July 24, 2013 | Issue #130-3  

Appraisers best at surviving Daubert challenges

Among all types of financial experts, appraisers fare best at surviving a Daubert challenge, reveals the newest PricewaterhouseCoopers’ survey, Daubert Challenges to Financial Experts.

The year 2012 marked the 13th anniversary of the U.S. Supreme Court’s Kumho Tire decision, which expanded Daubert’s reach to financial expert witnesses. The annual PwC study analyzes challenges to financial expert witnesses under the Daubert standards in the years following Kumho (2000-2012). Highlights include:

  • The number of challenges to financial expert witnesses rose to the highest level in the last 13 years, while the rate of successful challenges (45%) remained consistent with the historical average (46%).
  • Challenges were concentrated in the 2nd, 5th, 6th, 7th, and 9th Circuits, which heard more than half (57%) of all challenges. The 2nd Circuit accounted for the highest percentage (15%) of the total challenges.
  • In 2012, lack of relevance emerged as the most prevalent reason that a financial expert opinion was excluded. In the previous 12 years, lack of reliability was the top reason.
  • Economists and accountants are the most frequently challenged financial expert witnesses. But in 2012, appraisers were the most likely to survive a challenge, while economists were the least likely to survive.
  • Of all financial expert witnesses, intellectual property experts experience the highest exclusion rate.
  • Exclusions more commonly result from the misuse of accepted methodologies than from the introduction of unusual or untested analytical methods.

Court blasts financial expert as unqualified

Speaking of Daubert challenges (see item above), a new court ruling serves as a warning to valuation analysts who testify outside their range of expertise. A federal trial court recently severely limited a financial expert’s testimony because of his lack of qualifications. Often, an expert is deemed qualified and then the expert’s methodology is challenged, but that’s not what happened here.

Don’t go there:  In the SEC’s current trial against a former Goldman Sachs trader, Fabrice (aka Fabulous Fab) Tourre, Tourre brought in an expert to testify about collateralized debt obligations (CDOs). The trouble was the expert had no experience with CDOs. While he was an expert at structured finance, he was more of an economic generalist and also a “professional testifying expert,” as the court put it. In pretrial Daubert proceedings, the court ruled the expert is “not qualified to present this opinion” about CDOs. “Being a professional testifying expert in the financial area does not give an individual the qualifications to opine in every financial area as to every type of analysis,” the court said.

The opinion caught the attention of Bill Kennedy of the Berkeley Research Group LLC and chair of the AICPA’s ABV Credentials Committee. “It’s more common to accept the expert’s qualifications and attack his or her methodology as not being accepted practice in the field,” he said. “I have seen enough cases where experts (economists in particular, it seems) extend their reach into areas in which they are not qualified to testify. To ensure credibility, it’s really important that experts work in the practice area for which they are providing opinions, and stay on top of developments through continuing professional education and research and publishing in the field,” he added.

Find a comprehensive discussion of Securities and Exchange Commission v. Tourre, 2013 U.S. Dist. LEXIS 87211 (June 18, 2013) and the court’s opinion in the September Business Valuation Update and at BVLaw.

Strong upward trend in small biz-for-sale marketplace

More sales of businesses mean more valuations need to be done, so some recent statistics from the business marketplace should be good news for valuation experts.

Small business transactions jumped 61.8% in the second quarter of 2013 as compared to the same period of 2012, according to a report from BizBuySell.com, which aggregates business-for-sale transactions reported by participating business brokers nationwide. This is the largest year-over-year jump since small business sales bottomed out in mid-2008. These results build on a 55.7% increase in the first quarter of 2013, meaning the market is gaining steam.

Multiples on the rise: Sale price multiples have started to increase, says the report. For example, the average sale price as a multiple of cash flow had been on a steady decline since the start of 2011 but started to reverse itself in Q1 2013, rising to 2.23 for Q2 2013.

The reasons for the turnaround are a recovering economy, an aging business owner demographic eager to sell, and an increase in the number of qualified buyers, who had been hesitant because of an uncertain economy or lack of acquisition financing.

Kudos to Q2 Pratt’s Stats ‘hall of famers’

Through the assistance of business intermediaries who submit deal information, Pratt’s Stats is the leading private company merger and acquisition (M&A) transaction database. During the second quarter of this year, the intermediaries who submitted the most deals are considered our “hall of famers.” They are: Brad Bottoset (The Liberty Group), Bob Howells (Business Brokers of San Antonio), Frank Stabler (Certified Business Brokers), Pat Lawrence (Sunbelt Business Brokers of Portland), and Andy Kocemba (Calhoun Cos.).

Our sincere thanks to these individuals, who have helped Pratt's Stats surpass the 20,000-transaction mark! This is a significant milestone in terms of quantity—but it’s the quality that matters. Thanks to input from our subscribers, BVR continues to improve the database to make it the most useful—and useable—source of deal data.

Spotlight on medical practice performance

Hospitals and health systems are looking to buy more medical practices to increase outpatient services, reports the Healthcare Value Wire. Plus, Medicare reimburses for certain services at a much higher rate for hospital outpatient departments than for facilities that are not hospital-based, which is fueling this trend.

This is just one area where the healthcare sector is continuing to grow and reorganize. That means the opportunities and obstacles for practice benchmarking are increasing, which will be addressed on July 30 during Benchmarking Medical Practice Performance, with Lori Foley and Tynan Olechny (both PYA GatesMoore). This webinar is Part 7 of BVR’s 2013 Online Symposium on Healthcare Valuation.

July heat wave of CPE events

Do you use “dynamic, constantly recomputed, forward-looking estimates of risk premiums”? According to Aswath Damodaran (Stern School of Business, New York University), if not, you may be basing your appraisal work on shaky ground. On July 25, Dr. Damodaran joins BVR for Equity Risk Premiums: Looking Back, Looking Forward, a 100-minute webinar addressing how global economic changes have affected assessments of and adjustments for equity, country, and corporate risk.

Why stop with equity risks? Following hot on the heels of Dr. Damodaran’s presentation, BVR welcomes Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and Ron Seigneur (Seigneur Gustafson) for the Advanced Workshop on Cost of Capital on August 8. From data sources and size premiums to pass-through entities and the reliability of risk-free rates, Yeanoplos and Seigneur will cover the ongoing and emerging controversies and questions in their intensive, four-hour presentation.


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