BVR Logo June 19, 2019 | Issue #201-3

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:


Industry betas now included in CCPro platform

Users of BVR’s new Cost of Capital Professional (CCPro) platform now have the choice of two sources of industry betas to help in estimating the industry risk premium (IRP) component of the buildup method for developing the cost of capital for a private company. CCPro provides a simple and transparent way to estimate cost of capital with data similar to the original Ibbotson SBBI data.

The two sources of betas are those published by: (1) the “dean of valuation,” Professor Aswath Damodaran (New York University Stern School of Business); and (2) Salvidio & Partners, a Rome, Italy-based business valuation firm headed by Ascanio Salvidio. CCPro already includes some of Dr. Damodaran’s data library, such as the implied ERP, implied ERP with sustainable payout, and the Damodaran historical ERP. For more information on these two sources of beta, go to the FAQ pages on the CCPro webpage.

If you choose to use an IRP, there are a number of factors to consider, including how the data were developed, whether the sample size is sufficient, and whether the companies represented are truly comparable. If you feel that the published IRP is not appropriate, the CCPro platform allows you to enter a custom beta.

Changes in BV world highlighted at NACVA conference

The theme of “change” in the business valuation profession was predominant at the 2019 Annual Consultants’ Conference June 5-7 in Salt Lake City presented by the National Association of Certified Valuators and Analysts (NACVA) and the Consultants’ Training Institute. Change has also come to the NACVA organization itself, as Jonathan Jackson was welcomed as the new executive director, replacing Pam Bailey, who retired after 15 years in that post. In front of an adoring crowd, Brien Jones, NACVA’s COO, presented Bailey with a plaque for her years of dedicated service.

As for changes in the BV world, here’s some food for thought from a few of the sessions:

  • Technology: A proliferation of software tools has triggered concerns about black boxes and what’s behind the numbers. The comment was also made that too many analysts are overly immersed in these tools at the expense of having a solid understanding of the operations of the subject company. The expert who understands the business the best will likely prevail.
  • Cost of capital: The process to estimate the cost of capital has evolved from a relatively simple exercise into an exceedingly complex procedure. During one panel discussion, audience members had difficulty grasping some of the concepts such as the use of regression equations for the size premium and levering, unlevering—and then relevering—the cost of capital. At one point, cries of “enough is enough!” could be heard with one attendee asking the panel why we need all of these options and complexity. It’s a more complex world today, the panel explained, and better to consider many options instead of just one. But some wonder if all of this has gotten out of control and it is just an illusion of precision. Indeed, another session urged attendees to spend more time on the numerator (projections) of the valuation equation rather than the denominator (cost of capital).
  • Growth rates: A change in some fundamental notions about growth may be in the wings, according to new research being done by Roger Grabowski (Duff & Phelps) and Professor Ashok Abbott (West Virginia University). The most common error seen with growth rates is using one rate for the discrete period of a two-stage DCF and then a much lower rate for the terminal value. But businesses don’t operate that way in real life—there’s a transition between the two rates. Therefore, a three-stage DCF should be used with an interim period of adjustment. This adjustment period (the second stage) is basically five years, according to their research, which looks at other aspects of growth and will be coming out within the year.
  • Storytelling: The keynote presentation and a separate triple session were devoted to the art of storytelling, which has become more important than ever and will require a change in mindset. No longer is it enough merely to follow the numbers—a clear and convincing narrative must also be presented that ties to the numbers. Pretend you are telling a story to a child and focus on crafting a good beginning and ending—the middle will pretty much take care of itself.

Other areas of change discussed at the conference included the impact of the new tax laws, a rethinking of calculation engagements, greater scrutiny on management projections, a challenge to the Gordon growth model, a new approach to reconciling the outcomes of the various valuation approaches, and more. We’ll have full coverage of the conference in the August issue of Business Valuation Update.

DOL sticks to its tough ESOP litigations strategy

Despite criticism from the ESOP community, the Department of Labor is not abandoning its litigation-prone approach toward ESOPs, as a recently filed lawsuit makes clear. Following its playbook, the DOL, in its complaint with the Southern District of New York, alleges the ESOP trustee violated its fiduciary duties to the plan by causing the ESOP to overpay for the company stock. The trustee failed to negotiate in good faith as to the price and terms and scrutinize the valuation underlying the transaction, the DOL says.

Conflicted appraiser? The contested transaction involved Stargate Apparel and a sister company, Rivstar Apparel, private companies that produce denim jeans and swimwear for the junior market. Stargate’s founder and CEO owned essentially 100% of the two companies.

According to the DOL complaint, in the latter half of 2010, the owner hired CSG Partners, an investment bank specializing in ESOPs, to advise him on a possible ESOP transaction. On CSG’s recommendation, the owner engaged an appraisal firm to produce an initial valuation of the companies. The DOL claims that, before any valuation was done, CSG communicated to the appraiser what kind of offer the owner was prepared to make. The appraisal firm then produced a draft valuation that was in line with the offer.

