BVWire Issue #175-3 | April 19, 2017


Inadequate ESOP valuation vetting gets trustee into hot water

ESOP trustees have a duty to be engaged in the valuation process. As a recent court ruling shows, simply hiring an independent financial expert and relying on its analysis and value conclusion may expose the trustee to liability down the road.

The case involved a short-lived ESOP whose structure was unusual in that the sellers—the principal shareholders in a private security firm—agreed to sell 90% of their shares to the ESOP and exchange the remaining 10% for warrants. The warrants allowed the sellers to buy back equity in the company and keep control by appointing a majority of the board of directors.

Management hired a firm known for its ESOP experience to act as trustee. That firm in turn engaged a reputable valuation firm as financial advisor. Seven months after the ESOP’s formation (in late 2013), the company sold itself to a competitor. The sale terminated the ESOP. Valuators at trial called the ESOP an “extreme outlier” given its brief duration. The Department of Labor opened an investigation into the conduct of the trustee and other fiduciaries, and two plan participants filed a complaint.

Significant overpayment. The issue was whether the trustee had engaged in a prohibited transaction and, if so, whether it had an “adequate consideration” defense in that the ESOP paid no more than fair market value for the company’s stock. The court considers whether the trustee acted in accordance with its ERISA fiduciary obligations. To do so means investigating the financial expert’s qualifications, providing the expert with complete and accurate information, and making sure reliance on the expert’s advice is reasonably justified under the circumstances.

According to the court, the trustee had no defense; it had caused the ESOP to overpay by almost $28 million. Had it done a meaningful review of the financial advisor’s valuation report, it would have noted deficiencies in the analysis and questioned the value conclusion. For example, even though the trustee knew that a different financial firm had valued the company only 11 months before the ESOP valuator did and had used the same methodology, the trustee never asked to see the earlier valuation for comparison. Had it done so, it would have realized the earlier valuation stated an enterprise value that was almost $100 million below the value the ESOP valuator determined. A prudent trustee then would have asked to see the projections the ESOP valuator used and examined the assumptions it made, the court said.

Further, the trustee was aware of, but did not home in on, the risk stemming from the company’s high concentration of revenue in just two contracts. The trustee did not question the ESOP valuator’s risk assessment, reflected in a 0.7 beta. And, considering the lack of control the ESOP ended up having, the trustee should have probed the ESOP valuator’s addition of a 10% control premium in its guideline company method analysis and the failure to discount its DCF analysis for lack of control.

The case is Brundle v. Wilmington Trust N.A., 2017 U.S. Dist. LEXIS 35811 (March 13, 2017). A digest and the court’s opinion will be available at BVLaw.

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Pepperdine’s ‘2017 Private Capital Markets Report’ is now available

Business appraisers report increases in the number of engagements, fees for services, competition, and improved general business conditions over the last 12 months, according to the “2017 Private Capital Markets Report” from Pepperdine University Graziadio School of Business and Management. The survey of 131 business appraisers also finds that government regulations and taxes are the most important issues facing privately held business today. The appraisers also expect slightly worsening business conditions in the next 12 months. Other key findings include:

  • The most popular methods used by respondents for valuing a business were discounted future earnings method (33%), capitalization of earnings method (25%), and guideline company transactions method (17%). Only 10% use the guideline public company method.
  • Recast (adjusted) EBITDA multiple is the most popular when using the multiple valuation method.
  • Respondents use an average risk-free rate of 3.16% and a market (equity) risk premium of 6.14%.
  • Average long-term terminal growth is estimated at 3.28%.

The survey also presents cost of capital data for each major capital type and its segments. Respondents include lenders, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers.

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Many small-biz owners don’t want to retire

The tidal wave of baby boomers selling their small businesses may be a little later in coming than many people thought. Many owners want to keep working in their business in some capacity as long as they are able. The Wells Fargo/Gallup Small Business Index finds that, if money were no object, over one-half (53%) of the nation's small-business owners would continue working in a full- or a part-time capacity. Only about one in four say they would retire completely.

