BVWire Issue #191-2 | August 8, 2018


Virginia court nixes challenge to appraisal done according to valuation agreement

In the category of buyout disputes notwithstanding a valuation agreement, a recent Virginia case stands out for showing the evidentiary hurdle a challenger must overcome to defeat a third-party appraisal done in accordance with a controlling agreement. The court found the plaintiff did not satisfy the applicable “palpable error” standard.

Exercising business judgment: The two founders of a gourmet salumeria made an agreement that required the company to buy the defendant minority shareholder’s stake in the company. The contract called for an independent appraiser to calculate the enterprise value of the company. Ultimately, the company rejected the value determination and instead sued, urging the court to invalidate the appraisal because it allegedly contained numerous “palpable” errors. The appraiser misinterpreted the agreement, was biased in favor of the defendant, and made errors of commission and omission, the plaintiff contended. At trial, both parties offered testimony from highly qualified valuators as to the alleged palpable errors, but neither expert prepared an independent valuation. The appraiser also testified.

Where a valuation contract exists, it is not the court’s role to substitute its judgment for that of the appraiser or to decide which testifying expert was correct, the court explained. Instead the court must determine whether the appraiser understood and executed the provisions of the valuation contract. And, under the palpable error standard, a court may only set aside a valuation for “errors apparent on its face, misconduct on the part of the [valuators], some palpable mistake or fraud in one of the parties.”

The court found no evidence that bias infected the valuation and concluded the appraiser’s interpretation of the agreement was justified as a “fair and reasonable exercise of business judgment.” Moreover, on the stand, the appraiser addressed the alleged errors of commission and omission and was able to show in each instance that he used his professional judgment “fairly and reasonably.” And, since the company’s expert did not do his own appraisal, the company was unable to show that any of those claimed errors were material to the value calculation, the court said. It declined to vacate the appraisal.

Takeaways: For the party defending the appraisal, having the appraiser available at trial to explain why certain choices represent a reasonable exercise of judgment is critical. For the party attacking the appraisal, asking its trial expert to do an independent valuation to show the alleged errors seriously affected the valuation is money well spent.

Thank you to Brian Burns (Dixon Hughes Goodman LLP), who was the expert for the prevailing defendant and brought this case to our attention.

A digest of Olli Salumeria Americana, LLC v. Vosmik, 2018 Va. Cir. LEXIS 72 (Jan. 5, 2018), and the court’s opinion will be available soon at BVLaw.

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USPAP cited in IRS final regs on donations

The Internal Revenue Service (IRS) has issued final regs on valuing charitable donations that specifically cite the Uniform Standards of Professional Appraisal Practice (USPAP) of The Appraisal Foundation. As stated in Section III (B) of the regs, a qualified appraiser is to perform appraisals according to the “substance and principles of the Uniform Standards of Professional Appraisal Practice [USPAP] as developed by the Appraisal Standards Board of the Appraisal Foundation.”

The regs stop short of requiring strict compliance with USPAP, which would “eliminate use of all other appraisal standards, including some that are generally accepted in the appraisal industry,” the regs say. They go on to say that “it is beneficial to provide some flexibility by requiring conformity with appraisal standards that are consistent with the substance and principles of USPAP rather than requiring that all appraisals be prepared strictly in accordance with USPAP.”

Also, the final regs also do not cite any specific valuation credential. “The Treasury Department and the IRS do not require or prefer the designation of any particular appraiser organization, and, therefore, the final regulations do not contain examples of any designations.”

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Flawed thinking re: capex and the DCF

An article in the current (August 2018) issue of Business Valuation Update examines what it calls the Delaware court’s erroneous default position in fair value proceedings that capital expenditures should equal depreciation in determining terminal value in a DCF analysis. That is, the assumption is that the company has zero net capital expenditures. “The assumption makes sense only if one assumes the non-real-world scenario of both no growth and no inflation,” the authors say, and they demonstrate this in detail. The authors of the article are Gilbert E. Matthews (Sutter Securities Inc.) and Arthur H. Rosenbloom (Consilium ADR LLC).

As the authors point out, if the firm is expected to grow in perpetuity, how can it do so with no net capital investment? But many valuation experts do indeed assume capex equal to depreciation in their terminal value calculations, according to surveys. What to consider instead? You can look at industry averages for capex/depreciation ratios and use that as the basis for an assumption for your subject firm. Another approach is to estimate the net capex based on the subject company’s return on capital.

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Small biz not keen on growth prospects

Although profitability and borrowing success rates are up for small businesses (less than $5 million in revenue), this has not led to increased expectations for business performance or growth, according to the Q2 2018 Private Capital Access Index (PCA Index) from Pepperdine Graziadio Business School and Dun & Bradstreet. Only 27% of businesses expect to perform substantially better than last year, a 23% drop from 35% in Q1 2018, and a 25% year over year drop from 36% in Q2 2017. Similarly, only 42% of businesses are confident they will grow this year, down from 47% in Q1 2018 and down 12.5% from 48% in Q2 2017.

