BVWire Issue #183-2 | December 13, 2017


2nd Circuit supports nixing of lost profits based on unsuitable benchmark

Readers may remember the damages case that featured an upstart sportswear company whose founder claimed it could have been a major contender in the market “but for” the defendant’s breach. Recently, the 2nd Circuit rejected the plaintiffs’ efforts to revive a multimillion-dollar jury award that was based on a shaky yardstick analysis. After so many twists and turns, the latest ruling really may be the end of this litigation.

Yardstick analysis. The plaintiff and his company owned the “Sunday Players” (SP) brand. Hoping to break into the compression sportswear apparel market, they made an agreement with the defendant that required the latter to market SP’s products. The plaintiffs claimed MTV had expressed interest in partnering with SP to the defendant. An MTV promotion could have generated hundreds of millions in product sales. Nothing came of the MTV deal, and, in spring 2005, the defendant ended its relationship with the plaintiffs.

The plaintiffs sued, alleging the defendant breached its promise, and asked for damages in excess of $50 million. The plaintiffs’ expert based his damages calculation on two approaches: a yardstick analysis and a "Market Forecast Analysis.” The trial court excluded the latter in response to the defendant’s Daubert challenge. But the court admitted the yardstick analysis, which used the market leader, Under Armour, as a benchmark and posited that, but for the defendant’s wrongdoing, the plaintiffs’ revenues would have been 50% of Under Armour’s, at a time when Under Armour was at the top of its game.

A jury awarded the plaintiffs $4.35 million in lost profits or, in the alternative, $532,000 in lost business value. Post-trial, a different trial judge struck down the lost profits award, finding it lacked a sound basis. And, even though the judge initially allowed the plaintiffs to prove lost business value damages in a new trial, she changed her mind during pretrial proceedings, concluding the plaintiffs “had no intention of pursuing a realistic damages award.” After reviewing the plaintiffs’ damages evidence, the court excluded virtually all of it. “Accelerating the inevitable,” it decided to close the case by awarding the plaintiffs one dollar in nominal damages.

‘Not a reasonable comparator.’ Both parties appealed the findings with the 2nd Circuit Court of Appeals. The reviewing court affirmed the defendant’s liability as well as the trial court’s ruling that the plaintiffs had failed to present a plausible damages calculation.

“Under Armour was not a reasonable comparator,” the 2nd Circuit said. At the relevant time, Under Armour was an established business with annual sales of between $49.5 million and $195 million and it controlled about 80% of the relevant market. In sharp contrast, the plaintiffs’ company sold less than $200,000 in merchandise to a few small retailers and high school and college athletic teams. The expert’s claim that revenues were reasonably certain to increase from a few hundred thousand dollars to about $80 million in two years was completely unwarranted and could not create a legal basis for awarding future lost profits, the 2nd Circuit said. The trial court’s ruling to award the plaintiffs nominal damages was not error, the appeals court said.

A digest of Washington v. Kellwood Co., 2017 U.S. App. LEXIS 21871 (Nov. 2, 2017) (Kellwood IV), and the court’s opinion will be available soon at BVLaw.

Subscribers also have access to digests and court opinions for Washington v. Kellwood Co., 2015 U.S. Dist. LEXIS 63457 (April 21, 2015), as well as Washington v. Kellwood Co., 2016 U.S. Dist. LEXIS 92309 (July 15, 2016) (Kellwood II), and Washington v. Kellwood Co., 2016 U.S. Dist. LEXIS 136612 (Sept. 30, 2016) (Kellwood III).

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Other states’ courts looking to Delaware valuation methodology

Courts in other states are now looking to Delaware courts for the tools and approaches behind valuation methods, according to an appraisal rights blog. The blog cites an Arizona appeals court case that cited Delaware appraisal cases. This is also going on outside the country—a case in the Cayman Islands considered Delaware law in an appraisal rights matter.

Extra: A digest and the court’s opinion of Kottayil v. Insys Therapeutics, Inc., 2017 Ariz. App. Unpub. LEXIS 1179 (Aug. 29, 2017), are available to BVLaw subscribers.

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‘Preposterous!’ Comments start on article re: tax affecting S corps

Subscribers to Business Valuation Update read an article in the December issue that gives one expert’s opinion that there is a “bright-line rule” that precludes tax affecting S corporations under the fair market value standard. BVU asked for feedback from readers, and it’s starting to come in. “I find it preposterous that a handful of erroneous Tax Court cases equate to a bright-line rule for valuators to follow,” says one commenter. “Regardless of these few rulings, appraisers are still charged with determining fair market value as set forth in IRS RR 59-60, which includes the term ‘willing buyer.’ Why a willing buyer, with alternative investment opportunities at their disposal, would overpay for a stock/asset under the assumption that income taxes don’t exist (when in reality they certainly do) when comparative investments priced in accordance with tax realities eludes me. As it does for any logical, sensible investor. Or valuator.”

