Weary of the endless finger-pointing and back-and-forth between media “experts,” healthcare finance and valuation expert Mark Dietrich (Mark O. Dietrich CPA, PC) spent several hundred hours going directly to the source data in various scientific journals and fact-based websites to uncover the real story of COVID-19. The results of his research and analysis are in a new BVR Briefing: “The Real Story of COVID-19 for Valuation and Litigation Experts.”

What’s at stake: The briefing includes a focus on healthcare entities, but Dietrich’s insights into how the virus originated, how it spreads, protection methods, testing, and so on are important to all valuation and financial experts. Why? Much of the economy is highly localized, and the virus has varying impacts on different areas of the U.S. “That will impact future cash flow of the smaller businesses most of us work with,” he observes. What the physician scientists think is going on with this disease is important because, as he says, “I simply don’t think that we can forecast anymore if we don’t know that.”

This BVR Briefing is now available if you click here. (Note: If you are a subscriber to the BVResearch Pro platform, you already have this new briefing in your library!)

Accounting fraud causes Berkshire
Hathaway subsidiary to overpay for sinking German manufacturer

Financial experts were unable to prevent a Berkshire Hathaway subsidiary, Precision Castparts Corp. (PCC), from acquiring a German family business for five times as much as the collapsing company was worth, recent articles in the New York Times and the German newspaper Handelsblatt report. PCC is fighting to undo a deal that a tribunal found was based on trickery and deception by the seller.

Pervasive wrongdoing: In February 2016, Berkshire Hathaway bought PCC, an Oregon company specializing in manufacturing aircraft parts as well as products for the oil and gas industry. In summer 2016, PCC learned from an investment bank advising small and midmarket companies “in the German speaking regions” that the midsize company Wilhelm Schulz was for sale. Schulz, which is set up as three holding companies primarily owned by the Schulz family, manufactures pipes. PCC was interested and entered into negotiations. Handelsblatt reports that Schulz was described as part of a growth industry. Assuming revenue of €258.4 million in 2016, it could achieve EBITDA of €96 million, an increase of 25% from the year before. The targeted acquisition price was €850 million to €900 million.

Handelsblatt reports that, in actuality, by 2016, Schulz was on the verge of declaring insolvency, finding itself unable to make payment on a credit line it had with Commerzbank. PCC, it seems, was unaware of this fact. At Schulz, a frenzy broke out among top managers when the company learned of PCC’s interest. Handelsblatt notes that managers drafted IT specialists to use Photoshop to fabricate sales orders, invoices, and customer accounts, all efforts to make the numbers look good. In fall 2016, while PCC’s financial team was conducting due diligence at the company, Schulz’s accounting system broke down for five days, Handelsblatt reports. PCC now surmises that this was no coincidence, Handelsblatt says.

PCC and Schultz came to an agreement in December 2016, and the transaction closed in February 2017. Handelsblatt reports that PCC paid €800 million, 9.1 times the claimed EBITDA. Over €360 million went to Commerzbank, to which Schulz was deeply indebted. In comments to Handelsblatt, in May 2017, Ted Weschler, Warren Buffet’s investment manager, spoke with confidence about the recent deal. Regarding the difficulty of doing a transaction involving a foreign entity, foreign language, and foreign legal structure, he said it all came down to building trust and developing a sense of just how honest your counterpart’s intentions were. However, by that time, PCC had already received an email from a Schulz whistleblower, sounding the alarm about the questionable activities that went on at the company to make its performance look better than it was.

PCC began an internal investigation, but, according to Handelsblatt, those involved in the scheme, including top management, did not change course. Ultimately, PCC fired the management team and, by 2017, discovered the scope of the deception when it brought in forensic accounting experts to investigate.

According to the Times, a private tribunal in April 2019 found that the Schulz team had “engaged in a pervasive effort to present a fundamentally misleading picture” of the company’s condition. The tribunal awarded PCC €643 million in damages, the measure being the price PCC paid less the actual value of Schulz at the time of the sale.

It seems the Schulz team has appealed the ruling with the Southern District of New York. Schulz claims the company’s dismal situation is the result of the buyer’s failure to understand the company’s concept for success as well as the decision to fire managers in key positions.

