BVWire Issue #139-4 | April 23, 2014

Beware of hidden risks when valuing a franchise

Most valuation analysts might think that a franchise probably would be more valuable than an otherwise comparable independent business with similar revenues or cash flow. However, franchises can have a much greater degree of risk than an independent, which affects value. The franchising industry has a checkered history that includes fraud and misleading statistics. Plus, there’s a huge imbalance of power between the franchisor and franchisee. A recent lawsuit illustrates some of the trouble in this industry.

New lawsuit: A group of Papa Murphy’s franchisees have filed a lawsuit against the chain, accusing the company of misleading them about the financial results they could expect and forcing them to pay more for advertising than they were told. The franchisor—a take-and-bake pizza chain with over 1,400 stores—ranked No. 5 on Forbes magazine’s list of the top 20 restaurant franchises to buy in 2011. The lawsuit comes at an awkward time for the franchisor as it prepares for an IPO.

Valuation analysts need to understand the unique characteristics of the franchising industry. One is the significant control the franchisor exercises over the franchisee’s operations. This control can extend to many details of the operation, including location, suppliers, hours of operation, signage, and so on. The franchisee must also make required payments during the year. Another characteristic is that there is a wide disparity of relationships between franchisees and franchisors.

What to do: When valuing a franchise, carefully examine the franchise agreement because it “really drives the risk and the value of the business,” says Theresa Zeidler-Shonat (Smith & Gesteland). Speaking during a recent webinar on valuing franchises, she also advises that you look closely at the franchise disclosure documents. “These documents are incredibly important to understand because the provisions within them can significantly impact company value.”

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How to deal with roadblocks during discovery

Experts working on a lawsuit often get entangled in discovery disputes that make the valuation assignment very tricky. How do you perform good work and survive with your reputation intact? Two recent divorce cases show what to do—and what not to do.

What worked: In the first case, the husband was totally uncooperative with the wife’s expert. He refused to provide documents about his business and did not allow the expert to visit the site or conduct management interviews. All the expert had was the company’s tax returns and financial statements. His report noted that, since he only had limited access to information, his analysis fell short of the applicable valuation standards, but the valuation was based on a “reasonable degree of accounting certainty.”

For the most part, the trial court adopted the expert’s opinion—and an appellate court agreed. The husband’s egregious conduct prevented the expert from doing his job, and he did the best he could with what he had available to him.      

A discussion of Chattree v. Chattree, 2014 Ohio App. LEXIS 479 (Feb. 13, 2014), and the court’s opinion appear in the May edition of Business Valuation Update and at BVLaw.

What didn’t work: The second case also features an uncooperative husband who wouldn’t provide all the information about his business. At trial, the wife’s expert testified to the value based on the formulas in the buyout agreements. At the same time, he said the buyout price did not “truly and accurately” state the value under the applicable fair market value standard. The expert did not discuss the use of any other valuation methods.

The trial court found his approach problematic: Why didn’t the expert discuss valuation methods that were preferable to the buyout provisions? It said to the wife: “If I had something else from your expert other than ‘I don’t know what the fair market value is,’ then you’d be in a better position, but that’s not what I got.” Consequently, the court did its own valuations based primarily on the buyout provisions. The wife appealed, to no avail. Despite the husband being uncooperative, the wife’s expert could have explored other valuation methods, such as looking at sales of comparable businesses, said the appellate court. He did not do the best job he could under the circumstances.

A discussion of Burstein v. Burstein, 2014 Ill. App. Unpub. LEXIS 245 (Feb. 13, 2014), will appear in the June edition of Business Valuation Update; the opinion will soon be available at BVLaw.

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Valuing synergies: Will 1 + 1 = 3?

A major factor behind most M&A deals is the expectation of an increase in value triggered by the combination of two firms into a new entity. In reality, this synergy takes a lot longer to materialize than you think—and often does not happen at all.

New studies: A pair of reports from PwC reinforce existing research findings that the acquiring firms simply do not realize the full value of the synergies they expect. One report, Capturing Synergies to Deliver Deal Value, lays out a framework for delivering deal value by identifying, managing, and executing on synergy opportunities. A synergy analysis needs to be done early on in the assessment of the target company—long before the deal is announced.

The second report, PwC’s 2014 M&A Integration Survey Report, backs up the general belief that cost synergies are more achievable than revenue (growth) synergies. Two-thirds of buyers report favorable results for capturing cost synergies, but results from capturing revenue synergies are much worse, with just over half (54%) reporting a favorable result.

What it means: For valuation analysts, these findings reinforce the notion that expected revenue or growth synergies need to be viewed as more uncertain than cost synergies when doing projections. Also, they will take more time to achieve. Because of this uncertainty, more risk is associated with revenue synergies, so the discount rate should be adjusted accordingly.

The findings also stress the importance of focusing specifically on the identification and valuation of synergies prior to a merger. By doing this, the acquiring companies can develop a clear integration plan that will help ensure that the synergies are achieved.

