BVWire Issue #187-4 | April 25, 2018


Debate continues on use of statistics

“I can no longer stay a silent observer,” says Gary Trugman (Trugman Valuation) about the back-and-forth over how many transactions should be used in the application of the transaction method of appraisal. The April issue of Business Valuation Update contains point-counterpoint articles by Toby Tatum (Alliance Business Appraisal), who says at least 30 transactions should be used, and Ronald D. Rudich (Gorfine Schiller & Gardyn) and Howard A. Lewis (ENVRS and RiskGuidance Co. LLC), who say the minimum should be five transactions.

“Using five transactions makes no sense in most of the databases, but blindly being content with 30 transactions may be almost as bad,” writes Trugman, the author of Understanding Business Valuation: A Practical Guide to Valuing Small- to Medium-Sized Businesses, 5th edition. In a “Letter to the Editor” in the May issue of BVU, he goes on to give his thoughts before concluding that you need to “be careful and use your head.”

This is just one of the points that have triggered some strong reactions. Tatum had conducted a webinar on the use of the BIZCOMPS database of private-company transactions in which he presented “Tatum’s Law of Market Multiples.” Rudich and Lewis have taken issue with a number of other points Tatum presented, including stratifying the data, filtering, the R-square coefficient, harmonic mean, minimum number of transactions, the elimination of outliers, market multiples, and so on.

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Tennessee appeals court allows slight DLOM in divorce case

Valuators working on divorce cases in Tennessee know that the jurisprudence on the use of the marketability discount has been nebulous. But, as a recent appeals court opinion in a “drawn out” case shows, an important principle has emerged.

It’s important to note that the trial court made its value findings in 2016, thus before a July 2017 amendment (reported here), which specifically addresses the use of discounts by trial courts charged with valuing marital assets to affect an equitable distribution.

‘Characteristics of ownership interest’: In the instant case, the overriding valuation issue has been appreciation. During the marriage, as part of his estate planning, the wife’s father made a gift to the wife in the form of an interest in two pass-through entities. By the time the wife filed for divorce, after 25 years of marriage, the companies had increased in value. The trial court initially concluded the companies and any appreciation in value were separate property. But the appeals court, in its first decision, found the husband was entitled to a portion of the appreciation.

On remand, the trial court said it would rely on the judgment of valuation experts, “[a]bsent clear guidance and articulated policy considerations for the exclusion of marketability discounts otherwise routinely applied in the field of business interest valuations.” Since both experts found a discount for marketability was appropriate to “fairly reflect fair market value,” the court applied a slight DLOM to the wife’s interest in both companies.

The husband challenged the DLOM use in a new appeal. The Court of Appeals noted that, generally speaking, the application of a marketability discount “depends on the characteristics of the ownership interest being valued, not whether the owner of the interest actually intends to sell the interest.” The court went on to say that, in the divorce context, “in many instances, the decision to apply the discount is seen as discretionary” and depended on the facts of the case. In the instant case, based on all of the evidence relevant to the “characteristics of the ownership interest being valued,” the trial court’s use of DLOM was not error, the Court of Appeals concluded.

At the same time, the appeals court agreed with the husband that the trial court’s overall distribution was inequitable. It remanded, ordering the trial court to divide the marital estate in line with the appeals court’s proposed distribution.

A digest of Telfer v. Telfer, 2018 Tenn. App. LEXIS 120 (March 5, 2018), and the court’s opinion, will be available soon at BVLaw.

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New Mergerstat edition includes premiums over EV

Users of the 2018 Mergerstat Review will be happy to see that four new tables focus on premiums paid over the targets’ enterprise values. As in previous editions, transaction premiums feature the premium paid for the targets’ share prices five days prior to the announcement, but this new update enhances the data. Mergerstat Review provides complete statistics on merger and acquisition (M&A) transactions that involve U.S. companies, and the 2018 edition includes other changes that improve the data:

  • Historical updates were completed to 20 years of M&A data, including aggregate volume and value totals, as well as the respective pricing multiples associated with the year’s data;
  • The 50-category Mergerstat industry classifications have been retired in favor of its 20-category industry sectors;
  • Foreign seller ownership roles are more clearly defined; and
  • Deal pricing has been changed from base equity price to transaction value.

The Mergerstat Review PDF is available now, and the print version will be available in mid-May.

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Valuations frustrate RIAs

A survey of the nation’s top registered investment advisors (RIAs) by PPB Capital Partners found that firms are encouraged to provide customized alternative investment solutions for high-net-worth clients, but such funds are unwieldy and expensive to operate. Also, over half (52%) of respondents identified underlying investment valuations as the most frustrating area.

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Monte Carlo in court

During a recent webinar on the use of Monte Carlo for valuing distressed companies, an audience member asked: “Have the bankruptcy court and other courts accepted the Monte Carlo method?” Yes, the speakers—Jim Alerding (Alerding Consulting) and Matt Bernstein (Dixon Hughes Goodman)—pointed out.

In the Lyondell case (Lyondell Chemical Co. v. Occidental Chemical Corp., 608 F.3d 284, 5th Cir. 2010), which was an environmental cleanup case, the side opposing the use of Monte Carlo actually conceded that the method is reliable. Also, the court said that “just because Monte Carlo simulation produces a range of outcomes … does not mean it is speculative” and “the EPA itself has endorsed the use of Monte Carlo analysis.” In a bankruptcy case (In re Nanovation Technologies, Inc., 2007 Bankr. LEXIS 1862, May 17, 2007), the expert opposing Monte Carlo was not challenging the model but said that he had never seen it used in similar circumstances. But the court said that it is a “generally accepted statistical tool” and there was “no evidence that might provide a reason to believe that [the analysis] is unreliable.” Of course, you can still be challenged on the analysis itself if, for example, the opposition feels you used the wrong inputs or assumptions.

