Court tweaks blue-sky method in valuing a car dealer

A Tennessee appellate court recently considered the Chancery Court’s determination of the value of an oppressed minority shareholder’s interest in an “ultra-high-end” car dealership. The valuation of one expert utilized the “blue-sky method,” a commonly used method to value the dealership and ultimately the minority interest. “Blue sky” represents the intangible value of a car dealership. A blue-sky multiple is applied to normalized earnings, and then the tangible net assets are added in to get the fair market value of the entire enterprise. The other side’s expert also used a blue-sky multiple but did not add in the tangible net assets, saying it would be “double counting.”

While the Chancery Court accepted the blue-sky approach, it did not accept either expert’s normalization factor and made its own determination. Additionally, the Chancery Court added back only half of the adjusted net assets. The case was appealed, and the appellate court affirmed the Chancery Court’s valuation and its methodology, saying it was “generally accepted by the financial community.”

The case is Buckley v. Carlock, 2022 Tenn. App. LEXIS 75; 2022 WL 593549, and a case analysis and full opinion are available on the BVLaw platform.

Kroll increases U.S. normalized risk-free rate to 3.0%

Kroll has increased its recommended normalized risk-free rate to 3.0% from 2.5%, effective April 7. This new rate, used in conjunction with the firm’s current recommended U.S. equity risk premium (ERP) of 5.5%, implies a “base” U.S. cost of equity capital estimate of 8.5% (5.5% + 3.0%). “Kroll regularly reviews fluctuations in global economic and financial market conditions that warrant a periodic reassessment of the ERP and the accompanying risk-free rate,” the firm says. They also provide a table summarizing these recommendations over the period from January 2008 to the present.

Holy cow! New York Yankees hit $6 billion in value

That’s what the legendary announcer Phil Rizzuto would be yelling over this news. The New York Yankees have held their ground as Major League Baseball’s (MLB) most valuable team, according to Forbes’ latest rankings. What’s more, the Bronx Bombers have become the first MLB team to hit a $6 billion valuation, says Forbes, and it is the second most valuable franchise in U.S. sports, eclipsed only by the National Football League’s Dallas Cowboys ($6.5 billion). While the Yankees lead MLB in overall value, Forbes says that the second-ranked Los Angeles Dodgers ($4.08 billion) received the highest local-TV rights revenue, with $189 million as compared to the Yankees reportedly bringing in $135 million in local broadcast rights fees.

Extra: Don Erickson (Mercer Capital) provided a recent overview of valuing sports franchises during a recent BVR Power Panel webinar. Erickson has valued over 50 pro sports teams.

Tip: Add an expiration date to an engagement letter

During a very informative—and entertaining—webinar on expert witnessing, Robert Vance (Forensic & Valuation Services PLC), gave this advice: Consider putting an expiration date on the cover letter to your proposed engagement letter. He has found that certain firms will try to “conflict you out,” meaning they don’t necessarily want to hire you, but they don’t want the other side to hire you. They somehow think that the engagement letter ties up the expert even though it doesn’t get signed. Therefore, Vance uses a 10-day expiration date. He notes that this is especially important if the opposing side is a firm you have worked for before, so the 10-day expiration can clear the way to be hired by the other firm.

Vance gave many other good pieces of advice during his webinar, So You Want to Testify as a Financial Expert Witness? Testimony Tips, Traps, and Video Demonstrations From the Trenches. Click here for a recording (free to holders of BVR’s Training Passport Pro).

Mercer continues to examine appraisal review

After a hiatus from his blog, veteran valuer Chris Mercer (Mercer Capital) certainly has made up for lost time. A few weeks ago, he started a series of thoughtful posts focusing on appraisal review, a process he deems “essential.” As of now, he has done five installments in the series, the latest post discussing—from an appraisal review standpoint—the definition of fair market value and the basic eight factors in IRS Revenue Ruling 59-60. While these factors are discussed in nearly every business valuation report, “not every business valuation report reflects a solid understanding of this important standard of value,” he writes. “Often, one or more of the critical three factors of common sense, informed judgment and reasonableness are missing.” He discusses these three critical factors and gives an example of a simple reasonableness test still missing from certain appraisals he reviews. Mercer will continue the series in future weeks.

