March 23, 2011 | Issue #102-4 Forward to a Friend

Beware of myths when valuing Internet companies

During last week’s webinar “Valuing Internet-Based Companies” Mike Pellegrino (Pellegrino & Associates) dispelled five myths of Internet company valuations.  “Overly optimistic forecasts overstate value potential, and many forecasts understate development timelines and technology needs and costs,” says Pellegrino. “In fact, many Internet-focused companies should never receive funding,” he reminds all of us.

Listed below are some of the myths and facts Pellegrino discussed in the webinar:



We will generate revenues quickly

IF you survive your revenues will grow much slower than you ever anticipated

We accounted conservatively for #X per user/visit/eyeballs/etc. in revenue

Per-use metrics are meaningless for revenue forecasts

We are going to this on the cheap

Quality sites require significant investment to succeed

We are going to go viral

There is no way of predicting what goes viral

We are going to use this as a loss leader

Losses are just that - losses

A training pack of this session is available here.  In a recent article repeated in Business Week, David Wanetick (Incremental Advantage) also warns valuation analysts against overvaluing companies just because they own patents or have patents pending.  His statistics are sobering:

  • Half of all patents have NO strategic value.
  • Between 2 – 5% of patents generate any royalties.
  • The average length of time for USPTO to make a decision on a patent is now 32 months (albeit pushed up dramatically by particular technologies).

Here’s the key statistic for valuators: the “ONLY way a patent’s validity can be proven is through litigation,” and while filing for a patent might cost the holder, say, $10,000, on the average, in legal fees, the cost of litigation is closer to $7M (where $25M or more is at stake). Whether or not the patent owner able and willing to protect the patent becomes a crucial question with respect to value. Add to this the fact that rate of success in defending patent validity is not overwhelmingly positive.

Valuators must research the likelihood of success, based on results to date, other deals and their experience in the industry. The other effect of all of this, of course, is to force “small” or risk-averse inventors to sell their inventions or monetize their licenses. Then too, IP buyers know well of these risks, and monetization rates are startlingly low.

After Balicki: Not all divorce courts must consider tax discounts

In the February 2011 Business Valuation Update, we digested Balicki v. Balicki, a case from the Pennsylvania Superior court that requires local family courts to consider the tax consequences of selling a marital asset—even if the sale isn’t imminent or certain. Some BV authorities saw the case as setting a broad “new standard in divorce.” (See the article by M. Holland and M. Thomson in Valuation Examiner, Sept./Oct. 2010). Others believed that—rather than sounding “the death knell” for considering tax discounts in divorce, Balicki was limited to its legal and factual record. (See, “What’s the Hullaballoo about Balicki?” BVSource, Dec. 12, 2010.)

The latter school may be correct, as we now have a new Nebraska case in which a court-appointed expert applied a uniform 40% tax rate for purposes of quantifying the built-in capital gains tax liability under the net asset approach. State precedent typically precludes a court from considering the tax consequences of sale, but the appraiser distinguished the tax discount because it was not one that the owner-spouses (or even the business) would incur upon sale. “Rather, it is a tax liability that the purchaser . . . would acquire,” he emphasized, affecting only “the price a purchaser would pay for the shares of the entity.”

Nevertheless, the Nebraska Court of Appeals held that tax liability is only relevant in two situations: when the sale of the marital business is reasonably certain to occur in the near future, or when liquidation is necessary to satisfy a spouse’s obligations on divorce. At the same time, the court permitted tax adjustments to the cash flows of the business under the income approach. Because these relate to “required payment of annual ordinary income taxes” rather than any built-in depreciation recapture or capital gains tax liability realized on sale, they were proper. For the complete digest of Shuck v. Shuck, 2011 WL 206845 (Neb App.)(Jan. 25, 2011),see the April 2011 Business Valuation Update; the court’s decision will be posted at BVLaw.

FASB proposes three-step approach to assessing goodwill for impairment

At their last meeting on March 14, FASB directed staff to prepare an exposure draft proposing a three-step approach to assessing goodwill for impairment. “If the changes are approved, Topic 350, Intangibles—Goodwill and Other, formerly SFAS No. 142, would include a three-step test that would let companies, in some instances, avoid measuring a goodwill intangible at fair value,” according to Thomson Reuters’ SEC/GAAP Watch

Free webinar on the Valuation Advisors Discount for Lack of Marketability Study this Friday

As mentioned in last week’s BVWire, the Valuation Advisors Discount for Lack of Marketability Study just released a major additional dataset for transactions where pre-IPO timeframe is two years or greater.  On Friday, March 25 BVR will host the study’s author Brian Pearson (Valuation Advisors, LLC) for an exclusive and free one-hour webinar “Valuation Advisors DLOM Study: Using the newest Lack of Marketability Discount Data.” Pearson will provide a guided-tour and explain what this new data means for DLOM determination.  One CPE credit is available.

Top areas of law provide opportunities for BV appraisers

In the CPATrendlines article “The Four Hottest Areas in Litigation Consulting,” law firm marketing consultant Larry Bodine reported results from BTI Consulting’s Annual Study of Corporate Counsel.  According to the study, the four top areas where lawyers “can earn top dollar from corporate clients with litigation” are:

  • Commercial litigation
  • Employment litigation
  • IP litigation
  • Securities litigation

“If lawyers can cash in, so can the CPAs who advise them,” says CPATrendlines editor Rick Telberg.” The same can be said for the “business appraisers who advise them.” Valuations are often relevant in cases involving damages, shareholder dissent and oppression, and infringement of trade secrets, trademarks, and copyrights. 