CSG then proposed Wilmington Trust as ESOP trustee. Wilmington hired as ESOP appraiser the very firm that had done the initial valuation for the owner/seller, on recommendation of CSG. The DOL contends Wilmington either failed to investigate the ESOP appraiser’s prior relationship with the owner and CSG or Wilmington hired the ESOP appraiser knowing that the latter had earlier worked for the owner “in connection with the same proposed transaction.” Either way, Wilmington failed to hire an independent appraiser, the DOL claims.

The complaint also says Wilmington was remiss in its duty to “thoroughly review, analyze, and question any valuation report on which it relied.” The valuation report here was “rife with red flags,” the DOL says. It points to projections concerning the companies’ future revenue and earnings “that far outstripped the Companies’ historical performance” and that had operating expenses that “were far more modest than the Companies’ historical spending.” Also, Wilmington was aware of a third-party lawsuit against Rivstar in which the plaintiff alleged accounting irregularities, which Wilmington’s counsel called “rather serious.” Regardless, Wilmington “accepted at face value the Companies’ internally prepared financial statements for 2010,” which “showed a dramatic increase in earnings and unexplained efficiency gains over the previous years,” the complaint says.

The complaint makes other allegations. The DOL asks the court to order Wilmington to restore all losses to the ESOP and return to the ESOP all fees earned from the contested transaction and subsequent work as ongoing ESOP trustee.

Stay tuned for more commentary on this litigation as it unfolds. The case is Acosta v. Wilmington Trust, U.S. District Court for the Southern District of New York, Civil Action No. 19-2793 [Complaint filed 3/28/19].

Appraisers should take note of this pending FASB action

A pending FASB Request for Comment pertaining to ASC 350 and 805 may impact the demand for valuation services related to financial reporting. This was discussed at the recent 38th Annual SEC and Financial Reporting Institute. Tony Aaron and Tom Ryan, both with the USC Leventhal School of Accounting, participated in this event and will give an update at the ASA/USC 14th Annual Fair Value Conference at KPMG in Los Angeles tomorrow (June 20). Other important developments to be discussed at tomorrow’s one-day conference include:

  • How concepts relevant to cryptoasset valuations are central to a range of complex valuation challenges increasingly faced by business appraisers;
  • New research into terminal value calculations;
  • Trends in software valuation, including data-related intangible assets;
  • Latest initiatives from the AICPA, ASA BV Committee, PCAOB, and IVSC;
  • An update on the CEIV credential; and
  • The most recent study of expected returns in the private capital markets.

You can attend this important event either in-person or via live streaming if you click here.


ASA 2019-2020 election results

The American Society of Appraisers has announced the results of its 2019-20 elections for the new international officers, board of governors, Discipline Committee officers, and members at large. Those elected will officially take office on July 1. New international officers are:

  • International president—Douglas R. Krieser, ASA;
  • International vice president—Lorrie Beaumont, ASA; and
  • International secretary/treasurer—David Crick, ASA.

With respect to the business valuation discipline, the new Business Valuation Discipline governor is William A. Johnston, ASA-BV-IA. The Business Valuation Discipline Committee will be:

  • Chair: Kenneth J. Pia Jr., ASA;
  • Vice chair: Erin Hollis, ASA;
  • Treasurer: Ronald (Ron) L. Seigneur, ASA; and
  • Secretary: Arlene L. Ashcraft, ASA.

Members at large (three open seats):

  • Adriana Berrocal, ASA-BV-IA;
  • Alina Niculita, ASA; and
  • Laurie-Leigh White, ASA, CEIV™.

Also announced were members at large for the Appraisal Review & Management Discipline Committee. They are:

  • Richard Berkemeier, ASA, ARM;
  • Terri A. Lastovka, ASA, ARM-BV; and
  • Raymond Rath, ASA-BV-IA, ARM-BV, CEIV™.

Elections covered other appraisal disciplines including real estate, personal property, and gems and minerals. For the full results, click here.

The Appraisal Foundation seeks ASB and AQB board candidates

If you—or someone you know—has the desire to serve on one of The Appraisal Foundation’s national boards, the organization is currently conducting its annual search for qualified candidates to serve on the Appraisal Standards Board (ASB) and the Appraiser Qualifications Board (AQB). The ASB is charged with developing, interpreting, and amending the Uniform Standards of Professional Appraisal Practice (USPAP). The AQB is responsible for establishing the minimum education, experience, and examination qualification criteria for real estate appraisers. Individuals selected for these positions will serve an initial term of one to three years starting on Jan. 1, 2020. For an application package, click here. Deadline for applications is August 19.

Medieval accounting book sells for $1.2 million

A “good accountant” is one of the three essentials of business, wrote Luca Pacioli in the 15th century in his book, Summa de Arithmetica, a first edition of which just sold at Christie’s in New York for $1,215,000. In the book, Pacioli lays out the foundation for modern business and writes that the other two essentials are “cash or credit” and “good internal control.” The book also gives the first description of double-entry bookkeeping, which, of course, led to the proliferation of green columnar pads that cluttered every accountant’s office. For those of you who lost out on the bidding, you can get a reprint on Amazon for $43.54.

