Use of 3rd party appraisals challenged under Daubert
In a new twist to a long-standing bankruptcy case—In re Greater Southeast Community Hospital Corp. (Dist. of Columbia, January 2, 2007), defendants mounted a Daubert challenge against the Trustee’s valuation expert, in part for his reliance on third party real estate and equipment appraisals in performing a net asset valuation (NAV). In considering the motion to preclude his testimony under the federal standard, the Court reviewed the extensive credentials of the Trustee’s expert, Neil Demchick, CPA, CBA, CIRA, CVA (Invotex Group), and concluded he (and other similarly qualified experts) are entitled to rely on third party appraisals, so long as these are “the type experts in the field of business valuation would rely on.”
The defendants also challenged Demchick’s NAV analysis for its alleged “self-serving” exclusion of the one appraisal report which ran counter to the Trustee’s position. Specifically, they argued:
[his] decision to pick and choose from amongst the various appraisals, accepting parts of them and rejecting others without any discernible methodology, requires that he be precluded from testifying at trial.
The Court denied this element of the motion as well, but warned the parties that any “selective reliance on data favorable to the Trust’s litigation position requires close scrutiny.” For a copy of the full-text opinion, click here.
AICPA likely to reevaluate Standards re: 3rd party specialists
As reported a couple of weeks ago (BVWire #52-3), one of the more controversial provisions of the AICPA’s proposed Statement on Standards for Valuation Services concerns the use of third party specialists, and the extra layer of scrutiny business appraisers would have to give reports by machine, equipment, real estate appraisers, etc.
In BVR’s telephone conference last week “BV Standards: AICPA, IRS, and Beyond—Where Are We Headed?”, panelist Ed Dupke indicated his AICPA task force had received numerous comments on this particular provision of the Exposure Draft—and changes were likely. Instead of due diligence, the final Standards may simply require BV analysts to disclose the degree of reliance (or lack thereof) placed on the third party work and opinions, according to moderator Ron Seigneur.
“But until Ed and his task force have an opportunity to fully evaluate all the 119 comment letters received,” Seigneur cautions, “nothing is official.” The vast majority of comments have been very constructive and helpful to the AICPA task force in its efforts toward finalization. “This particular part on third party reliance was arguably the most contentious provision within the exposure draft,” Seigneur says, “but I sense this resolution will be acceptable to most if not all,” as the AICPA continues to work hard at building consensus.
For a full transcript and/or CD of BVR’s telephone conference, which covered new IRS initiatives as well as continuing convergence of U.S. and international BV standards, click here.
Ramifications of recent healthcare cases
First there was Caracci v Commissioner, then Delaware Open MRI Radiology v. Kessler—and now, the ongoing litigation in the Greater Southeast Community Hospital case: All point to the continued “critical care” BV professionals must give any appraisals in the healthcare sector. For BVR’s next telephone conference—“Healthcare Valuation and the Impact of Recent Court Cases,” moderator Mark Dietrich joins Carol Carden, Don Barbo and Reed Tinsley to dissect these recent decisions and discuss, in particular, the failures of the market and guideline company approaches in Caracci; and the unsuccessful income approach assumptions in Delaware Open MRI. Registrants for the February 8, 2007 conference will receive case abstracts and full-text court opinions of these two vital decisions, as well as a multitude of additional “must read” articles on healthcare valuations and industry resources. To register, click here.
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Ask the experts: applying a DLOM to controlling interests
“Can you tell me if there is any research or database quantifying discounts for lack of marketability (DLOM) for controlling interests?” asks subscriber Dennis Kramer (William Greene & Co., Katonah, NY).
“Courts and various authors—including Shannon Pratt—agree that while the pre-IPO and restricted stock studies are appropriate in estimating DLOMs for minority interests,” responds Alina Niculita (Shannon Pratt Valuations), “they may not be appropriate for estimating DLOM for controlling interests.”
Lance Hall (FMV Opinions, Inc.) agrees, but points out the question is common, as it’s “virtually impossible” for investors to turn a 100% controlling interest into cash within three business days, which prompts many to believe a DLOM applies. However, “as the transaction price reflects the normal selling period commensurate with a sale of just such a company,” the more common answer is no DLOM applies to controlling interests, unless “you use data other than a comparable sale or discount rates derived from public company returns.” In cases where DLOM may apply to controlling interests, remember “restricted stock will probably overstate the discount.”
And as of today, Niculita says, “There is no empirical transaction database from which to draw guidance for quantifying DLOM for controlling interests.” But there is BVR’s Guide to DLOM Case Law (2006 edition), a current, best-selling compendium of nearly 200 court cases involving marketability discounts for minority/controlling interests in estate and gift, marital dissolution, ESOP, etc. To order a copy—which comes with a searchable CD, click here.
A new source for intangible asset valuations
There’s a dearth of market data for valuing intangible assets such as company workforce, trade name, emerging technologies, research and development, etc. “You can’t go to the Wall Street Journal and look up today’s pricing of patents,” says Mark Zyla (Willamette Management Associates), a panelist on yet another BVR “hot topic” telephone conference.
But the environment is changing, albeit slowly. For example, Zyla points to “Ocean Tomo,” an investment banking group which has experimented with auctioning patents, categorized by specific industries; this summer, they auctioned certain technology—which offers some data on market transactions of intangibles. For a complete transcript or CD of BVR’s “Valuing Intangible Assets for Financial Reporting,” click here.
FASB reappoints Herz to a second term
Last week the Financial Accounting Standards Board (FASB) announced the reappointment of Chairman Robert H. Herz to a second five-year term, beginning July 1, 2007. Chairman Herz has helped lead the Board through “one of the most challenging times in the history of our reporting system,” according to the FASB release, helping its efforts “to significantly improve the quality of financial information available to investors and the capital markets.” For more information, click here.
Also new this month at the FASB: In its continuing outreach to the financial, appraisal and accounting industries, the Board established the Investors Technical Advisory Committee, which met for the first time on January 11, 2007. Meeting handouts and a current list of committee members are available at the FASB website.
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