BVR Logo December 4, 2019 | Issue #207-1

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:

Lawyer-expert panel demystifies cross-examination

How to excel as a testifying expert was a question that several panels at this year’s AICPA FVS Conference in Las Vegas addressed. One discussion was particularly insightful in that it gave attorney and expert perspectives of how expert testimony fits into the attorney’s presentation of the case and what makes for a successful collaboration.

The panel was “Cross-Examination … Inside the Brain of an Attorney,” and the speakers were Randall J. Dean, Esq. (Chapman Glucksman) and Neil Beaton (Alvarez & Marsal Valuation Services). Here are a few key points for attorneys and experts to keep in mind.

Think ‘theme’: In working up a case, the attorney typically develops a theory of the case, a theme, that guides his or her presentation to the judge and jury. The attorney looks to the expert to support the theme and uses cross-examination of the opposing expert to debunk the other side’s theory and reinforce the validity of his or her theme.

Dean explains that the retained expert must understand the theme the retaining attorney offers and how the expert’s work fits into the narrative. It’s critical that the expert does not allow the opposing counsel to lead him or her astray on cross-examination. For the testifying expert, the key to staying on point is to listen carefully to the retaining attorney’s questions on direct and the opposing attorney’s questions on cross-examination. Be present.

Further, if the expert believes a key point of his or her testimony needs clarification or further explanation, the expert may send the retaining attorney a signal in the form of a buzzword. Attorney and expert listening to each other is the secret to making the expert’s appearance (in deposition or trial) helpful to the case.

Be prepared: Dean and Beaton agree that a litigation’s success depends on preparation. They have a formula, the “5 P’s,” standing for “prior planning prevents poor performance.”

A good trial attorney will know all there is to know about the opposing expert, besides the work product relevant to the case. This includes all prior opinions, particularly ones that contradict the current opinion. An expert has to show the same level of preparedness. Know your record. If there are seemingly contradictory opinions, work with the attorney to explain, on direct, how the prior case differed from the current one, Dean says. Similarly, if the expert was excluded in another case, the attorney needs to deal with the exclusion, either in the form of a motion to exclude this fact or, in direct, by showing this fact is not relevant to the instant case. Dean says the attorney and expert need to have a shared understanding of the expert’s background and move in sync on countering attacks from the opposing expert.

Don’t lose your composure: One piece of advice Dean offers to attorneys and experts is never to exhibit aggression against the opposing side. Dean says an attorney doesn’t have to be snarky, or, worse, mean to show the opposing attorney’s case is weak or the opposing attorney or expert lack competence. A good attorney can expose flaws in the opponent through polite questions that focus on the record—never the person. Similarly, Dean says, he expects that the retained expert, even if asked the same question in multiple ways, makes every effort to remain polite and patient.

Valuers stress concerns about goodwill impairment vs. amortization

The last issue of BVWire covered the morning session of the full-day roundtable discussion at FASB headquarters on the standard-setter’s Invitation to Comment (ITC) on moving from the current impairment model for goodwill to one of amortization or a hybrid approach. The afternoon session covered the same agenda but with a new set of individual players from a range of stakeholders that included valuation professionals, users of financial information (including investors), auditors, preparers, academics, standard-setters, and regulators. Here are some of the main points made by roundtable participants:

  • A representative from the user community echoed remarks from the earlier session that the information that emanates from material goodwill impairments is important for investors and other users of financial reports—and the information is not completely retroactive. Impairments trigger ancillary conversations about what’s going on in the company that may impact future performance.
  • Instead of moving to amortization, additional steps could be taken to further reduce the burden of impairment testing on public companies, such as testing at the operating segment rather than reporting unit level, changing the threshold that triggers impairment testing, and decreasing some of the more subjective aspects of impairment testing that are time-consuming and costly.
  • Valuation experts cautioned against the idea of subsuming other intangible assets into goodwill before it gets amortized. These assets, particularly intellectual property (e.g., patents and trademarks), often have long lives that cannot be assigned a definitive lifespan. These assets are also frequently licensed or sold separate and apart from the business combination. Subsuming noncompete agreements would be relatively favorable as they are not typically material in terms of the overall purchase price.
  • A hybrid approach of goodwill amortization with impairment testing could work if the impairment test is simplified, such as using a trigger-based test.
  • Disclosures about an acquired business and its subsequent performance should be enhanced, but the requirements for these improved disclosures should be predicated on the model chosen for goodwill accounting.

What’s next: The FASB is conducting a very thorough process in laying out the issues and soliciting comments from a wide variety of stakeholders. After all the feedback is processed and a presentation is made to the FASB board, the next step will be taken. This usually involves the issuing of an exposure draft that would go through one or more revisions before rules are finalized. This is a very deliberate process that can take up to several years to complete.

Research paper finds the size premium mostly nonexistent

“Investors require no premium to hold small stocks over big stocks in normal times,” says a recently updated paper on the size premium. The study finds that the size premium in listed firms is nonlinear, occurring only in very “bad” times (when stock prices are low), which is “less than 30% and possibly less than 15% of the time.” That means the size premium is nonexistent more than 70% of the time. The paper’s author, Thiago de Oliveira Souza (University of Southern Denmark; Danish Finance Institute), argues that asset pricing models should account for the states of economic conditions in addition to firm size. The paper is titled “Aggregate Price of Risk and Tests of the Size Premium” and is the latest in a number of recent academic papers that find that the size premium has largely disappeared since the 1980s when it was first documented by Rolf Banz. The recent papers include “Firm Size and Stock Returns: A Quantitative Survey,” “Why Has the Size Effect Disappeared?” and “The Size Premium and Macro Volatility Risks: Evidence From US and UK Equity Markets.”