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Full agenda now available for AICPA’s FVS Conference

The full agenda for the AICPA Forensic & Valuation Services Conference taking place November 5-7 in Atlanta is now available. Click here to head over to the interactive agenda and start planning your learning experience today. One addition to sessions this year is the new Emerging Technologies Session Track, where forensic and valuation services technology trailblazers will cover topics such as cryptocurrency, cybersecurity, big data, and new technologies in forensic accounting in seven separate sessions. Don’t forget to register before September 21 to receive $75 off. To register, click here.

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New edition of essential guide to damages

The latest thinking on economic damages is in the new 5th edition of The Comprehensive Guide to Economic Damages, edited by Nancy J. Fannon (Marcum) and Jonathan Dunitz, Esq. (Verrill Dana). The two-volume guide blends the financial expert’s knowledge of accepted methods and procedures with the attorney’s knowledge of legal issues and insights to provide a unique and in-depth analysis and interpretation of the continually expanding body of case law.

Greatly expanded: This new edition is seriously expanded from the last one, with seven new chapters in Volume One, such as theft of trade secrets, apportionment, and damages in cases involving rights of publicity and for franchises. In Volume Two on case law, 100 additional court cases have been added and analyzed. In addition, previous chapters have been revised and updated. In total, this new edition has a total of 43 chapters and over 300 court case digests.

For more information on the guide, click here.

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Willamette’s summer issue of Insights is available

The Summer 2018 issue of Insights from Willamette Management Associates is titled “Thought Leadership in Intangible Asset Valuation, Damages, and Transfer Price Analyses” and is edited by Scott R. Miller. Here’s a sampling of the articles: “A Primer on the Fundamental Elements of Economic Damages Analysis” (Fady F. Bebawy), “Application of the Cost Approach to Value Internally Developed Computer Software” (Connor J. Thurman), “Estimating Trademark Royalty Rates for Intercompany Transfer Price Analyses” (John C. Ramirez and Casey D. Karlsen), and “Applications of the Asset-Based Business Valuation Approach” (Robert F. Reilly).

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Global BV News

KPMG’s McPhee on emerging themes in valuation

Disruptive technology, FinTech, and data analytics are some of the emerging issues challenging clients, according to Doug McPhee, a partner and global head of valuation services with KPMG. During an interview with the IVSC, McPhee pointed to technology such as artificial intelligence and bots replacing humans, the rise of autonomous vehicles, rapidly changing habits as a result of the sharing economy, and impact of millennials. “For traditional manufacturers and bricks and mortar operators, this poses a real threat and assessing how this may impact on value in the near-term cannot be underestimated,” he said. FinTech, such as blockchain and distributed ledger technology, “has the potential to really upend many long established and previously thought to be hugely insulated businesses,” he observes. A focus on data analytics and digitization helps in terms of depth of analysis and speed of response. On a macro level, major global corporates are faced with doing difficult deals in more difficult parts of the world, and typically in some kind of collaborative structure, such as a joint venture. “Information and transparency in such markets can be challenging as well as taking a view on growth rates in hugely green and inflationary markets,” he said.

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BV movers . . .

People: Tyler Wright has joined Moore Colson (Marietta, Ga.) as consulting senior manager; he was formerly with IAG Forensics & Valuation and KPMG Mary Beth Koester has been promoted to lead the business valuations team at Rea & Associates (Dublin, Ohio) … EY has appointed Herb Engert as the new MP of its New York City office; he recently led the firm’s Global Private Equity practice … Smith & Howard of Atlanta named Sean Taylor as MP, effective Jan. 1, 2019; he started there over 30 years ago as an intern and will assume the MP role from John Lucht, who will transition to a consultative role in 2019.

Firms: Milwaukee-based Wipfli announced that South Portland, Maine-based Macpage has joined the firm; this adds nearly 100 professionals to Wipfli’s team of more than 2,000 in 49 U.S. locations … Marietta, Ga.-based Moore Colson has moved its headquarters to a new, larger office space at the Galleria Office Park in Atlanta; the new space will house its 120 employees, and it has an option to add space enough for 50 more people … Katz Viola Lebenhart & Mauro LLP and Lipner, Sofferman & Co. LLP, both located on Long Island, N.Y., have merged to form KVLSM LLP; the combined firm has seven partners (four from the former and three from the latter) … Chicago-based BDO USA has acquired SWC Technology Partners to bolster its IT advisory capabilities.

Please send your professional and firm news to us at

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CPE events

  • DealStats: Market Data. Evolved. (A Free Webinar) (August 9), with Adam Manson, Mitchell Cameron, and Oday Merhi (all with Business Valuation Resources).

    A demo of the new platform that merges Pratt’s Stats and Public Stats. Please note that this webinar covers the same content as the July 11th webinar.

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In this issue:

Buyout appraisal


Capex and DCF

Small biz outlook

AICPA FVS confab

New damages book


Global news

BV movers . . .

CPE events

LinkedIn discussions



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