Battle of experts: Is it better to have BV or industry experience?

Two recent cases demonstrate that—as between two otherwise qualified BV experts, the one with the better industry and company-specific experience may prove the more credible:
           

• In Ringgold Telephone Co. v. Comm’r, T.C. Memo. 2010-103 (May 10, 2010) the U.S. Tax Court assessed the built-in capital gains tax triggered by a telecomm company’s sale of a 25% partnership interest after conversion to an S Corp. The IRS’s expert had only recently returned to BV practice (after ten years off) and had never valued a telecommunications firm. “Consequently, [he] took a more mechanical approach to the valuation of the [taxpayer’s] interest, relying heavily on historic data without significant adjustment to reflect prevailing market conditions in the telecommunications industry,” the court found. By contrast, the taxpayer’s expert was a CPA/ABV who had devoted the last ten years (and 25% to 75% of his time) to telecomm appraisals. On the basis of his “substantial experience,” the court found he “was able to factor in the specific conditions and outlook of the telecommunications industry, as well as the economic outlook in general, existing on the valuation date,” and adopted his appraisal.

• In Trahan v. Trahan, 2010 WL 2342653 (La. App. 1 Cir.)(June 11, 2010), the husband owned a profitable chemical company. The parties’ experts used a DCF approach with essentially the same inputs, but the wife’s expert adjusted the company’s profit margins (up) and operating expenses (down) according to industry averages and his own “judgment call.” On cross-examination, however, he conceded he didn’t know about the rising costs of chemical companies generally or the specific cost increases this company faced. By contrast, the husband’s expert used lower profit percentages and higher operating costs based on his extensive discussions with company management and his work with similar phosphate firms. Overall, the court found his DCF values to be more credible, because he was “more aware of the [company’s] activities” and his “numbers were more clearly supported by historical evidence.” 

Read the complete case digests in the next (August 2010) BVUpdate™. Copies of the court’s opinions will soon join the 2,000+ valuation-specific cases at BVLaw™.

New case law alters fair market value of intellectual property

The Supreme Court decision in Bilski v. Kappos opened the door to patents of new techniques and processes. But Bilski also paves the way for new challenges to expert witnesses testifying on the value of intellectual properties. At the BVR/Morningstar Summit on Best Practices in Valuing Intellectual Property, attorneys Lisa Brownlee and Jimmy Nguyen, both experts in intellectual property law, will discuss these and other issues in “Navigating Legal Minefields in IP Valuation: New Case Law,” the opening session of the Summit’s second day.
This session, along with many others, can be seen live in Chicago, or via a live webcast, September 15 and 16, 2010.  To find more information on the Summit, its agenda, or how to register, click here.

The debate on 409A valuations continues

We received another response to the item on 409A valuations in BVWire™ piece two weeks ago (“CFOs don’t value appraisals done for 409A compliance”):

• “There are those private company CFO’s who see ‘value’ in a properly completed – and priced – 409A engagement,” reports Mark Krikovich (MK Appraisal Group). “We are hearing from a number of our 409A clients that they are being heavily pitched by their onshore West-Coast banking partners for 409A work: as you can guess, it is on the cheap.  However, many of these CFO’s have informed us that they would rather pay a higher fee to avoid the conflicts posed by the banks’ investment in the company.   For us, the time to find substantial new AND properly-priced 409A work is long-gone.”
  

Even poor LeBron James is affected, reports Richard Meisner (Berman, Sauter, Record & Jardim, P.C.) in the blog 409A Dismay:

"As the ink dries on James’ new employment agreement, as well as those of Dwayne Wade and Chris Bosh, the Miami Heat and James’ attorneys will have inevitably contemplated and believed, in good faith, to have satisfied the requirements contained in the statute and in the accompanying regulations.”

Meisner pulled the quote from Jerald David August’s (Fox Rothschild) blog post “LeBron James, the Miami Heat and Section 409A of the Internal Revenue Code”.

Valuation Advisors' DLOM Study™ now contains over 300 convertible preferred stock transactions

Brian Pearson (Valuation Advisors LLC), developer of the Valuation Advisors' Lack of Marketability Discount Study, updated listeners on his pre-IPO database last week in a BVR webinar.  The Valuation Advisors DLOM Study database, which currently has over 4,300 transactions, is a valuation tool that compares the initial public offering stock price to pre-IPO common stock, common stock option and convertible preferred stock (CPS) prices.  Pearson and his team recently added 316 CPS transactions from 1999 “near the pentacle of the IPO market,” bringing the total to 386.

“What's interesting about running discounts for convertible preferred stock is those discounts arguably should be lower over time than stock if they're issued at the same point in time.  In other words, if you looked at a transaction issued 12 months before an IPO date – one being stock, one being convertible preferred stock – the convertible preferred stock transaction should reflect a lower discount, not a higher discount,” Pearson remarked.

To learn more about the Valuation Advisors’ Lack of Marketability Discount study click here, and for more information on the BVR webinar on the subject click here.

