New York’s high court OKs minority discount in wrongful dissolution context
New York’s highest court recently weighed in on a long and ugly partnership dispute in which a minority shareholder had unilaterally dissolved the partnership. The court approved the discount-laden valuation of the departing partner’s interest. The crux is that this case is not a dissenting shareholder action.
FMV-driven valuation: The defendant, who had a minority interest in a general partnership that owned and operated a shopping center in upstate New York, withdrew from the partnership in the mid-2000s. The remaining partners accused him of breaking the partnership agreement and continued the business pursuant to New York’s Partnership Law § 69(2)(b). Litigation ensued. The trial court and the appellate division concluded the dissolution was wrongful. In valuing the exiting partner’s interest, the appellate division found discounts for goodwill, lack of marketability, as well as a sizable (66%) minority discount were appropriate. Further, the appellate division affirmed a $1.6 million award in attorneys’ and expert fees to the plaintiffs.
On review, the New York Court of Appeals recently upheld the rulings, except for the fee award. The majority opinion said the applicable statute contemplates a fair market value determination of the wrongfully dissolving partner’s interest “as if that interest were being sold piecemeal and the rest of the business continuing as a going concern.” Because a minority interest is worth less to a buyer of just that interest, a minority interest is applicable. Just because the exiting partner’s interest “may be absorbed by the remaining partners … does not render the value generated by application of a minority discount an inaccurate valuation of the intrinsic worth of that partner’s interest.”
The majority differentiated the instant case from dissenting shareholder cases that rely on a different statute requiring that the dissenter be paid “fair value.” The high court noted: “The term ‘fair value’ is not present in the statute under review here.”
Two judges dissented on the minority discount issue. The dissent said there was an analytical flaw in applying a minority discount where the actual purchasers are the remaining shareholders, not a hypothetical “willing buyer.” The dissent also objected to using the minority discount to deter or punish “wrongful” conduct because New York’s Partnership Law already requires a deduction for goodwill and payment for damages. “A further discount for lack of control is cumulative and unnecessary in light of these other provisions,” the dissent said.
A digest of Congel v Malfitano, 2018 N.Y. LEXIS 496 (March 27, 2018) (Congel II), and the court’s opinion will be available soon at BVLaw. A digest of Congel v Malfitano, 2016 N.Y. App. Div. LEXIS 3706, is available at BVLaw now.
Private firm valuations surge, per Pepperdine report
Business valuations have been significantly increasing, according to new results from the “2018 Private Capital Markets Project” from Pepperdine Graziadio Business School. Survey respondents from investment banks report that average company valuation multiples have increased from 8.0 to 8.7 times recast EBITDA for firms with EBITDA between $25 million and $50 million. The increases are similar for other deal sizes, which are also on the rise after a slight softening in 2016-17.
“Last year, it looked like valuations were starting to soften a bit, after years of very high levels,” said Craig R. Everett, Ph.D., finance professor at Pepperdine who runs the project. “However our current survey results reveal that valuations have been aggressively increasing again. Tax cuts and general business optimism are the likely reasons for this new surge in company valuations. It is definitely still a seller’s market.”
The survey represents the hard work of Pepperdine researchers in developing a private cost of capital method as a legitimate alternative to looking to the public markets. To do this, they ask private capital market players what returns they project. The players are divided into six segments aligned with the major institutional arms of the private investment world, each with different return, investment, and research characteristics. The segments are: bank lenders, asset-based lenders, mezzanine lenders, private equity groups, venture capital, and angel investors.
Extra: Dr. Everett will give a presentation on Pepperdine’s research at the ASA/USC 13th Annual Fair Value Conference in Los Angeles on May 10. You can attend either on-site or via a live streaming webcast.
