BVWire Issue #173-1 | February 1, 2017

Focus more on ‘CF’ than the ‘D’ says Damodaran

Valuation analysts spend way too much time tweaking the cost of capital and not enough time on cash flows and earnings, says Professor Aswath Damodaran (New York University Stern School of Business). He reiterates this point in his newly released data posts and datasets updated for 2017 related to valuation and the cost of capital, including historical stock returns, implied equity risk premiums, country risk premiums, and more. All of his commentary and data (with more to come) is available free on his blog that also includes several video presentations about the updates.

“When your valuations go awry, it is almost never because of the mistakes that you made on the discount rate and almost always because of errors in your estimates of cash flows (with growth, margins and reinvestment),” he writes. Therefore, you should focus on making the most accurate cash flow projections possible and include all risks, instead of “obsessing about the minutiae of discount rates.”

In a hurry? When time is of the essence (and when is it not?), Damodaran’s method for valuing an average risk public company in U.S. dollars is to use an 8% cost of capital (his graph shows a global median of 8.03%). If he has time, he will go back and adjust the rate. “If it is a very risky firm, I will start off with a 10.68% cost of capital (the 90th percentile) and again revisit that number, if I have the time,” he says.

Whether or not you agree with his views, we urge all valuation experts to read his insightful commentary and keep an open mind. Also, it’s important to be prepared for possible critiques to your own conclusions.

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Tennessee appeals court validates Delaware block method

The Delaware block method is obsolete, dissenting shareholders in a Tennessee fair value case argued. They asked the appeals court to strike down the lower court’s DBM-based fair value determination and went as far as proposing a change in valuation law. Their efforts fizzled.

Focus on past performance: At issue was the value of a Nashville-based, closely held media enterprise that suffered a serious decline in revenue during the 2008 recession. In 2010, an investor approached the company proposing a $1.5 million investment and presenting a turnaround plan. Besides buying into the company, he assumed the roles of president and CEO. When the company’s situation did not improve, he was asked to step down. Later, the majority shareholders proposed a merger, buying out the minority shareholders for $0.10 per share. The minority shareholders, including the investor, rejected the offer, arguing their shares were worth $6.19 per share. The controlling shareholders asked the court for a judicial appraisal.

The trial court followed case law and applied DBM, which uses the three primary valuation methods (market, asset, and income approaches) and weights their results considering the facts of the case (type of business, primary purposes of business, established market). The court adopted the $0.10-per-share price the controllers proposed.

On appeal, the dissenting shareholders contended it was time to abandon DBM. With its rigid focus on past performance and disregard for prospective performance, this approach was “ill-suited” to valuing a company undergoing a turnaround. In fact, the dissenters said, courts in Delaware have long adopted a more liberal approach that allows valuation by any technique that is acceptable in the valuation and financial professions and is admissible in court.

In response, the Tennessee Court of Appeals noted a change in Delaware case law did not translate into a change in Tennessee law. Precedent in Tennessee prescribes the use of DBM. The trial court used the correct valuation method, and it applied the method correctly, the appeals court found. As for changing the law on valuation, “it is the Tennessee Supreme Court that will have to do it and not this Court,” the appeals court said. The $0.10-per-share price represented fair value, the appeals court affirmed.

The case is Athlon Sports Communications, Inc. v. Duggan, 2016 Tenn. App. LEXIS 773 (Oct. 17, 2016). A digest and the court’s opinion are available at BVLaw.

Extra: You can get a rundown of the latest valuation-related court cases during the BVLaw Case Update: A One-Hour Briefing on February 7 with R. James Alerding (Alerding Consulting LLC) and Sylvia Golden (Business Valuation Resources).

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Key ratios for investment advisory firms

The largest database of sales transactions involving investment advisory firms is maintained by FP Transitions, an Oregon firm that has done over 8,000 valuations of these businesses since 1999. In addition to doing appraisals, the firm is also a broker of financial services practices.

During a recent BVR webinar, Warren Burkholder, a valuation consultant with the firm, shared with the audience some key ratios developed from the database, which contains 880 private-company transactions and calculates 130 data points on each one. The ratios (see table below) are sales price (SP) over revenue (Rev), assets under management (AUM), recurring revenue (Rec Rev), and discretionary earnings (DE).

