BVWire Issue #153-2 | June 10, 2015


IRS internal document has innovative approach to reasonable comp

The recently released IRS job aid on determining reasonable compensation provides an “insightful view” on dealing with this topic, Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) tells BVWire. However, he feels there’s a bit of a disconnect in approaching reasonable compensation from a valuation perspective, as it mentions the three approaches to value in determining reasonable compensation. “I suppose one could argue that you’re actually ‘valuing’ the worth of a person’s services,” he says.

Novel approach: “The job aid covers the market approach, which is certainly appropriate,” says Yeanoplos. “But I thought the application of the cost approach, namely, breaking down a person’s various duties and assembling a ‘many hats’ compensation amount, is innovative,” he says, pointing out that it’s an approach that he and Ronald Seigneur (Seigneur Gustafson) have been espousing for years. “It’s a helpful step in the right direction as it provides a comprehensive list of factors to consider. I’d like to see a more systematic framework for determining reasonable compensation.”

Yeanoplos and Seigneur are the authors of Reasonable Compensation: Application and Analysis for Appraisal, Tax and Management Purposes, which is published by BVR. The IRS lists the book in the job aid in an appendix on suggested readings. The IRS job aid is available from BVR as a free download.

Extra:  Don’t miss Michael Gregory’s presentation and commentary on the IRS job aid on determining reasonable compensation (August 4). Click here for more information.

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DLOM inconsistency in N.Y.

New York court decisions on DLOM are all over the map and sometimes very perplexing, a panel of speakers pointed out at the recent annual business valuation conference in New York City hosted by the New York State Society of CPAs (NYSSCPA).

A puzzlement: For example, there’s a “treacherous landscape” regarding DLOM and real estate companies. In the Chiu case, the business owned real estate that was easily marketable, so Chris Mercer (Mercer Capital), who testified in this case, argued that there should be no DLOM. The court agreed (recently affirmed on appeal). But, in Giaimo (another Mercer case), a company also owned marketable real estate, but the court ruled for a 16% DLOM. “There was credible evidence that people were lining up to buy the property,” Mercer recalls. “I don’t know where the court got the 16% DLOM.” Peter Mahler (Farrell Fritz P.C.) suggested that, because the real estate was held in a “corporate wrapper,” the situation was more complex. Mercer also stated that he testified that, because of transaction costs, a 5% DLOM-like discount should be applied. But the written opinion states that there was “no testimony” in this regard. Go figure.

The cases are: Chiu v. Chiu, 2015 NY Slip Op 01427 [2d Dept Feb. 18, 2015], and Giaimo v. Vitale (II), 2012 N.Y. App. Div. LEXIS 8706 [Dec. 20, 2012 (slip op.)]. For more on these cases, go to BVLaw.

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Dubious causation narrative tarnishes lost profits analysis

Causation is a critical element of damages, and it has a tendency to stump experts, who may rely on the plaintiff to link its losses to the defendant’s conduct. A recent Daubert case shows the risk of an expert’s assuming too much and scrutinizing the client’s narrative too little.

‘Luster effect’: The plaintiff sued the defendants, the seller and manufacturer of a heavy-duty truck crane, over defects related to the crane’s engine and other components. Ultimately, the crane failed inspections and became unusable. The plaintiff asked for lost profits and offered testimony from a damages expert, which the defendants challenged under Daubert.

The expert was a veteran CPA with a deep knowledge of the construction industry. He said he determined the plaintiff suffered a loss in gross revenue because of the problems with the crane. A comparison of the plaintiff’s total revenue generated in the six-month period preceding the delivery of the crane with the revenue generated in the subsequent six months, when the crane was performing well, showed that the plaintiff generated some $325,000 in additional revenue. He noted that the company’s overall revenue continued to increase through February 2013, but it “dropped precipitously for the period of March 2013 through July 2013.”

To explain the drop, he adopted the luster effect theory the company’s owner developed. Having the crane gave luster to the company in the marketplace and increased revenue. Once the crane became unusable, the luster and the extra revenue went away. In other words, there was a direct connection between the availability of the crane and the company’s revenue. The expert admitted that he did not independently verify the causation narrative. Nor did he explore other reasons for the increase and decrease in the plaintiff’s revenues. The only actual data he used for his analysis was financial data he had obtained from the company.

The court agreed with the defendants that the expert’s finding was inadmissible. “Pinning the company’s overall financial performance on the Crane, untethered from any data or methodology that provides insight into [the company’s] actual rental experience with it and its other cranes, is speculative.” The expert failed to gather anecdotal evidence supporting the luster effect claim. He also failed to break out data as to the revenue the plaintiff was able to generate when the crane was in service and the expenses related to the crane’s use. And he failed to research the market for the particular crane model to determine what the rate of demand for it actually was.

