More calls for the BV profession to take a stance on DLOM
In the February 10 issue of BVWire, we highlighted the article “NY’s Unfair Application of Shareholder-Level Marketability Discounts,” written by Gil Matthews (Sutter Securities). The article has rekindled the debate over New York's out-of-step position with respect to the discount for lack of marketability in fair value proceedings. It has also sparked calls for the BV profession to speak with “one clear voice” on this issue.
“This is a topic that is dear to my heart,” says Chris E. Best, a managing director at Acclaro Valuation Advisors. “I have a number of cases going on right now that involve this issue and just testified in a couple of cases last month. I can tell you that even in a state where this is settled law, many of the judges still do not understand the concept of fair value and need education on it.” Best goes on to say that many judges are not familiar with the case law in the state, much less such learned treatises such as O’Neal and Thompson’s “Oppression of Minority Stockholders.” Best continues: “Many of them do not have a good understanding about valuation or valuation theory. It would be great for the BV community to come out and take a consistent stance on the topic.”
William C. Quackenbush (Advent Valuation Advisors), former chair of the ASA's business valuation committee, is not surprised there are calls for the BV profession to speak with one voice on this issue. He has written a follow-up article, “DLOMs in N.Y. Statutory Fair Value Cases—A Follow-Up to Matthews.” Among other points, he suggests that the “valuation profession needs to continue its discussion regarding control level DLOMs.” The article appears in the March issue of Business Valuation Update.
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Chancery questions value of supplemental valuation disclosures to plaintiffs
The use of “disclosure settlements” to resolve dissenting shareholder suits is increasingly raising eyebrows among judges. This skepticism found full expression in a recent decision in which the Delaware Court of Chancery rejected a settlement whose only benefit to the plaintiff stockholders was additional valuation-related information.
Too much information: The case involved the real estate site Zillow and its acquisition of Trulia, an online provider of information on homes for purchase or rent. Trulia stockholders filed a class action, claiming Trulia’s board of directors breached its fiduciary duty when it approved the merger. The transaction went through, and the parties subsequently worked out a settlement, which the plaintiffs asked the court to approve. The agreement included a very broad release of claims.
Prior to voting on the proposed merger, the Trulia and Zillow stockholders received a 224-page proxy statement that discussed the board’s reasons for supporting the transaction and explained the opinions of the financial experts advising the boards. It included a summary of Trulia’s financial advisor, J.P. Morgan, which was 10 single-spaced pages long.
The disclosures the plaintiffs would obtain from the settlement gave additional detail regarding the financial analysis, including: (1) synergy numbers in J.P. Morgan’s value creation analysis; (2) selected transaction multiples; (3) selected public trading multiples; and (4) implied terminal EBITDA multiples for a relative discounted cash flow analysis.
Word of caution: The court found that the additional information was neither material nor did it provide a meaningful benefit to stockholders. Much of it was trivial and would not affect the “total mix” of available information. The proxy already provided a “more-than-fair” summary of the financial analysis underlying the transaction. Therefore, the proposed settlement was of no “genuine” value to the plaintiffs, the court decided.
It added the court should rethink its propensity to approve disclosure settlements given the mounting evidence suggesting supplemental disclosures rarely yielded a real benefit to stockholders and the increasing risk that stockholders are being made to give up on valuable claims too soon. And it noted that “practitioners should expect that the Court will continue to be increasingly vigilant in applying its independent judgment” when assessing such settlements.
Takeaway: In a shareholder class action, the Chancery finds a settlement requiring the plaintiffs to agree to a broad release of claims in exchange for additional valuation-related information does not meet the applicable “fair and reasonable” standard.
Find an extended discussion of In re Trulia Stockholder Litig., 2016 Del. Ch. LEXIS 8, in the April edition of Business Valuation Update; the court’s opinion will be appear soon at BVLaw.
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Popular state-by-state chart to goodwill in divorce just updated
BVR has just updated its ever-popular complimentary download formerly titled “Goodwill Hunting in Divorce." It gives you an at-a-glance look at a state’s basic position toward enterprise and professional goodwill so that you can shape your valuations accordingly.
Expanded info: The updated chart has a new title, “Charting Goodwill Jurisprudence,” to reflect an expanded discussion of the law that includes excerpts from foundational cases that highlight the concepts (e.g., salability, transferability, solo practice, noncompete agreements) underlying a state’s position. The additional information gives insight into how different courts emphasize different concepts and how much discussion there is within a jurisdiction around the basic rule.
This chart is designed to be a real-time guide, so we welcome alerts to precedent-making new cases or legislative changes. To check out the updated chart, click here.
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Alternative method for tracking the value of a corporate brand
“The proper stewardship of a corporate brand includes the measurement of financial metrics that may result from certain brand strategies,” says Rene Hlousek (Beacon Valuation Group LLC). For example, brand managers would want to know whether certain strategies (e.g., increased brand awareness, improved product recall, etc.) will result in greater revenue growth and, hopefully, profitability.
Consider this: An alternative method, the residual contribution method, results in a valuation metric that allows you to track the brand from a purely valuation perspective, by systematically exploring the relation between a business enterprise, its underlying key intangible assets, goodwill, and, ultimately, corporate brand value. It’s one thing to know that if you raise brand awareness by 20%, it will result in a corresponding increase in revenue. But how does that translate into value? “That’s not answered by the existing schools of thought and valuation models,” he says. Additionally, “current and popular methods to value a corporate brand, although traditionally deemed as being adequate or ‘passable’ for financial reporting purposes, are far less than sufficient when it comes to measuring the full or realistic value of this intangible asset.”
