BVR Logo July 10, 2019 | Issue #202-1

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:


'We're killing ourselves!' with cost of capital complexity

That was the cry of one attendee at the NACVA conference in Salt Lake City during a session titled “The Cost of Capital Conundrum.” Indeed, the term “conundrum” is fitting to describe a process that has evolved from a relatively simple exercise into an exceedingly complex procedure with multiple options. During the session, audience members had difficulty grasping some of the concepts such as the use of regression equations for the size premium and, particularly, the notion of levering, unlevering—and then relevering—the cost of capital. The attendee who was at his wits’ end asked the panel why we need all of these options and complexity. It’s a more complex world today, the panel explained, and better to consider many options instead of just one. But some wonder whether all of this has gotten out of control and it is all just an illusion of precision.

Simpler way: During the session, the panel mentioned different methodologies and tools available to estimate the cost of capital but overlooked a new choice: BVR’s Cost of Capital Professional online platform, which provides a simple and transparent way to estimate cost of capital with data similar to the original Ibbotson SBBI data. The platform recently added two sources of industry betas to help in estimating the industry risk premium (IRP) component of the buildup method.

Reminder: Take our cost of capital survey

Our thanks to those of you who took the first in a series of short surveys to investigate how appraisers derive cost of capital in their valuations of private companies. Before we report on the results, we’d like to get a few more responses, so please take a minute or so to take the five-question survey by clicking here. All responses are anonymous, and we will present the results next week. Thank you!

More than one valuation issue in Kress

Tax affecting is only one issue that makes the federal district court’s opinion in Kress a must-know for valuators, notwithstanding a recent reader comment that it’s doubtful the case would have received much attention had it not been for the tax-affecting angle.

Use ‘prudential judgment’: One thing that stands out is the court’s reminder to appraisers that valuation is more than mathematics. The issue came up when the court critiqued the government expert’s market multiples analysis, finding it was skewed because it was based on only two companies, one of which the court found to be an outlier as to the relevant tax year, 2009. The parties’ experts agreed that this company (Rock-Tenn) was comparable to the subject company for the analyses of years 2007 and 2008. But Rock-Tenn was on its own trajectory as concerns year 2009. Specifically, Rock-Tenn had acquired another company, which had the consequence of increasing Rock-Tenn’s stock price while the stock prices of other guideline companies decreased during that year, the court noted. The subject company’s earnings in the first half of 2008 also were strong, but not for the reasons that drove Rock-Penn’s earnings increase, the court found.

The court noted that the government’s expert said he simply followed the numbers where they led him. But doing so, the court found, did not guarantee a reliable value indicator. Valuation, the court said, required using professional judgment. “Mathematical calculations may give an appearance of precision even when the mechanical formulae on which they rest depends on assigning arbitrary weights to factors that in truth are matters of prudential judgment.” Although the government’s expert tried to be consistent by applying multiples derived from Rock-Tenn’s financial performance, the analysis did not hold up because Rock-Tenn was not a true comparable for each of the relevant tax years. Based on its unique circumstances, it did not feel the effects of the recession, the court said. Therefore, the expert’s analysis failed to properly consider the economic recession, the court decided.

In contrast, the court found the taxpayer’s prevailing expert compared the company on a “holistic” basis to the guideline companies he chose (five to six for each year) and in doing so achieved a much sounder valuation. The court said this expert’s analysis “recognizes the variability and non-quantifiable judgments by which various factors are taken into consideration and impact the price of a share of minority stock.”

A close reading of the Kress opinion reveals the multiple considerations that went into the court’s decision to give “less weight” to the value conclusions of the government’s expert—all of them worthy of attention.

A digest of Kress v. United States, 2019 U.S. Dist. LEXIS 49850, 2019 WL 1352944, and the district court’s opinion are available at BVLaw.

