recent case (Wright v. Wright), a valuation expert's excess earnings method withstood an appeal in a divorce case involving a law practice. Previously, the expert was on the winning side of another divorce case involving this very same law firm. The trial court found his valuation “better reasoned and more credible” and showed a “better focus on intrinsic value.” And the appellate court agreed.

Of course, a practice run like this expert had won’t happen too often. It can be difficult to place a value on a company whose product is intangible and whose workforce is possibly its quintessential asset. Despite their prevalence in today’s service-based economy, these practices present numerous challenges. On April 25, expert appraiser Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) joins BVR for an in-depth look at how best to avoid the many pitfalls of their valuation in Valuing Professional Practices.
Read the complete digest of Wright v. Wright, 2013 Va. App. LEXIS 53 (Feb. 19, 2013), in the May Business Valuation Update; the court’s decision will be posted soon at BVLaw.



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