(click to view full size)

During the webinar, a number of listeners quickly asked, “Is your database available for sale?” Burkholder replied that, while this is a proprietary database, they would respond to requests for access to it on a case-by-case basis. If you are interested, you can contact him at And you can access his full webinar, Valuation of Investment Advisory Firms, if you click here.

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Valuation issues KO’d a third of M&A deals in 2016

Disagreement over valuation is the most prevalent reason a merger or acquisition fails to be completed, according to a report from KPMG. In a recent survey, over a third (36%) of respondents say valuation issues were the primary reason for deal failures over the past 18 months. The other reasons are: loss to a competing bid (22%), financial issues revealed during due diligence (11%), operating issues revealed during due diligence (11%), management issues or lack of fit (9%), recent regulatory changes (4%), changing industry-specific conditions (4%), and changing macroeconomic conditions (3%).

M&A education: Want to get some perspective and learn practical insights on the latest strategies for evaluating and structuring corporate transactions? BVR partner Transaction Advisors will present some events this year where you can rub shoulders with M&A experts. The events are: Chicago M&A Conference (March 2, Chicago) and the San Francisco M&A Conference (May 11, San Francisco).

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2704 regs would hit franchises hard

The proposed Section 2704 regs still kicking around Washington would have a particularly bad effect on franchises, according to an article in Multi-Unit Franchisee.

Supersized impact: At the December 1 public hearing at the IRS, there were several speakers from the franchise world, including Keith Miller, a Subway franchisee and chair of the Coalition of Franchisee Associations (CFA), and Rob Branca, a Dunkin' Donuts franchisee and vice chair of the CFA. The CFA represents 41,000 franchisees at 86,000 locations employing about 1.4 million people. Miller points out that franchises operate under extremely restrictive rules set forth in the franchise agreement. For example, not all franchises automatically renew, so their value “goes down every day,” he said. Also, there are many restrictions on the sales of franchises. To ignore these restrictions, as the proposed regs would require, would hit franchises especially hard.

For more information, BVR has a special report, “Proposed IRC Section 2704: Potential Impacts on Estate and Gift Valuations.” This report includes updates covering the December 1 public hearing and any other developments on the proposed regulations.

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Will the valuation profession use drones?

Don’t have time for a site visit? Can’t travel to verify the existence of assets? Consider using a drone. New rules from the FAA have paved the way for increased commercial usage, and the accounting profession is already on it, according to an article in the Journal of Accountancy. For example, PwC is looking to use the devices to capture information and data for audits or to be used as third-party asset confirmation in litigation. The firm also can help clients incorporate drones into their own operations, such as a mining company using the devices to take photos or measurements of mineral deposits or ground operations. Of course, the drone industry itself may pose an opportunity for appraisers—PwC estimates it will be a $127 billion global market. Just imagine all these gadgets buzzing around the skies.

Extra: The paparazzi—always on the cutting edge—have already used drones to spy on celebs at home, but at least one state (California) has banned this type of use.

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Healthcare M&A volume up, spending down in 2016

The healthcare merger and acquisition market was up slightly in 2016 in terms of deal volume, but overall spending was down 36% from 2015, according to data from Irving Levin Associates Inc. There were 1,536 transactions in 2016, up 1% from 2015, but overall spending dropped to $255.7 billion from $400.3 billion in 2015. Healthcare sectors showing the biggest jumps in deal volume include eHealth (up 23%), rehabilitation (up 21%), and physician medical groups (up 19%). The biggest declines were in managed care (down 53%), labs/MRI/dialysis (down 21%), and hospitals (down 12%).

The strong M&A market for physician groups is likely to continue due to the uncertainty surrounding the potential repeal and replacement of the Affordable Care Act. These groups have partnered with hospitals because they see a difficult time ahead, especially if they have not developed a specialty niche.

