BVWire Issue #143-2 | August 13, 2014


Court’s mixed message on ‘sufficient and credible’ financial evidence

What quantity and quality of evidence does a trial court need to make a meaningful valuation of a business? This was the central question in a hard-fought divorce proceeding that featured questionable financial records, problematic expert testimony, and highly polarized value determinations.

‘Scant’ information: The husband owned a business whose exact nature was a mystery. He seemed to be a broker for the semiconductor industry and regularly dissolved companies and reincorporated them under a slightly different name. He was the 100% owner of the current incarnation. At trial, the husband testified that he did business “everywhere” and that the company had no inventory at that moment. Tax returns related to the predecessor company and the current business showed a massive decrease in income from 2010 to 2012. He said that the company’s recent poor performance was the result of “the bad economy” and “the semiconductor business was not doing well at all.” Also, “I was not in a situation to run the business,” he added. He concluded the company was worth zero. The wife hired an expert who reviewed the company’s website, certain corporate documents, tax returns, financial statements, and deposition statements the husband and his CPA gave. The wife’s expert said he received “scant” information from the husband. For example, he only had access to the company’s 2010 financial statement, which, he said, showed more than double the income the tax return listed. He expressed “some doubts about the correctness of the tax returns as filed,” concluding they were “prepared in a very taxable motivated fashion.” He noted that the business website stated the company had “the world’s largest inventory of semiconductor and manufacturing equipment parts.”

The expert relied on the market approach, reviewing 31 comparable companies, and came up with a value estimate of $2 million. He concluded there was goodwill value attributable to the husband and applied a discount of 30%, resulting in a $1.4 million intrinsic value. He acknowledged that, in light of the limited data available to him, his valuation did not meet AICPA standards. But, he said, his calculation was based on “sound foundation and fact and accounting theory.” He maintained his work product for trial was “useful and … a reasonable estimate of the value of the company as it [was].”

Mixed message: The trial court concluded it did not have sufficient evidence for a valuation. It cited the husband’s statement that the company was worth zero dollars and found that “almost all of what [the expert] relied upon to form his opinion was not in fact correct.” On review, the appeals court acknowledged the obstacles. “At best, husband’s testimony regarding [the company] was vague, indefinite, and confusing,” it said. The husband provided “scant and indefinable” information to the wife’s expert. Also, the expert’s valuation came with caveats. Then the appeals court changed its tune. Citing case law on what amounts to “sufficient and credible evidence,” it said the trial court “had a relative wealth of information” with which to value the business. Both the husband and the wife’s expert stated figures. The wife’s expert used an accepted method, and, even though he did not produce an AICPA standard value, he called his determination “a reasonable estimate” of the company’s value as it was. Therefore, the appeals court ordered the trial court to perform a valuation and make an equitable distribution.

An extended discussion of Hugh v. Hugh, 2014 Va. App. LEXIS 222 (June 3, 2014), appears in the September issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Excel problems in calculating means

At the recent NACVA conference in Las Vegas, we heard in several sessions that Excel has some shortfalls and traps when calculating means, especially the harmonic and geometric mean.

Watch out: The GEOMEAN function does not work when negative growth is involved, so you need to use the RATE formula. Also, the HARMEAN function doesn’t work if you use zero or if a negative factor is introduced. In addition, when Excel calculates a standard deviation and coefficient of variation, it uses the arithmetic mean. That means that, if you are using the geometric or harmonic mean, you will have to make those calculations manually.

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New healthcare provider revenue model gets shot in the arm

Valuation analysts will face greater challenges in looking at cash flow and revenue projections in the healthcare industry because of a new payment model that’s gaining steam.

Here’s the story: The number of healthcare providers participating in the new “bundled payments” model for Medicare payments has just tripled, according to an article in Modern Healthcare (subscription required). The Centers for Medicare and Medicaid Services (CMS) is administering the bundled payments model, which is one of the biggest changes under health reform.

Traditionally, Medicare made separate payments to the various healthcare providers involved in a patient’s care, such as the hospital, physician, rehab facility, and the like. Under bundled payments, one single payment will be made for all providers who render services during a patient’s entire “episode of care” for certain medical conditions. This is designed to increase the quality of care and reduce healthcare costs.

Providers who adopted the model starting in 2013 have seen positive results, encouraging others to sign up. CMS reports that 4,122 providers will be added to the exploratory phase (Phase 1) of the program, joining the 2,412 providers already participating.