Private-company selling price/EBITDA median is 4.4x, per DealStats

The median selling price/EBITDA multiple across all industry sectors is 4.4x, according to the 4Q 2019 DealStats Value Index (DVI). As the graph below shows, EBITDA multiples are highest for the information sector (11.1x) and the mining, quarrying, and oil and gas extraction sector (8.5x). Meanwhile, the lowest EBITDA multiples are in the accommodation and food services (2.6x) and the other services sectors (3.0x).

View full size chart

The DealStats Value Index (DVI) summarizes valuation multiples and profit margins for private companies that were sold over the past several quarters. The DVI is a quarterly newsletter and is complementary with a subscription to DealStats.

Spend more time on the numerator, expert
panel advises

Attendees at a recent online workshop were urged to spend more time on the numerator (forecasts) of the valuation equation rather than the denominator (cost of capital). Management-provided projections, forecasts, and prospective financial information (PFI) deserve much more scrutiny than given in the past. You cannot simply take the projections and plug them into a DCF without questioning them, the panel stressed. You can access a recording of the four-hour workshop, Back to the Future? Exploding the Income Approach with Robert M. Dohmeyer (Dohmeyer Valuation Corp.), Bethany Hearn (CliftonLarsonAllen LLP), Brenda M. Clarke (Seigneur Gustafson LLP), and Kevin R. Yeanoplos (Brueggeman and Johnson Yeanoplos PC). The workshop was divided in two parts: a discussion of current hot issues in the numerator (forecasting, free cash flow, and adjustments) and then an examination of the denominator (beta, equity risk premium, and company-specific risk).

KPMG Germany releases 2019 cost of capital study

Subtitled “The Calm Before the Storm—Rising Profits and Deflated Values?” the 14th edition of the Cost of Capital Study from KPMG Germany examines, among other things, the impact of regulatory interventions, scarcity of resources as well as digitalization on business models, their performance (cash flows) and their risk (cost of capital) by industry sector. Survey respondents include 312 companies: 240 from Germany, 31 from Austria, and 41 from Switzerland. Some highlights:

  • The average WACC across industries was 6.9%, the same level as in the past four years;
  • After last year’s increase, the average risk-free rate remains nearly constant, at 1.2%;
  • The average market risk premium remains stable, at 6.5%;
  • The highest unlevered beta factors were applied by the automotive and technology sectors; and
  • The average cost of debt increased slightly, to 2.9%.

The survey was conducted between March 2019 and July 2019. The reporting dates of the consolidated financial statements included in the study were between Feb. 28, 2018, and March 31, 2019.

BV movers ...

People: Steven Pinsky has joined UHY Advisors as principal in the Melville (New York) office; he will be responsible for providing transaction and transition consulting services to private equity-backed and privately owned companies.

Firms: New York City-based Marcum LLP has merged with Cleveland-based Skoda Minotti effective December 2; the combination adds 31 partners and more than 190 associates; Skoda Minotti operates from Mayfield Village, just east of Cleveland; Fairlawn, Ohio; and Tampa, Fla. Marcum’s 2,000 employees operate from 26 offices throughout the U.S., Grand Cayman, China, and Ireland … Charlotte, N.C.-based Dixon Hughes Goodman has acquired RyanSharkey of Vienna, Va., a 50-person firm with a strong specialization in the government contracting, technology, and life sciences industries … Hayes & Varga of Orlando, Fla., has merged into Winter Park, Fla.-based Moss Krusick & Associates; the combined firm has 10 partners and 70 staff … Seattle-based Moss Adams grows its healthcare consulting practice with the acquisition of Southwest Consulting Associations of Plano, Texas, which offers reimbursement services for hospitals and health system organizations … SRG, with offices in Woodland Hills, Calif., and Los Angeles, merged into Irvine, Calif.-based Squar Milner LLP December 1; the acquisition adds nearly 55 professionals to Squar Milner’s staff of about 550 … Greensboro, N.C.-based Bernard Robinson & Co. (BRC) has merged in Haas and Morgan CPA of Charlotte, N.C.; the combined firm now has more than 170 employees and seven locations in North Carolina.

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Upcoming BVR training events

  • Royalty Rates and How to Use Them in the Relief from Royalty Method (December 4), with Brent Sloan (Vantage Point Advisors). This is part of BVR’s Special Series on Intellectual Property.

    Although recent intellectual property court battles have focused on the relief from royalty method, it remains a misunderstood and often misused appraisal technique.

  • A Masterclass in the Valuation of Family Limited Partnerships and LLCs (A BVR Web Workshop) (December 5), with Bruce Johnson (Munroe, Park & Johnson Inc.), Spencer Jefferies (Partnership Profiles), and James Park (Munroe, Park & Johnson Inc.).

    A special four-hour workshop that will present case studies to teach the best practices for valuing noncontrolling, nonmarketable FLP and LLC interests. Also, an in-depth understanding of the Partnership Profiles marketplace will be presented.

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

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