BVWire Issue #165-4 | June 29, 2016


Top BV stars provide insights, inspiration—and a few laughs

BVR has had the honor of having the valuation profession’s brightest thought leaders grace the airwaves of our webinars over the years. To mark the occasion of having presented 500 webinars, BVR is turning over the microphone to 15 of these distinguished individuals who will offer what they feel is the most helpful advice they can give to the profession. Here are just a few samples:

“If you ask me to describe valuation the way I describe it is it’s a craft,” says Aswath Damadoran (New York University Stern School of Business), who will talk about storytelling and valuation. “The essence of a craft is that you learn it by doing it. Cooking is a craft. You learn cooking by actually cooking. Not by reading cookbooks or watching cooking shows. Valuation you learn by doing.”

“There is a Chinese proverb that says, ‘The best time to plant a tree is 20 years ago,’” says Chris Mercer (Mercer Capital), reflecting on the growing valuation professional. “The next best time is now. The growing professional is always tilling the proverbial soil and planting the proverbial seed.”

“Traditionally in our profession most people use what I refer to as average discounts from restricted stocks or IPO studies,” points out Bruce Johnson (Munroe, Park & Johnson), who’ll present on DLOM. “I caution people to not use a fixed or an average discount. Putting a 35% discount on an appraisal report usual leads to scrutiny and it’s very hard to justify that unless there is some objective data behind it.”

“In a survey, two-thirds of respondents say that CapEx (capital expenditures) and depreciation were the same or very similar,” points out Gil Matthews (Sutter Securities). “That assumption is wrong. CapEx must be greater in a growth model.”

“We get calls from our clients contemplating a secondary transaction and asking how is that going to impact their 409a value,” notes Neil Beaton (Alvarez & Marsal), speaking on current trends in 409a valuations. “What I tell them is basically two things: magnitude and frequency. How big is the deal? How often does it occur? And each of those will have an impact on what will transpire and move forward.”

“One of my favorite worst practices is people who use complexity to show off their math or Excel prowess,” says Anthony Banks (Marcum), talking about common mistakes in advanced financial modeling. “One example is called a two-loop hexagon Wilson loop. The formula runs for 22 pages, and the author of this formula was able in subsequent papers to reduce this massive equation down to a single line.”

Four-hour special: You’ll hear many more insights from many more speakers during the Valuation Jubilee: Celebrating BVR's 500th Event. Tune in tomorrow, June 30, from 1 p.m. to 5 p.m. ET.

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Appeals court fudges DLOM issue in divorce case

Appraisers rely on clear directives from the courts to produce sound valuations, but they may not always get them. A recent Tennessee appellate ruling in a divorce dispute is a case in point. The issue was whether it was appropriate to use a marketability discount in the valuation of the husband’s interests in several businesses. The court’s answer creates a quandary for experts as to what the law is.

Agreement on DLOC: The husband, a successful real estate developer, owned minority interests in three general partnerships that bought land, developed it for residential subdivisions, and sold the lots to builders. Trial focused on the valuation of the interests, with both sides offering testimony from real estate appraisers as well as business valuators.

Both parties’ BV analysts used the net asset approach and agreed it was appropriate to apply a minority discount to account for the husband’s lack of control over the businesses. But they disagreed over the use of a marketability discount. The wife’s expert claimed it was inappropriate to use a DLOM when the owner spouse had no intention of selling his interest. The husband’s expert applied the discount regardless of the husband’s lack of intent to sell, saying the DLOM was “the gauge of a readily available market to turn a particular interest into cash.” Moreover, he said, here the partnership agreements restricted a partner’s ability to sell his interest. Based on restricted stock studies and state case law, he used an 18% DLOM for one partnership, a 12% DLOM for the second business, and a 30% DLOM for the third one.

‘Slight’ DLOM: The trial court awarded the husband all of the business interests but credited the valuations the wife’s experts offered. In terms of the DLOM, it found the rates the husband’s expert used were too high or altogether inappropriate. Concerning one partnership, the court found the “Husband might be compelled to sell some portion of his assets in order to accomplish the property divisions ordered by the Court while still maintaining and supporting the remaining business interests.” Therefore, the court reduced the 18% DLOM to a “slight discount for marketability.” (The opinion fails to state what “slight” means.) As for the other two partnerships, the trial court declined to apply a DLOM because the husband had no intention of selling his interests.

