BVWire Issue #143-4 | August 27, 2014


Estate wins big over valuation of personal goodwill

What do these amounts have in common: $0, $4.3 million, $9.3 million, $26 million, and $92.2 million? Amazingly, they are all valuation estimates of the same company at the same point in time. And the cause of these wild swings in value? The estimate of personal goodwill, as a recent estate case in Tax Court illustrates.

Son also rises: Franklin Adell owned 100% of STN, a company that provided cable uplink services to a single customer: The Word, a 24-hour religious broadcast network. The Word was a 501(c)(3) organization formed by Adell and his son, Kevin, who was made president of STN. The driving force of the entire operation—the network and the uplink business—was Kevin’s personal relationships with churches and religious leaders. He had no employment contract with STN, and there was no noncompete agreement. The deal was that The Word would pay STN a “programming fee” equal to the lesser of: (a) actual cost; or (b) 95% of net programming revenue received by The Word.

When the elder Adell passed away, his estate reported on Form 706 that the 100% interest in STN was worth $9.3 million based on a valuation from an experienced financial analyst who used the discounted cash flow method. Almost four years after Adell’s death, the estate filed an amended return that claimed the STN stock was worth $0. The IRS issued a notice of deficiency and determined that the value of STN was $92.2 million. Next stop: Tax Court.

Do-overs: At trial, the estate’s expert submitted a revised valuation for STN of $4.3 million, based on liquidation value. The expert said his original valuation failed to account for the deal that put a limit on the programming fee, which prevents STN from being profitable. One problem with this approach, however, was that the deal seems never to have been enforced, as STN had healthy profits.

The IRS also revised its valuation, coming up with $26 million also using the DCF method. The IRS expert based his calculation on the assumption that a hypothetical buyer could retain the son by paying him $1.3 million a year.

One-man show: The court noted the estate’s “substantially inconsistent positions” but adopted the estate’s original $9.3 million valuation. It discredited the estate’s revised valuation in light of the company’s historical profitability and expectations that it would make a profit in the future. At the same time, the IRS expert’s goodwill approach also was inappropriate. He greatly undervalued the pivotal role the son played in operating both companies and his personal relationship with customers. Plus, if he quit, he could compete directly with the company, the court pointed out. (Postscript: Later on, the son actually did quit and took all of the business with him to a new company he formed.)
Find an expanded discussion of Estate of Adell v. Commissioner, 2014 Tax Ct. Memo LEXIS 155 (Aug. 4, 2014), in the October issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Take your site visits to the next level

Paying a visit to the business you are valuing is SOP during an engagement. But why not also visit competing firms? After all, you’re trying to assess the performance of your subject versus others in the market, so dropping in on rivals can yield some valuable information.

Numbers come alive: Speaking during a recent BVR webinar on valuing hotels, Mark Dayman (Franintel Inc.) says visiting competitors is a must in the hotel industry. Of course, this can be a good idea no matter what the industry. “Suddenly the quantitative information you’ve developed starts to take life,” he says. “You start to understand why your client performs better than the others within that market. You will also start to learn what is missing in the market that may be an opportunity for your subject entity. Those interviews are really important.”

Also, sometimes the firms that are initially considered competitors aren’t really competitors at all because of the nature of their operations. One way to weed these businesses out of the list is to visit them.

Open arms? Will competitors welcome you when you show up asking questions? “I must say it is relatively unusual that I am unable to speak with an owner or general manager,” says Dayman about visiting competing hotels. “You have to go in with a good attitude. But most owners and general managers are open to a discussion about their product and how they see competition in the marketplace, who they think the competition is, and why.” If management will not speak with him, he’ll seek out some knowledgeable staffer who’s willing to talk. “I will talk to the front desk manager just to get a handle on who their guests are, where they’re from, how long they are staying, who is competing with them, and so on.”

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New tool helps value fractional interests

Fractional interest discounts have been a problem for a long time, if Tax Court opinions, IRS workload, and appraiser sanctions are any indication. This is a multidisciplinary valuation area that requires collaboration between appraisers and with clients that often fails to happen. Facts are lost, and the beat goes on. Dennis A. Webb (Primus Valuations) is developing a major tool to help bring the facts and valuers together: The Webb Discount Chart.

This graphic tool displays typical upper and lower discount boundaries for different holding structures (common tenancy, general partnerships, and limited partnerships/LLCs) and shows discounts as a function of risk and holding period. It is a guide to interdisciplinary discount results tested for two decades with extremely good success.

Look for the introductory article in an upcoming issue of Business Valuation Update.

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Fair value drives latest BV theories

“If you think about the development in valuation theory over the last 10 or so years, it has been spearheaded by the area of fair value measurements,” observes Mark Zyla (Acuitas Inc.), speaking during a BVR webinar on fair value. “For example, we are seeing more information on what was formerly known as control premiums, which are now being referred to as market participant acquisition premiums. There is some additional thought by valuation leaders on the appropriate use of those types of premiums in measuring fair value in financial reporting.”

“We are seeing valuation techniques such as the multi-period excess earnings method that is being widely used to measure the fair value of specific intangible assets,” Zyla continues. “Also, we are seeing more thought about the differences in value between the income approach using a discounted cash flow and the market approach and how to reconcile that situation. This whole area of fair value is really driving the latest in valuation theory.”

