BVWire Issue #195-1  | December 5, 2018


Contentious ruling from Minnesota high court on dealing with earnout payments in divorce

In an important ruling, a divided Minnesota Supreme Court recently ruled on whether earnout payments related to the sale of the husband’s interest in a lucrative company were a marital asset. Family law financial experts will appreciate the extended discussion of the concepts of valuation and classification.

The dispute involved Talenti, a gelato and sorbet producer (offering 43 flavors as of this date). The husband indirectly held an interest in Talenti through a different entity, Wyndmere. Eventually, David Goliath Group LLC (DGG) became the parent company of Talenti, and Wyndmere became one of several members of DGG. Under state law, Wyndmere (created during the marriage) was presumptively marital property.

The parties married in 1993 and separated in 2013, while DGG’s members negotiated a sale to Unilever. The sale closed in December 2014. Per a July 2014 letter of intent, Unilever agreed to pay “an aggregate maximum purchase price” of $350 million—$180 million would be paid at the closing of the transaction. Moreover, members of DGG were entitled proportional shares in two future earnout payments whose value was based on 2015 and 2016 net sales and would not exceed $170 million. The same provisions appear in the parties’ purchase agreement. The husband negotiated a separate employment agreement and received extra compensation for the continuing employment.

The district court determined a valuation date of September 2014 and valued the company based on the upfront payment ($180 million). The court found the earnout payments were highly uncertain (they could be as little as “$0,” the court said) and represented compensation for the husband’s future efforts to grow the company. Therefore, they were not marital property.

A majority of the state Supreme Court disagreed, finding the earnout payments were part of the purchase price. “Wyndmere received the contractual right to the upfront payment and the potential earnout payments only by selling the parties’ marital asset, which was acquired during the marriage and before the valuation date.” The controlling purchase agreement was unambiguous: all members of DGG had a right to the earnout payments, regardless of whether they continued to work for Talenti, the high court’s majority said. “[E]very person with a financial interest in David Goliath shared in the payments.” Even if the earnouts’ exact value was not certain and the payments were not received before the dissolution of the marriage, “the right to receive the payments was acquired before dissolution, on the date of closing,” the court’s majority emphasized. A valuation of Wyndmere therefore had to include the earnout payments. The majority remanded, ordering the trial court to value the earnouts and include their amounts in any equitable distribution.

The majority opinion triggered a sharp dissent.

A digest of Gill v. Gill, 2018 Minn. LEXIS 613 (Oct. 24, 2018), and the court’s opinion will be available soon at BVLaw.

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IRS issues proposed regs on business interest limits

The IRS proposed rules that would govern the new business interest expense deduction limit in the Tax Cuts and Jobs Act (TCJA). These limitations blunt the effects of the interest expense tax shield, which increases the cost of debt. In general, a taxpayer may deduct business interest expense up to the sum of its business interest income, plus 30% of its adjusted taxable income, and its floor plan financing interest. This has a downward impact on value for highly leveraged firms. Not impacted are smaller companies, defined as those with revenues under $25 million. The IRS has asked for comments on all aspects of the proposed regulations by 60 days after they are published in the Federal Register and plans to hold a hearing on Feb. 25, 2019, in Washington, D.C. (which may continue to February 26, if necessary).

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Bibliography explains basis for new cost of capital platform

The Cost of Capital Professional, BVR’s new platform for estimating the cost of capital, is rooted in solid theory and empirical data. A bibliography of related cost of capital articles and resources has been created that provides the basis for the methodology used in the platform. The bibliography, freely available if you click here, may also help to further build your knowledge of cost of capital. BVR’s intent with the Cost of Capital Professional is to provide a simple, independent service to augment each appraiser’s own judgment and his or her other cost of capital research. Free trials of the new platform are available to all practitioners through the end of 2018. For more information, click here.

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PE firms relying more on third-party valuers

Private equity firms will use more independent valuation experts specializing in portfolio valuation and alternative, illiquid assets for fund-level analyses and financial reporting requirements, according to a report from Valuation Research Corp. Fund managers are choosing between two distinct paths in this partnership: (1) an entirely outsourced portfolio valuation engagement; or (2) positive assurance, says the report. There is an urgency to this, with audit season coming up and the feeling that valuation scrutiny will be a top priority for all auditors.

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Surprising statistic on private firm multiples

A white paper, the “Private Business Valuation Market Update,” examines the median price-to-revenue metric private firm buyers paid for all private firms from 2003 to 2017. During this 15-year period, the following statistics were gleaned using data from Pratt’s Stats (now DealStats):

  • Price-to-revenue range: 45% to 49%;
  • Midrange: 47%; and
  • Low to high percent change: 9%.

“Surprisingly to many, the variation from low to high for average price to revenue multiples paid for all private firms is a meager 4% in absolute terms and only 9% in relative terms,” says the white paper. Compared to data from the public markets, “private firm multiples do not rise and fall as widely (erratically) as those of the public firm cohort.”

