BVR Logo January 30, 2019 | Issue #196-4

Welcome to the new layout for the weekly BVWire ezine. You'll still receive all the same news you rely on, but we've streamlined the presentation for a mobile-friendly view. Highlights of this week's issue include:


For goodwill, sometimes simpler is better

In last week’s BVWire, we covered a divorce case in which the husband’s valuation expert used the multiattribute utility model (MUM) framework for separating personal and enterprise goodwill. The case occurred in a state (Illinois) where personal goodwill is not a marital asset, so it needs to be extracted. Interestingly, the expert used a “simplified version” of MUM and prevailed over the wife’s expert, who came up with a lower value using the “with-and-without method.”

The traditional MUM (which the courts have long accepted) uses an elaborate systematic method with such detail that it may open up the expert to aggressive attack on its many elements. For example, a 1-to-5 scoring scale is often used to weight each attribute of goodwill. Opposing counsel could ask: “Why did you choose a ‘3’ and not a ‘4’?” This full-blown method may be perceived as an “illusion of precision” that may trigger tough cross-examination. Instead, the MUM framework can be used in a more simplified way. In the recent case, the expert did not use a scoring scale but instead used a simple binary scoring method. For each attribute, he indicated whether it either existed or did not exist. A one-or-zero or a plus-or-minus indicator can be used for this.

Learn more: An article on the simplified MUM was published in the February 2016 issue of Business Valuation Update. It was written by Thomas Gillmore, a valuation expert and forensic accountant in Florida, who first brought this streamlined version to our attention. The article gives some background on the relevant legal landscape in Florida and describes his version of MUM based on an actual engagement. BVR has made Gillmore’s article available as a free download.


Damodaran posts his 2019 data updates

Professor Aswath Damodaran (New York University Stern School of Business) has so far posted a series of five data updates on his blog, “Musings on Markets.” His first post includes an examination of the equity risk premium (ERP), and the others include data related to bond markets, “playing the numbers game,” insights into risk, hurdle rates, and funding costs. The ERP is a favorite topic of the professor, and he does not use static historical data in estimating ERP because he says you’ll get some very strange-looking numbers. Instead, he uses a forward-looking method he calls the “implied” ERP, which he says is “an estimate of the price that investors are demanding for the risk of investing in equities. I back this number out from the current market prices and expected future cash flows, an IRR for equities that is analogous to the yield to maturity on a bond.” He computed the ERP at the start of 2019 to be 5.96%, up from 5.08% on Jan. 1, 2018.

PwC examines SEC comment letters

You can learn a lot from the large amount of back-and-forth communications between the SEC and companies over fair value measurement issues. When the SEC reviews financial statements and disclosures of public firms, it may send a comment letter to the company if it has questions or sees problems. PwC has posted its 2018 version of “SEC Comment Letter Trends,” which include topics such as business combinations, fair value (valuation techniques and inputs), and goodwill and other intangibles. Examining the issues in the comment letters can help you make sure you have addressed these areas properly in your own engagements. All of the comment letters and responses from the companies are made public via the SEC website. Plus, you can do a keyword search on specific issues, such as impairment, stock-based compensation, and the like.

Business Valuation Review spotlights the
'size effect'

If you’re a subscriber to BVResearch Pro, you have access to a vast amount of research material, including the full archive of Business Valuation Review, the journal of the American Society of Appraisers (ASA). The journal’s Fall 2018 issue is devoted to the ‘‘size effect’’ with respect to the cost of capital. Some appraisers feel that the size effect has diminished or disappeared since it was first documented in 1981. Other appraisers feel it is alive and well. There are two articles on this—one by Clifford Ang (Compass Lexecon) that questions the evidence that there is a size effect with respect to the cost of equity. Ang concludes that “size effect studies have not been able to surmount the criticisms that the size effect lacks a theoretical basis and that the results of size effect studies are susceptible to data mining criticisms.” The second article, by Roger Grabowski (Duff & Phelps), takes a differing view. There are also two articles, one by James K. Herr (Alvarez & Marsal) and the other by Vincent Covrig (Crowe LLP) and his coauthors, that deal with volatility measurements and company size.

One reason for the differing views on the existence of the size effect is the time horizon of historical returns that is used. If you look at the last 35 years, the size effect is very different than if you go all the way back to the 1920s. You can clearly see this difference if you use the Cost of Capital Professional platform, which gives you control over the time horizon of historical return data that are appropriate for your case. That is, professional judgment is required in choosing the part of history you believe best represents investor expectations of the future.


In court, a picture is worth a thousand numbers

For an appraiser to be a good expert witness, he or she must be able to explain highly technical and complex financial concepts in a simple way. Forget about presenting a pile of spreadsheets—you need to boil it all down to a few effective pictures, graphs, charts, or other visuals. Don’t have too many exhibits or it will be hard for the court to digest. And they must be simple—if they’re loaded with too much information or jargon, the court may not grasp what you are trying to say. Should your chart use the label “EBITDA” or “earnings?” Instead of using technical terms, use simple and commonly understood words.

Chris Mercer (Mercer Capital) has testified in many complex valuation cases and will present a session, How to Present Complex Finance to Judges: KISS, at the upcoming AAML/BVR National Divorce Conference May 8-10 in Las Vegas. He will draw from over 30 years of experience presenting complex valuation and damages issues to judges and juries, including the powerful use of exhibits.

