BVR Logo January 22, 2020 | Issue #208-3

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:



Bankruptcy Court highlights comparables selection in assessing experts’ valuations

A meaningful comparable company analysis requires careful selection of comparable companies, the Bankruptcy Court recently emphasized in a case in which it ruled on the debtor’s proposed reorganization plan.

The debtor was a group of related entities that mined and produced silica sand used in hydraulic fracturing, i.e., fracking. It headed into Chapter 11 bankruptcy as a result of industry-related problems and events specific to the company. After unsuccessfully pursuing an out-of-court restructuring, the debtor, in July 2019, began in-court proceedings. The issue was whether the debtor’s reorganization plan was confirmable over the objection of several parties, including a class of general unsecured claims holders (Class 6) that would get nothing under the plan. A committee represented the interests of Class 6 at the plan confirmation hearing.

Under the Bankruptcy Code, the debtor had to show that the plan was “fair and equitable” to Class 6. If the debtor succeeded, the court could impose the plan (cram down the plan) on Class 6. Under the facts of the case, the unsecured creditors would only be entitled to a distribution if the total enterprise value (TEV) of the reorganized debtor exceeded the $317 million debt hurdle. If the committee could show the TEV exceeded the total outstanding obligations, the plan, as it was, was not confirmable.

Key value driver: The committee’s expert valued the debtor’s TEV between $335 million and $445 million. The midpoint was $390 million. The unsecured creditors would be in the money by $73 million. The debtor’s expert calculated TEV in the range between $180 million and $220 million, with a midpoint of $200 million. The court said it lacked market evidence as to the value. Therefore, the court’s decision “must rest on the battle of the parties’ valuation experts.” Both sides’ experts were highly qualified, used the same valuation methods (discounted cash flow analyses and comparable company analyses), and weighted the results similarly. “Yet despite these similarities, the experts reached vastly different value conclusions,” the court noted.

The court’s analysis focused on disagreements related to the experts’ comparable company analyses, specifically the selection of comparables. The set of comparable companies was a “key value driver,” the court said, because the companies “serve as a proxy for the subject company’s market and industry volatility and related future cash flow generating ability." The debtor’s expert considered five companies as possible comparables to the debtor, but, upon examination of their relative size, composition of assets, and the market they served, narrowed the set to two companies. The committee’s expert considered the same five companies and only excluded one company. The experts disagreed over the exclusion of the other two companies.

The court sided with the debtor’s expert, noting he had provided materials and testimony that showed the contested companies were not true comparables. Both had much more diversification of business lines, and both were bigger in size and scope of operation than the debtor. Diversification was a “not insignificant” characteristic and was unique among the comparable set, the court said. Relative to the other companies, diversification increased the contested companies’ revenue-generating ability and profitability and reduced their dependency on the fracking market. Arguing for inclusion, the committee’s expert said that all four companies were competitors of the debtor, which suggested they were similar. “Competitors and comparables are two completely different animals,” the court noted, citing the debtor’s expert. A company may be the debtor’s competitor but may not be a suitable comparable. The court noted that the committee expert’s larger set of comparables increased the debtor’s TEV by $78 million.

The court’s decision also notes several other disagreements over inputs for the valuation models but says the evidence was clear that the debtor’s TEV could never surpass the debt hurdle. The plan was confirmable but required modification as to an unrelated issue.

A digest of In re Emerge Energy Services LP, 2019 Bankr. LEXIS 3717 (Dec. 5, 2019), and the court’s opinion will be available soon at BVLaw.

Discover the magical functions of Excel for BV

Spreadsheets can be a valuation analyst’s best friend–or a worst enemy, according to Shawn Hyde (Canyon Valuations), a valuation practitioner and Excel enthusiast. In fact, he teaches classes in the power and potential of Excel for business valuation. He recently shared some tips and tricks he’s learned from over 20 years of using spreadsheets (starting with Lotus 1-2-3!) for valuation analysis.

Check this out: “One of my biggest problems was linking a formula to a very specific number on a different spreadsheet and then, after completing my analysis, finding out that the very specific number I had selected originally had been replaced by some other number,” recalls Hyde. Then he discovered a pair of “magical functions” that solved the problem: INDEX and MATCH. “When used together, the effect is awesome because it now incorporates the very labels that I use in my spreadsheets to identify my data in the exact formulas I use to analyze that data!”