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Westminster College team takes first place in BV Challenge

Congratulations to the team from the Bill and Vieve Gore School of Business at Westminster College (Salt Lake City), which has earned the first-place Kierulff Cup at the 2018 Business Valuation Challenge at Georgia State University. The national competition included eight college business teams selected from an initial group of 24 to see who could best assess the value of selected real-world private companies. A group of 21 executives from firms around the country judged in person the final teams. Business Valuation Resources was a sponsor of the event and provided complimentary data, resources, and other materials.

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NYSSCPA to hold cannabis conference December 11 in New York City

If you’re either currently working with or considering a cannabis client, check out the 2018 Cannabis Conference on December 11 in New York City to be held by the New York State Society of CPAs (NYSSCPA). BVWire attended the last cannabis event the NYSSCPA held, and it was excellent, and this one looks just as good. CPAs, valuation experts, attorneys, and investors will be there, so you’ll learn from experts in the field, build connections across sectors, and hear from legislators about what to expect as the law evolves in this growing industry. You can attend in-person or via a streaming webcast. For more information, click here.

Extra: BVR offers several resources for business appraisers who are valuing firms in the cannabis industry, including The State of Legal Marijuana Markets and The Cannabis Industry Appraisal and Accounting Guide.

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Global BV News

New on-demand global education courses from iiBV and BVR

If you’re looking for global BV education—when and where you want it—check out four new e-learning courses from the International Institute of Business Valuers (iiBV) and Business Valuation Resources (BVR). These courses are designed as a second step in knowledge for those who have taken some valuation education, such as ASA 100-level courses or valuation classes in college. The courses, which have non-U.S. examples and are based on IVSC international valuation standards, are:

  • “Valuing Intangible Assets”;

  • “Valuing Early-Stage Companies”;

  • “Valuing Minority Interests”; and

  • “International Cost of Capital.”

These courses are based on the globally recognized iiBV courses that have been delivered in-class since 2013. But the new on-demand format lets you take them at your own pace and earn a Certificate of Knowledge. “BVR is excited to partner with iiBV on such a quality course,” says Jared Waters, training director at BVR. “Anyone looking to raise their valuation knowledge can now get expert-led instruction from anywhere in the world on their schedule.”

Registration is now open for these new courses. For more information, including a special offer on a bundle of all four courses, click here.

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BV movers . . .

People: Gilbert A. Herrera has joined LaPorte CPAs & Business Advisors as a director in the firm’s Consulting Services Group in the Houston office; he will focus on transaction advisory services, litigation services, and business valuations … Emmett Mulcahy, CPA, CVA, was promoted to director at Redpath and Co. Ltd. (St. Paul, Minn.) James (Jamie) Katz, CPA, CVA, MBT, was promoted to partner at St. Cloud, Minn.-based BerganKDV … Who’s Who Legal has listed Richard M. Wise, FCPA, FCA, FCBV, FASA, FRICS, MCBA, CFF, C.Arb (Wise Global Advisors), as “one of the world’s leading” Consulting Experts and Thought Leaders—Financial Valuation, Corporate Tax litigation, the “Global Elite 2019.”

Firms: Sansiveri, Kimball & Co. LLP of Providence, R.I., has added John W. Clegg & Co., also in Providence, effective Nov. 1, 2018; the combined workforce is more than 60 employees … New York-based Prager Metis CPAs has merged in E. Martin Davidoff & Associates, a prominent tax firm in New Jersey; the firm now has 78 partners and more than 450 team members … Reynolds + Rowella (Ridgefield, Conn.) has joined DFK USA, an association of independent, full-service public accounting and consulting firms … Newport News, Va.-based PBMares has expanded in Maryland through the addition of Santos Postal & Co. in Rockville, Md. Houston-based Weaver relocated its Dallas office to a new multiuse tower in the city to be closer to clients, particularly the many hedge and private equity funds that are located nearby … Ridout Barrett, with offices in San Antonio and Austin, Texas, has joined DFK USA, an association of independent, full-service public accounting and consulting firms … BDO UK LLP and London-based Moore Stephens LLP are in advanced merger discussions, expected to be completed in spring 2019 … Two Southeastern Pennsylvania firms, Dunlap & Associates PC (Chalfont) and Seitz, Leatherman & Kolb LLC (Montgomeryville), are joining forces effective Jan. 2, 2019; the combined firm will be DunlapSLK and will have nine shareholders and 47 other team members.

Please send your professional and firm news to us at

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CPE events

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:
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In this issue:

Earnout case

IRS proposed regs

CCP references

PE opportunity

Private multiples

BV Challenge

Cannabis event

Global news

BV movers . . .

CPE events

LinkedIn discussions



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