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BVR launches Australia BV training—and more

Do you need training, news, or resources on Australian-specific business valuation topics? BVR is excited to announce the launch of BVR Down Under!

Upcoming training: BVR is partnering with the International Institute of Business Valuators (IIBV) and the American Society of Appraisers (ASA) to offer business valuation training events in Australia. The first group of courses is:

  • BV Training Block One: IIBV 101—Introduction to Business Valuations (May 2-5, 2014) and IIBV 102—International Cost of Capital (May 9-12, 2014); and
  • BV Training Block Two: IIBV 103—Business Valuation Case Studies (Nov. 26-29, 2014) and ASA 204—Advanced Topics (Dec. 1-4, 2014).

BVU and BVWire Australia: BVR is launching a line of resources for the Australian business valuation practitioner, including our free biweekly ezine, BVWire Australia. Sign up here!

Plus, the Business Valuation Update—Australia (BVU), a monthly newsletter, will follow in July 2014. We're currently soliciting contributions and welcome anyone interested to write to John-Henry Eversgerd, our associate publisher for the publication.

Check out all of our resources at or call +1 503 291 7963 from Australia or 503-291-7963 from Stateside.

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Comment deadline looms re: customer-related assets

Comments are due April 30 to the Appraisal Practices Board (APB) on the exposure draft Valuation of Customer-Related Assets. The exposure draft covers the identification of customer-related assets; application of the cost, income, and market approaches to valuation; and other valuation considerations. Included in this document are several useful case study examples regarding alternatives to the multiperiod excess earnings method (MPEEM).

Related webinar: One of the methods the exposure draft discusses is the “distributor method.” BVR has an upcoming webinar, Using the Distributor Method to Value Customer Relationships, on May 6, featuring PJ Patel and Edward Hamilton (both Valuation Research Corp.). Patel and Hamilton were involved in the development of the APB’s exposure draft, so BVR is very pleased that they are conducting this webinar. They will explain how to derive an objective, market-based value for customer relationships. This webinar is Part 5 of BVR’s Online Symposium on Fair Value Measurement.

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BV movers

People: Monica Castelli joined The Bonadio Group of Albany, N.Y., as administrative assistant for the business valuation team ... The University of Akron’s George W. Daverio School of Accountancy awarded the distinction of “Outstanding Professional” to Ray Dunkle, a partner in forensic and valuation services at Brockman, Coats, Gedelian & Co. in Akron, Ohio … Richard Gray returned as director of business valuation services to Daszkal Bolton LLP, a leading accounting and advisory firm in South Florida … Dr. Steve Lim, professor of accounting at the University of Seoul and advisor to the Korea Accounting Standards Board, was appointed to the IFRS Advisory Council … KPMG LLP advisory director Keaton Miller and managing director Olli Valikangas were winners of Consulting magazine's inaugural "Rising Stars of the Profession Awards" … John Cristiano has joined Grant Thornton LLP as managing director in the firm’s transaction advisory services practice in New York City … Simon J.K. Miller, who has more than two decades of experience in representing closely held businesses in trial litigation over ownership disputes, has left Thompson Hines to join Blank Rome’s New York City office as a partner in its corporate litigation group.

Firms: Baker Tilly joined RSM International, a leading global network of independent accounting firms of which McGladrey LLP is a founding member … Bennett Thrasher LLP, one of the largest Atlanta-based full-service CPA and consulting firms, is merging with Taylor Consulting Group and expects the formal union to be concluded by July 2014 … Brown Smith Wallace has been named to the Vault Accounting 50—a ranking of the 50 best accounting firms to work for in North America … The International Management Advisory Group and Crowe Horwath LLP have teamed up to provide anti-money laundering and Bank Secrecy Act consulting services … During the 54th annual scholarship award ceremony, The New Jersey Society of Certified Public Accountants will award more than $520,000 in scholarships … Plante Moran was recognized as one of West Michigan’s 101 Best & Brightest Companies to Work For … For the fourth year in a row, Smith & Howard was recognized as a Top Workplace in the Atlanta Region by The Atlanta-Journal Constitution. 

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Interesting array of CPE events

Using the Empirical Method for Determining DLOMs (April 24), featuring: Bruce Johnson (Munroe, Park & Johnson Inc.). Marketability discounts are fundamentally a market-made concession to compensate an investor for the increased risks associated with a less-marketable and illiquid concern. Learn how to put this simple fact to use in determining a sound and defensible DLOM.

Valuing Assembled Workforce in Physician Practices (April 29), featuring: Timothy Smith (American Appraisal). With fresh research and logical analysis, Smith will sort out the ongoing and recently reignited debate regarding the value of trained workforces in physician practices. Part 4 of BVR’s Online Symposium on Healthcare Valuation.

Valuing Veterinary Practices (May 8), featuring Byron Farquer and David McCormick (both Simmons & Associates). Join the two most experienced and knowledgeable experts on veterinary practice management, operations, and valuation for the most informed and authoritative insights into this common, but challenging, valuation target.

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

Franchise risks

Discovery woes

Synergy studies

BVR Down Under

Customer assets

BV movers

CPE events




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