July 10, 2013 | Issue #130-1  

TAF BV Roundtable on future of profession

While the BV profession has come a long way, more work is needed on cohesiveness and direction, panelists agreed during The Appraisal Foundation Business Valuation Roundtable II held recently in Washington, D.C.

Valuators, auditors, and regulators (including the SEC and PCAOB) all agreed that there should be one set of valuation standards (as well as improvements to the actual process of setting standards) and more “meat” to BV credentials. A clear enforcement arm or mechanism to ensure that valuators are following best practices is also recommended. Although leaders from top audit firms on the panel feel there is enough oversight in place, it was suggested that an independent entity be formed and empowered to oversee all aspects of the profession.

Good news. It was decided that the TAF BV Roundtable, which began last year, will be an annual event. BVWire applauds this decision and the efforts of the TAF to recognize the issues and put them on the table for ongoing and meaningful discussion.

More details on the event will appear in the August issue of Business Valuation Update.

IVSC issues exposure draft on valuation of derivatives

The lack of global standards for the valuation of derivatives and the corresponding lack of trust in the valuations that have been done in this area have prompted the International Valuation Standards Council to issue an exposure draft, Valuation of Equity Derivatives.

This is the first of a planned series that will include similar guidance on derivatives for foreign exchange, fixed income, and commodities. Comments on the exposure draft are due by September 30.

“All companies that hold any sort of financial instrument need to value these in their accounts, and for banks and other financial institutions these valuations are also critical for regulatory compliance,” says Ana Castañeda, the IVSC board member leading the project. “However, while trillions of dollars of derivative contracts are in existence there is too little understanding of the principles that underpin their value. Our project is aimed at identifying generally accepted good practice and bringing greater transparency and trust to the process.”

No mapping. While the exposure draft describes the main types of equity derivatives and various valuation models, it does not explain which model would be appropriate for which derivative product.

Defendant challenges valuation expert over relying on defendant’s own data

Can a defendant credibly attack a damages expert for basing his analysis on the defendant’s own projections? This was the key issue on appeal in a recent case in which a minority owner sued the majority owner for breach of fiduciary duty and received a $28.2 million award.

The parties had formed several companies to buy and develop real estate, but bitter strife led to the minority owner’s ouster and, in mid-March 2007, the dissolution of the jointly owned entities. The plaintiff (the ousted partner) retained an expert with extensive experience in valuing real estate similar to that at issue to compute his interest in the companies’ income-producing properties as of March 2007. He adopted figures, including the capitalization rate, net operating income, and stabilized values, from the defendant’s investor summary schedule, which went to equity investors and lenders to secure funding, after assuring himself that the defendant “was doing the methodology the same way that I would.” For his calculation, he used the “direct capitalization” method to determine the stabilized income for the various properties.

The defendant offered a rebuttal expert who, by his own admission, had never done a direct capitalization valuation. He said he also relied on the internal projections and investor summary schedules “as being accurate.” In his Daubert challenge, the defendant contended the plaintiff’s expert used the projections as the present value when they reflected future values. The plaintiff’s expert called this characterization “a lack of understanding of what I did,” explaining he started with the stabilized values and adjusted them for certain factors.” The stabilized values, he said, “are prepared as if the property were stabilized in the first quarter of 2007. That’s what those values represent.” The trial court denied the defendant’s motion to exclude the testimony.

Nothing but a hope. On appeal, the defendant reframed the issue, contending that the trial court’s decision was in error because the expert’s analysis was based on unreliable foundational data. The appellate court agreed and struck down the award. The defendant’s attempt to discredit his own data “would lack credibility, if those projections are otherwise reliable.” But, the appeals court continued, here the plaintiff failed to show that the stabilized values the defendant put on the properties were anything more than hopes for future values. “Such hopes do not establish a reliable damages model.” The decision provoked a strong dissent. Find a comprehensive discussion of Citrin Holdings, LLC v. Minnis, 2013 Tex. App. LEXIS 5723 (May 9, 2013) and the court’s opinion in the August Business Valuation Update and at BVLaw.

Learn more. This case, along with other recent and important cases, will be discussed on July 10 during a webinar, Quarterly Case Update: A One Hour Briefing. Featuring BVR legal editor Sylvia Golden and expert appraiser James Alerding (Alerding Consulting), this program will highlight what recent judicial decisions mean for the practice and presentation of business appraisal for legal purposes.

Florida enacts Daubert standard for expert witness testimony

As we recently reported here, the Florida legislature passed a bill to adopt the Daubert standard for expert testimony. As expected, Governor Rick Scott signed it, and the law went into effect on July 1. Florida is now aligned with the federal courts and the majority of state courts that already have adopted Daubert wholesale or in part. Most important, the new test replaces the state’s controversial, idiosyncratic Frye standard.

Under Daubert, the court functions as a gatekeeper, admitting only testimony from a witness who qualifies as an expert in the field, whose testimony is helpful to the jury, is relevant, and is “the product of reliable principles and methods.” Opponents of the new legislation contended that the introduction of a Daubert-like standard will lead to prolonged litigation because of the resulting Daubert challenges and hearings.

20,000+ reasons to check out BVR and Pratt’s Stats

Pratt’s Stats, the private company transaction database from Business Valuation Resources, has passed a major milestone, amassing details of more than 20,000 private company transactions. As of June 21, Pratt’s Stats now offers 20,315 transactions. While achieving this goal is significant, the continuing quality and breadth of the data in Pratt’s Stats are even more important. Thanks to Pratt’s Stats users, BVR continues to improve the product and introduce it to valuation stakeholders beyond the business appraisal market.

“When we first created Pratt’s Stats back in 1996, I never could have imagined we would someday amass more than 20,000 sold private companies. Everyone, from the contributing business intermediaries to the wonderful staff at BVR, has put so much time and effort into this database—the results are truly amazing. Pratt’s Stats continues to be the leading private company transaction database.” —Shannon P. Pratt, CFA, FASA, MCBA, MCBC, CM&AA

Each Pratt’s Stats transaction offers up to 100-plus data points, including (when available) a detailed business description, a latest full-year income statement, asset data, a purchase price allocation, noncompete information, financial ratios, valuation multiples, and much more! Not only does Pratt's Stats offer this level of detail for each transaction, it also covers many different industries; Pratt’s Stats contains private transactions in 891 NAICS codes and 779 SIC codes. To learn more, click here.

Hot July for CPE events

In Valuations vs. Calculations: Advice & Guidance from Professional Standards, taking place July 11, BVR welcomes experts Linda Trugman (Trugman Valuation Associates), Edward Dupke (Dupke Consulting) and Curtis Kimball (Willamette Management Associates) for an in-depth look at the responsibilities and consequences that arise from engaging in a valuation or calculation assignment. The members of this all-star panel will combine their years of experience and in-depth knowledge of SSVS and USPAP to provide the guidance every appraiser needs.

Five years after the bursting of a “debt bubble,” BVR welcomes Dwight Larsen and Matthew Becker (both BankValue Advisory Services) for Community Bank Valuation: What's Happened Since the Great Recession. This July 18 webinar will feature a discussion on where banks have been in the past five years, where they are today, and where they're headed.

On July 25, BVR welcomes Dr. Aswath Damodaran (Stern School of Business, New York University) for Equity Risk Premiums: Looking Back, Looking Forward. This webinar will include a look at what past equity risk premiums tell us about future trends and how appraisers, analysts, and other financial professionals can put this information to use.


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