It will be interesting to see how providers figure out how to divvy up these payments and also how they calculate costs for an episode of care.

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Currency risk in multinational companies

Currency risk is a significant component of total risk of multinational companies exposed to nondomestic currencies.

Large portion: Evidence exists that currency risk may be 50% of total incremental country risk or more, notes James T. Budyak (Valuation Research Corp.). For example, a recent article, “International Equities: Currencies Matter,” by Axel G. Merk (Merk Investments), points out that, when investing in international equities, the return stream generated can be broken into equity returns and currency returns. “Between 30% and 50% of monthly equity index returns, when measured in U.S. dollars, were attributable to currency fluctuation.”

The impact of currency on risk depends on the nature of the multinational company’s business, Budyak points out. If the company is completely exposed to individual local country currencies that are from emerging markets, it may have a high degree of risk. But if it is gathering hard currency from various offshore affiliates, the perception of risk is mitigated to some extent.

Budyak discusses currency risk along with other components of valuing a multinational company in an article in an upcoming issue of Business Valuation Update.

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Private companies ramp up capital spending

Optimism in the U.S. economy is triggering increased capital spending at private companies, according to a new report from PricewaterhouseCoopers. Over half (59%) of private-company leaders are optimistic about U.S. economic prospects for the next 12 months, according to PwC US's latest Trendsetter Barometer. More than one-third of them plan major new capital investments, the highest percentage in over two years.

PwC's Trendsetter Barometer incorporates the views of 205 C-suite executives (CEOs and CFOs): 118 from companies in the product sector and 87 in the service sector, averaging $355 million in enterprise revenue/sales and including large, $500 million-plus private companies.

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BV movers . . .

People: Holly Breuer, director at Purk & Associates PC, St. Louis, Miss., was named one of the “2014 Top Business Accountants” by Small Business Monthly in the August issue … Ben Ellingson has been promoted to partner at Eide Bailly LLP’s Mankato, Minn., office … Robert Kind has been appointed to the shareholder group at the Albany, N.Y., firm Teal, Becker & Chiaramonte CPAs PC … Mack Lawhon, CPA and chairman of Weaver LLP, received the Texas Society of CPAs’ 2013-14 Meritorious Service Award … Andy Lowe will head LBMC’s Valuation, Litigation & Business Transition Services Group in the Knoxville, Tenn., office of Lattimore Black Morgan & Cain PC (LBMC) … Neil Prasad has been named partner-in-charge of New York City-based Marcum LLP’s Los Angeles office … Ben Redman has joined Dixon Hughes Goodman LLP’s New York City office as a new partner and will lead the transaction advisory practice … Howard Rosen, president of Conner Ash PC, St Louis, Miss., has been elected to serve as world chairman of the global association BKR International … Karen Schuler has been appointed to managing director at the Washington, D.C., office of BDO Consulting.

Firms: CBIZ Inc. was recognized as “Accounting Firm of the Year” by the Association for Corporate Growth New York ChapterKennedy and Coe LLC announced its merger with Chico, Calif.-based firm Matson and Isom, to be finalized by January 2015.

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CPE events

Summer is still hot with BV-related webinars.

Valuing Sole Proprietorships (August 14), featuring Ron Seigneur and Brenda Clarke (both Seigneur Gustafson). Personal and professional goodwill, key person discounts, and sloppy or nonexistent financial records are just some of the obstacles these ubiquitous businesses pose. Find out how to overcome them all.

Valuing Imaging Centers (August 19), featuring Douglas Smith (Integrated Medical Partners). The 2014 Online Symposium on Healthcare Valuation features the industry’s foremost expert on imaging centers in a thorough examination of the state of imaging center operations, transactions, values, and valuations.

BVLaw Case Update: A One Hour Briefing (August 21), featuring Sylvia Golden (BVR) and R. James Alerding (Alerding Consulting). Join expert appraiser Alerding and BVR legal editor Golden for a look at the most pressing valuation cases of the past six months and what they mean for the practice and presentation of valuation.

Price and Value: Discerning the Difference, an Advanced Workshop (September 10), featuring Aswath Damodaran (NYU Stern School of Business). Space is running out for this exclusive opportunity to join Dr. Damodaran live in New York City for this must-attend event. Learn more about benefits for live attendees or how to attend via live webcast on our webpage.

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963
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In this issue:

'Enough' evidence

Excel traps

Healthcare revenue

Currency risk

Capital spending

BV movers

CPE events







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