New guide edition: BVR's Guide to Physician Practice Valuation, 3rd edition, contains contributions from 21 of the top healthcare valuation experts and attorneys in the profession. Edited by healthcare valuation expert Mark Dietrich, this new guide provides current and comprehensive "how-to" guidance on valuation approaches in this evolving industry sector.

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Global BV News
China cracks down on trademark infringement

Courts in China are taking trademark infringement more seriously. Two Chinese firms and the founder of one of them have been ordered to pay BMW over $400,000 for registering trademarks similar to that of the German automaker, according to the Shanghai Daily. This action comes on the heels of a case involving basketball star Michael Jordan, who won a long-running trademark case relating to a local sportswear firm using the Chinese version of his name. China’s highest court ruled in his favor, overturning earlier rulings against the athlete.

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RICS sets agenda for global summit

How much is the World Series worth? Find out during the RICS 2017 Summit of the Americas, May 1-3 in Chicago. RICS is the Royal Institution of Chartered Surveyors and has traditionally been known as an accrediting organization for professionals within the land, property, and construction sectors. But RICS is also involved in business valuation and is one of the three VPOs (along with the ASA and AICPA) that offer the new CEIV credential for fair value for financial reporting. The summit will have a mix of real estate and business valuation-related sessions (see the agenda), and you will be able to connect with practitioners of different disciplines from around the world. Speaking of the World Series—the Cubs again this year?

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BV movers . . .

People: Houston-based GBH CPAs has admitted Gary Canon as partner and leader of the business valuation and M&A team … Chad Clinehens has been named president and CEO of Zweig Group (Fayetteville, Ark.), and Jamie Claire Kiser has been appointed director of consulting … Shannon Farr has joined Pershing Yoakley & Associates as a principal. She’ll work out of its Knoxville, Tenn. office … Schenck of Appleton, Wisc., announced the admission of Chris Hendricks and Brad Kussow as shareholders. Kussow will now serve as managing director of transaction advisory services.

Firms: Blue & Co. was named one of the “Best Places to Work in Kentucky” for a sixth consecutive year. The firm has offices in Bowling Green, Lexington, and Louisville … Brown Edwards & Co. acquired Dixon Hughes Goodman’s Roanoke, Va. office, employees, and partners, effective February 1 … Nick Mears recently opened Caprock Business Consulting LLC in Lubbock, Texas. The new firm provides attorneys, business owners, and CPAs with valuation-related services for civil and commercial litigation, family law, estate planning, and corporate planning purposes … Carr, Riggs & Ingram has acquired Nashville, Tenn., firm Rayburn FitzgeraldEisnerAmper has added Princeton firm Field & Higgins … Atlanta-based Habif, Arogeti & Wynne has changed its name to Aprio … The National Association for Business Resources recognized Sikich’s Marlborough, Mass., office as one of “Boston’s Best and Brightest Companies to Work For.”

Please send your professional and firm news to us at

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CPE events

BVLaw Case Update: A One-Hour Briefing (February 7), with R. James Alerding (Alerding Consulting LLC) and Sylvia Golden (Business Valuation Resources).

How Repurchase Obligations Impact Valuation (February 9), with Chuck Coyne (Empire Valuation Consultants), Tabitha Croscut (Steiker, Greenapple & Croscut), and Joseph Marx (Principal).

Valuing Banks: Day 1 Fundamentals (February 15), with Keith Sellers (University of Denver). Part 2 of BVR's Special Series on Banking and Financial Services.

Valuing Banks: Day 2 Case Study (February 16), with Keith Sellers (University of Denver). Part 3 of BVR's Special Series on Banking and Financial Services.

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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New and Trending LinkedIn Discussions

The “2017 Report on the State of the Legal Market”: Stagnation, Innovation & What Lies Ahead

After Modigliani, Miller and Hamada: a new way to estimate cost of capital?

Collected testimony from the December 1st IRS hearing on proposed 2704 changes

Your discussion could be featured here—BVR's LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you're not already a member, request to join:

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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:

Cash is king

Tenn. likes DBM

IA firm ratios

Valuations KO M&As

2704 and franchises

Consider a drone

Healthcare M&A

Global BV news

BV movers . . .

CPE events

LinkedIn discussions


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