On appeal, the husband claimed the trial court erred in its DLOM rulings.

The appeals court noted that valuation experts typically use a marketability discount to reflect that there is no ready market for an interest or that provisions in a partnership agreement restrict a partner’s ability to liquidate his or her interest. It further said: “Generally, applicability of the use of a lack of marketability discount depends on the characteristics of the ownership interest being valued, not whether the owner of the interest actually intends to sell the interest.”

But, even though the trial court’s DLOM analysis focused on the owner’s intent to sell, the appeals court did not expressly critique or reject the trial court’s findings. Rather, it found, “in many instances, the decision to apply the discount is seen as discretionary” and was “dependent on the facts of the case.” Here, the facts suggested the trial court did not abuse its discretion in applying a “slight” DLOM for one general partnership and no DLOM in valuing the other two interests, the appeals court said in affirming the trial court’s valuations.

Takeaway: The Tennessee Court of Appeals sends a mixed message regarding the use of a marketability discount in valuing marital assets. While the appeals court suggests the trial court focused on the wrong question when deciding on the use of DLOM, the appeals court defers to the trial court, noting valuation is a fact question and as such the province of the trial court.

Find an extended discussion of Grant v. Grant, 2016 Tenn. App. LEXIS 327 (May 12, 2016), in the August issue of Business Valuation Update; the court’s opinion will appear soon at BVLaw.

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Comment period extended for FVQI exposure drafts

You have an extra 60 days to comment on two important exposure drafts that relate to the ongoing fair value quality initiative (FVQI) designed to improve financial reporting valuations for U.S. publicly traded companies. The ASA, AICPA, and RICS have spearheaded the initiative that includes the development of a new credential for valuation professionals. The credentialing process will be subject to ongoing quality oversight and compliance with a “mandatory performance framework,” which is the subject of the new exposure drafts. The original deadline for comments was June 24.

New deadline is August 24: The two exposure drafts are: Proposed Mandatory Performance Framework for the Fair Value Quality Initiative and Proposed Application of the Mandatory Performance Framework for the Fair Value Quality Initiative. Written comments should be sent either to the AICPA, ASA, or RICS.

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What’s the value of a small piece of an epic pop song?

A recent lawsuit alleged that one of the top-selling rock acts of all time stole a piece of its signature song from another songwriter. Led Zeppelin’s “Stairway to Heaven” (1971) opens with a “riff” (a progression of chords) that the plaintiffs claimed was lifted from a 1967 song “Taurus” by the band Spirit. But the jury sided with Led Zeppelin and found that there was no infringement.

If the jury had sided with the plaintiff, it would have had to carve out the value of the riff that only forms part of the song. BVWire asked Michael Pellegrino (Pellegrino & Associates), a valuation expert (and musician) who specializes in intellectual property, for some insights into some of the thoughts behind how this would have been determined.

Tricky process: “Apportioning value in a song is tricky as many songs share common themes,” says Pellegrino, the author of BVR’s Guide to Intellectual Property Valuation. “For example, there was also some degree of common elements to ‘Stairway to Heaven’ in the ‘Gilligan’s Island’ theme song (check out Little Roger & The Goosebumps parody of ‘Stairway to Gilligan’ which got them sued by Led Zeppelin years ago). Some degree of overlap is common when you consider that there are only 13 notes in the musical scale. In fact, many punk bands make a good living playing only four or five power chords in different orders. When I was learning how to play guitar, Green Day was always an easy band to cover for that reason.”

The jury’s task would have been difficult because “Stairway to Heaven” “is an epic song,” Pellegrino points out. “The song is about eight minutes in length, but the value of a song is not necessarily the sum of its musical parts. What is it that makes ‘Stairway to Heaven’ what it is? Is it the opening progression, the lyrics, John Bonham’s drum entrance, Jimmy Page’s guitar solo, Robert Plant’s soft entrance or his hard finish, the crescendo as the song progresses, or Heart’s amazing cover of it at the Kennedy Center in December 2012? There is no clear cut formula and the answer depends on the context and perspective. The easiest apportionment factor one might consider is to allocate the duration of the accused portion of the song to its total length to arrive at a percentage. So of the accused portion of the song is 60 seconds on a 180 second song, then the apportionment would be a straight 33% allocation (60 seconds/180 seconds). This is likely an approach a jury might consider because it is easy to contemplate and calculate.”

