August 17, 2011 | Issue #107-3  

IRS’s DLOM Job Aid lands in cyberspace

BVWire thanks Richard Warner (Great Lakes Valuation), current editor of the ASA’s BV E-Letter, for alerting us to the Review of the Discount for Lack of Marketability: Job Aid for IRS Valuation Professionals developed by the IRS Engineering/Valuation Program DLOM Team. Although completed in 2009, the 107-page Job Aid wasn’t available on the internet until just recently, and contains a comprehensive review of the models, databases, studies, and case law pertaining to discounts for lack of marketability. Notably, in its final overview, the Aid advises IRS reviewers to “approach [the] marketability discount as a valuator,” adding:

If you are approaching the question of DLOM fresh, either as a reviewer confronted with an unreasonable taxpayer position based on invalid approaches or as a valuator charged with making your own valuation discount decisions, it is often helpful to start with a basic question as relates to DLOM. That question is: “Under the prevailing facts and circumstances and considering the nature of the interest to be valued why is the DLOM not zero?” By enumerating the factors that would lead to a conclusion that some DLOM at all is appropriate you will be building a framework as to how substantial a discount for lack of marketability might be reasonable. This process will give you a reality check on DLOM amounts that you might ultimately derive using some of the approaches discussed in this job aid.

IRS sources acknowledge the public availability of the DLOM Job Aid without officially endorsing its content. With that in mind, we’ve made the Job Aid available as a free download: click here.

FASB ‘simplifies’ impairment testing

Last Wednesday, the Financial Accounting Standards Board (FASB) approved a revised accounting standard that’s intended to simplify how an entity tests goodwill impairment. BVWire asked Brad Pursel (Brown Smith Wallace) to comment:

The 72 comment letters submitted to FASB regarding the April 2011 exposure draft reveal two common elements: 1) reducing costs for financial statement preparers, particularly smaller, private companies, is a worthy objective; but 2) the application of a qualitative assessment to impairment testing will be difficult to implement in many instances.

The qualitative assessment to goodwill impairment testing will likely become a frequent discussion topic among preparers, valuation specialists, and auditors during the remainder of 2011. Valuation specialists and preparers should review the final Accounting Standards Update (ASU) along with the comment letters submitted by relevant audit firms, some of which have a more favorable view of the qualitative assessment than others. Ultimately, however, valuation specialists should encourage their preparer clients to reach out to their auditors to start a dialogue over the suitability of a qualitative option for the client.   

FASB intends to release the final ASU in September; click here for project updates.

Dollar-for-dollar capital gains discount wins another court

Mississippi’s business statutes prohibit assessing minority and marketability discounts in statutory fair value actions. Accordingly, the expert for a family held investment firm appropriately revised an underlying real property appraisal to remove its minority discount in a suit by dissenting shareholders, the federal district court (N.D. Miss) held.

At the same time, the federal court found that the expert’s dollar-for-dollar discount for embedded capital gains tax liability “must be taken into account” to determine “actual fair value of the shares in this case,” which he said were worth $225,000. This value lay primarily in farmland, which the firm’s founder purchased in the 1940s for about $20,000. Thus, in a sale to a prospective buyer, either the company would incur substantial capital gains tax liability before dispersing the shareholder proceeds, the court said, “or the buyer would…pay a reduced price because he’d later have to incur the tax liability to sell the property.” Even from a fairness standpoint, “it only makes sense to include the built-in capital gains tax liability when valuing the corporation based on its assets,” the court emphasized, citing Estate of Dunn v. Commissioner, 301 P.3d 339 (5th Cir. 2002).

Query for appraisers: Didn’t Dunn (and also Jelke, in the 11th Circuit) accept a dollar-for-dollar discount in the context of a fair market value appraisal of a holding company? Should the different valuation standard in this case make a difference? Email your comments to the editor. And look for complete digest of Dawkins v. Hickman Family Corp., 2011 WL 2436537 (June 13, 2011), in the Sept. Business Valuation Update; the court’s opinion will be posted soon at BVLaw.

Perfecting your BV reports is a daily practice

In preparing their valuation reports, business appraisers may want to consider adopting “Kaizen,” the post-War Japanese practice of continuous daily improvement, said attorney Paul Hood during BVR’s recent webinar, “The Business Appraisal Report: Perfecting the Art." A second path to improvement may be to “adopt a reviewer’s mentality,” added co-presenter Timothy Lee (Mercer Capital). “We may be satisfied, but with the stakeholder there is little that is convincing,” Lee said.  “Lay the groundwork: own the basic facts and circumstances of the subject business,” Hood advised. And watch your writing style – “just say it so the reader can just read it,” he said.

Finally, while “offshoring” BV work is still a real threat to the profession, both presenters stressed using less “robotics”—fewer boilerplate forms and checklists. “We can easily gather data, but the future [of the profession] is how we differentiate the work product from someone else’s,” Lee said.

How’s your scenario modeling for start-up valuations?