Takeaway: As an expert, don’t assume there is a causal connection because the client or the client’s attorney says so. If you don’t test the story for holes, the other side will.

Find an extended discussion of American Aerial Services v. Terex United States, 2015 U.S. Dist. LEXIS 55997 (April 29, 2015), in the July edition of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Slight dip in healthcare deals versus 2014

The number of healthcare industry transactions done in May 2015 was down slightly compared with May 2014, according to a report from Irving Levin Associates. While the total number of deals (103) was down from last year (109), the number of healthcare technology deals increased 9% year-over-year (50 versus 46). The number of healthcare services deals was down 16% (53 in May 2015 compared to 63 in May 2014).

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Global BV news

New data on discount rates used in 41 countries

A new survey collects information about the discount rate (risk-free rate and the market risk premium) used in 2015 for 41 different countries. Pablo Fernandez, Alberto Ortiz Pizarro, and Isabel Fernández Acín (all with the University of Navarra in Spain) co-authored the survey.

Rate changes: The survey found that the average risk-free rate used in 2015 was less than the one used in 2013 in 26 countries (in 11 of the countries the difference was more than 1%). On the other hand, eight countries used an average risk-free rate in 2015 that was more than 1% higher than the one used in 2013. For the U.S., Europe, and U.K., most of the respondents use a risk-free rate that is greater than the yield for 10-year government bonds. The difference in the average market risk premium used was more than 1% for 13 countries in 2015 versus 2013.

“I started to do surveys to prove that expectations are not homogeneous and there is no single parameter in finance—not even the risk-free rate—that is homogeneous among people,” Pablo Fernandez tells Michael Crain (Financial Valuation Group), a leading business valuation practitioner and researcher, in an exclusive interview. “People use different numbers and put different reasoning behind them. One survey I do every year is about the risk premium. This year I did the risk premium plus the risk-free rate. It’s interesting to see the variety of numbers people use and the different reasons behind the numbers they use.”

Read the full Fernandez interview in the July issue of Business Valuation Update (subscription required).

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Current thinking and best practices in valuation report writing

A just-released special report from BVR includes advice from top experts on building valuation reports that will withstand intense scrutiny. The report, How to Write Bulletproof Reports: Tips From the Experts, also offers analysis of key valuation court cases that reveal critical report writing elements scrutinized by judges. The sometimes controversial topic of calculation reports is also covered. There is also a discussion of compliance and standards as they relate to business valuation reports. For an excerpt from the new report, which includes an introduction by Mark Hanson (Schenck SC), click here.

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Leading-edge track at NACVA’s annual conference

A track devoted to leading-edge topics in business valuation will be a popular draw at the NACVA/CTI Annual Consultants Conference in New Orleans June 24-27. In one session, Dr. Ashok Abbott will present empirical evidence challenging commonly accepted notions about the size premium. Another session sure to pique interest focuses on an alternative approach to the valuation of S corps and other pass-through entities. The approach is based on academic research about the impact of taxes on value and how to apply that research to private-company valuations. Nancy Fannon and Keith Sellers, the authors of a new book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle, will conduct this session.

Other topics on the leading-edge track include:

  • Caution!—IRC §6695A Can Be Injurious to Your Personal Wealth (Alfred King);
  • Oil & Gas: From Rock to Bank (Jim Harden);
  • Valuing Complex Financial Instruments—Monte Carlo Simulation and Lattice Models (Matthew Goldberg);
  • Valuing Complex Debt and Equity Structures (Lorenzo Carver); and
  • Valuation of Businesses, Securities, and Intangible Assets for Bankruptcy Purposes (Robert Reilly).

BVWire looks forward to attending the NACVA conference. Why not join us?

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BV movers . . .

People: Joseph Falbo (Grand Island, N.Y.) was elected the new president of the New York State Society of Certified Public Accountants … Rick Parent was named managing director of the Santa Monica, Calif.-based firm Gumbiner Savett Inc. and succeeds Michael Savoy after nearly a decade of tenure leading the firm … Kenneth Pia, partner in charge of business valuation services at Meyers, Harrison & Pia Valuation and Litigation Support LLC, was elected treasurer of the ASA’s Business Valuation Committee … Mike Zeleznik was promoted to associate at the financial services firm GDK & Co. of Akron, Ohio.

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June is busting out with exciting CPE events

Here’s our new lineup of CPE events for the rest of June.

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

Novel comp approach

DLOM woes in N.Y.

Lost profits pitfall

Healthcare deal dip

Global BV

Report writing tips

NACVA conference

BV movers

CPE events











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