NACVA wants USPAP 2014-15 to recognize calculation engagements, consulting appraisers, and four new fact patterns

The National Association of Certified Valuators and Analysts recently responded to the third exposure draft of proposed changes to the 2014-15 Uniform Standards of Professional Appraisal Practice (USPAP). In a letter to the Appraisal Practices Board, Parnell Black, president, and Robert Grossman, chair of the standards committee, target three main areas of concern:

• First, calculation of value engagements have “proven to be very useful” and serve a “specific need” in the user marketplace. Moreover, NACVA’s professional standards as well as the AICPA’s SSVS-1 explicitly permit calculation engagements under certain circumstances. Yet the current USPAP draft and its two new proposed definitions of “report” (a standard appraisal and restricted appraisal) do not include a calculation within its list of excepted services (Section 1).
  
  “No valuation analyst would suggest that a calculation engagement rises to the level of an appraisal, as that term is defined under USPAP,” the letter says. At the same time, given market acceptance and institutional approval, NACVA asks the board to either add the term "calculation assignment" or "calculated value assignment" to the Iist of excepted services and to the definition of restricted appraisal or to add a third definition. (Note: In contrast, the ASA’s written comments essentially approved the current definitions as complying with its BV standards.)

• Second, appraisers who act as consulting experts for attorneys during the initial stages of litigation frequently find their roles expanding to that of testifying exert when the matter proceeds to trial. Should that happen, the experts may not be able to comply strictly with the new proposed directive (in Section 1) that limits an expert’s ability to act as an appraiser and an advocate for the client "in the same case.” As a solution, NACVA suggests the board simply revise this language to read “at the same time,” thus leaving the appraiser “free to make the very personal decision” whether to proceed as an independent expert in any one case.

• Finally, NACVA asks the board for feedback on four specific fact patterns, two concerning an appraiser’s calculation value of a private company (on an equity-unit and asking-price basis) and two regarding the delivery of a fairness opinion, one using agreed-on valuation techniques and the other using standard methodologies. “We respectfully request that the ASB address these circumstances to confirm the Board's interpretation of the applicability of the USPAP standards in such cases.” To read the complete comment letter, click here.

DLOM survey ranks among top three

Our most recent online survey on determining the discount for lack of marketability (DLOM) tied with last year’s survey on valuing S corps in terms of the number of respondents. (The No. 1 survey of all time: our 2011 poll on BV professional credentials.) Ranked by the depth and disparity of comments, however, the DLOM survey clearly takes the top position:

• “In general I still think there is a huge gap in understanding how the restricted stock studies relate to privately held interests (especially in smaller companies). Some people blindly complain that the studies are ‘outdated’ and the most recent studies are ‘better without understanding the changes in marketability of 144 stocks [and holding periods] over time. [In addition], most projects simply do not have the budget allowance to do a full-blown detailed and thoughtful DLOM analysis. We just throw lots of studies and numbers out there and conclude something between 25% and 35% to be ‘safe’ and hope that our analysis is never challenged.”

• “I tend not to attempt to get too fine in my ultimate selection of a DLOM. For example, I might conclude that a 25% DLOM is appropriate, but would not arrive at a 23% or 26% or 29%, [without] this otherwise becoming an exercise in angels dancing on the head of pin. I just do not believe that the DLOM factor is susceptible of, or warrants, such fineness.”

• “Appraisers, much like the accountants, have tried to over-engineer the DLOM, and it has given them a false sense of precision. [Rather than build support], they are actually undermining the DLOM because they're ignoring the underlying economic reality. Most of the models, factor analysis, etc. should be abandoned. And I was an engineer before, so I am not biased against mathematical models!”

And the comments keep on coming. Valuation and litigation experts who practice in Daubert jurisdictions should reconcile their various calculation methods and support of the DLOM just as they do the result of multiple appraisal approaches/methods in their primary value conclusions, says Paul French (Lain Faulkner & Co.). “Consider the powerfulness of direct testimony when the valuation analyst says: ‘And the third way, your Honor, that I tested the reliability of my selected DLOM was …’” Given the continuing discussion and debate, we will be featuring two full-length articles on the DLOM in the next two issues of the Business Valuation Update; stay tuned for more details.

