BVWire Issue #151-1 | April 1, 2015


Damodaran takes on DCF myths

“There is a great deal of mythology around DCF valuation, some of it promoted by model-users and some by model-haters,” writes Dr. Aswath Damodaran (New York University Stern School of Business). He has set out his 10 common myths of discounted cash flow analysis and will examine each one in his blog over the rest of the year. Here they are:

  • Myth 1: If you have a D (discount rate) and a CF (cash flow), you have a DCF. As a DCF observer, I see a lot of pseudo-DCF, DCFs in drag, and other fake DCFs being pushed as discounted cash flow valuations.
  • Myth 2: A DCF is an exercise in modeling and number crunching. There is no room for creativity or qualitative factors.
  • Myth 3: You cannot do a DCF when there is too much uncertainty, thus making it useless as a tool in valuing startups, companies in emerging markets, or during macroeconomic crises.
  • Myth 4: The most critical input in a DCF is the discount rate, and, if you don’t believe in modern portfolio theory (or beta), you cannot use a DCF.
  • Myth 5: If most of your value in a DCF comes from the terminal value, there is something wrong with your DCF, since the value rests almost entirely on what you assume in that terminal value.
  • Myth 6: A DCF requires too many assumptions and can be manipulated to yield any value you want.
  • Myth 7: A DCF cannot value brand name or other intangibles.
  • Myth 8: A DCF yields a conservative estimate of value. It is better to underestimate value than overestimate it.
  • Myth 9: If your DCF value changes significantly over time, there is either something wrong with your valuation (since intrinsic value should not change over time) or it is pointless (since you cannot make money on a shifting value).
  • Myth 10: A DCF is an academic exercise, making it useless for investors, managers, or others who inhabit the real world.

‘Twisted’ DCF: In his first post in the series, Damodaran challenges what he says is a widely held misconception that all you need to arrive at a DCF value is a D(iscount rate) and expected C(ash) F(lows). He examines what he calls a “twisted” DCF, “where you have the appearance of a discounted cash flow valuation, without any of the consistency or philosophy.”

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Another blow to the Heller double dip framework

Heller is in serious trouble. On the heels of the Bohme case (see the March 18 BVWire), another divorce ruling from the Ohio Court of Appeals shows just how moribund the Heller double dip analysis has become.

It’s about the future income stream: The husband was an ocular plastic surgeon. At issue was his ownership interest in a surgical center. The parties stipulated the value based on the 2013 share price, which, in turn, seems to have been the result of a capitalization of earnings approach.

The trial court adopted the stipulated value for its division of property. It then determined the husband’s annual income, including the distributions he received from the surgical center, and, based on that calculation, ordered him to pay spousal and child support. The husband appealed, alleging the trial court’s ruling violates the 2008 Heller prohibition against double dipping.

The Court of Appeals in essence posed and answered two questions: Did a double dip occur? And does the law prohibit it, as Heller said it did? As to the first issue, the Court of Appeals found Heller got it wrong when it defined “double dipping” as “the double counting of a marital asset, once in the property division and again in the [spousal support] award.” Double counting only occurs “when a court twice counts a future income stream—once in valuing the marital asset and once in deciding the economically superior spouse’s ability to pay spousal support,” the appeals court explained. For clarification, it added: “It is the future income stream, not the marital asset, that is the subject of the doubling in the double dip.” The premise for a double dip claim, therefore, is that the asset was valued based on its future income stream, by way of a discounted cash flow analysis or a capitalization of earnings analysis, the court noted. This was the case here.

No flat prohibition: As to the second question, the Court of Appeals found several reasons to back away from Heller. Most importantly, Heller failed to consider a crucial statutory provision that expressly requires a court determining spousal support to consider all sources of income, including income derived from a marital asset divided in the property distribution. This provision “precludes us from adopting an outright prohibition of double dipping. To the extent that Heller did that, we must overrule Heller.”

