Valuation cases booming
The BVLaw database—the only online repository of all leading valuation-specific case law—has just tipped 3,000 cases, both federal and state. More than a quarter (25%) of these court opinions has come in during the past five years—and the database goes back at least 30 years, to 1980. Just to give you an informal snapshot: in 2005, the Business Valuation Update averaged 5 to 6 digests of published valuation cases per month. This year we’re averaging 10 to 12.
What’s behind the increase? In part, BVLaw has continued to expand its search parameters as valuation-specific issues begin to spread from straight business appraisal to lost profits and economic damages, IP, reasonable compensation, fair value for financial reporting, and more. This follows the basic trends behind the growth and maturity of the profession; that is, in the beginning, business valuation was largely focused on valuing fixed assets, but has since come to encompass the more complicated intangibles such as goodwill, trademarks and patents, customer base, brands, etc. Analysts have met this trend with more sophisticated financial models and “structured” analyses. Certainly, the FASB and fair value for financial reporting put a new spin on valuation issues during the past decade. The ongoing recession has brought more focus on hard-to-value assets in bankruptcy, securities litigation, fair value appraisal, and breach of fiduciary cases, while Daubert and its progeny have made a preliminary challenge to expert financial evidence practically “de rigeur” in the current litigation climate.
Even IRS cutbacks don’t seem to have stopped the rising tide of tax cases concerning private company valuation, FLPs, fractional interests, and discounts. “I’m just not seeing a downtrend anywhere,” reports Sherrye Henry Jr., BVR’s Legal Editor. “If the economic sky is indeed falling these days, Chicken Little is probably running around hiring an attorney first, and a valuation expert next….” What’s your take on this perceived boom in valuation case law? What’s behind it—and will it continue? Email your comments to the editor.
Majority of gift tax valuation discounts in 2008 exceeded 40%
“There were 102,608 gifts given in 2008 against which valuation discounts were taken,” reports IRS economist Melissa J. Belvedere in the recent IRS publication 2008 Gifts, “and the dollar value of these discounts totaled $3.7 billion.” The majority of discounts exceeded 40% of the reported fair market value of the gifts, Belvedere adds. “Approximately 43.6% of discounted assets were stock, while real estate made up 21.1% of discounted assets.” Remember, the statistics are for 2008 gifts, and the IRS’s posture towards these discounts for gifts in 2009 and later might be different given the current U.S. deficit woes.
When is it appropriate to use a calculation of value in court?
When the court specifically asks for one! At least, that’s the implicit reading of a new California divorce case, in which both party experts valued the husband’s 80% interest in a radiology software company at the beginning of the marriage (1995), for determination of its appreciation at its sale three years later (for $7.5 million). The husband’s expert used the comparable transactions approach, which better captured the high-tech startup’s value, he said. At the same time, he relied on sales data that took place after the valuation date because earlier comps “were not on hand at his office.” The court agreed with his method but ordered both parties to find better comps—and at the next hearing, the husband’s (new) appraiser said he had searched “numerous” databases but could still find only one comparable sale that took place before the valuation date; the remainder took place within a year.
Nevertheless—citing an article by Shannon Pratt in the March 2002 Business Valuation Update, (“Should Subsequent Events be Considered in the Present Value of the Business Entity”), the expert maintained that these comps were the best evidence of value under the facts of the case, particular given the availability of six transactions within a year of the valuation date, including three sales of radiology systems; the intervention of the Stark laws; and the likelihood that the subsequent sales were past the initial offer stage as of the valuation date. The court agreed, and adopted his $6.25 million value—and the wife appealed, arguing in part that the husband’s expert had “only” a calculation of value (under the applicable ASA BV standards).
That may be, but the expert was operating under specific instructions from the trial court to present “comps only” evidence, the appellate court said. “Whether labeled a ‘calculation’ or ‘conclusion,’ [the expert’s] analysis was valid evidence upon which the trial court properly relied,” it ruled, and confirmed the $6.25 valuation. Read the complete digest of In re Marriage of Price and Turkanis, 2011 WL 1783096 (Cal. App. 2 Dist.)(May 11, 2011) in the August 2011 BVUpdate; the court’s opinion will be posted soon at BVLaw.
Before using industry and economic data, understand its derivation
In the recent Manpower, Inc. v. Insurance Co. of the State of Pennsylvania, 2011 WL 1356945 (E.D. Wisc.)(April 11, 2011) (digested in the July 2011 BVUpdate), the court declined to reconsider its Daubert ruling, which excluded the expert for basing his growth rate (7.76%) on the five-month revenue period just before the relevant damages date. What should the expert have done differently?
Laura Pfeiffenberger (Fannon Valuation Group) says, “rather than consider management interviews and historical growth rates in a proverbial ‘judgment’ vacuum, Manpower, Inc.’s expert should have reinforced the argument for the selected growth rate by considering the company’s historical performance and forecasts available in the context of industry and economic outlooks available at the time of the damages period. This information is readily accessible from a number of sources widely used and commonly accepted by forensic accountants and finance and valuation professionals. However, experts should be cautioned that their selected industry and economic data may be vigorously challenged and thus, to survive a Daubert motion, they should be familiar with how the selected data was derived. In some instances, it may be appropriate for an expert to use such data in a yardstick method to show a guideline company’s performance or growth as a proxy for the damaged company’s affected revenues and profits.”