Free download of an improvement to the Gordon growth model

One of the benefits of attending BV conferences in person is that you can also pick up some interesting things outside the formal sessions, such as during networking events, in the exhibit hall, or in the local watering hole after a long day. At the recent NACVA conference in Salt Lake City, Mike Adhikari (Illinois Corporate Investments Inc. and Business ValueXpress Software), a valuation and M&A advisor, was set up right next to our BVR booth in the exhibit hall. We watched as he unveiled his Capitalization 2.0 methodology, which is designed to improve on the simple Gordon growth model (GGM). A lot of attendees converged on Adhikari’s booth where he gave a live demonstration of Capitalization 2.0, which uses a newly developed advanced growth model (AGM) formula. GGM assumes that the capital structure of the business will remain constant and that the debt principal will never be repaid. Because of this, GGM can overvalue a business by 10% to 50%, according to Adhikari. AGM considers that, even when the business is growing at a constant rate, the debt principal may have to be paid down, and hence the capital structure will change. Unlike the GGM formula, the AGM formula is complex, so Adhikari offers a spreadsheet of the AGM formula that can be downloaded (free for a limited time) from his website, Your feedback on this model is welcome!

SEC approves PCAOB updates to fair value audit standards

The U.S. Securities & Exchange Commission (SEC) has approved proposed rules by the Public Company Accounting Oversight Board (PCAOB) to revise auditing standards that increase oversight of specialists employed by accounting firms. The specialist category includes appraisers and other valuation experts, actuaries, legal specialists, and other experts. A new standard, Auditing Accounting Estimates, Including Fair Value Measurements (AS 2501), replaces three existing standards. Plus, AS 1210, Using the Work of a Specialist, has been retitled and replaced with a new AS 1210, Using the Work of an Auditor-Engaged Specialist. The amendments are effective for audits of fiscal years ending on or after Dec. 15, 2020.

One of the matters the new rules seek to reinforce is that of “professional skepticism.” That is, you should not simply corroborate the information you get from management or other third parties. You need to look at any negative evidence and address it. Not long ago, the PCAOB found that professional skepticism was lacking when a former Big Four auditor failed to adequately scrutinize accounts receivable, which may have led to an overvaluation of this asset. The auditor was censured, fined, and barred for two years.

New edition of Valuation and Common Sense by Fernandez

The 2019 edition of Valuation and Common Sense by Professor Pablo Fernandez (IESE Business School, University of Navarra) is now available—and it’s gratis. Fernandez is very generous in making a great amount of material freely available to BV practitioners and global academics. He’s a highly respected BV authority and is ranked No. 1 of all business authors on the Social Science Research Network (SSRN) in terms of downloads (1.1 million) of his 268 papers (also available free). The new edition (the seventh) of his book has 24 thought-provoking chapters, and you can download each one from its table of contents, where you will also find a link to all of the figures and tables (in Excel format with all calculations).

M&A world converges July 15-17 at the AM&AA summer confab in Chicago

The 22nd Annual AM&AA Global Summer Conference boasts a solid program and a once-a-year networking opportunity for anyone in the deal-making space! View the complete conference agenda here (there is still time to register). David Foster, BVR CEO, will be speaking on the “Getting Deals Done: Best Practices and Innovative Ideas” panel with Mark McNally (moderator, The Ashford Group LLC), Erik Dykema (Lineage Capital), and Andrew Boemi (Optimum Capital)—an entrepreneurial group with a unique take on structuring and completing deals (Tuesday, July 16 at 2 p.m.). Also be sure to stop by the BVR booth to meet Oday Merhi and Katie Infante-Cisco and learn more about DealStats and its contributor network.

Tweedie to keynote ASA's 2019 Advanced BV Conference

Sir David Tweedie will discuss how adoption of international valuation standards (IVS) will impact appraisers in the U.S. when he gives the keynote address at the American Society of Appraisers Joint ASA 2019 Advanced Business Valuation & International Appraisers Conference in New York City on August 25-27. In an interview, Tweedie, chairman of the International Valuation Standards Committee (IVSC), gave the ASA a preview of other things he’ll talk about, including his predictions for significant future changes. IVSC technical boards are “looking at issues as broad as social value, biological assets, cryptocurrency, valuation models, non-financial liabilities and inventory, to test the need for new or revised standards,” he says. “One asset class that we expect to see grow significantly within the IVS over the next five years is financial instruments.” Earlier this year, the IVSC launched a new Financial Instruments Board that is “looking to build and enhance the chapter (IVS 500) which covers these assets today.” You can read the full interview if you click here.