Zyla will be conducting the AICPA Fair Value Measurements Workshop, a two-day event, on Sept. 29-30 in New York City. It will include:

  • Interactive discussions among participants, including financial statement preparers, auditors, valuation specialists, and, often, regulators;
  • The latest in best practices in valuation of intangible assets for financial reporting purposes;
  • An update on the SEC and PCAOB and their views on fair value measurements; and
  • The impact of the Private Company Council proposals on fair value;

For more information on the workshop, click here.

Extra: The PCAOB has a continuing concern over auditing requirements related to fair value measurements. A new staff paper asks for public comments that may lead to a revised auditing standard.

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New white paper focuses on life insurance valuation

There are three elements of fair market value for life insurance or life insurance-linked instruments (such as split-dollar collateral assignment receivables or split-dollar promissory notes), according to a new white paper from Pluris Valuation Advisers LLC. The three elements are: (1) the illustrations from the insurance company projecting expenses, premiums, and cash values; (2) the mortality rates applicable to the insured life as of the valuation date; and (3) the discount rates applicable to the cash flows from the policy as of any given year.

More details are in the white paper, titled Life Insurance Valuation—Mortality and Discount Rates.

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IPO surge adds to valuation resource coffers

Because of the Jumpstart Our Business Startups Act, there have been 25% more U.S. initial public offerings annually, according to new research by economists at Penn State University and the State University of New York at Buffalo. The two-year-old law is designed to make it easier for companies with less than $1 billion in revenue to do an IPO.

Indeed, more small firms are showing up in the ranks of IPOs. “What's interesting about the recent IPOs is the number of smaller companies that have been able to go public, several with little or no revenues,” observes Brian Pearson (Valuation Advisors LLC). “Investors are clearly beginning again to get a taste for higher levels of risk and possible reward.”

Pearson’s firm offers the Valuation Advisors Lack of Marketability Discount Study, whichcompares the IPO stock price to pre-IPO common stock, common stock option, and convertible preferred stock prices. The study, used to help quantify a discount for lack of marketability (DLOM), has been given a boost from the increased IPO activity. Pearson reports that July was another record-setting month for IPOs, with almost 200 transactions added to the study and its online searchable database that now contains over 11,300 transactions.

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BV training with a global spin

Custom-tailored to international valuation topics, IIBV 101, Introduction to Business Valuations, will be offered in Amsterdam on Nov. 10-13 by the Benelux Investment Institute. It is the first of a set of four business valuation courses from the International Institute of Business Valuers (IIBV). The courses contribute to the business valuation accreditation processes of the American Society of Appraisers (ASA) and the Canadian Institute of Chartered Business Valuers (CICBV) The purpose of the IIBV 101 course is to introduce the novice valuation practitioner to an overview of topics common to a comprehensive business valuation. This course addresses professional, practice, and theory issues.

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Take a step beyond ‘old methodologies’ of valuation

For the business valuation profession to progress, it must be open to new ideas. But, when we step beyond “old methodologies” and explore new ideas, we face different "choices” available as they relate to the valuation process. That’s why you should attend Business Valuation: Exploring Old Methodologies and Considering New Ideas on Sept. 19-20 in Atlanta. That’s the theme of the 15th Annual Conference of the Southeast Chapter of Business Appraisers and is co-sponsored by the American Business Appraisers. The focus will be on some of the major issues faced by appraisers outside the old methodologies and the application of “new” theory or the choice of techniques used to develop appropriate deliverables.

For more information on the conference and how to register, click here.

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BV Movers

People: Ilieva Ageenko joins Grant Thornton LLP as a managing director, leading its Financial Services Advisory Model Risk Management out of the firm’s Charlotte, N.C., office … Nick Carbone is the new director of assurance and business advisory services at the Orlando, Fla., accounting firm of Davis, Grim and Co. P.A. … Frank S. Friedman has been named Deloitte LLP’s new CEO, succeeding Joe Echevarria, who is retiring to focus on public service … Gavin Williamson has been appointed as a partner and Cathie Cameron as a director in the forensic accounting team of the BDO London office.

Firms: Grant Thornton has announced the agreement to merge with EPR Kielstra & Co. Chartered Accountants based in Ontario, Canada, and ACPA Nexia based in Hanoi, doubling its firm in Vietnam. In Europe, the firm announced its merger with Zurich-based Bankrevisions-und Treuhand AG, which specializes in audit and advisory for banks and financial services.

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CPE events

As summer winds down, two excellent events emerge.

The Latest With Goodwill Impairments (September 9), featuring Mark Edwards (Grant Thornton). Part 9 of BVR’s Online Symposium on Fair Value Measurement addresses the rapid evolution of goodwill impairment guidance and methodology over the past few years.

Price and Value: Discerning the Difference, an Advanced Workshop (September 10), featuring Aswath Damodaran (NYU Stern School of Business). Space is running out to join Dr. Damodaran in person for the marquee business appraisal lecture of the year. Attend in person for a special luncheon and extended Q&A session or via live webcast for a portion of the event, and learn the costly mistakes of pricing versus valuing. If you attend in person you’ll also receive a complete recording and transcript of the event as well as a copy of the book Damodaran on Valuation, 2nd edition.

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Holiday break

BVWire will take a brief break for the Labor Day holiday next week. We will resume publication on September 10. Have a happy and safe holiday!

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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:

Extreme goodwill

Site visit idea

Fractional interest tool

FV drives BV

Life insurance values

IPO surge

Global BV training

SECBA conference

BV movers

CPE events







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