Valuation issues in Argentina

For a high-level summary of valuation issues for companies with operations in or considering transactions in Argentina, check out this overview prepared by R. Biasca & Asociados, a member firm of the Valuation Research Group. Main valuation practice characteristics include high inflation, government regulations regarding valuations, very few Argentine companies offering stocks in Buenos Aires or New York, and small financial markets. Also, a “valuation profession” does not necessarily exist in Argentina. Instead, a wide range of registered professionals in different fields consider valuation engagements.

Preview of the July 2019 issue of Business Valuation Update

Here’s what you’ll see:

  • Determining the FMV of Small Privately Held Promissory Notes” (Bruce A. Johnson). The appraisal of promissory notes is an area of business valuation that has not received much attention from academic journals. Appraisers are taught to use corporate bonds as comparable investments, but they are much too large and marketable to be used as a proxy for most privately held promissory notes. This article introduces the concept of using Business Development Company (BDC) rates to value small promissory notes.
  • Inclusion of Betas in CCPro Platform Puts the Spotlight on the IRP” (BVR Editor). Two sources of industry betas are now included in BVR’s Cost of Capital Professional (CCPro) to help in estimating the industry risk premium (IRP) component of the buildup method for developing the cost of capital for a private company. For appraisers that choose to use an IRP, care must be taken and there are some important factors to consider.
  • Attorneys and Valuers Strengthen Ties at AAML/BVR Divorce Confab” (BVR Editor). The Tax Cuts and Jobs Act, expert witnessing, rigged valuations, and other interesting topics were presented at the National Divorce Conference (in Las Vegas May 8-10), co-sponsored by the American Academy of Matrimonial Lawyers (AAML) and Business Valuation Resources (BVR). This article recaps some important takeaways.
  • Avoiding Ethics Violations When Working on Divorce (or Other) Cases” (Sylvia Golden, Esq.). A session at the AAML/BVR National Divorce Conference did a good job explaining how attorneys and financial experts must think about ethical issues that may arise while working on a divorce (or any other) engagement so as to ensure they abide by their profession’s rules of ethics and work together in an effective and efficient way.
  • Front-Burner Issues Presented at This Year’s NYSSCPA BV Conference” (BVR Editor). Inputs into the cost of capital, cryptocurrency, and financial projections are just a few of the important topics discussed at the annual business valuation conference of the New York State Society of CPAs (NYSSCPA) in New York City. Business Valuation Update attends this event every year and provides a few takeaways from the sessions in this article.

The issue also includes:

  • An expanded section of “BV News and Trends/Global BV News and Trends.”
  • Regular features: “Ask the Experts” and “Tip of the Month.”
  • BV data spotlight: “DealStats MVIC/Revenue Trends,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and “Cost of Capital Center.”
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the July issue of Business Valuation Update.


BV movers...

People: Thomas Hilton, MSF, CPA/ABV/CFF, CVA, CGMA, partner in the forensic and litigation services group at St. Louis-based Anders CPAs + Advisors, was appointed as 2019-2020 chair for the Missouri Society of CPAs Mike Hill Jr., FASA, CPA, ABV, will be a partner in the valuation services practice following the merger of Houston-based firms HSSK LLC and WeaverTim McPoland, CPA/ABV, CFE, CVA, a director at Buffalo, N.Y.-based Freed Maxick, was named a member of the Standards Board of the National Association of Certified Valuators and Analysts (NACVA); he is the leader of the firm’s business valuation and litigation support team … At Chicago-based Baker Tilly, Jason Bodmer, CPA/ABV, ASA, has joined the firm as senior manager to the firm’s valuation and litigation advisory services team in the Detroit office and Shanté George, CIRA, a director in the forensic, litigation and valuation services group in the firm’s New York office, has been admitted as a new partner.

Firms: Warmels & Comstock and Layton & Richardson of East Lansing, Mich., have agreed to merge with Cincinnati-based Clark Schaefer Hackett, effective July 1 … New York-based EisnerAmper LLP announced that managed IT security services firm CSAM Marketing Inc. has joined the firm.

Please send your professional and firm news to us at

Upcoming BVR training events

  • Valuation in a Nonlinear World (June 19), with Gary Schurman (Applied Business Economics).

    There are areas of valuation that are outside the box of the typical business appraiser because they utilize a much higher level of mathematics and creativity. Robust modeling and analytics are needed where the primary purpose of the valuation is investment, acquisition, liquidation, financial reporting, assessing risk, and/or pricing.

  • ASA/USC 14th Annual Fair Value Conference: A BVR Webcast (June 20).

    A full-day live webcast that will feature presentations from nationally recognized speakers covering a range of important valuation topics related to fair value for financial reporting. Up to eight CPE credits available. See conference agenda for speaker and session information.

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

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