Much of the windfall savings companies are expecting from the new tax law will be used to increase domestic investment, according to a Deloitte survey of CFOs. They will also boost hiring and wages and repatriate cash abroad. Most of the CFOs polled said they plan to use repatriated cash for investment in both core and new businesses as well as R&D, followed by debt repayments, buybacks, and dividends. While many expect some increase in hiring and pay, it does not account for as much of their anticipated spending as the other areas. The survey polled 155 CFOs, nearly all of whom are from companies with over $1 billion in revenue.
The Treasury Department and the IRS have issued guidance (Notice 2018-28) for computing the business interest expense limitation under the Tax Cuts and Jobs Act. In general, the new tax law imposes a limitation on deductions for business interest incurred by certain large businesses. For most large businesses, business interest expense is limited to any business interest income plus 30% of adjusted taxable income. These new limitations blunt the effects of the interest expense tax shield, which increases the cost of debt.
The “2018 Private Equity Valuations Report” examines trends in financial sponsor-led transactions and highlights how private equity investors are adjusting to record deal multiples. The report, from Murray Devine Valuation Advisors, says that, while U.S. private equity deal volume leveled off last year (falling to levels not seen since 2013), valuation for private equity deals advanced considerably. “The median multiple of 12.9x EBITDA easily surpassed 2016 levels and also exceeded the previous high of 10x EBITDA set in 2006,” says the report. To read the full report, click here (filled-out form required).
The American Society of Appraisers will offer a new Rising Stars Award to honor the brightest young ASA leaders who have demonstrated success throughout the year and who are making a difference in their professions and community. Eligible nominees must be age 40 and under and will be judged on their accomplishments, leadership, community efforts, and milestones. Nomination forms (click here) must be submitted by Saturday, June 30. The awards will be handed out at the Joint ASA 2018 Advanced Business Valuation and International Appraisers Conference October 7-10 in Anaheim, Calif.
James R. Hitchner, author of one of the books on business valuation, will do the keynote at this year’s business valuation conference hosted by the New York State Society of CPAs on May 21 in New York City. He will present highlights from his seven-part webinar series on best practices and will touch on topics such as the DCF, cost of capital, guideline company methods, S corps, report writing, and more. He’s a great speaker and is the author of Financial Valuation: Applications and Models, among other books. BVWire attends this excellent event every year, so we hope to see you there! If you can’t be there in person, you can watch the webcast. For more details and to register, click here.
You can find global betas for 134 industries and “regional” betas for 10 geographical areas (including North America, the EU, and Western Europe) in the Industry Betas study from Salvidio & Partners, a Rome, Italy-based business valuation firm headed by Ascanio Salvidio. His firm has begun producing a quarterly report on levered and unlevered industry betas, and BVWire readers can download the current report (for the first quarter of 2018) here for free.
The report is distinctive in that it combines industry and geographical perspectives and also features two separate series of levered and unlevered betas. The first series includes levered and unlevered betas estimated for any selected company, regardless of whether its gross debt is higher or lower than its cash and cash equivalents. The second series excludes “net liquidity” to represent companies where “decisions taken by management, all other circumstances being equal, may be different in case of the company’s gross debt being higher or lower than cash and equivalents,” according to Salvidio.
Feedback? It is hoped that this study will provide valuers with useful information about industry risk in cost of capital calculation, improving the quality of their analyses around the world. Salvidio welcomes feedback from BVWire readers on how to improve the study, and you can contact him here.
The International Valuation Standards Council (IVSC) and the World Association of Valuation Organisations (WAVO) will jointly host the Inaugural IVSC-WAVO Global Valuation Conference June 25-26 in Singapore. This conference is part of the collaboration between both organizations to develop the valuation profession and enhance its professionalism through joint activities and exchanges.
Preview of the May 2018 issue of Business Valuation Update
Here’s what you’ll see:
“Earnouts and the Monte Carlo Method: Practice Tips for Implementation” (Erica L. Wilson and A. Vincent Biemans). Practice tips to use when implementing a Monte Carlo method (MCM) analysis to value earnout rights or obligations, plus a brief overview of earnout provisions and the MCM.
