BVWire #45-4

June 28, 2006 | www.BVResources.com | Issue 45-4

*Click here for the Kohler case abstract

Valuation: Make room for uncertainty amidst all the accuracy
Hearty congratulations to the Institute of Business Appraisers (IBA) for a ground-breaking annual meeting in St. Louis last week. The new IBA format of two concurrent sessions—one running a valuation appraisal from start-to-finish, the second presenting advanced topics and practice expansion areas—allows for more intimate and interesting discussions than you might otherwise receive at other “big tent” BV events.

Case in point: During his session on deriving market values, Ray Miles, IBA founder and a “great grandfather” of the profession (according to one attendee) reminded all appraisers that their work is a “search for the truth—but we may not know it when we find it.” For instance, you can’t really get from public company data to accurate private company values, Miles said. “After tax-free rates, discounts and premia—which all come out of our heads and databases, you can only hope to be within 20%-25% of the ‘real’ market value.” An informal poll of conference attendees confirmed that this range is the norm; as a further reminder, Miles quoted that other great founder of the profession, Shannon Pratt, as saying that “it is not unusual for the high-end valuation range to be 50% or more above the low-end.”

“Don’t get too concerned with the uncertainty you face,” Miles comments. The truth can be elusive, no matter what methodology you use. In the end, “it’s simply a question of your best judgment,” and the more questionable judgment may be the one that insists on certainty.

Recommended reading on S Corps
“For those of you who haven’t read the Delaware Chancery Court decision in Delaware Open MRI Radiology Associates P.A. v. Kessler, I HIGHLY recommend you do so,” writes Nancy Fannon (Fannon Valuation Group) in a recent email “blast” to colleagues and the BVWire. “In addition to having a Judge who goes to great length to perform valuation, and makes some very astute observations along the way, this is the most complete discussion of the S Corp issue I’ve seen to date, and a case in which the Judge ‘gets’ the essence of the argument we have been making—that is, it’s the avoidance of the DIVIDEND TAX, not the deduction of the income tax, that is the issue.”

An abstract of this sure-to-be landmark case appears in the July issue of the Business Valuation Update (BVU) ; for a free copy of the article, go to www.bvresources.com/BVWireCentral.

Also: Look for a “point/counter-point” article by Fannon and Jim Hitchner on the controversial S Corp issues in the August BVU, plus an interview with an attorney for the minority shareholders in the Delaware Radiology case—who won a value for their shares that was nearly twice what the majority had originally offered in the squeeze-out merger.

Update on ‘Death Tax’ repeal
After the Senate stalled on repealing the estate tax earlier this month, House Ways and Means Committee chairman Bill Thomas (R-CA) introduced H.R. 5638: the “Permanent Estate Tax Relief of 2006.” While not a repeal of the so-called “death tax,” the bill does allow for substantial reductions, including: elimination of existing provisions that reduce estate tax to zero in 2010; reunification of estate and gift tax credit amounts; increase of exemption to $5 million per person ($10 million per couple) by 2010; imposition of capital gains rates on estates under $25 million, and twice those rates (30 %) for estates over $25 million.

The House passed the bill last week (modified to inflation-index the $5 million exclusion). The Senate vote is due this Wednesday or Thursday. For the most current status of the legislation, go to http://www.gop.gov/Committeecentral/bills/hr5638.asp.

What happens when the judge hates your lawyer?
At the IBA conference, presenter Jay Fishman (Financial Research Associates) pointed out that no matter how good you and your opinion may be, valuators are in tough shape during a divorce trial when they have a bad lawyer—or worse, a “bad” client; i.e., one who’s character could be driving the conflict—more so than any real dispute over valuation or other financial issues—and whose lawyer is unwilling or unable to rein the client in. “Where will judges turn if they don’t like the case?” Fishman asks. To your assumptions—which they’ll take apart, “even if you’re right.” His point: Choose your clients carefully.

Jay will be a featured presenter, along with Shannon Pratt and William Morrison, at BVR’s telephone conference on “Standards of Value,” to be aired later in October. To register early, go to www.bvresources.com/conferences.

An easy way to download public company financial information
FetchXL is an automated report generator that enables you to: retrieve data for guideline company reports as of a specific valuation date; benchmark against other companies and industries; and automate guideline company reports. To try a live demo, go to http://www.fetchxl.com/business_valuation.shtml.

Hiring tip: Interns are indispensable
According to the latest issue of Journal of Accountancy, staffing shortages among CPA firms are at an “all-time high.” So it’s no wonder that many BV firms are suffering in the wake, and good talent—at all levels—is hard to find these days. At the IBA, Bill Quackenbush (Advent Valuation Advisors), tells a bit of a horror tale about hiring a college junior (and paying several semesters of her tuition), only to have her jump onboard a Big 4 firm after graduation.

Presenter Chris Mellen (Delphi Valuation Advisors, Inc.) had a better experience with interns: “They are the way to go,” he says. (He started his career as one.) “I’m a big believer in interns,” as a finance student from your local university or MBA program is eager for the experience—and far less expensive than a “regular” hire.

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