There’s been a lively discussion of late on LinkedIn’s Valuation Group about early-stage valuations. For example, Noreen Dornenburg (Avondale Appraisals) suggests analysts look at specific facts and circumstances, such as:

  • Is this a niche product or a mass market one?
  • How good is the management team?
  • Is the plan for the team to manage the whole process, or will they sell the patent? And if the latter, to whom?
  • Is there a workable prototype or is the patent for a product idea or process only?

Craig Cook (Grant Thornton) favors a “scenario-based expected value or real option approach, running the branches” of the analysis until it incorporates “the most dilutive capital-raising rounds.”

Mark your calendars: Most of the participants end by recommending some form of scenario modeling. This can be tricky, so BVR has enlisted expert David Dufenbach (Grant Thornton) to lead the “Advanced Workshop on Monte-Carlo Simulations” on January 26, 2012.

More lessons from McReath

Craig K. Billings (Capital Valuation Group, Inc.), the primary valuation expert for the wife in McReath v. McReath (see BVWire #107-1), believes the case stands for the proposition that “the business appraiser should carefully analyze a business and trends in its income and expenses, and then reach an independent opinion.” The trial judge was critical of the husband’s expert not so much because of the numeric value he reached, Billings observes, “but because it was not adequately supported and came across as advocative rather than independent”:

The decision by the Wisconsin Supreme Court focuses primarily on the treatment of goodwill associated with the practice, concluding that the determinative factor is whether the goodwill is salable, not whether it is described as "personal" or "enterprise" goodwill. From this perspective, the court valued Dr. McReath’s orthodontic practice [using the same] valuation standards applicable to any business, whether a commercial enterprise or a professional practice.  The primary consideration is whether the intangible or goodwill value is transferable (salable) to the willing buyer.

New source of CEO compensation data

For the past year, BVR has consulted with the Chief Executive Group (CEG), the publishers of CEO Magazine, on their new study of pay for private company owners. The work has paid off: Just this week we’ve released the new CEO and Executive Compensation Report for Private Companies, which presents benchmarking data and best practices on over 1,600 private company CEO and senior executive positions from 789 companies across the US. The rich data will assist analysts in:

  • benchmarking a subject company’s compensation practices against those of companies with comparable profiles and equity compensation plans
  • deciphering the components in the compensation mix and uncover salary, bonus, benefits and perquisites for key senior executives

For ease of use, the report comes in two sections: Part I: CEO Compensation and Part II: Senior Executive Compensation. They can be purchased individually or as a package.

Restaurants continue lead in middle market transactions

Pratt’s Stats has just added 511 transactions in the past two months, taking its deal total to 17,554. The median net sales of the newly collected transactions equaled $438K with a median selling price of $200K. Here’s how the deals break down by major industry:





Tech companies


Insurance agents


Lawn and garden services


Drinking places


Each transaction includes up to 89 data points. Access all the data via a one year subscription or by purchasing a single search.  

Gallagher tops list of free downloads  

BVR now offers over 100 Free Resources—including articles, professional standards, landmark case law, and more—for the benefit of the larger valuation community. Just last month, for example, a record-setting 436 users downloaded the new Gallagher v. Commissioner decision, and nearly 80 looked at Examples of Factors Implementing Personal Goodwill in Cases. The 2011 update to How to Use Transactional Databases for M&A was also popular in July, followed by our free downloads on the Size Premium, Tax Court Rule 143, and Tips for Successful On-site Interviews.

Debate on the size premium continues; so does analysis of vital healthcare sector

On August 25th Jim Harrington (Duff & Phelps) and Ted Israel (Ekhoff Accounting) will join BVR for “The Overlap of Company-Specific Risk and the Size Premium.”  The expert duo will examine new research suggesting that double-counting of some company-specific risk measures may be occurring, particularly if these risks are already embedded in a subject company’s earnings stream.  (Attendees to BVR’s recent webinar “The Diminishing Size Effect and Link to Liquidity Risk” will note that this research may differ from findings by presenters Michael Crain and William Kennedy).  As the debate continues, tune into BVR for continued analysis and update.

BVR’s Online Symposium on Healthcare Valuation continues on August 23rd with “Fair Market Value: Ensuring Compliance within the Life Sciences.”  Featuring a trio of experts from HealthCare Appraisers, Ann Brandt, Jason Ruchaber, and Timothy Smith, this latest installment of our Symposium focuses on recent trends in the government’s oversight of the life sciences industry—including closer scrutiny of company practices and tighter enforcement of regulations—and what it means for your FMV estimate of these complicated firms.


To ensure this email is delivered to your inbox, please add to your e-mail address book. We respect your online time and privacy and pledge not to abuse this medium. To unsubscribe to BVWire™ reply to this e-mail with 'REMOVE BVWire' in the subject line or click here. This email was sent to %%emailaddress%%

Copyright © 2011 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by
Business Valuation Resources, LLC

Contact Editor
| Advertise in the BVWire | Reprint Requests


Search All BVR

Share on LinkedIn Upcoming Training Opportunities



Business Valuation Resources, LLC | 1000 SW Broadway, Suite 1200 | Portland, OR 97205-3035 | (503) 291-7963 |