“This Short Paragraph Can Bolster the DLOM Section in Your Next Report” (BVR Editor). Are you using a simple “benchmark average approach” for your analysis of a discount for lack of marketability (DLOM)? That type of analysis may have passed muster years ago, but times have changed.
“Letter to the Editor: Response to Article on Separating Active and Passive Appreciation in the Value of a Marital Asset” (Mark Filler). The author says there are flaws inDr. Ashok Abbott’s approach to segregating passive from active increases in the value of a marital asset—and he presents an alternate approach.
“Letter to the Editor: Comments on an Article on the Use of Statistics in the Transaction Method” (Gary Trugman). A renowned valuation expert weighs in on dueling experts’ opinions on how many transactions should be used in the application of the transaction method of appraisal.
“New Tax Legislation Consequences on U.S. Transfer Pricing and Intangibles” (Guy Sanschagrin). The Tax Cuts and Jobs Act of 2017 (the Act) brought sweeping changes to the international tax landscape, including the transfer pricing arena. Intangible property is at the core of many of these changes. Plus, the IRS is cracking down in this area.
“Case Study Reveals How to Use Neuroscience to Collaborate With the IRS” (Michael Gregory). A former IRS manager marries neuroscience theory with practice as he presents real-life cases where an eight-step process was used in successful negotiations with the IRS over valuation matters.
“Work File Checklist for Operating Rights” (BVR Editor). Documentation requirements for determining the fair value of certain intangible assets deemed to be operating rights, such as government licenses and commercial franchises. This is based on the Mandatory Performance Framework (MPF) for the Certified in Entity and Intangibles (CEIV) credential.
The issue also includes:
An expanded section of “BV News and Trends/Global BV News and Trends.”
Regular features: “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.
People:Carl Von Hake has joined Rusk O’Brien Gido + Partners (ROG), a firm that specializes in architectural, engineering, and environmental consulting firms; he will lead ROG’s expansion efforts in the western U.S.…Angela Sadang (Marks Paneth) has been appointed to the marketing committee of the International Institute of Business Valuers (iiBV) … Duff & Phelps has promoted the following individuals to the managing director level in its Valuation Advisory Services practice area at various global locations: Alexander Bregonje (Amsterdam), Rüediger Brunschlik (Munich), Sharon Davies (London), Cristiano Egidi (Rome), Rebecca Fuller (London), Jonathan Goldblatt (Morristown), Aviral Jain (New Delhi), Umakanta Panigrahi (Mumbai), Stefanie Perrella (New York), Peter Salvatori (Morristown), and Lee Tourscher (Philadelphia)… PwC Canada named Nicolas Marcoux as CEO, effective July 1; he will succeed Bill McFarland, who has served as CEO since 2011.
Firms: Calgary, Alberta-based MNP acquired Craig Keen Despatie Markell (CKDM) of Cornwall, Ontario, effective June 1; MNP now has more than 70 locations across Canada, and CKDM has six partners and 13 staff … The Indiana Chamber of Commerce has recognized Katz, Sapper & Miller (KSM), based in Indianapolis, for the 13th consecutive year as a Best Place to Work in Indiana … Syracuse, N.Y.-based Peters & Associates acquired Shirley Kessler Accounting and Tax Service of Pulaski, N.Y., and sole practitioner Robert Deschano of Utica, N.Y.
An examination of the business model behind many hospice companies, as well as fair market value and commercial reasonableness issues related to compensating medical directors and hospice physicians, a major concern in this industry.
Monte Carlo in Distressed Company Situations (April 17), with R. James Alerding (Alerding Consulting, LLC) and Matthew Bernstein (Dixon Hughes Goodman). Part 2 of BVR’s Special Series on Advanced Modeling and Methodologies.
Valuing a distressed company often requires you to go beyond the basic tool set and use a Monte Carlo simulation to craft a quality report. This session will discuss considerations and how to identify key inputs.
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