BVWire Issue #153-4 | June 24, 2015


New research paper analyzes IPCPL

A new research paper examines the theory behind the implied private company pricing line (IPCPL), a method recently introduced to eliminate the inherent problems in comparing public and private data and to add another approach in estimating the cost of capital for a privately held business. The paper calls IPCPL a “significant innovation in the valuation of privately-held, small-or-medium-sized enterprises (SMEs).”

Bridging the gap: The paper, written by David H. Goodman (Gosule, Butkus & Jesson LLP) and Malcolm McLelland (Equilíbrio Cursos Ltda.), points out that some appraisers believe that SMEs can be valued using data from public capital markets, but other appraisers disagree. The IPCPL developers “have suggested that, intuitively, the IPCPL valuation method ‘bakes-in’ differences between private and public equity markets (e.g., private versus public market pricing of liquidity). While there seem to be skeptics of this idea in online public forums, our exposition of IPCPL theory in this paper shows that this idea—properly interpreted—is essentially true,” the paper says.

The paper puts forth a quote by R. Buckminster Fuller: “If you want to teach people a new way of thinking, don’t bother trying to teach them. Instead, give them a tool, the use of which will lead to new ways of thinking.” The IPCPL, “we believe, is such a tool,” the authors say.

“Bob Dohmeyer, Pete Butler, and I appreciate the detailed and insightful analysis of IPCPL in the SSRN paper written by McClelland and Goodman,” Rod Burkert tells BVWire. Dohmeyer, Butler, and Burkert are the developers of IPCPL. “While we believe the IPCPL is, as the paper says, a tool to spark new ways of thinking, we want our appraisal colleagues, as well as valuation academicians, to read the paper and develop their own conclusions. We also encourage appraisers to utilize the free IPCPL-based BUM WACC calibrator tool that is updated monthly and available from Business Valuation Resources on a special IPCPL web page.”

To download the new paper, “The Implied Private Company Pricing Line (IPCPL): On the Nature, Scope, and Assumptions of IPCPL Theory,” click here.

back to top

If CAPM is ‘absurd,’ why is it still so prominent?

In a candid interview, Pablo Fernandez (University of Navarra), the author of a recent paper, “CAPM: An Absurd Model,” was asked why the model—which has also been criticized by others over the years—still has a prominent place in business schools and in valuation practice. “I did a survey eight or nine years ago of professors and asked them why they were still teaching the CAPM and beta,” he recalls. “They gave me two main reasons. First, the CAPM fills seven class sessions, so, they asked me, ‘What do we otherwise do in those seven classes?’ The other answer is that the students like recipes, so they keep teaching it.”

Lot of inertia: Fernandez believes the affinity for using recipes is partly the reason valuation practitioners continue to use the capital asset pricing model. For consulting firms and regulators, there's also a lot of inertia and still enough of a mass of firms using it that you can justify its use by showing a list of all of those firms and people who still use it,” he says. “From the point of view of consulting firms, the beta impresses clients and people who are not in finance because it gives a sense of something magical and difficult going on. Also, it's very easy to copy the last valuation your company or colleague did when you are doing a new one, so that can perpetuate it.”

Fernandez talks about other valuation topics during the interview, conducted by Michael Crain (Financial Valuation Group), a valuation practitioner who has done academic research, most recently on the size premium. Read the complete interview in the July issue of Business Valuation Update (subscription required).

back to top

Lack of evidence KOs claim for goodwill

Hire a valuation expert. That’s the message the Alaska appeals court recently sent in a ruling involving a professional practice caught up in a divorce. The opinion also includes a good summary of the state’s position on goodwill.

‘Evidentiary void’: The husband was a licensed naturopathic physician who owned two practices on the Kenai Peninsula in Alaska. After filing for divorce, the wife obtained a court order directing the husband to pay her $10,000 to take care of interim attorney fees and to hire an expert to value the business. Even though the husband paid, the wife did not retain a valuation expert. Neither did the husband.

At trial, the husband testified that his business had zero market value, reasoning that the only similar business on the peninsula was for sale for over a year but did not sell and was taken off the market. The wife did not present any evidence to the contrary or, for that matter, any alternate valuation. Instead, she claimed there was an “evidentiary void” as to the business value and maintained that the practice should be valued at $500,000 “to account for its goodwill as an ongoing established business.” She offered no support for that claim.

She did, however, provide evidence of the business’s various assets and their values. The trial court adopted the individual asset values for purposes of dividing the marital estate. At the same time, based on the husband’s testimony, the trial court found the business had zero goodwill value. The wife appealed the business valuation to the state’s highest court, arguing the trial court should have directed the party with the best access to data—that is, the husband—to fill the evidentiary void. The husband countered that there was no evidentiary void since he had testified as to the market value of the business.

The state Supreme Court noted that the burden of supplying sufficient evidence for the record lay with the parties, not the court. If a party fails to do so, he or she may not later attack the adequacy of the evidence on appeal. In this instance, the trial court provided the wife with the resources to gather valuation evidence, which she failed to do. Accordingly, the trial court did not abuse its discretion when it declined to order the husband to present additional evidence about the value of the practice.

The state’s highest court also upheld the trial court’s goodwill ruling. It was based on the husband’s testimony that there was no marketable goodwill. “[V]aluation evidence from the parties alone is sufficient to determine marital property value,” the appellate court noted.