Other commenters say this matter is not settled law, as the article implies. They point to the fact that the Tax Court cases cited are memorandum decisions, which are not precedent. Also, cases now pending in Tax Court back this up—one in which the experts for both the taxpayer and the IRS use tax affecting for an S corp.

What do you think? If you’re not a BVU subscriber, you can acquire the article here. It’s “Tax Affecting S Corporations: It’s Not a Matter of Whether. It’s a Matter of When,” by Alan S. Zipp, a CPA, attorney, and accredited in business valuation.

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ASA urges IRS on definition of ‘qualified appraiser’

A letter to the IRS urges the agency to spell out the specific professional credentials that would suffice under the definition of “qualified appraiser” in Section 170 of the tax law. Section 170 requires any charitable contribution of property valued in excess of $5,000 to be substantiated on the tax return with a qualified appraisal. In proposed rules, the IRS did not explicitly state what designations would meet the definition. The letter, from the CFA Institute, the American Society of Appraisers (ASA), and the National Association of Independent Fee Appraisers (NAIFA), asks the IRS to consider recognizing the designations they offer, such as the Accredited Senior Appraiser (ASA), Chartered Financial Analyst (CFA), the Independent Fee Appraiser (IFA), and others. “These designations have proven rigor in the valuation profession, and they are a mark for excellence because of their stringent criteria in education, experience, and professionalism,” the letter says.

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How many certified BVers are there?

Individuals who are members of the four valuation professional organizations hold about 10,050 BV credentials, according to the updated “Business Valuation (BV) and Financial Forensics Credential Comparison Chart” from the National Association of Certified Valuators and Analysts (NACVA). Of course, some practitioners have multiple credentials, so the 10,050 figure does not equate to an amount of discrete individuals. The credential breakdown is as follows:

  • CVA (NACVA), 5,500 (plus 700 designees in progress);
  • ABV (AICPA), 2,800;
  • ASA (American Society of Appraisers), 1,465; and      
  • CBA/MCBA (Institute of Business Appraisers),
    285 (no longer issued; part of NACVA).

There are also about 100 individuals with the ABAR (Accredited in Business Appraisal Review) designation from NACVA and six with the ARM (Appraisal Review and Management) credential from the ASA. The chart also includes statistics on credentials for financial forensics, fraud, and financial analysts. Please contact NACVA if you have comments or suggestions for future updates of the chart.

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Deloitte issues 2017 edition of SEC Comment Letters

The SEC must review financial statements and disclosures of public firms at least once every three years. When it does, it may send a comment letter to the company if it has questions or sees problems. Companies have 10 days to respond, and all of these responses and comment letters are made public. Deloitte has published its 2017 edition of SEC Comment Letters—Including Industry Insights. Topics included cover business combinations, fair value (valuation techniques and inputs), and impairments of goodwill. Examining the issues in the comment letters can help you make sure you have addressed these areas properly in your own engagements.

Tip: Use the SEC’s EDGAR database to search comment letters when deciding to accept a new client for a fair value engagement. Are the company’s responses clear and well thought out? Are they argumentative? What you find may make the difference in whether you take the engagement or turn it down.

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Healthcare expert Robert James Cimasi passes away

On a sad note, Robert James Cimasi, the founder of Health Capital Consultants, has passed away. He was a pioneer in the healthcare valuation profession and devoted a significant amount of his professional life to selflessly giving back to his colleagues. Cimasi was a nationally known lecturer on healthcare industry topics and a renowned author of nine acclaimed books, numerous chapters in legal treatises and anthologies, published articles in peer-reviewed professional journals and industry trade publications, and was often quoted by the healthcare industry press. “He will be acutely missed, but his tremendous impact on this profession, and us, will certainly not be forgotten and will be forever appreciated,” says a statement issued by his company. BVWire extends its deepest condolences to Cimasi’s family and his many colleagues and friends.

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Global BV News

EU issues valuation rules for banks

The European Commission has confirmed its earlier draft Regulatory Technical Standards prepared by the European Banking Authority for the valuation of the assets and liabilities of financial institutions at risk of failure. The regulations specify the valuation principles to be followed before and after a resolution occurs, thus promoting a consistent approach to such valuations across the EU.

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Valuation impact of plain packaging

Following the introduction of plain packaging rules for tobacco products in some countries and calls to extend the legislation to other sectors, Brand Finance has analyzed the potential financial impact of such a policy on food and beverage brands in four categories: alcohol, confectionery, savory snacks, and sugary drinks. Eight major brand-owning companies are predicted to lose a total of $187 billion if plain packaging mandated for other fast-moving consumer goods (FMCG) products, with alcohol and sugary drinks brands most vulnerable. An extrapolation of the results to all major alcohol and sugary drinks brands points toward a potential loss of $293 billion for the beverage industry globally. The analysis is included in the report, “Brand Finance Plain Packaging 2017.”

