June 19, 2013 | Issue #129-3  

What’s new in final ‘cheap stock’ guide from

Four years in the making, the revised AICPA guide, Valuation of Privately-Held Company Securities Issued as Compensation, has been released. It’s available now in e-book format, and the print version will be available in July.

New chapters in the revised guide discuss a framework for evaluating private and secondary market transactions; adjustments for control and marketability; implications of highly leveraged entities (i.e., how companies should incorporate the fair value of debt in the valuation of equity securities); and a new discussion on the relevance of ASC 820 (SFAS 157) to cheap stock issues. The final guide also discusses the latest thinking on discounts for lack of marketability.

“This practice aid serves to codify the accumulated best practices that have evolved in the eight years since the original practice aid was issued, in part confirming much of what is already being applied in current valuations,” says Rob Barnett, managing director of Valuation Research Corp. (VRC).

Bad behavior in forced buyout triggers
marketability discount

Children learn that bad behavior has consequences. An appellate court recently taught a similar lesson to a troublemaking shareholder whose doings forced a buyout.

Three siblings each owned a one-third interest in a family business. They had a falling out, and one sued the others, claiming they tried to oust him. But the trial court turned the tables on him and found he was the oppressing shareholder. Accordingly, it ordered him to sell his interest back to the company at fair value based on valuation expert reports.

The seller’s expert used the discounted cash flow (DCF) method, and the buyers’ expert used the market approach. The court (with some reservations) adopted the DCF method, calling it “relatively more reliable” and “more conducive … to yielding the value of a closely-held company for which there was no ready market.” Ultimately, the court’s valuation satisfied neither side, so the parties appealed. Among other things, the buyers claimed the trial court should have applied a marketability discount.

Spanked. The appellate court agreed. A marketability discount, it said, “adjusts the value of an interest in a closely-held corporation on the understanding that demand for such a relatively illiquid interest is limited and its value consequently diminished.” Because of the potential of unfairly depriving the minority shareholder of the full proportionate value of his shares, it was only applicable under “extraordinary circumstances” in forced buyout situations.

Prior case law held that “where the oppressing shareholder instigates the problems … fairness dictates that the oppressing shareholder should not benefit at the expense of the oppressed.” This, the appellate court said, was the situation here. Even though the selling shareholder was a minority shareholder and his actions did not actually hurt the company, “the fact remains that [he] should not be rewarded when his conduct not only harmed the other shareholders but necessitated this forced buyout.”

In remanding, the appellate court pointed out that it did not exclude the possibility that the discount already was “embedded” in the discount rate of the DCF valuation the trial court adopted. But absent a clear understanding of whether that was so, the trial court “should reconsider the award through application of an appropriate marketability discount.”

Find an extended discussion of the issues in Wisniewski v. Walsh, 2013 N.J. Super. Unpub. LEXIS 724 (April 2, 2013) and the court’s opinion in the July Business Valuation Update and at BVLaw.

New quarterly briefing. On July 10, BVLaw comes to life in BVR’s first-ever law briefing webinar. Join BVU legal editor Sylvia Golden and appraiser James Alerding (Alerding Consulting) for Quarterly Case Update: A One Hour Briefing. In their one-hour presentation, Golden, an attorney, and Alerding, a highly experienced valuation expert, will discuss the most pressing cases to emerge over the past few months, the legal theories they highlight, and their implications for financial and valuation experts.

M&A valuation tips ‘beyond the obvious’

Is one of your small or midsize clients looking to expand through acquisitions? A new book offers a complete road map to this strategy—and reveals valuation tips that are not so evident.

The book, Successful Acquisitions: A Proven Plan for Strategic Growth, by M&A expert David Braun, provides a detailed and practical guide to his entire “road map to acquisition.” Based on over 20 years’ experience working in M&A, the book lays out the process required to successfully purchase a midsize company that has never been formally offered for sale.

Sneak peek at the July issue of Business Valuation Update

Here’s what you’ll see in the next issue:

  • Conference Roundup: Some Highlights From NACVA’s Annual Confab. Interesting takeaways from the recent 2013 Annual Consultants’ Conference held by the National Association of Certified Valuators and Analysts in Washington, D.C.
  • Pension Plans: The $20 Trillion Elephant in the (Valuation) Room (Dr. Susan Mangiero, CFA). Massive underfunding and complicated economics make it crucial for appraisers to have a solid grasp of the ins and outs of company pension plans and their potential consequences on enterprise value.
  • Using Oil and Gas Royalty Trusts to Value Minority Interests in Similar Holdings. Chris D. Treharne talks about using this technique to help value a minority interest in a family LLC or family limited partnership that includes oil and gas overriding royalty interests.
  • Latest Techniques to Sort Out the Complexities of Brand Valuation. Mike Pellegrino (Pellegrino & Associates) and Ira Mayer, president of EPM (a division of BVR), talk about valuing brands in light of their legal protections.
  • Regulators Turn Their Sights to Private Equity Valuation. Recent remarks by Bruce Karpati, chief of the SEC enforcement division's asset management unit, make it clear that transparent and independent valuations are expected for private equity group (PEG) portfolios.

To read these articles—plus a digest of the latest court cases—see the July issue of Business Valuation Update.

June busting out with CPE events

In Critical Issues in the Use and Application of Market Survey Data and the Market Approach in Healthcare Compensation Valuation, Part 6 of BVR’s 2013 Online Symposium on Healthcare Valuation, expert Tim Smith (Touchstone Valuation) discusses the use and misuse of market data in healthcare compensation valuation. Attendees will learn how recent growth in the data available to appraisers has been a double-edged sword, increasing both the information available for assessment and the possibility of mistakes in its application.

Valuation of Know-How: Patents, Proprietary Technology and IPR&D, featuring Mark Zyla (Acuitas Inc.), on June 27, tackles the numerous challenges posed by the collective body of intellectual property that many companies hold. From defining intangibles to assigning them value, Zyla will discuss proper valuation and reporting methodologies that every appraiser should know.

Jeff Litvak (FTI Consulting) and Kenneth Mathieu (Mesirow Financial Consulting) join BVR on July 9 for Damages in M&A and Purchase Price Disputes, Part 5 of BVR’s 2013 Online Symposium on Economic Damages. This intensive webinar will focus on the myriad challenges that can arise in assessing damages claims involving mergers, acquisitions, and other business combinations.



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