Excess earnings method for determining enterprise/professional goodwill value in divorce withstands appeal

The husband was one of nearly 70 partners in an anesthesiology practice who owned an equal number of shares and executed a covenant not to compete. The firm billed its services according to rates published by a trade association (the American Society of Anesthesiologists) and paid its practitioners based on their comparative units of productivity. For the two years prior to divorce, the husband’s productivity ranked between the 75th and 90th percentiles of the association’s rates. At the same time, his earnings exceeded the 90th percentile of anesthesiologists in a national survey of medical compensation (MGMA).

At trial, the wife’s expert used the excess earnings approach, capitalizing the difference between the husband’s actual earnings and the industry standard, to value his interest in the anesthesiology practice at $337,000, before a discount for lack of marketability, and $253,000 after. The trial court adopted his value, and the husband appealed, arguing the expert failed to exclude personal goodwill as required by state law (Indiana). The appellate court disagreed, stating:

We are clearly able to determine from the [evidence] what portion of the aggregate value given by [the expert] was attributable to the husband's personal goodwill, that is, none. [The expert’s] method of calculating the value of the husband's interest in [the practice] excluded the husband's personal goodwill, and left only … enterprise goodwill.

Read the complete digest of Burnett v. Burnett, 2012 Ind. App. Unpub. LEXIS 1477 (Nov. 13, 2012) in the next Business Valuation Update; the district court’s decision will be posted soon at BVLaw.

Alerding was the expert. The Burnett case is unpublished, but it still serves as good instruction on what courts will accept as reliable evidence of valuing the goodwill of professional practices in divorce, particularly in the application of the excess earnings method by the expert—who was none other than James Alerding (Alerding Consulting). Don’t miss “The Excess Earnings Method” on February 14, when Alerding discusses the decision as well as a thorough overview of the method, its many strengths and applications, as well as its particular usefulness in determining the components of goodwill in divorce.

Read all about it: What standards apply to an estate/gift tax appraisal?

A recent discussion on LinkedIn’s BV Professionals group (membership required) reflects the continuing debate among appraisers—as well as some confusion—regarding the applicable standards to estate and gift tax appraisals. The original question, posed by Mark Bulmer, essentially asked whether it was necessary to certify compliance with USPAP as well as SSVS-1 when valuing an operating company in connection with estate/gift valuations.

From a credentials standpoint, “the ASA is the only credentialing group that requires compliance with USPAP,” says Bob Morrison. “From the IRS's standpoint, the Pension Protection Act of 2006 (PPA) suggests that an appraisal conducted in compliance with a recognized body of appraisal standards and referencing USPAP … is more likely to meet the ‘qualified appraisal’ requirement in the PPA.” Morrison also suggests an article by Mike Crain in the Journal of Accountancy as a “good read for CPAs doing estate and gift tax appraisals,” available here.

For a further comparison of SSVS-1 to USPAP and other valuation standards, James Feldman suggests “an excellent article” by Martin Lieberman and David Anderson: “Will the Real Business Valuation Standards Please Stand Up?" (CPA Journal).

Another good read and analysis. After following the discussion thread, Jim Hitchner was prompted to write a thorough overview, adding his own insights and comments but astutely avoiding the “designation wars” that could plague the topic (and which leads to his referring to some of these discussions as “LinkedOut”). Read his entire analysis, currently posted at NACVA’s QuickRead.

Patent value may drive return to U.S. prosperity, says new Brookings report

Despite the proliferation of “patent wars” in federal courts and the perception that the system for establishing, maintaining, and measuring patent value is broken (or in need of repair), a new report from Metropolitan Policy Program (Brookings) on the current state of invention in the U.S. reveals:

• Despite the recent recession, the rate of patenting has been steadily increasing in recent decades and now stands at historically high levels. “Moreover, patents are of objectively higher value now than in the recent past and more evenly dispersed among owners than in previous decades.” At the same time, due to increasing global competition, the U.S. ranks ninth in patents per capita.