Economic damages experts commonly use both options in lost profit cases, as discussed in more detail in BVR’s The Comprehensive Guide to Lost Profits Damages for Experts and Attorneys.
Personal goodwill may not be a marital asset absent a non-compete
William Holmer (First Princeton Corp.) joined NACVA members last week in BVR’s conference room to discuss Slater v. Slater, 2010 WL 5356556 (Or. App.)(Dec. 29, 2010). Holmer was the expert for the husband, who owned a chiropractic practice.
“Using Slater as an example, Holmer made it clear that it is important to distinguish between valuing the shares of the company versus valuing the company itself,” says Stuart Weiss, CPA/ABV, CVA and president of NACVA’s Oregon chapter. That perspective was important because anyone looking at buying shares in the chiropractor’s practice would be concerned about the lack of a non-compete agreement as well as the lack of an employment contract tying the doctor to the practice. In Slater, Homer concluded that most of the goodwill was personal and not enterprise. “To consider goodwill a part of the business, the wife assumed that Dr. Slater would eventually sign a covenant not to compete if the business were put up for sale, a fact not in evidence,” Holmer told the group. The court agreed with Holmer and concluded that any enterprise goodwill was minimal. Slater v. Slater is available at BVLaw.
Now, go educate the attorneys. During last week’s BVR webinar Goodwill in Divorce, presenter James Alerding (Clifton Gunderson) said “most states are firmly entrenched in the division of personal and enterprise goodwill.” But don’t expect attorneys to know anything about it, co-presenter Andrew Soshnick (Baker Daniels) added. Alerding provided a list of common and not-so-common factors that analysts should consider when determining personal versus enterprise goodwill in divorce cases. Download Examples of Factors Implementing Personal Goodwill in Cases on the BVR Free Resources page.
New survey provides insight how companies view IP—and the risks associated with it
“The topic of IP and intangible assets is becoming more prominent to businesses around the globe and it will be interesting to see if IP becomes the subject of more risk management planning,” says Matthew Hogg, lead author of 2011 Intellectual Property Survey Report, just released by Liberty International Underwriters and Marsh, which documents how companies view IP. For example, survey respondents indicate small and medium enterprises (SMEs) value patents more highly than larger companies, and 32% of respondents have had at least one licensing dispute action against them.
Revised International Valuation Standards are now available
The International Valuation Standards Council (IVSC) had just released its International Valuation Standards 2011.The revised edition includes the IVS framework, three IVS general standards, six IVS asset standards, and two IVS valuation applications.
New Insights on forensic analysis and dispute resolution
Willamette Management Associates just posted its Insights Summer 2011 issue online, including these full-text articles:
M&A sector is still on the rebound
In their State of the M&A Markets – Second Quarter 2011, PCE Investment Bankers report continued positive trends in M&A transaction volume. “Median valuation multiples in the less than $50 million, $50-$100 million, and greater than $250 million range increased over 1Q10 median multiples while median multiples in the less than $100-$250 million segment decreased by 21.9% versus 2Q10,” says the report author Michael Poole.
Noting similar trends, the new report by investment bank Berkery Noyes, First Half 2011 Online & Mobile Services Industry M&A Report, analyzes 2,750 transactions between 2009 and the first half of 2011 and concludes:
- Total transaction volume increased by 13% over 2009, from 199 in 2009 to 224 in 2010.
- Total transaction value increased by 81% over 2009, from $6.43 billion in 2009 to $11.62 billion in 2010.
- Both the median EBITDA and revenue multiples in 2010 have increased from 2009, with the EBITDA multiple rising 36% from 8.1 to 11.0 and the revenue multiple rising 50% from 1.2 to 1.9.
In the “Main Street” M&A arena, BVR has just updated the BIZCOMPS® database with details on 400 sold private businesses. The deals in this update had a median selling price of $197,500 (excluding inventory) and a median Seller’s Discretionary Earnings of $110,000. In addition to this update, BVR is now offering the BIZCOMPS/BVR Deal Review publication, an exclusive new complimentary report that’s included with a BIZCOMPS subscription through BVR; click here for details. Lastly, we’ve added the “harmonic mean” to the subscriber results for the Sale Price to Annual Gross and Sale Price to SDE valuation multiples. To learn more, click here and “find” harmonic mean on the BIZCOMPS FAQ page.
The ‘January effect’ in July
On July 28 BVR welcomes experts Michael Crain (The Financial Valuation Group) and William Kennedy (FTI Consulting) for “The Diminishing Size Effect and Link to Liquidity Risk,” a 100-minute webinar. Crain and Kennedy will discuss studies reviewing anomalies like the “January effect” (whereby the size effect appears most prominently in January) and the concentration of the size effect on smaller listed firms. They will also reveal what new research in this area means for appraisers today.
New update to Business Reference Guide Online, with free guide
Business Valuation Resources has just posted the second online update this year to the Business Reference Guide Online. The fully searchable database, one of the most widely used references in the business, includes sections on rules of thumb, general information, expert ratings and comments, pricing tips, benchmarks, expenses as a percentage of sales, industry trends, advantages, disadvantages and more. Click here to review the visitor results for the 102 new updates (subscribers can login to view full results) or here to purchase the online database, which now includes a complimentary print version, The 2011 Business Reference Guide.
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