Ultimately, it comes down to fairness and equity, the Court of Appeals said. Whether to remedy the double dip and how to do it (if it exists) were left to the discretion of the trial court, it explained. Here, it remanded, but only because it found the trial court had not considered the double dip in its analysis. This did not mean that the trial court necessarily had to change its property division or spousal support award. It just had to show it considered the issues.

Takeaway: Reading Gallo in tandem with the recent Bohme decision makes it clear that double dip is permissible under Ohio law. Ohio courts hitch the determinations as to property division and spousal support to fairness and equity.

Find a discussion of Gallo v. Gallo, 2015 Ohio App. LEXIS 938 (March 17, 2015), in the May edition of Business Valuation Update; the court opinion is available soon at BVLaw.

Legal update webinar: The Bohme case and the double dipping issue will be discussed in a webinar on April 2: BVLaw Case Update: A One Hour Briefing, with Sylvia Golden, BVR’s legal editor, and R. James Alerding (Alerding Consulting LLP). Other recent BV cases of note will also be covered.

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Use of binomial method to value ESOs gaining steam

While the Black-Scholes model continues to be the most common method of valuing employee stock options, the binomial method is becoming more prevalent, according to Anthony Banks (Marcum LLP).

More flexible: The binomial model is a lattice-based model that is more flexible than the Black-Scholes model, Banks explained during a recent BVR webinar. The Black-Scholes model cannot be modified for vesting, turnover, or early exercise (suboptimal exercise behavior). But these assumptions can be incorporated into the binomial method, he points out.

Also, the SEC has indicated that the binomial model is the preferred model for stock warrants, according to Banks. However, if the company does not have any history of suboptimal exercise behavior, you have the safe harbor provision provided by page 36 of the SEC Staff Accounting Bulletin 107 (SAB 107) that allows you to use the Black-Scholes model and average the term and the vesting period.

Workable Excel files: Webinar participants were given several working Excel files that demonstrate how to apply the binomial method to valuing ESOs. To access an archived version of the webinar that includes the working Excel files, click here.

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AICPA: SSVS No. 1 is still in place and can remain in engagement letters and reports

Last week’s BVWire reported that the AICPA’s Statement on Standards for Valuation Services No. 1 (SSVS No. 1 or Standard)has recently been codified in its professional standards as VS Section 100. BVWire also reported that NACVA recommended that applicable paragraph numbers from the new VS Section 100 be included in engagement letters. Here are some clarifying factors regarding recent changes to SSVS No. 1:

  • SSVS No. 1 has always been included in the body of professional standards of the AICPA. The Standard has had equal footing with all other professional standards since it was released in 2007.
  • SSVS No. 1 is still in place. It is now organized in the AICPA Professional Library under Valuation Services, still under the title “Statement on Standards for Valuation Services,” and has been split into two subsections: VS Section 100: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset and VS Section 9100: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset: Valuation Services Interpretations of Section 100.
  • Recent changes were made to SSVS No. 1 to bring the references to the AICPA Code of Professional Conduct into conformity with the recent ethics codification. No other substantive changes were made.

What does this mean? This means that SSVS No. 1 and VS Sections 100 and 9100 are the same. The difference is confined solely to how the Standard is organized in the AICPA Professional Library. SSVS No. 1 can still be referenced in engagement letters and reports, and citing paragraph numbers from the codified format is unnecessary.

The most recent versions of SSVS No. 1 can be accessed by visiting the FVS website or can be accessed with other AICPA professional standards in the Forensic and Valuation Services Library. For more information, please contact

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IASB analyzes impact of new lease standard on company financials

The International Accounting Standards Board is finalizing a new standard that will require companies to bring leases onto the balance sheet. The new International Financial Reporting Standard (IFRS) on leases will also result in some changes to company income statements. The IASB has published a document (registration required) outlining the likely practical effects of the new IFRS on leases. The document also compares the IASB’s requirements to those of the Financial Accounting Standards Board (FASB).