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BV movers . . .

People: Meg Post has been promoted to director of Grand Rapids, Mich.-based Adamy Valuation Advisors; she joined the firm as an intern in 2007 … Craig Kucik has joined Schenck SC as a manager—business valuation in the firm’s Milwaukee office … Kelly Grier will be the new U.S. chairman and managing partner-elect of Ernst & Young, as well as Americas area managing partner-elect, succeeding Steve Howe, who will retire in 2018; Grier is the third woman to run a Big Four firm … Sherry Ziesenheim has been hired as a senior manager at Boyer & Ritter CPAs and Consultants, a Pennsylvania firm; she’ll be in the firm’s forensic, valuation, and litigation support services groups … Prairie Capital Advisors Inc., a leading corporate advisory and investment banking firm, has hired Dan DeLap as vice president; he has extensive experience in valuation services, and he’ll work out of the firm's Chicago digs … Duff & Phelps has appointed Peter Clokey a senior advisor in the U.K. and Ireland practice; he was formerly with PwC and is one of the U.K.’s most experienced and well-known valuation experts … Daniel Michael has been named chief of the SEC’s Enforcement Division’s Complex Financial Instruments Unit; he’ll lead a specialized unit of attorneys and industry experts located in offices across the country … John W. Haag Sr., managing principal at Yeo & Yeo CPAs & Business Consultants in the Michigan firm's Midland office, was recognized for 15 years of dedicated service.

Firms: Gross, Mendelsohn & Associates PA bolsters its presence in northern Virginia by merging with Gurman & Co., a CPA and consulting firm in Fairfax; this more than doubles the size of the local office and brings the firm’s total headcount to 125 … London-based Moore Stephens International Limited, a global accountancy and consultancy network, has formed a Leadership Growth Academy to provide leadership training for member firms … Massachusetts firms DiCicco, Gulman & Co. LLP and Sabelli & Co. PC have merged; Sabelli adds its two owners and six client service professionals to the mix … CBIZ Inc. acquired the nonattest business of McKay & Carnahan Inc. (Newport Beach, Calif.); at the same time, Mayer Hoffman McCann PC acquired McKay’s attest business; CBIZ and Mayer operate an alternative practice structure—the two firms are affiliated but are separate and independent legal entities … The Glass Jacobson Financial Group has acquired Friedman and Associates (Owings Mills, Md.), expanding Glass Jacobson’s services in the Baltimore-Washington, D.C., area; this ups the firm’s headcount to 70 people—50 in Owings Mills and 20 in Rockville, Md. … New York City-based Mazars USA LLP has bought Elliot Horowitz & Co. LLP, also based in New York City; this adds 40 staffers to the combined firm … Squar Milner LLP, based in Orange County, Calif., will merge with Bay Area firm DZH Phillips LLP effective Jan. 1, 2018; the combined firm will retain the name Squar Milner and will have 460 professionals and staff … RubinBrown LLP has merged with Chicago-based FLS Group LLC to grow its national real estate practice with a larger presence in the Midwest market; the new office in the Windy City will integrate five new partners and 40 team members from FLS … The Glenview, Ill.-based accounting firm, Weiss & Co. LLP has merged with Fischman & Associates Ltd. and will keep that firm’s office in Arlington Heights as a second location to service clients … The IFRS Foundation, the governance and oversight body of the International Accounting Standards Board (IASB), will stay in London, moving its headquarters to Canary Wharf during the summer of 2018. There had been speculation it would relocate to a European venue such as Paris, Brussels, or Frankfurt in the wake of Brexit … In the wake of its merger with Ecken & Smith, Strothman and Co. will launch a wealth management division; the firm now has three offices in Louisville, Kentucky, and Southern Indiana.

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CPE events

Valuing Very Large Estates Holding Investment Assets (December 13), with William Frazier (Stout Risius Ross Inc.).

Learn about special valuation situations that can arise in very large estates, such as blockage discounts for large positions in equities, tiered discounts, and discounts associated with investments in hedge funds and private equity partnerships.

Valuing Luxury Brands (December 14), with Chris Mellen (Valuation Research Corp.) and Edward Hamilton (Valuation Research Corp.). This is Part 2 of BVR's Special Advanced Series on Intangibles.

What’s in a name? Learn about the underlying attributes that drive luxury brand value and see concrete examples of the different approaches to brand valuation.

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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:

Bad proxy

Delaware impact

Tax affecting

Qualified appraiser

BV headcount

SEC comments

In memoriam

Global news

BV movers . . .

CPE events

LinkedIn discussions

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