Salvidio's global industry betas for 1Q2019

BVR offers a free download (click here) of the 1Q 2019 “Industry Betas” report from Salvidio & Partners, a Rome, Italy-based business valuation firm headed by Ascanio Salvidio. The report includes levered and unlevered betas for 65 industries, 144 subindustries, and “regional” betas for 10 geographical areas—including North America, the EU, and Western Europe. The report is issued quarterly with the hope that it will provide valuers with useful information about industry risk in cost of capital calculation, improving the quality of their analyses around the world. Salvidio’s betas are included in BVR’s Cost of Capital Professional online platform to help in estimating the industry risk premium (IRP) component of the buildup method.

IACVS seminars of note

The International Association of Certified Valuation Specialists (IACVS) will present a number of interesting CPE seminars in July at various locations. To register, please contact the individuals listed for each event below.

Cash Flow Projections for the Income Approach Under IAS—Challenges and Avoiding Mistakes (July 18; 2 p.m.-6 p.m.; Beijing Xinliu Huigu Technology Co. Ltd). Contact: Zhang Chi at

The Valuation Process A to Z (July 23; 9 a.m.-5 p.m.; INSPEN, Malaysia). Contact: Elvin Fernandez at

Valuation of Stem Cell Formula (July 30; 6 p.m.-10 p.m.; 6F, Taiwan Academy of Banking and Finance). Contact: Jennifer Chan at


BV movers...

People: Alex M. Barry, CFA, has rejoined Memphis-based Mercer Capital as a vice president in the firm’s Dallas office; he will be a senior member of the firm’s oil and gas industry team and will provide valuation services to these firms in a wide variety of contexts … Jessica Hollobaugh Giresi, CPA, ABV, CFE, has been admitted as a partner at Princeton, N.J.-based WithumSmith+Brown; she focuses on a wide range of consulting services related to civil and criminal litigation … Former U.K. Finance Minister Alistair Darling is the newest member of the International Valuation Standards Council (IVSC) board of trustees; he also held several other U.K. ministerial roles and was appointed to the House of Lords in 2015 … Autumn Kraus, JD, CPA/ABV, a partner in the forensic litigation & valuation services area of Whitley Penn in its Dallas office, received the Women in Business Award from the Dallas Business Journal for 2019 … The Securities and Exchange Commission named Sagar Teotia as chief accountant; he had been serving as acting chief accountant since the departure of Wesley Bricker in June; previously, Teotia held positions as SEC professional accounting fellow, SEC deputy chief accountant, and partner at Deloitte LLP.

Firms: Portland, Maine-based BerryDunn merged with Rodman CPAs of Waltham, Mass., on July 1; the combined firm will operate as BerryDunn and adds 40 employees to the staff of about 400 … Business Valuation Resources, LLC (BVR) has been appointed a member of the International Valuation Standards Council (IVSC), the global organization that sets valuation standards worldwide … Cleveland-based Skoda Minotti will expand its office space in downtown Cleveland this fall and put 40 to 50 employees in approximately 10,000 square feet of office space on the eighth floor of the Fifth Third Center at 600 Superior Avenue … BKD Corporate Finance, the investment banking arm of Springfield, Mo.-based BKD, is celebrating its 25-year milestone with a new name: BKD Capital Advisors LLC … West Hartford, Conn.-based blumshapiro will expand its presence into central Massachusetts on October 1 with a new office in Worcester, which will be able to house as many as 25 people initially; the firm currently employs more than 450 people … Chicago-based UHY Advisors Inc. has established the UHY Advisors Alliance and welcomed Grobstein Teeple LLP (Woodland Hills, Calif.) as its first member … Towson, Md.-based Rosen, Sapperstein & Friedlander LLC (RS&F) is celebrating 40 years of business throughout 2019; Howard Rosen and Lou Sapperstein Rosen founded the firm in 1979 … Voorhees, N.J.-based Bowman & Co. is celebrating its 80th year of providing accounting, audit, tax, and consulting services in southern New Jersey.

Please send your professional and firm news to us at

Upcoming BVR training events

  • Insurance Agency Valuation and Consolidation Trends (July 11), with Lucas Parris (Mercer Capital).

    This session will address the current state of insurance agency consolidation including industry trends, who’s buying and who’s selling, and the valuation methodologies and drivers of value.

  • Purchase or Sale of the Closely Held Business
    (July 17), with R. James Alerding (Alerding Consulting LLC)

    How can you be the best advisor to your client, whether a buyer or a seller? This session will give you the ins and outs of the buying and selling process and how to synchronize all of the moving parts of the process.

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:

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