PCC has filed suit in Krefeld, Germany, where Schulz is located, to recoup the €800 million PCC paid for the company. Handelsblatt says a criminal investigation against the current owner, Wolfgang Schulz (son of Wilhelm Schulz, the founder), is also underway.

Using a size premium could trigger Daubert trouble, says new article

Adding a size premium to the cost of equity could make an expert’s testimony subject to a Daubert challenge, says Clifford Ang (Compass Lexicon) in a recent article. If the challenge is successful, the expert’s testimony is not admissible. He points out that one of the indicators under Daubert is “whether the theory or technique in question can be (and has been) tested.” Ang says that, “with regard to the size premium, there is no theory that exists, let alone one that is testable.” He points to the groundbreaking 1981 article by Rolf Banz on the size premium that concludes that there is “no theoretical foundation for such an effect.” Plus, Ang says that adding a size premium results in an unknown error rate, which goes against another indicator mentioned in Daubert.

The article, “It’s Time for Valuation Experts to Let Go of the Size Premium,” is available if you click here (free registration required). Ang has written a number of other articles on the size effect, including “The Absence of a Size Effect Relevant to the Cost of Equity,” in the ASA’s Business Valuation Review, and “Why We Shouldn’t Add a Size Premium to the CAPM Cost of Equity,” which appeared in NACVA’s QuickRead.

Valuations for divorce: That was then, this is now

For those experts grappling with business valuations in a divorce context, practical tips and advice will be presented in what had been the AAML/BVR National Divorce Conference—but has been re-engineered as the AAML/BVR Virtual Divorce Conference. The agenda has been revamped to focus on the issues most impacted by COVID-19 that have upended valuations, particularly those for divorce. For example:

Then: At last year’s conference, the income, market, and asset approaches to valuation were all given their just due. Before the virus hit, the income and market approaches dominated, while the asset approach was rarely used for going concerns.

Now: The use of the market approach is down but certainly not out (you still must consider it under IRS Rev. Rul. 59-60). The asset approach may apply in more cases as many businesses may now be worth more dead than alive. But it’s the income approach that has gained much more prominence in the COVID-19 era. Within that approach, the single-period capitalized cash flow method has virtually disappeared in favor of the discounted cash flow—and with varying discrete periods and even different discount rates. Of course, projections are a lot more tricky than before. The conference has a session, Fact vs. Fiction: The Discounted Cash Flow Method in Family Law, to be presented by veteran valuation expert Ron Seigneur (Seigneur Gustafson LLP) and attorneys Darryl Feldman (Feldman Jackson) and Drew Soshnick (Faegre Baker Daniels LLP).

The conference begins September 9 with a multiday schedule designed to fully respect your workday obligations. To check out the full agenda, click here. See you there!

ASA inks deal for new edition of Pratt book

Through its BV committee (BVC), the American Society of Appraisers will collaborate with Shannon Pratt on a new edition to Valuing a Business: The Analysis and Appraisal of Closely Held Companies. The ASA Educational Foundation signed an agreement with McGraw-Hill (the current publisher) for the new sixth edition expected to be out in 2021. The fifth edition was published in 2008. “It is a distinct privilege to be the chair of ASA’s BVC at a time that we are able to take Shannon’s longstanding, well-regarded treatise and make the ASA its new home, while providing a legacy for Shannon that will fulfill his wishes as a devoted member of ASA for decades,” said Ken Pia (Marcum), in a statement.

Reminder: Take our economics trivia quiz

In case you missed it last week, we have a short quiz for nonsubscribers of BVR’s Economic Outlook Update (EOU) to test your economic IQ. If you earn a passing grade, BVR will offer a 30% discount on a new EOU subscription. To take the quiz, click here. Please make sure to include your name and contact information so we can let you know whether you’re a winner.

Free sample: EOU is published monthly and quarterly and contains expansive research from leading authoritative resources that you can use in your valuation reports (as long as you give proper attribution). For a free sample issue (May 2020), click here.