Comments on new IVSC standards due by September 30th

Yesterday the International Valuation Standards Council (IVSC) released an exposure draft of proposed new International Valuation Standards (IVS) for public comment.
The IVS are designed to:
 

• promote consistency and aid the understanding of valuations of all types by identifying or developing globally accepted principles and terminology,
• identify and promulgate common principles for the undertaking of valuation assignments and the reporting of valuations,
• identify the appropriate valuation objectives and solutions for the major purposes for which valuations are required,
• identify specific issues that require consideration when valuing different types of assets or liabilities,
• promote the convergence of existing valuation standards that are in use in different sectors and states.

Comments may be sent as email attachments to CommentLetters@ivsc.org, or by post to the International Valuation Standards Board, 41 Moorgate, London EC2R 6PP, United Kingdom.

Pellegrino chairs BVR Summit on IP valuation; final agenda announced

Plan now to join us in Chicago Sept 15-16 and grow your intellectual property valuation business.   Conference chair Mike Pellegrino (the author of BVR’s Guide to Valuing Intellectual Property) will initiate the Summit with his unique perspective on the primary importance of patents, trademarks, copyrights, brands, and trade secret assets in corporate capital structures now, and what they mean for the financial analysts, appraisers, lawyers, and IP owners who must analyze, defend and maximize intangible asset value.  Intangibles dominate balance sheets, so the methods and standards of valuation are critical, and filled with opportunity.
Other topics presented include:

• Standards and Risks for IP Value:  The International Perspective: Thayne Forbes (Intangible Business Ltd.) and Jackie Maguire (Coller IP Management).
• IP Valuation and Management and their Impact on Shareholder Value:Michael Friedman (Ocean Tomo)
• How Prudent Management of IP is Dependent Upon Sound Valuation: Daniel Steinert (Ocean Tomo) and Patrick Sullivan (ICMG LLC)
• Roles in Valuing IP: A Case Study: Jimmy Nguyen (Wildman Harrold), Ron Laurie (Inflexion Point Group), Robert Reilly (Willamette Management Associates), and David Ruder (RPX Corporation)
• Transfer Pricing of IP Assets: Wes Cornell (Ceteris) and Vinay Kapoor (Duff & Phelps)
• Monetizing IP Assets to Increase Shareholder Value: Mike Pellegrino (Pellegrino & Associates), Ron Laurie (Inflexion Point Group) and Suzanne Harrison (Gathering2.0)
• Patent Damages:  Managing the Risks and Contingent Costs:Rick Bero (The BERO Group) and John Bone (Stout Risius Ross, Inc.)
• The Critical Intersection of IP Valuation and Fair Value for Financial Reporting: Mike Pellegrino (Pellegrino & Associates), Bryan Benoit (Grant Thornton LLP), William Johnston (Empire Valuation)
• Navigating Legal Minefields in IP Valuation: New Case Law: Lisa Brownlee and Jimmy Nguyen (Wildman Harrold)
• IP Valuation Research: Defending Your Conclusion of Value:  Robert Reilly (Willamette Management Associates)
• Early Stage Valuation: Chris Bakewell (Duff & Phelps), Ron Seigneur (Seigneur Gustafson LLP)
• Where Do We Go From Here?  Conference Summary and Conclusions: Mike Pellegrino (Pellegrino & Associates)

To register click here.

Valuing an auto dealership?  Let Alerding, Yeanoplos and Woodward guide you

On Thursday July 29th, appraisers Jim Alerding (Clifton Gunderson) and Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) will join Carl Woodward (Woodward & Associates) for “Valuing Auto Dealerships”, a BVR webinar. From “bail-outs”, recalls, “cash for clunkers”, and industry innovations to operations, accounting, and service and repair departments, these three experts will cover everything you need to know when valuing an auto dealership.  To find out more or to register, click here.  Two CPE credits are available.

Blockage discounts apply to art valuations too

Lance Hall’s (FMV Opinions) recent article “Solving the Blockage Discount Dilemma” (BVUpdate Aug 2010) brought readers up to date on the use of blockage discounts in business valuations; Alan Breus’ (The Breus Group) recent Journal of Accountancy (July 2010) article addresses the use of blockage discounts when valuing art for tax and non-tax purposes.

“The concept of a blockage discount in art is borrowed from business valuation. It describes the reduction in value when similar items are presented for sale at the same time,” Breus reports. “In art, the concept was first applied to the estate of artist David Smith, who left as part of his estate assets over 400 sculptures. The estate convinced the Tax Court that, as a group, the sculptures should be devalued, as there would not be
enough ready and able buyers willing to pay full price if the items were offered for sale at the same time. The agreed-upon discount was 37%.”  Breus also discusses other decisions recognizing blockage discounts of artworks for gift tax purposes, such as Calder v. Commissioner, 85 TC 713 (1985) and Estate of Georgia T. O’Keeffe v. Commissioner, TC Memo 1992-210.

Click here for the full text of the article “Valuing Art of Tax Purposes.”

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