Don’t throw Ibbotson’s out with the bathwater

“As analysts of private equity, we can access many sources of information from public and private databases,” writes Nancy Fannon, responding to the recent BVWire item on the possible obsolescence of Ibbotson’s and other cost of capital data (and methods) drawn from the public securities market.   “But let’s step back and think about what we’re doing when we value a private company, and why we use market transactions data in the first place.  Each source of data can inform the analyst about investment risks.  All require careful analysis, understanding, and adjustments before being applied to any private company.”  Neglecting to consider certain sources just because they require diligence and care—or adjustment—“is like throwing the baby out with the bathwater.”

Fannon is currently slated to lead a session on the use (and abuse) of market transaction data at the AICPA BV conference in December.  She’s also hard at work (with co-author Heidi Walker, also from Fannon Valuation Group) on BVR’s Complete Guide to Applying Market Data in Valuation Analyses, due out this fall.  Look for an excerpt in an upcoming issue of Business Valuation Update™.   

BV is a ‘maturing’ profession (but ‘it ain’t rocket science’)

The results of last week’s survey, asking whether business valuation is an “industry” or a “profession,” came out resoundingly in favor of the latter, 92% to 8%.  Predictable, perhaps, but the comments provided the surprises, insights—and intelligence:

  • I concur that business valuation is a profession.  However…the Standard Industrial Codes consider ALL professions as industries.
  • If it has an SIC or NAICS code, it’s an industry…After all, an industry is a group of competitors delivering similar output to similar elements in the same target market…This ain’t rocket science.
  • The major difference between an industry and a profession is that [the latter] has a code of ethics.
  • [The distinction between product/service] is off the mark.  Is the teenager who cuts my lawn engaging in a ‘profession’?...A profession is characterized as a vocation based on a written body of knowledge, with recognized ethical standards.

“We are a relatively ‘immature’ profession,” another commented, and cited this “legal” definition:

[A profession is] a calling requiring specialized knowledge and often long and intensive preparation, including instruction in skills and methods as well as in the scientific, historical, or scholarly principles underlying such skill and methods, maintaining by force of organization or concerted opinion high standards of achievement and conduct, and committing its members to continued study and to…work which has for its prime purpose the rendering of a public service.”  Lawyers Title Insurance v. Hoffman (Neb. 1994).

Given the divergence of opinion, we’re keeping the lines open for another week; please take a few moments to cast your vote and add your voice to the survey.

Hitchner, Grabowski, Mercer: a dream team on buy-sell

We feel like a professional team that just won all three of its top draft picks.  BVR’s next teleconference will feature the “dream team” panel of Jim Hitchner, Roger Grabowski, and Chris Mercer for “Buy-Sell Agreements: Opportunities & Challenges for Business Appraisers.”  The last in a three-part series, the discussion will kickoff with each expert delivering a central message to appraisers on buy-sells, followed by a discussion of the biggest problems, best and worst experiences—and what each would like to see in a “best of all possible” buy-sell world. 

To register for the July 19th conference, click here; copies (CD or transcript) of the first two parts of the series are also available at that site.

ESOP case opens the door to trustee/appraiser liability

“On the surface, Armstrong is really an unremarkable ruling on the standard of review applicable to decisions of [ESOP] trustees,” writes Michael Molder, JD, CPA, CFE (Margolis & Co., P.C.) after reading the abstract of Armstrong v LaSalle National Ass’n from last week’s BVWire.  “The substance of the decision is that trustees must necessarily use their judgment in balancing the competing interests of stakeholders in the trust, and courts should defer to the reasonable exercise of that judgment.”   As the record didn't explain the valuation method used in the case—including the application (or failure to apply) marketability discounts, the Court’s discussion of DLOM was “dicta” (non-binding), and may have been a chance for Judge Posner, an extremely sophisticated jurist, to vaunt his economic expertise.

“The greater concern…for the valuation professional is what plaintiff’s attorneys can do with the actual holding,” Molder says.  “Armstrong actually imposes an obligation on the trustee, and indirectly on the valuation professional, to consider matters clearly outside the scope of the traditional business valuation” and the traditional definition of fair market value.  For example, following Posner’s logic, “does the appraiser now have to consider a whole host of outside factors, such as the projected retirement dates of employees?”

Yesterday’s teleconference on ESOP Valuation considered such questions and more; copies of the transcript and CD are available here

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Another ‘bad facts’ FLP case reminds analysts:
Check third-party assumptions of value

The U.S. Tax Court just issued yet another opinion involving “bad facts” and the formation of a family limited partnership (FLP).  In Estate of Gore (June 27, 2007), the children of an aging, wealthy widow (on advice of a CPA and legal counsel) formed an FLP with themselves as general partners.  But the FLP held no title to anything but a bank account, was never fully capitalized until after the widow’s death, and had been used for the widow (and children’s) support during her lifetime.  “The estate planning on behalf of…the decedent reflects a remarkable and persistent pattern of informality and inaction,” the Tax Court observed, making its 74-page findings a long but not surprising read.

The decision also mentions an “informal valuation opinion letter” accompanying the widow’s gift tax return, which included “an adjusted aggregate nonmarketable and noncontrolling” value for the FLP.  “Seems appraisers should now look carefully on the assumptions of value provided by attorneys, CPAs, and other third parties,” especially in light of the new IRS penalty provisions, comments Owen Fiore ( (who has some knowledge of all that entails).  In this month’s (July) BVU, Fiore looks at ten years of FLP case law and the challenges appraisers now face in helping attorneys, advisors, and clients to preserve the continued viability of these estate-planning entities through a “team” approach.

New *free* download:  And we’ve just added the IRS’ most recent FLP settlement guidelines to the free valuation downloads at
Best kept secret in the BV-world? 

The business valuation blog written by Rand Curtiss may be the “best kept secret on the Internet,” according to the Institute of Business Appraisers, which publishes the blog at its website (look under the “Discussion Group” link).   The postings are practical, no-nonsense, and fast-paced.  The ten most recent appear with the current day’s blog, and archives contain past discussion threads.  Subjects are far-ranging, from “What kind of BV work do you want to do?” to the technical aspects of risk and return adjustments.  The most recent issue of the IBA’s newsletter, also available at its website, lists twenty of the “Pop Quiz” topics that appeared on the blog, including whether the Gross decision on tax-affecting makes sense, how to respond to a seller who wants you to value unreported income, and more.

For the good that they do:  Also of note from this year’s IBA Symposium in Denver, the second annual ”On the Shoulders of Giants” award went to Stanley L. Pollock, DMD, CBA, PhD, JD and his wife, Debbie Pollock, for their contribution of $50,000 toward the establishment of the Ray Miles Business Appraisal Research Foundation.  Chris Treharne will help spearhead the project; we’ll keep you posted with details and fundraising efforts in future issues.    

‘Take vacations—without your cell phone’

Next week, the BVWire will be taking the advice of Lance Hall, who recently spoke to appraisers and valuation analysts at NACVA’s 14th Annual Consultants’ Conference in Washington, D.C.  His session, “Guiding Your Practice to Larger Fees, Higher Profits, and Greater Personal Satisfaction” focused on the “economics of scarcity.”  That is, the value of anything—be it product or professional—goes up when it’s rare or scarce.  “By making yourself less available,” and by focusing your time on quality engagements and clients, “you’re putting a higher value on your own time and talents.”  Delegate all but your unique abilities and intellectual capital, he advised.  And yes—take vacations without cell phones.

The BVWire plans to do just that in the coming week; we’ll be back with our next edition July 25th.  Best wishes to everyone for an enjoyable summer break, whenever that may be.


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