Another audience member asked how one might report on a Monte Carlo simulation in a valuation report. Since the SSVS and USPAP both allow reporting a conclusion of value as either a single amount or a range of values, the report could include a conclusion as a range of values selected from the simulation or a single amount selected from the simulation. Keep in mind that the valuation analyst should be prepared to defend the selection of the range or the amount. It is suggested that supporting language be included within the report itself.

The webinar, Monte Carlo in Distressed Company Situations, is available in BVR’s on-demand training archive.

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Appraisal rights in the U.S. and EU

In the U.S., there has been a surge of appraisal petitions and appraisal arbitrage, but this is not the case in the EU, according to a paper by Alexandros Seretakis (Trinity College, Dublin). In the EU, shareholders view the appraisal remedy as a last-resort measure because of a variety of factors (which the paper deciphers), including a hostile legal regime, the paper says.

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The Big Four’s booming consulting biz

Collectively, the Big Four accounting firms saw 42% of their global fiscal 2017 revenue come from consulting and advisory work. From 2012 to 2017, audit revenue grew by only 3%, but consulting and other advisory services grew by 44%, according to a Wall Street Journal article. This is raising the debate about conflict of interest over consulting and auditing within the same firm.

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Video invite to ASA FV event

In a YouTube video, Ray Rath (Globalview Advisors) gives 10 reasons why you should attend the ASA/USC 13th Annual Fair Value Conference in Los Angeles on May 10. This is the only event that focuses exclusively on fair value for financial reporting, and there is a great lineup of speakers and sessions. For the first time, BVR will live stream the conference, so, if you can’t be there in person, you can watch it live.

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Sorting out M&A transactions

Get an inside look at M&A transactions at the San Francisco M&A Conference on May 16 sponsored by Transaction Advisors. You’ll hear perspectives and practical insights on the latest strategies for evaluating and structuring complex corporate transactions. There will be speakers from Juniper Networks, Golden Gate Capital, EY, Morrison & Foerster, SoftBank, GE Digital,and many others. When you register, use special code BVR_20 at checkout for 20% off the registration price.

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Global BV News

Malaysia valuers take ICVS training

Nearly 40 candidates from Malaysia, Hong Kong, and Indonesia recently took ICVS Certification Training conducted by the Business Valuers Association of Malaysia (BVAM) and the IACVS Malaysia Charter. The International Certified Valuation Specialist (ICVS) designation reflects International Valuation Standards and is designed to help improve and provide a minimum level of uniformity and give assurance to clients and regulators around the globe. Developed by the International Association of Certified Valuation Specialists (IACVS) and the International Institute of Business Valuers (iiBV), training is scheduled later this year for Beijing, Hong Kong, Korea, Australia, the Middle East, and other locations, according to the current training calendar.

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Upcoming BV Summits in India

The next in the series of BV summits in India will be on May 3 in Mumbai. The agenda includes valuation issues in insolvency, valuation of blockchain-based companies, startups, private equity, M&A, and more. Click here for more details and to register. This conference is followed by a two-day iiBV Advanced Topic Workshop May 4-5, with topics including the cost of capital—India, valuing early-stage companies, valuing minority interests, and valuing intangible assets. For more details on the workshop, click here. I-Deals Network and the International Institute of Business Valuers (iiBV) organized these events. Another BV summit will be held on June 6 in New Delhi (click here to register).

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BV movers . . .

People: Jeremy Jennings has been promoted to a partner at Eide Bailly; he will assist in the leadership of the valuation practice … Francis A. Longstaff joins Boston-based The Analysis Group as an academic affiliate; he’s the Allstate Professor of Insurance and Finance at the UCLA Anderson School of Management and is known for his financial valuation models … Gillie McCreath joins New York-based Mazars USA LLP as a principal in the healthcare consulting group; he comes from the Big Four and has held leadership positions at major hospitals Rachel Appleton joins Warren Averett, CPAs and Advisors as a senior associate in the firm’s Transaction Advisory Services group.

Firms: The Royal Institution of Chartered Surveyors (RICS) is celebrating its 150th anniversary; it’s holding a series of summits in major cities across the U.S., Canada, Mexico, and Brazil … Akron, Ohio-based Apple Growth Partners will open a new office in Canton, Ohio, in May … Cleveland-based CBIZ acquired InR Advisory Services, effective April 1; InR provides investment advisory services for public- and private-sector clients and nonprofits … Pennsylvania firm RKL LLP has a redesigned the firm’s website focusing on “real results” with an expanded portfolio of client case studies, actionable insights, and innovative solutions.

Please send your professional and firm news to us at

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CPE events

  • Fundamentals of Financial Modeling (May 16), with Mark Shirley (V&L Consultants). This is Part 3 of BVR’s Special Series on Advanced Modeling and Methodologies.

    An introduction to the logical structure of decision theory (problem solving) applied in constructing financial models, including a mathematical model structure for spreadsheet application.

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The “Value” of Beer—and Breweries—Is Rising!

Thoughts on the Usefulness of Historical Private Company Transaction Multiples?

Bright-Line Rules for Tax-Affecting S Corps?

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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:

Statistics hubbub

Tenn. DLOM

Mergerstat update

RIAs irked

Monte Carlo

Appraisal rights

Consulting burst

Streaming FV

M&A deep dive

Global news

BV movers . . .

CPE events

LinkedIn discussions

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