BVWire Issue #167-1 | August 3, 2016


Sound valuation report keeps expert alive in Daubert fight

A recent fraud case illustrates how a thorough expert report can help an embattled valuator stay the course even in the tumult of litigation. The key is to document everything.

Need for reverse engineering: Four defendants sold their tanning salon franchise to a third-party buyer for $40 million. The day the transaction closed, they each received over $5.8 million of the sales proceeds. The company soon stopped operations, and the buyer eventually went into bankruptcy. The plaintiff was a creditor that had tried to collect a $411,000 judgment against the company.

To support its allegations of intentional and constructive fraudulent transfer of assets, the plaintiff hired a valuation expert. In her reports, the expert explained that she had not been provided with many of the documents “normally maintained by companies of this size for tax and management purposes.” Also, the documents that were made available to her came in PDF format and excluded critical underlying information. To speak to the company’s solvency, she had to recreate the company’s financial situation.

The defendants attacked the expert opinion in a Daubert motion, contending the expert used hindsight to value the subject company. The court found the expert’s methodology was reliable. She sufficiently documented how the many assumptions, estimates, and adjustments that went into her recreation of missing income statements and balance sheets aligned with AICPA valuation standards and authoritative treatises.

Takeaway: Know the valuation standards, follow them, and prepare a comprehensive expert report that explains how your approach accords with the standards of the profession. MSKP Oak Grove, LLC v. Venuto, 2016 U.S. Dist. LEXIS 84950 (June 29, 2016).

More details of the case will appear in the September issue of Business Valuation Update. A digest of the case and the court’s opinion will be available at BVLaw.

Extra: Experts active in the litigation arena know the battle starts before the Daubert challenge. For free advice from seasoned attorneys on how to approach an expert deposition, click here to read “Attorneys Reveal Seven Surprising Views on Expert Depositions.” 

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PwC examines FASB’s new impairment model for financial instruments

Not only financial services firms will be affected by the FASB’s standard that introduces a new impairment model for financial instruments. The broad scope of the new standard will affect other firms as well, according to an in-depth look at the model by PwC.

Expected loss model: Under Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), financial statements will have to show credit losses on loans and other financial instruments in a more timely fashion. It replaces the current incurred loss model with an expected loss model, which will apply to: (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost; (2) loan commitments and certain other off-balance-sheet credit exposures; (3) debt securities and other financial assets measured at fair value through other comprehensive income; and (4) beneficial interests in securitized financial assets.

The ASU is effective for U.S. SEC filers for fiscal years beginning after Dec. 15, 2019, and later for other entities.

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Impact of VW settlements on dealer valuations is uncertain

How the Volkswagen settlements over its diesel emissions cheating scandal will affect VW dealership values depends on how the settlements affect dealership profits, according to an article in Automotive News.

Bumpy road: Most agree that buy-sell activity will increase because there’s a clearer picture of what will happen. But experts don’t agree on the valuation issue. Some say the settlements do not mean franchise values will increase. Others say the settlements could “cleanse” the brand, spurring new- and used-vehicle sales as well as service business, which could boost valuations. Also, some dealers will want to recoup their losses by not selling unless they get a higher premium than what’s currently offered. Experts also predict that VW will heavily push incentives to get customers on the lot and inflate revenues.

Some dealers are optimistic about the settlements and are watching dealership prices to scope out new acquisitions. But one dealer is not so positive—he saw his dealerships drop in value by 70% in the wake of $1 million in losses, and he sees the future as unclear.

Extra: BVR offers a guide, What It’s Worth: Automobile Dealership Value (an update to Key Trends Driving Auto Dealership Value), which includes contributions by auto industry accountants, brokers, M&A executives, former dealership employees and owners, and other consultants.

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Damages experts: Be careful with surveys

The use of surveys can be very important in helping to determine damages, but this is not part of the damages expert’s know-how. So what role should the expert play in the use of surveys? The damages expert should be involved only to the point where the survey is ready to be piloted or pretested, according to Dr. Leon Kaplan (Princeton Research and Consulting Center), who spoke during a recent webinar. Co-presenter Dr. Larry Chiagouris (Brand Marketing Services and Pace University) added that the survey expert will consult with both the damages expert and technical subject expert to make sure that the survey is designed in a way that produces valid results.

Watch out: Damages experts are not supposed to be involved in the execution of the survey, they say. The attorney may hypothetically discuss some things with the expert, but the expert needs to be able to state that he or she was not at all involved in the actual implementation of the survey.

Kaplan and Chiagouris are co-authors of a chapter on the use of survey research and damages estimation in the recently published fourth edition of the Comprehensive Guide to Economic Damages.

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BV blog roundup

A number of stimulating discussions relevant to business valuation are going on now in the social media world:

Musings on Markets. Professor Aswath Damodaran (New York University Stern School of Business) gives an update on country risk (political, default, and equity risk). Separately, he looks at Tesla and its stock price that has held up despite lots of bad news stories.

Chris Mercer. A continuing series, “Market Value of Total Capital and Enterprise Value,” discusses the differences between these two concepts.

BVR LinkedIn Group. PCE posted links to 10 of its 2Q2016 industry reports that analyze the M&A marketplace, industry trends, and subsector performance. The industries include banking, finance and insurance, healthcare, IT and telecom, power and energy, and others.

Pepperdine Private Capital Markets LinkedIn Group. A new article sparks a discussion of using real private company cost of capital for valuing a private company rather than data from public companies.