Complicating factors: However, this percentage approach can have problems, he says. “What if the accused song has a higher degree of production? In that case, such an approach may not be appropriate. For example, when Mutt Lange produced Def Leppard’s “Hysteria” album and had the band record the chord progressions, he had the band record each individual guitar string as a separate track! So recording a simple D cord involved four tracks for the notes in the strummed notes in the chord (D, A, D, F#). While the notes are the same, the effect is acoustically different, producing a more lush sound. Of course, it is more expensive to record a D chord in four tracks and mix them later as opposed to a single track capturing all notes ringing together.”

Pellegrino says the other complicating factor is that copyrighted elements of a song can effect different emotive responses on the listeners. “For me, not being affiliated with the case, but having listened to both songs, I can clearly hear some degree of familiarity in elements of both songs,” he says. “However, I was never a personal fan of the beginning of ‘Stairway to Heaven.’ For me, the song gets better as it progresses and I like the second half of the song better than the first half, where there is no reasonable degree of overlap between the two songs. As such, the value of the song to me does not rely on Spirit’s disputed elements of the song. Thus, Spirit’s contribution, if any, to my enjoyment in listening to ‘Stairway to Heaven’ is minimal. Yet different listeners may have opposing views.”

Expect to see more cases such as this—which is part of a crop of copyright infringement cases triggered by the Supreme Court’s Raging Bull case. In fact, the Led Zeppelin case was filed just two weeks after the decision in Raging Bull.

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APB’s new advisory includes alternative model for customer relationships

The Appraisal Practices Board (APB) of The Appraisal Foundation has adopted APB VFR Valuation Advisory No. 2: The Valuation of Customer-Related Assets. The 116-page document offers voluntary guidance on recognized valuation methods and techniques and “is not intended to be an authoritative valuation standard.” Customer-related assets can include customer lists, order or production backlog, and contractual (and noncontractual) customer relationships.

Nontraditional model: The valuation advisory includes a nontraditional approach, the distributor method, for valuing customer relationships. Traditional valuation approaches tend to treat customer relationships as a company’s primary asset and thus may overstate their value, particularly when an IP asset (such as a brand or technology) is the key business driver. In these instances, using market observations of both wholesalers and distributors as inputs in a multiperiod excess earnings method may be an appropriate approach to valuing certain types of customer relationships.

In BVR’s online archive, there are two articles on the distributor method. One is “Using the Distributor Method to Value Customer Relationships,” by Edward Hamilton and PJ Patel (both with Valuation Research Corp.). The other article raises concerns over this method. Dan Guderjohn and Robert Reis (both with Corporate Advisory Associates) wrote that article, “Valuing Customer Relationships: Does the Distributor Method Miss the Mark?” These are available to subscribers of Business Valuation Update, but they can also be acquired separately.

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Deadline looms for exclusive BV firm economics survey

You have until July 8 to participate in BVR’s Firm Economics Study. Once all responses are compiled, you’ll see how your firm compares to others in terms of performance, compensation, billing rates, marketing, practice development, and more. This is the largest and most thorough analysis of its kind, and those who participate will receive a free Executive Summary of survey results, plus the opportunity to purchase the full report for $99 (regular price is $299). Click here to participate now.

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Global BV news:
New research reveals MRP used in 71 countries

Market Risk Premium Used in 71 Countries in 2016: A Survey with 6,932 Answers” is the latest research from Pablo Fernandez, Alberto Ortiz Pizarro, and Isabel Fernández Acín. They found that over half (54%) of the MRP used in 2016 decreased (vs. 2015) and 38% have increased. “Most previous surveys have been interested in the expected MRP, but this survey asks about the required MRP,” they say. The paper also contains the references used to justify the MRP as well as written comments from 46 respondents.

This research is currently in the sixth spot in SSRN’s list of Top Downloads for the Financial Economics Network over the past 60 days. Pablo Fernandez, a professor in the department of financial management at the University of Navarra—IESE Business School in Spain, has over 200 papers published on SSRN, many of them related to valuation. He currently ranks as No. 1 in all-time downloads.

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Latest What It’s Worth guide examines hotels

The latest in the new series of What It’s Worth guides brings you the expert insight you need to understand and value hotels. Top hotel industry experts have contributed to the guide, What It’s Worth: Hotel Business Value, and they provide an overview of the opportunities available in the hospitality industry and walk you through a detailed valuation case study. The report also includes recent U.S. statistics and metrics and a comprehensive review of the current market for hotels, rules of thumb for pricing a hotel, hotel valuation multiples, succession planning tips for hotel owners, and an extensive list of industry resources. Also covered are special valuation considerations regarding real estate associated with hotel properties.