• Most U.S. patents (63%) are developed by 34% of the population, who live in just 20 metro areas. The vast majority (92%) of U.S. patents are concentrated in just 100 metro areas, representing 59% of the total population.

• Patented inventions are a “major driver of long-term regional economic performance, especially if the patents are of higher quality,” says the Brookings report. “In recent decades, patenting is associated with higher productivity growth, lower unemployment rates, and the creation of more publicly traded companies.” For example, by becoming a “high-patenting” metro area, a city could gain $4,300 more per worker over a decade. Research universities and an educated workforce help drive this growth.

• Government-funded patents tend to be of especially high quality and help boost the productivity of small business as well as urban centers.

The complete report, “Patenting Prosperity: Invention and Economic Performance in the United States and Its Metropolitan Areas,” is available here.

Updated executive compensation survey for
NW region

The 2012-2013 Northwest Executive Compensation Survey (Milliman) is now available through BVR. The survey compiles data on 19 top executive positions (CEO, CFO, COO, CIO, CTO, etc.) from over 220 privately held and publicly traded companies in Washington, Oregon, and Idaho. Various size categories include details on:

• Base salaries and total cash compensation, plus equity compensation;
• Bonuses and perquisites;
• Incentive plan performance measures, long-term incentive plans and program changes, and retirement plans;
• Annual pay adjustment trends, and more.

To view the first 11 pages of the survey, click here; to purchase it, click here.

New resource takes the ‘mystery’ out of Monte Carlo simulations

Finally, new guidance “removes the mystery surrounding Monte Carlo simulations,” writes Neil Beaton (Alvarez & Marsal) in his introduction to Monte Carlo Simulations—Advanced Techniques: A BVR Special Report.

“With this report,” authors Dave Dufendach (Grant Thornton) and Jason Andrews (Alvarez & Marsal) “have taken Monte Carlo simulations out of the laboratory and into the workplace,” Beaton says. In addition to a clear explanation on how to apply Monte Carlo techniques to a broad spectrum of valuation issues, the authors address “real-life valuation problems so that even the casual practitioner will be able to understand the underlying concepts,” Beaton says. They also expose “minefields” of the Monte Carlo technique and discuss current tools to design and interpret appropriate models, all tied to the appropriate accounting rules and valuation principles.

“In short, this report is invaluable for practitioners who wish to elevate their valuation analyses of complex assignments,” Beaton writes. “I highly recommend it.”

New York Times puts BV in the clouds?

A recent article in The New York Times, “Do You Know What Your Business Is Worth? You Should,” says the majority of small business owners delay determining the value of their enterprise until a sale is imminent—something most business appraisers are painfully aware of in their own practices.

Only recently, however, have some owners started “to treat the act of valuing their business as an integral part of running it,” the article adds. That’s good for business appraisers to hear, coming from so venerable a source. But then the NYT highlights Bode Tree, a startup that created cloud software for valuing small businesses. (According to its website, the company offers “an alternative to overcomplicated and overpriced software and services currently available.”)

The article also quotes a business broker who believes “there’s still something to be said for having a real person trained at valuations come in and get to know your business before running the numbers,” adding: “There’s an art to doing a valuation.” Has the article cleared or clouded the BV process for small business owners? Email your thoughts to the BVWire editor.

For a short month, February is packed full of CPE

On February 26, Part 2 of BVR’s Online Symposium on Healthcare Valuation continues with attorneys James Pinna and Matthew Jenkins (both Hunton & Williams) for “The Stark Law and Anti-Kickback Statute,” an important overview and update of current regulations for appraisers in the healthcare sector.

On February 28, the Online Symposium on Economic Damages begins with the “Advanced Workshop on Lost Profits Calculations,” featuring Robert Gray and James O’Brien (both ParenteBeard). This intensive, four-hour workshop is free to subscribers of the full Symposium and will cover the lost profits calculation process from start to finish, using case studies and “live” examples.

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