ISO 10688 creates new focus on brand valuation

Brand valuation has evolved considerably since it originated in the 1980’s, writes Sophie Roberts in “Brand Valuation: the methodologies” in Intellectual Property Magazine. “Universally recognised methods used to carry them out have been devised, tweaked and rated,” she says.  Just last year, the International Organization for Standardisation (ISO) published BSI ISO: 10668 Brand Valuation: Requirements for monetary valuation.

Roberts quotes Roy D’Souza and Brad Sarna of Ocean Tomo:

A brand valuation is similar to any other valuation, but has additional steps that extend the time-frame and amount of work to be completed. It involves the application of generally accepted valuation techniques and factors it also requires an understanding of the qualitative factors that go into the key elements of a brand.  The process of combining market research with financial results to understand what drives a brand’s value is complex and specialized.

For a detailed article on brand valuation and BSI ISO: 10668 read “ISO 10668 and Brand Valuations: A Summary for Appraisers” by James Catty in the upcoming issue of Business Valuation Update (April 2011).

Effective communication skills just as important as “the numbers” when testifying in court

“Testifying as an expert witness in court is no big deal. I just have to tell them what the numbers mean, right?”  Well, not exactly.  “It’s important to have the technical background in valuation or forensic accounting to become an expert witness, but it’s just as critical to have effective communication skills,” say Stacy Collins (Financial Research Associates) and Jim Lawrence (University of Houston Law Center).

Valuation practitioners have two opportunities to improve their communication and presentation skills as expert witnesses:

  • A faculty of judges, experts and attorneys from a broad range of disciplines will present the AICPA Expert Witness Skills Workshop on April 28-30 at the Georgetown University Hotel and Conference Center in Washington, DC. Among other things, this forum will cover:
    • testimony, demonstrations and analysis
    • participant practice sessions - direct testimony and cross examination
    • one-on-one video Review & Critique by Seasoned Attorneys
    • effective communications presentation by expert trial consultant
    • testimony at a mock trial
  • “Winning the Battle of the Experts: How to Get the Edge,” at the AICPA Family Law Conference on May 18 at the Bellagio in Las Vegas. Collins and Lawrence, along with Randy Kessler (Kessler Schwarz & Solomiany) and Greg Ortiz (Ham & Ortiz), share their experience and expertise in the courtroom at the optional workshop.
    • The first part of the workshop will briefly address some background in communication theory, including the neuro-linguistic programming Model (NLP). The NLP links behavior patterns and experiences to help people become more effective communicators.  A brief case study in business valuation will be used to demonstrate effective – and ineffective - means of communication.  Depending on the size of the class, students will then have the opportunity to practice what they learn, possibly on video, with timely feedback by seasoned family law attorneys.

What’s your take on convergence?

In last week’s BVWire we reported on Sir David Tweedie’s speech to the U.S. Chamber of Commerce on the need for the U.S. adopt IFRS this year. This week we report on The Accounting Onion’s response to Tweedie’s speech. In his post "’Convergence Flaws’ v. Convergence Spin” Tom Selling blogs “how many of those Dodd-Frank and fair value bashers actually understand (or care) that GAAP and IFRS will be far from converged even after the frantic race to the bottom on leasing, financial instruments and revenue recognition has been declared fini in just a few months?”

Selling provides a quick list of projects “that were abandoned, never fully addressed or mutilated by "convergence":

  • Impairment of long-lived assets
  • Research and development costs
  • Borrowing costs
  • Pensions
  • Financial statement presentation, statement of cash flows and disclosures
  • Contingent liabilities
  • Business combinations
  • Joint ventures
  • Oil and gas accounting
  • Agriculture
  • Goodwill impairment

“Rigorous SEC enforcement of IFRS with only 'soft-touch' enforcement elsewhere in the world will only make us out to be chumps,” says Selling. What do you think?  Send your comments to

Learn small business valuation from the experts

BVR is pleased to host Ron Seigneur (Seigneur Gustafson), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos), and Michelle Gallagher (Gallagher & Associates) in “Valuing A Business Worth Less than $2 Million” on April 28.  The latest installment in BVR’s Industry-Spotlight Series, this 100-minute webinar will cover all of the challenges inherent in very small business valuations.  Special focus will also be given to how the recent economic downturn has affected and continues to affect these companies.

Where Stark, referrals, kickbacks and BV meet

On April 26 BVR’s Online Symposium on Healthcare Valuation returns with one of its most important programs for anyone doing healthcare appraisals: “The Anti-Kickback Statue and Stark Law: Avoiding Valuation of Referrals.”  Through their 100-minute presentation attorneys James Pinna and Matthew Jenkins (Hunton & Williams) will discuss everything appraisers need to know to avoid the valuation of referrals.  Two CPE credits are available.


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Copyright © 2011 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by
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Valuation Advisors DLOM Study: Using
the Newest Lack of Marketability Discount Data

March 25, 2011
10:00am - 11:00am PT
Featuring: Brian Pearson

The Anti-Kickback Statute and Stark Law: Avoiding Valuation of Referrals
April 26, 2011
10:00am - 11:40am PT
Featuring: James Pinna and Matthew Jenkins


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