Takeaway: It’s not clear why the wife—or her counsel—did not offer any kind of business valuation. But the failure to spend money on an alternate appraisal proved a costly blunder.

Find a discussion of Reedy-Huffman v. Huffman, 2015 Alas. LEXIS 56 (May 20, 2015), in the August issue of Business Valuation Update; the court’s opinion will appear soon at BVLaw.

back to top

Certain buy-sell agreements need frequent updates

When a buy-sell agreement calls for a predetermined price, it should be revisited regularly, according to experts in a new BVR special report on buy-sell agreements. Attorneys are seeing value in frequent updates of these types of agreements for their clients, particularly with companies in volatile industries or in the early stages of development when value is accruing fairly substantially or could be subject to wide swings. This provides a market opportunity for business appraisers, as buy-sell agreements can be an integral element in many valuations.

For more information on valuation and buy-sell agreements, see the new BVR special report, Buy-Sell Agreements: How to Avoid the Valuation Pitfalls.

back to top

Multiples in the healthcare services sector

The S&P Healthcare Services Index has decreased by 2.0% over the last three months, underperforming the S&P 500 (a 0.1% increase over the same period), according to the June 2015 Healthcare Sector Update from Duff & Phelps. The best performing sectors were emergency services (up 18.8%) and special managed care (up 17.4%). The worst performing sectors were diagnostic imaging (down 23.1%) and healthcare REITs (down 8.6%).

The current median LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 1.76x and 13.1x, respectively. The sectors with the highest valuation multiples include: HCIT (3.7x LTM revenue, 19.5x LTM EBITDA), healthcare REITs (12.0x LTM revenue, 17.4x LTM EBITDA), consumer-directed health and wellness (3.4x LTM revenue, 20.8x LTM EBITDA), and other services (2.0x LTM revenue, 27.2x LTM EBITDA).

back to top

Global BV news

IVSC and TAF will bridge gaps in standards

The International Valuation Standards Council (IVSC) and The Appraisal Foundation (TAF) are working to harmonize any remaining differences between the IVSC's International Valuation Standards (IVSs) and TAF's Uniform Standards of Professional Appraisal Practice (USPAP).

‘Bridge document’: The two groups recently met to establish joint objectives and a long-term plan to collaborate and execute upon a memorandum of understanding (MoU) signed in October 2014. This will be accomplished, in part, through a document that will act to bridge the two sets of standards. Appraisers using this "bridge document" will be able to develop appraisals that are compliant with both the IVSs and USPAP, keeping the core principles intact.

"The MoU has reinvigorated our long-term relationship between the IVSC and TAF,” says Sir David Tweedie, chairman of the IVSC board of trustees. “We are now determined to capitalize on the wealth of expertise we have at our disposal in our common goal of establishing a globally accepted set of valuation standards. Bringing USPAP and the IVSs together is an extremely important step towards achieving this goal."

back to top

IIBV revamps website

The International Institute of Business Valuers (IIBV) has launched a redesigned website focused on becoming a worldwide forum for communicating up-to-the-minute news involving the business valuation profession, including a fresh logo, links to new LinkedIn and Twitter pages, and a new video section.

The IIBV is an umbrella organization of business valuation professional organizations that promotes the sharing of best practices in business valuation through its program of education courses delivered globally. The current members of the IIBV include: the American Society of Appraisers, the Canadian Institute of Chartered Business Valuators, China Appraisal Society, and the Saudi Authority for Accredited Valuers (TAQEEM).

back to top

BV movers . . .

People: Jeffery Drummonds has been named managing partner of LBMC of Nashville, Tenn., succeeding co-managing partners Mike Cain and David Morgan Ted Verkade was elected chief executive officer and president by the Baker Tilly International board of directors, succeeding Geoff Barnes, who will retire from that role in June 2016 … Brad Weckwerth was promoted to shareholder at Vrakas CPAs + Advisors of Brookfield, Wisc.

Firms: Baldwin CPAs agreed to merge with Eldridge, Jackson & Leedy of Flemingsburg, Ky., and will operate under the Baldwin CPAs name … Empire Valuation of New York City received two prestigious awards as part of the 2015 Alternative Investment Awards from Wealth & Finance International, a U.K.-based publication: Best for Alternative Investment Valuation and Best-in-Class for Client Satisfaction … Kruggel Lawton CPAs of South Bend, Ind., and Brian Alwine, president of ClarityBV Inc., are joining forces to provide business valuation services.

back to top

Summer sizzles with exciting CPE events

The month of July kicks off with these webinars:

  • NOTE NEW DATE: Hot Topics in Patent Royalty Damages (July 7), with Richard Bero (The Bero Group) and David Hanson (Reinhart Boerner Van Deuren). This is Part 4 of BVR's 2015 Special Series on Intellectual Property;

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

back to top

Holiday break

After taking a break next week for the Fourth of July, BVWire will be back on Wednesday, July 8. Have a happy and safe holiday!

back to top

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



Not a BVWire subscriber?
Get on the list today!

In this issue:

IPCPL analysis

CAPM inertia

Court pitfall

Buy-sell op

Healthcare multiples

Global BV news

BV movers

CPE events











Copyright © 2015. All rights reserved.

Business Valuation Resources, LLC

1000 SW Broadway, Suite 1200
Portland, OR 97205
P: 1-503- 291-7963