The Appraisal Foundation seeks board members

Many valuation experts give back to the profession by serving on various boards and committees. The Appraisal Foundation is currently conducting its annual search for qualified candidates to serve on the Appraisal Standards Board (ASB) and the Appraiser Qualifications Board (AQB). The ASB is charged with developing, interpreting, and amending the Uniform Standards of Professional Appraisal Practice (USPAP). The AQB is responsible for establishing the minimum education, experience, and examination qualification criteria for real estate appraisers. Individuals selected for these positions will serve an initial term of one to three years starting on Jan. 1, 2021. A minimum of 10 years’ appraisal experience is required. For an application package, click here. Deadline for applications is August 7.

COVID-19 impact on EURO STOXX 50 captured in new study Not surprisingly, in the first four months of 2020, only six of the EURO STOXX 50 had positive return and the average return was -24.4%, according to Shareholder Return of the EURO STOXX 50 Companies: 2004-2020 (April 30) from Pablo Fernandez (University of Navarra—IESE Business School, Spain). Even considering only the period December 2018 to April 30, 2020, 26 companies had positive return, but this group, as a whole, lost value, with an average return of -3.2%. Eduardo de Apellaniz, also of the IESE Business School, co-wrote the study.

BV movers . . .

People: Nancy Czaplinski, CPA/ABV/CGMA, CFA, ASA, managing director in the Valuation Advisory practice at Duff & Phelps, has been appointed as a member of the AICPA Accredited in Business Valuation (ABV) Credential Committee for a 12-month term that started on May 21 … Joshua S. Sechter, CPA/ABV, CFE, a vice president at Lawrenceville, N.J.-based MPI, and Jason Soman, CPA/ABV, CFE, an assistant vice president at the same firm, were honored with the inaugural “40 Under 40” awards from the New York State Society of CPAs … Noel Capuano, CPA, CFF, CVA, has been promoted to principal at New York City-based Friedman LLP; also, James Aronoff, J.D., was hired as managing principal in the firm’s forensic accounting, litigation support, and valuation services practice.

Firms: Richmond, Va.-based Cherry Bekaert increases its presence in the Austin, Texas, market by adding PMB Helin Donovan; three partners and more than 20 professionals from the firm will join Cherry Bekaert’s Austin practice … Nashua, N.H.-based Melanson Heath has rebranded to be known simply as Melanson going forward; the firm has also redesigned its company logo and launched a new website at melansoncpas.com … Calgary, Alberta-based MNP is set to acquire outsourced IT service and support company Next Digital effective August 1 … CBIZ & MHM of Cleveland and Kansas City, Mo., has acquired Prince-Wood Insurance of Woodbridge, Va., which provides property and casualty insurance to small and midsized businesses in northern and central Virginia, Maryland, and Washington, D.C. … Chicago-based BDO USA is adding two firms to expand its industry and geographic reach: Detroit-based CFO Advisors LLC, which provides outsourced CFO and CDO services to restaurant and retail groups across the U.S., and MorganFranklin Consulting’s public-sector practice gives the firm an increased presence in the greater Washington, D.C., area.

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

• Valuation of Small Promissory Notes, July 16, 10:00 a.m.-11:00 a.m. PT/1:00 p.m.-2:00 p.m. ET. Featuring: Bruce Johnson (Munroe, Park & Johnson Inc.).

Corporate bonds are much too large and marketable to be used as a proxy to value most small privately held promissory notes (up to $10 million). This webinar presents a new technique and presents real-world examples to illustrate.

• BVLaw Case Update, July 22, 10:00 a.m.-11:15 a.m. PT/1:00 p.m.-2:15 p.m. ET. Featuring: Sylvia Golden, Esq. (Business Valuation Resources) and R. James Alerding (Alerding Consulting LLC).

A discussion of some of the most consequential recent valuation decisions, including two key state court rulings on the use of discounts in valuing minority interests in buyback situations, a state court decision on the admissibility of calculations of value in divorce proceedings, an expansive statutory appraisal ruling involving a public company from a North Carolina court, and rulings from the U.S. Tax Court as well as the IRS’ Office of Chief Counsel on the appropriateness of considering possible scenarios and subsequent events in a valuation.