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Three focus areas at ASA’s 2016 Advanced BV Conference

BVR is proud to be a sponsor of the 2016 Advanced Business Valuation Conference of the American Society of Appraisers (ASA). It will be held on September 11-14 in Boca Raton, Fla., at the Boca Raton Resort & Club. This year’s event features three areas of educational focus with over 30 sessions to choose from:

  • Business valuation—The best in BV education can be found in sessions that include: “When an Option is Not an Option,” “The Valuation of Complex FLPs,” “Incorporating S Corp Research Into Your Valuation Analysis,” and many others.
  • Fair value—Detailed content on valuable topics is provided in the following sessions: “Supporting Clients Through the Audit of Fair Value Measurement and Disclosure,” “Value Allocations in Complex Capital Structures,” and “How to Effectively Review an Appraisal Report.”
  • Cost of capital—Specialized topics that you'll only find here include sessions titled: “The Absurdity of CAPM,” “Beyond CAPM,” and “Variable WACC.”

For a complete listing of all topics and presenters, click here. Take advantage of the early bird registration through July 22. BVWire will be there—will we see you?

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BV movers . . .

People: Andrew Bernstein has joined EisnerAmper as a managing director in the forensic, litigation, and valuation services practice and is based in both the Miami and Fort Lauderdale offices … Mary Jo Eaton has been promoted to global president, asset services and valuation & advisory services at CBRE; she has led CBRE’s Florida region since 2011 … Lisa Myers, a principal in forensic, valuation, and litigation support services group at Boyer & Ritter CPAs and based in Camp Hill, Penn., was elected president of the Pennsylvania Institute of CPAs. Myers is the institute’s fourth female president in 119 years … Jason Ruchaber has joined VMG Health, a leading healthcare valuation firm with offices in Dallas and Nashville, Tenn., as a managing director with the Business Valuation Division and will lead the newly formed Denver team.

Firms: Markit, a financial information services firm based in London, has agreed to acquire Toronto-based Prism Valuation, a provider of valuation and risk analysis of derivatives and structured products … Mize Houser & Co., a Kansas firm with multiple locations and 225 employees throughout the state, celebrates its 60th anniversary of the firm’s founding by Bob Mize and Ralph Houser on July 1, 1956.

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Summer heats up with some exciting CPE events

Damages Estimation and Valuation: How to Use Survey Research (June 29), with Leon Kaplan (Princeton Research & Consulting Center) and Larry Chiagouris (BrandMarketing Services). This is Part 3 of BVR's Special Series presented by The Comprehensive Guide to Economic Damages, 4th edition.

SPECIAL FOUR-HOUR PROGRAM: Valuation Jubilee: Celebrating BVR's 500th Event (June 30), with Jay Fishman (Financial Research Associates), Anthony Aaron (Ernst & Young), Jared Kaplan (McDermott Will & Emery LLP), Bruce Johnson (Munroe, Park & Johnson Inc.), Neil Beaton (Alvarez & Marsal), Anthony Banks (Marcum Accountants and Advisors), Michael Crain (The Financial Valuation Group), Aswath Damodaran (Stern School of Business, New York University), David Dufendach (Alvarez & Marsal), Gilbert Matthews (Sutter Securities Inc.), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC), James Ewart (Dixon Hughes Goodman), Candice Bassell (Grant Thornton), R. James Alerding (Alerding Consulting LLC), and Z. Christopher Mercer (Mercer Capital).

Key Concepts in Middle Market Debt Valuation (July 12), with Melissa Brady (RSM US). This is Part 4 of BVR's Special Series on Fair Value.

Valuing Timeshares and Unique Provider-Based Arrangements in Healthcare (July 14), with Schaeffer Smith (Horne LLP) and Brooke Pierce (Horne LLP). This is Part 3 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation, 4th edition.

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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Holiday break

After taking a break next week for the Fourth of July, BVWire will be back on Wednesday, July 13. Have a happy and safe holiday!

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

BV stars speak

Fudged DLOM

FVQI comments

Riff rift

Customer assets

Survey deadline

Global BV news

Valuing hotels

ASA advanced BV

BV movers

CPE events

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