Extra: Speaking of appraisal reviews, there is a webinar today, April 20, Appraisal Review for Financial Reporting, with Raymond Rath (Globalview Advisors).

‘Eye-opening’ valuations for RIA firms

A review of 2021 M&A activity among registered investment advisors (RIAs) shows that valuations “increased materially, while the median-adjusted EBITDA multiple set a record,” according to the newest edition of “The RIA Deal Room,” an annual study from Advisor Growth Strategies. “The median valuation multiple for sellers increased for the fourth straight year to 8.99x EBITDA,” the study says. “However, this marks a 12% increase over the previous year, compared to the 21% increase in 2020 and 29% increase in 2019. While deal volume is likely to persist for years, valuations may soon hit their ceiling.”

Three special BVR workshops in May: energy, estate/gift, and intangibles

The month of May will see BVR webcast three special events:

1. May 12: 2022 Houston ASA Energy Valuation Conference: A BVR Live Webcast, a full-day event—the 12th year for this event—presenting leading-edge valuation techniques applicable to all sectors of the energy industry (CPE credits: 9);
2. May 24: Estate and Gift: The Complete Valuation Package, a four-hour workshop (4.5 CPE credits) with Carla Glass (Marcum LLP) and Marissa Turrell (Marcum LLP); and
3. May 26: Best Practices In Developing Intangible Asset Valuations and Asset-Based Approach Business Valuations, a four-hour workshop (4.5 CPE credits) with Weston Kirk and Robert Reilly, both with Willamette Management Associates.

Click on the links above for more information. Mark your calendars!

Eurozone ERP, risk-free rates unchanged: Kroll

Kroll has left unchanged (until further notice) its recommended German normalized risk-free rate of 1.5% and its current eurozone equity risk premium range of 5.5% to 6.0% (from a German investor’s perspective). Kroll has published its recommended eurozone ERP and corresponding risk-free rate since 2019, and it provides a table summarizing these recommendations over the period from December 2019 to the present.

BV movers . . .

People: The National Association of Certified Valuators and Analysts (NACVA) has named its outstanding members for the first quarter of 2022: Shelia Darby, MBA, CVA, MAFF, a managing director of BizWorth, a financial services company and provider of certified business valuations of closely held businesses; and Michael J. Molder, JD, CPA, CFF, CVA, MAFF, CFE, owner of AILA Limited, providing forensic accounting and business valuation services primarily in litigation engagements … Kevin Marold, CPA, CFE, CFF, has earned the Accredited in Business Valuation (ABV) credential from the AICPA; he is with Morones Analytics (Portland, Ore.) and focuses on forensic accounting investigations and damages analysis for litigation.

Firms: New York City-based Citrin Cooperman & Co. has received a majority investment from New York City-based private equity firm New Mountain Capital, which is aiding the firm in pursuing a growth strategy that has resulted in the acquisitions of several accounting, technology, and advisory companies, with additional deals on the horizon … Stout has acquired Genova Group, a Philadelphia-based advisory firm with a team of 20 professionals who provide accounting, tax, and valuation advisory services … Marcum Wealth, a division of New York City-based Marcum LLP, has acquired Mason Road Wealth Advisors of Chesterfield, Mo., which was the financial services division of accounting firm BWTP PC, which Marcum added in December 2021.

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

• Appraisal Review for Financial Reporting, April 20, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Raymond Rath (Globalview Advisors). CPE credits: 2.0.

Appraisal reviews are increasing in importance and frequency. This discussion will cover topics important to the process of performing an appraisal review as well as responding to inquiries from a reviewer of a valuation prepared for financial reporting.

• A Nation Getting Older: Valuing Senior Citizen-Focused Companies, April 28, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Vanessa Claiborne (Chaffe and Associates). CPE credits: 2.0.

This webinar will focus on skilled nursing and senior housing—market trends, pandemic-related effects on value, key valuation metrics, and the transaction landscape.