BVAN LinkedIn Group. A link has been posted to a white paper that challenges popular conventions used in the valuation of earnouts.

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Appeal filed in ‘Stairway to Heaven’ IP case

Lawyers have appealed a jury decision that cleared Led Zeppelin of accusations it lifted part of another song for the intro to its classic rock anthem "Stairway to Heaven," according to a report in the Associated Press. Because the jury had found there was no infringement, it did not get to the issue of valuation—how to carve out the value of a small piece of an epic song. A prior issue of BVWire gives some insights from Michael Pellegrino (Pellegrino & Associates), a valuation expert (and musician) who specializes in intellectual property, into how this would have been determined. Depending on what happens with the appeal, this issue may be resurrected.

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Duff & Phelps updates multiples in healthcare services

The S&P Healthcare Services Index increased 1.3% over the past month, outperforming the S&P 500, which remained flat over the same period, according to the June 2016 Healthcare Sector Update from Duff & Phelps. The best performing sectors were Managed Care – Government (up 11.5%), Healthcare REITs (up 8.6%), and Other Services (up 6.5%) as certain of the companies in these sectors reported strong financial performance during the month.

The current median LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 2.34x and 14.2x, respectively. The sectors with the highest valuation multiples include: HCIT (4.67x LTM Revenue, 27.0x LTM EBITDA), Pharmacy Management (1.14x LTM Revenue, 26.7x LTM EBITDA), Other Services (2.08x LTM Revenue, 22.8x LTM EBITDA), and Healthcare REITs (14.01x LTM Revenue, 22.0x LTM EBITDA).

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Global BV news:
Comment letters are in for first round of IVS 2017

The standards board of the International Valuation Standards Council has received comment letters for its first group of exposure drafts of the chapters that will comprise IVS 2017. Letters came in from organizations and firms such as the AICPA, The Appraisal Foundation, Duff & Phelps, RICS, the Russian Society of Appraisers, and others. The comments relate to the first group of exposure drafts: IVS 104, Bases of Value; IVS 105, Valuation Approaches; IVS 210, Intangible Assets; and Introduction and Framework for IVS 2017.

Next deadline: Comments are due August 31 for the second group of exposure drafts:

  • IVS 101, Scope of Work; IVS 102, Investigation and Compliance; and IVS, 103 Reporting;
  • IVS 200, Businesses and Business Interests;
  • IVS 300, Plant and Equipment;
  • IVS 400, Real Property Interests;
  • IVS 410, Development Property; and
  • IVS 500, Financial Instruments.

The IVSC wants comments from those who agree with the proposed standards as well as from those who have suggestions for improvement. Those who disagree should be as detailed as possible and suggest alternatives supported by specific reasoning.

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Pratt and Lifflander explain complex valuations to non-appraisers

Attorneys, accountants, bankers, loan officers, and real estate brokers now have a resource that explains how to value businesses with considerable real assets. Shannon Pratt and John Lifflander are the authors of a new book, Analyzing Complex Appraisals for Business Professionals, which is essentially a crash course on valuations for residential, commercial, business, and industrial entities. The book is in two sections: Section I: Real Estate and Machinery and Equipment Appraisals; and Section II: Business Valuations, which wraps up with an example of an appraisal of an operating company with significant real assets.

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BV movers

People: Vin Batra has joined the New York City office of Duff & Phelps as a managing director; he was previously with Alvarez & Marsal Securities and Deloitte Corporate Finance ... Marc Chiang also has joined Duff & Phelps as a managing director in the firm’s San Francisco office; he was previously at Grant Thornton where he advised clients on due diligence and valuation in the technology sector ... Curtis Farrow was promoted to manager in the business valuation practice at the Philadelphia-based GBQ Consulting ... Nancy Foringer, member of the National Financial Services Group and the Forensics & Valuation Services team at BKD CPAs, was named managing director in the firm’s Oklahoma City office ... Carsten Hoffmann has joined Stout Risius Ross (SRR) as a managing director in the Valuation & Financial Opinions group and head of its new Irvine, Calif., office. Prior to SRR, Carsten was a managing director of FMV Opinions, where he managed the national valuation group and oversaw the operations of the Irvine, Calif., office.

Firms: In a bold move to enter the Boston market earlier this week, Citrin Cooperman merged in Kirkland Albrecht & Fredrickson, a firm that has provided tax and advisory services in the Boston area for over 25 years.

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CPE events

Goodwill: Let's Get Personal (August 9), R. James Alerding (Alerding Consulting LLC) and Harold Martin (Keiter, Stephens, Hurst, Gary & Shreaves PC).

Personal Injuries: Valuing the Impact (August 10), with Jonathan Brogan (Norman, Hanson & DeTroy LLC) and Joseph DeCusati (Meyers, Harrison & Pia). This is Part 5 of BVR's Special Series presented by The Comprehensive Guide to Economic Damages.

Early Stage Companies: Mastering Valuation from Start-Up to Success (Advanced Workshop) (August 18), with David Dufendach (Alvarez & Marsal), Jason Andrews (Alvarez & Marsal), John Sawyer (Alvarez & Marsal), and Tommy Tu (Alvarez & Marsal Valuation Services).

Cost of Capital: An Anti-Cookbook Approach to Understanding (August 24), with Michael Crain (The Financial Valuation Group).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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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:

Lifesaver report

New impairment model

VW valuations

Damages surveys

BV blogs

Riff rift encore

Healthcare multiples

Global BV news

Latest Pratt book

BV movers

CPE events

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