For example, a common line on Excel is labeled “Officer Compensation,” and this expense may need a normalizing adjustment, so instead of typing “=” or “+” and then clicking on the number in the spreadsheet and hoping it stays there, use the INDEX and MATCH functions to make sure the data are not being mislabeled. “If my data happens to move on my spreadsheet, the references are locked in so it doesn’t matter, as the formula will always return exactly what it says it is presenting,” says Hyde.

New book: Hyde is the author of Building the Essential BV Templates in Excel, in which he walks you through the nuts and bolts of building Excel templates for business valuation analysis. You can cut and paste formulas from the book right into your spreadsheets. Plus, you get web access to Excel template samples and a video that demonstrates the INDEX and MATCH functions! (Note: If you are a subscriber to BVResearch Pro, this book is included with your subscription.)

Little-known feature of the VA pre-IPO study

Did you know that the Valuation Advisors Lack of Marketability Pre-IPO Discount Study also contains convertible preferred stock (CPS) transactions? Many valuation experts may not be aware of this, says Brian Pearson (Valuation Advisors) in an interview in the February 2020 issue of Business Valuation Update. “These pre-IPO transactions are often with very sophisticated investors, and therefore there are lots of arm’s-length negotiation of price and terms on these investments,” he says. “I think they provide a good floor for discounts for the time period to liquidity that the BV professional is considering. This is especially true since oftentimes they do offer the holder some form of income in the form of dividends. Also, the CPS transactions are useful if you are valuing an entity such as an LLC or FLP that may hold primarily investment securities. “The income nature of CPS offers a good reference point for the discount for lack of marketability (DLOM) of such entities,” he says.

Free webinar: Pearson will conduct a free webinar, Pre-IPO Revival: Up Your DLOM Game in 2020, on January 29. Pre-IPO studies have withstood criticisms and court challenges to remain a viable method for developing a DLOM. A 2018 BVR survey showed that 38% of respondents use pre-IPO studies for estimating DLOM, second only to restricted stock studies.

Fairness opinion provider rankings for 2019

The “Global Mergers & Acquisitions Review: Full Year 2019/Financial Advisors” from Refinitiv 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 (2018 rank: 1);
  2. Stout (2018 rank: 3);
  3. Houlihan Lokey (2018 rank: 2);
  4. J.P. Morgan (2018 rank: 4); and
  5. Morgan Stanley (2018 rank: 12).

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

  1. Duff & Phelps (2018 rank: 1);
  2. J.P. Morgan (2018 rank: tied for 3);
  3. (tie) Houlihan Lokey (2018 rank: 5);
  4. (tie) Stout (2018 rank: 6); and
  5. CITIC (2018 rank: 2)

(Note: This report was previously the “Thomson Reuters Mergers & Acquisitions Review.”)

TAF seeks candidates for its board

The Appraisal Foundation (TAF) is looking for qualified candidates to fill three at-large seats on its board of trustees. The TAF’s board oversees the funding, work, and members of the Appraisal Standards Board and the Appraisal Practices Board. The TAF board meets twice a year, and appointed members will serve three-year terms beginning Jan. 1, 2021. Completed applications for the board vacancies are due by March 6. For information regarding applications, click here.

ASA sets date set for its Fair Value Conference in Los Angeles

Regardless of whether or not you practice in the area of fair value, mark your calendar for the 15th Annual ASA/USC Fair Value conference on Thursday, June 18, at the offices of KPMG in downtown Los Angeles. Why attend if you don’t practice in this area? In recent years, the advancements in fair value measurements have spearheaded developments in valuation theory. New thinking about control premiums (market participant acquisition premiums), contingent consideration, reconciling the income and market approach, and the multiperiod excess earnings method are examples of fair value issues that have spilled over into other areas of valuation. BVWire attends this important full-day event every year because it consistently features nationally recognized speakers and timely topics. Stay tuned for the agenda and more details.