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Comments due April 28 on contingent consideration exposure draft

The deadline for comments is April 28 on the Valuations in Financial Reporting (VFR) exposure draft Valuation of Contingent Consideration. Issued by The Appraisal Foundation, it contains detailed discussions of the typical structures of contingent consideration, key valuation issues, valuation techniques deemed to represent best practice, methods for assessing the reasonableness of contingent consideration fair value estimates, and issues at subsequent measurement dates.

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Sleep easier over your IP valuations

Worried about a challenge to your intellectual property (IP) valuation? You’ll be in a better position to defend your work if you understand how courts look at the key issues at play in your analysis. BVR's Intellectual Property Valuation Case Law Compendium, 3rd edition, provides the crucial takeaways from nearly 200 cases dealing with disputes over the value of IP. This reference also gives you online access to the full court opinions. Insights are provided by leading IP valuation experts.

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BVR will debut flexible eLearning courses

We no longer schedule our lives around when content is delivered. For example, when we watch TV, we use services such as Netflix or Hulu to stream our favorite shows based on our schedule. “BVR is bringing that same flexibility and user control to education for appraisers with its new eLearning platform,” Jared Waters, BVR’s training director, tells BVWire. “It allows us to pull in our best content, such as videos, slide decks, and articles, and then lets users control how long they spend learning and what they focus on.” Leading valuation experts are helping to shape the curriculum for appraisers around the world. Here are some of the initial offerings:

  • Monte Carlo: This is a perfect topic that lends itself to eLearning. “This is a wide-ranging and complex topic, and it is very difficult to do a comprehensive treatment in a live format,” says Waters. “The eLearning format allows us to pack in nearly nine hours of lecture and over 30 downloadable templates for different applications. You can digest the material at your own pace, which is critical for comprehension.”
  • Excel: “Despite it being the most used software in valuation, there is very little training on Excel,” says Waters, who points out that this course focuses on efficiency. “Being able to increase efficiency for small actions you do many times a day everyday will be a tremendous help in easing your workload.”
  • IVS 2017: “We have partnered with the International Institute of Business Valuers (iiBV) on a great course covering the new IVS 2017 standards, and the course will be available May 1,” says Waters. “This is a great example of the power of online learning in its most flexible form. These standards just came out in February, and we’ll have a comprehensive course that valuation professionals around the globe can access. It really democratizes and speeds up the dissemination of information in a way that traditionally learning simply cannot do.”

Stay tuned for more announcements of future eLearning offerings!

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Global BV News

More BV nuggets from Hong Kong

Last week’s BVWire revealed that a fledgling valuation professional organization (VPO) is taking shape in Hong Kong and will seek approval from regulators. In our talks with several valuation firms, we learned about some other aspects of local BV:

  • There is concern in the profession over the quality of valuation work here. There are no official local standards and no formal oversight of BV work. Regulators had put some pressure on the profession several years ago, but that has died down.
  • Since there is no VPO and “anybody can do it,” it’s difficult to get a real handle on the number of valuers in Hong Kong. Estimates range from 200 to 500.
  • The most prevalent and respected credential here for BV experts is the CFA, who get BV-specific training. There is also a CPA designation from a Hong Kong group. There are some ASA members here, but it’s tough to recruit new members as there’s no strong incentive to join.
  • Appraisers use the typical data: Duff & Phelps, Bloomberg, Cap IQ. No data are available on private companies here, but some appraisers feel they can use U.S. data and adjust it.
  • The valuation books on the shelf are the same as you’d see in the U.S. The English language is prevalent here, so translation is not an issue. Hong Kong appraisers look to the U.S. for methodology if they don’t know how to handle a particular issue.
  • Credentials are not listed on business cards here—it’s considered “boastful.” More important is relationship with clients.
  • Fair value engagements are common, such as purchase price allocations and impairments.
  • Not much litigation work is done here related to valuation. Shareholder disputes are few as many firms—including the listed firms—are family owned without wide ownership. There is not much damages work, we’re told. There is no requirement for fairness opinions here, but with large deals an independent valuation is needed.
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Preview of the May 2017 issue of Business Valuation Update