Fairness opinion provider rankings for 2018

The “Thomson Reuters Mergers & Acquisitions Review – Full Year 2018” contains M&A statistics and also rankings for worldwide providers of fairness opinions. Here are the top five providers (based on the number of transactions) of announced fairness opinions rendered in the United States:

  1. Duff & Phelps;
  2. Stout;
  3. J.P. Morgan;
  4. Houlihan Lokey; and
  5. Goldman Sachs.

Worldwide, the top five providers of announced fairness opinions are:

  1. Duff & Phelps;
  2. CITIC;
  3. Huatai Securities Co. Ltd.;
  4. J.P. Morgan; and
  5. Stout.

Extra: Save yourself time by using BVR’s Fairness Opinion Research Service (FORS). It gives you full access to hundreds of actual fairness opinions from around the world, searchable by any data point or field.

NACVA’s 2018 year in review

The National Association of Certified Valuators and Analysts (NACVA) has posted the organization’s 10 accomplishments and milestones for 2018. Among them are: the launch of a Certificate of Educational Achievement (CEA) for business valuation fundamentals and transaction advisory services; the fifth anniversary of its 40 Under Forty honoree program (the submission deadline for this year’s honorees is February 28); the launch of the NACVA Nation mobile app; and the appointment of one of its international chapters, the European Association of Certified Valuators and Analysts (EACVA), as a member of the International Valuation Standards Council (IVSC) as a valuation professional organization. The full list is available on NACVA’s website.

IPEV updates PE/VC valuation guidelines

International Private Equity and Venture Capital (IPEV), a trade group that sets valuation practices for private funds, has published the 2018 edition of its guidelines. The revised edition was designed to be more readable and eliminate confusion, and now contains explanatory comments. In addition, a number of enhancements have been made including:

  • Removing the use of the price of a recent investment as a technique to calculate fair value;
  • Replacing the term “Private Equity” with “Private Capital”;
  • Increasing detail on valuation considerations for early-stage investments; and
  • Adding further information on valuing debt as an investment.

BV movers . . .

People: Howard Fielstein, CPA/ABV/CFF, CFE, CIRA, CTP, ASA, CDBV, has joined New York City-based Grassi & Co. as a partner in its forensic, litigation support, and valuation services practice … Denise Dauphin, CPA, ABV, CFE, CFF, CGMA, CLP, formerly of Veritas Forensic Accounting, has joined Greenville, S.C.-based Elliott Davis in its forensic valuation and litigation support practice … Owen Sizemore, CPA, CVA, has been promoted to manager at Brady Ware & Co.; he specializes in business valuation and debt advisory services across a variety of industries; the firm has offices in Dayton and Columbus, Ohio; Atlanta; and Richmond, Ind. … The National Association of Certified Valuators and Analysts (NACVA) has named Achille Ekeu, CVA, of The Washington Valuation Group LLC, Outstanding Member—Fourth Quarter 2018 … David L. Maaskant, CPA, CVA, has been promoted from manager to member of his firm, Smith Elliott Kearns & Co. LLC (SEK); he’s in the firm’s Carlisle, Pa., office and provides business valuation and tax services to clients.

Firms: Cincinnati-based Barnes Dennig has joined with two firms: Lucarelli Tactical Group, which offers succession planning, capital raising, M&A, business valuation and financial management services to middle-market businesses, and Ducks in a Row, which offers back-office and outsourced controller services … McKonly & Asbury, based in Camp Hill, Pa., has acquired Brewer & Co. LLC and the addition of an office in Bloomsburg, Pa. Chicago-based Baker Tilly announced a merger with Plano, Texas-based Montgomery Coscia Greilich, which is expected to finalize on June 1; this will expand the firm’s presence in Texas, where it already has office in Houston, Dallas, Austin, and Fort Worth … Fish & Davis, CPAs and Homer Brown, CPA have merged with Dallas-based L&H CPAs and AdvisorsWhalen & Co., CPAs, headquartered in Worthington, Ohio, has joined CPAmerica Inc., an accounting association of independent CPA firms … Petkovsek & Moran (Madison, Wis.) has joined Johnson Block & Co. in its Madison office.

Please send your professional and firm news to us at


Upcoming BVR training events

  • Auto Dealership Valuation and Damages: Under the Hood (A BVR Web Workshop) (January 31), with Adam Lawyer (Dixon Hughes Goodman), Robert Davis (Dixon Hughes Goodman), Stephen Dietrich (Holland & Knight), and Joseph Roesner (The Fontana Group).

    Learn about the current environment of auto dealership valuations, damage claims frequently occurring within dealerships, and the impact on the economics of dealership operations.

  • The Valuation of Private Debt Investments: A Fair Value Update (February 12), with Antonella Puca (BlueVal Group LLC) and Andreas Dal Santo (BlueVal Group LLC)

    Based on new guidance, learn about the valuation methodologies that are suitable for private-debt investments and hear the key provisions of the guidance as they apply to private debt.

New and trending LinkedIn discussions

The Absence of a Size Effect Relevant to the Cost of Equity

Is a Merger Causing a Culture Clash in Your Organization?

OPM Backsolve and Convertible Debt Financing

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 today.

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