Primary effects: “The main change that will be brought about by the new Leases Standard is an increase in assets and liabilities on the balance sheet for those companies that currently have a large amount of leases off balance sheet, thus improving the transparency of a company’s leverage and asset base,” says Hans Hoogervorst, IASB chairman. Among the likely effects on the income statement is the reporting of higher operating profit compared to the current requirements and in comparison to the FASB model. In terms of cash flow, there will be no changes to total cash flows, but, in the cash flow statement, the amount of operating cash will increase while the amount of financing cash will decrease.

Deliberations by the IASB on the new accounting model for leases will be completed this month, and the final standard is scheduled to be issued later this year.

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Forward multiples for the healthcare industry

“Healthcare companies outperformed the broader market during 2014, and the sector is poised for strong gains in 2015,” according to a new report, “Value Focus: Healthcare Facilities, Year-End 2014” from Mercer Capital. “Transaction activity remains healthy, as industry participants aim to vertically integrate multiple steps of the patient experience, from doctors’ offices to specialists to hospitals.” The report covers legislative updates, macroeconomic trends, industry perspectives and trends, M&A transactions, public company pricing, and more. It also covers valuation trends.

Forward multiples: In terms of EV/Revenue, the report reveals that (excluding healthcare REITs) the subsectors with the highest revenue multiples in 2014 were emergency services centers (2.42x), surgical and rehabilitation centers (2.42x), and dialysis service providers (2.01x). “Forward multiples imply growth in estimated revenues for most sectors during 2015,” says the report. For EV/EBITDA, the subsectors with the highest EBITDA multiples in 2014 were assisted living (17.9x), distribution/supply (14.5x), and physician practice management firms (14.2x). Forward EBITDA is also expected to increase across healthcare facility sectors in 2015.

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IPCPM featured at ASA Philly event

The new cost of capital model, the implied private company pricing model, will be presented at a double session of the ASA’s Philadelphia chapter’s 2015 Business Valuation Seminar on April 24. The presenter will be Bob Dohmeyer (Dohmeyer Valuation Corp.), a co-developer of the model. IPCPM is designed to address problems with the build-up method (BUM)/modified CAPM in estimating the cost of capital for small private companies

The full-day seminar also includes these timely sessions:

  • Unlocking Private Company Wealth—A Tutorial for Business Advisers (Z. Christopher Mercer, Mercer Capital);
  • Our Biggest Protection—Engagement Letters (Stacey Udell, Gold Gerstein Group LLC); and
  • Case Law Developments: Where Are We Now? (Laura E. Stegossi, Esq.).

For more information and to register, click here.

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BV movers . . .

People: John Bullock has been promoted to director of the forensic and litigation practice at the Philadelphia firm Smart Devine … Jeff Buono joins the commercial real estate firm Kidder Mathews as vice president and manager of valuation advisory services in the firm's Portland, Ore., office … Grant Thornton announced that Marci Kaminsky joined the Chicago headquarters as chief communications officer and John Harmeling joined its Charlotte, N.C., office as chief marketing officer … James O'Connor joins Chicago investment bank William Blair & Co as a managing director to source deals with startups … David Rogers has joined the Chicago firm Ostrow Reisin Berk & Abrams (ORBA) as director of business valuation and litigation support as it continues to expand this practice.

Firms: The Atlanta Journal Constitution has named Moore Colson one of Atlanta’s 2015 Top Workplaces for the fifth year in a row.

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How to expand your IP valuation practice: Part 1 of new CPE series

BVR debuts its 2015 Special Series on Intellectual Property on April 7 with a webinar that reveals how BV analysts can expand their intangible asset valuation practices by assisting industrial and commercial taxpayers with property tax compliance, appeal, and litigation services. The webinar, Intangible Asset Valuation for Property Tax Compliance and Appeal Purposes, will feature Robert Reilly (Willamette Management Associates).

Other upcoming webinars of interest:

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

DCF myths

Double dip saga

Valuing ESOs

SSVS No. 1 clarification

IASB: lease rule impact

Healthcare multiples

IPCPM spotlight

BV movers

CPE events








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