Here’s what you’ll see:

  • Attorney’s Slant on Three Methods to Estimate Personal Goodwill(BVR Editor). A family law attorney as well as several top valuation experts recently provided interesting perspectives that take the discussion of allocating enterprise and personal goodwill to an entirely new level. Discussed are a twist on the excess earnings method, the new concept of “pure” personal goodwill, the strengths and weaknesses of the multiattribute utility model (MUM), and a new residual method based on the purchase price allocation concept.
  • Do You Share Business Valuation’s ‘Dirty Little Secret’?(BVR Editor). There’s a perception that too many valuation experts simply accept projections and forecasts they’re given without applying enough scrutiny. New guidance is available on how to examine and substantiate prospective financial information (PFI) you get from management or other third parties.
  • Damodaran’s New Book on the Power of Stories in Valuation(BVR Editor). Dr. Aswath Damodaran (New York University Stern School of Business) has a new book, Narrative and Numbers, The Value of Stories in Business, which is a must-read for valuation experts. This article details his five steps to effectively developing a narrative when constructing valuations.
  • Time to Update the Guiding Principles to a Valuation Report(Robert E. Kleeman Jr., OnPointe Financial Valuation Group LLC, Englewood, Colo.). A 40-year veteran of business valuation says new complexities trigger the need to take the elements of a good valuation report to the next level.

The issue also includes:

  • Regular features: “BV News At-a-Glance/Global Perspective,” “Ask the Experts,” and “Tip of the Month.”
  • BV data spotlight: Pratt’s Stats MVIC/EBITDA Trends, ktMINE Royalty Rate Data, Economic Outlook for the Month, and Cost of Capital Center.
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the May issue of Business Valuation Update.

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BV movers . . .

People: Justin Horsman and Will O’Donnell have been promoted to managers in the Business Valuation Practice of Columbia, Md.-based corporate advisory firm Evergreen Advisors … Lawrenceville, N.J.-based valuation specialists MPI announced that Stacy Statkus has joined the firm as a senior vice president … Southfield, Mich.-based Plante Moran announced the appointment of Sharon Ulep as principal in its healthcare consulting strategy and operations practice … Nan Zheng has been appointed as corporate finance executive of MC Vanguard Corporate Finance in Manchester, England.

Firms: Baker Tilly was honored as a nonlegal provider of pro bono services at the Access to Justice Annual Pro Bono Recognition and Cocktail Reception on April 6. Partner Harold L. Deiters III was recognized for his team’s pro bono valuation and forensic accounting services to victims of family violence and assault … The Democrat & Chronicle named Freed Maxick, of Rochester, N.Y., one of the “Top Workplaces in Rochester” for 2017 … GBH CPAs was selected as one of Houston’s “Best and Brightest Companies to Work For” for the sixth time … Princeton, N.J.-based WithumSmith+Brown will be presented with the Bishop’s Award on May 6, the highest honor bestowed by Saint Peter’s Healthcare System.

Please send your professional and firm news to us at

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CPE events

Regression Analysis: Fundamentals for Appraisers (April 20), with G. William Kennedy (Duff & Phelps).

CEIV: Ready, Set, Go! (April 25), with William A. Johnston (Empire Valuation Consultants). This is Part 7 of BVR's Special Series on Fair Value.

Advanced Bankruptcy Valuation (April 27), with Robert Reilly (Willamette Management Associates).

Purchase Price Allocations for Banks (May 3), with Rick Childs (Crowe Horwath LLP) and Charles Clow (Crowe Horwath LLP). This is Part 5 of BVR's Special Series on Banking and Financial Services.

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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New and Trending LinkedIn Discussions

Goodwill in Virginia for Professional Practices?

BV Outsourcing to India Stirs Strong Feelings

Do You Have Questions About the CEIV Credential?

Your discussion could be featured here—BVR's LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you're not already a member, request to join:

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

ESOP snafu

Private capital

Small biz

Valuing earnouts

IP valuations


Global BV news

BVU preview

BV movers . . .

CPE events

LinkedIn discussions

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