The story’s the thing at EACVA confab

A keynote address at the European Association of Certified Valuators and Analysts (EACVA) 13th Conference for Valuation Professionals stressed the importance of storytelling in business valuations. Dr. Aswath Damodaran (New York University Stern School of Business) spoke about the two camps in the world of investing and finance: the number crunchers and the storytellers. Numbers are empty—unless they are connected with a narrative. Likewise, stories matter in the valuation process—but only if they are connected with the numbers. Damodaran is so passionate about this topic that he wrote a book on it.

The EACVA event brought together more than 370 business valuation professionals, corporate finance and tax consultants, analysts, controllers, lawyers, and academics from 20 different countries in Europe and beyond, according to a blog post. This year’s conference will be October 29-30 in Munich, Germany.

Preview of the February 2020 issue of Business Valuation Update

Here’s what you’ll see:

  • Pre-IPO Studies Endure to Retain Foothold in the DLOM Toolbox” (BVR Editor). Pre-IPO studies have withstood criticisms and court challenges to remain a viable method for developing a discount for lack of marketability (DLOM). Over a third (38%) of valuation experts use them, according to a survey. Includes an interview with Brian Pearson of Valuation Advisors, a provider of the largest pre-IPO study.
  • Assessing Cybersecurity Risk When Doing a Business Valuation” (BVR Editor). Don’t fall into the trap of thinking that just large firms face material risks related to data security and privacy concerns. Here’s a checklist for the guidance of valuation professionals to help assess these risks when performing a business valuation.
  • Examining the Correlation Between IP and Startup Valuations” (Efrat Kasznik, Foresight Valuation Group LLC). Based on recent studies, this article discusses the role that intellectual property (IP) assets play in startup valuations and the IP strategy startups implemented that recently went public.
  • Rollover Equity: Don’t Just Take It at Face Value” (Charles Sapnas, Valuation Research Corp.). The rights and preferences of rollover equity compared to the private equity sponsor’s shares and the sources of deal financing have important implications for valuation.

The issue also includes:

  • An expanded section of “BV News and Trends/Global BV News and Trends.”
  • Regular features: “Ask the Experts” and “Tip of the Month.”
  • BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the February 2020 issue of Business Valuation Update.

BV movers ...

People: John Czapla has been appointed chairman of the board at Valuation Research Corp. (VRC), which was effective as of January 1; he succeeds Neil Kelly, who will continue serving on the board as vice chairman … The National Association of Certified Valuators and Analysts (NACVA) has named Charlotte R. Clark, CPA, CVA, ABAR, a manager at Squire & Co. PC, a Utah CPA firm of 135 employees, outstanding member for the fourth quarter of 2019 … Julia Miessner, CPA/ABV/CFF, CGMA, has been admitted as a partner at Tucson, Ariz.-based BeachFleischman; she is the practice leader for the firm’s financial forensics and valuation services group … Carrie Zhou, ASA, has been admitted into the partner group at Atlanta-based Aprio.

Firms: New York-based Citrin Cooperman has acquired LGSH of Encino, Calif., adding 10 additional partners and 55 staff members … Fiondella Milone & LaSaracina, based in Glastonbury, Conn,. has merged with two Connecticut firms, Viola Chrabascz Reynolds (VCR), with offices in Enfield, Simsbury, and Stafford Springs, and Formica & Dobkin of Berlin … Miami-based MBAF (which is celebrating its 50th anniversary) has acquired Kramer & Associates of Coral Gables, Fla., bringing five full-time professionals to the firm … Chicago-based UHY LLP and UHY Advisors Inc. has added Pattison Koskey Howe and Bucci (PKHB), which operates six offices in the Hudson Valley area of New York; the deal adds three partners, six principals, and approximately 50 additional professionals and administrative staff to UHY.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

  • Fair Value Measurements in 2020 (January 28), with Mark Zyla (Zyla Valuation Advisors LLC). Part of BVR’s Special Series on Fair Value.

    A lot is going on in the world of fair value! One important matter is a possible revision to the goodwill impairment model that has triggered some passionate discussions. That, along with other current fair value issues, will be discussed.



We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at: info@bvresources.com.


LinkedIn Icon
Twitter IconYouTube Icon

Business Valuation Resources, LLC
111 SW Columbia Street, Suite 750, Portland, OR 97201
1-503-479-8200 | info@bvresources.com
© 2019. All rights reserved.