“The tracking of corporate brand values with the residual contribution method on an ongoing or regular basis can benefit management internally and be used as a strategic planning and evaluation tool aimed at maximizing value for the company’s stakeholders,” says Hlousek. “RCM-based brand tracking systems can also be used as a means of better monitoring marketing efficiency, improving marketing budget allocation, and highlighting marketing’s contribution to the bottom line in financial and valuation terms.”
For more information: Hlousek is the developer of the residual contribution method, and he recently conducted a BVR webinar that explains it in detail. To acquire a recording, please
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Full results and respondent comments to latest BVWire poll
Last week’s BVWire reported on the results from our online survey that asked about BV practitioners’ top concerns. The detailed results as well as write-in comments are now available as a complimentary download. Our thanks to all of those who responded—and we’ll have another poll soon!
As a recap, 40% of respondents cite practice management as their biggest concern for 2016 (including issues such as competition, fee pressures, hiring, succession planning, and the like). The other concerns are: keeping up with developments in the profession (cited by 15% of respondents); expanding into new areas of valuation (12%); regulatory and standards compliance (10%); and litigation issues (5%). The “Other” category was cited by 19%, with the most prevalent answer related to business development and growth.
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Recent valuation research papers on SSRN
Several business valuation-related research papers have recently been posted on the Social Science Research Network (SSRN):
- “Capital Structure on Valuation,” Guillermo L. Dumrauf (University of CEMA). The author states that all of the approaches to estimating capital structure “have controversial issues and yield some mathematical inconsistencies. In this paper we disentangle some of these issues and propose a different approach.”
- “Is It Time to Regulate Forensic Accounting?” Wm. Dennis Huber (Capella University) and Emmanuel Charrier (Université Paris Dauphine). This paper includes a discussion about the practice of forensic accounting in France.
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Global BV news:
Tweedie opines on next big challenge in financial reporting
The International Accounting Standards Board (IASB) recently issued a final standard (IFRS 16, Leases) that will require companies to bring leases onto the balance sheet (see the January 27 issue of BVWire).
Sir David Tweedie, former chairman of the IASB and the current chairman of the board of trustees of the International Valuation Standards Council, was recently asked: With IFRS 16, Leases now published, what do you see as the next big challenge in financial reporting?
“Insurance accounting,” he says. “For many years insurance companies have suffered from the fact that many consider their accounts to be extremely opaque. Insurance is a back-to-front industry. Cash is received upfront and the service provided later—the complete antithesis of most commercial transactions.
“In accounting terms the debit is simple—it goes to cash. The question is how much of the credit is a liability and how much is income. The measurement of insurance liabilities is a highly complex subject and the IASB is to be congratulated for persevering with this extremely difficult problem—a problem that is taking almost as long to solve as did the leasing problem.”
Tweedie made his remarks during a recent interview with Wiley Insight IFRS.
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AICPA/AAML National Conference on Divorce
The growing area of divorce represents an important opportunity for valuation analysts, so don’t miss the upcoming AICPA/AAML National Conference on Divorce on May 19-20 in New Orleans. This intensive program offers unique sessions that are presented by both a valuation/financial expert or CPA and an attorney, bringing a diverse set of perspectives. As a result, you’ll walk away with new ideas and solutions to help you succeed in this exciting area of practice.
Discount offer: If you register by April 4, you will save $75. To register, click here. Can’t make it to the Big Easy? No problem—you can attend online! Follow the conference at #AICPA/AAML.
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Pratt’s Stats hall of famers for 2015
With the help of business intermediaries who submit deal information, Pratt’s Stats now lists over 24,000 private-company merger and acquisition (M&A) transactions in its database. BVR has created the Pratt’s Stats Hall of Fame to thank those intermediaries who have contributed the most transactions. For 2015, they are:
- Ian McLachlan, Business Team Inc. (San Jose, Calif.);
- Scott Perry, Gateway M&A LLC (Carrolton, Texas);
- Russell Cohen, Murphy Business & Financial Services (Davie, Fla.); and
- Paul Chambliss, Front Range Business Inc. (Boulder, Colo.).
Sincere thanks to these and all of the individuals who have helped BVR build Pratt’s Stats into the trusted and reliable data source that it is today.
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BV movers . . .
People: David Consigli joined the Boston-based AAFCPAs as the new director of business valuations … Chris David has joined PYA, the national healthcare management advisory and accounting firm based in Knoxville, Tenn., as principal within PYA’s valuation service line … Derek Groff has joined Hein & Associates LLP as director of valuation in its Specialized Services Group and will be based in the firm’s Denver office … Alina Niculita, who for over 12 years served as president of Shannon Pratt Valuations, has joined the Portland, Ore., Morones Analytics as the new director of valuation services.
Firms: Hassouneh Auditing Firm based in Hebron in the Palestinian territories joined the global accountancy network UHY.
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March CPE events come in like a lion
Active and Passive Appreciation: An Empirical Method for a More Accurate Determination (March 8), with Ashok Abbott (West Virginia University).
Valuation in Divorce Litigation: Winning Clients and Testifying in Court (March 15), with Melissa Gragg (BDO USA) and Kristin Zurek (Cordell & Cordell).
Forecasts and Projections for Small Companies (March 17), with George Levie.
Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to white-list coeducation@resourcefulness.
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