BVWire Issue #162-2 | March 9, 2016


Goodwill snafu invalidates noncompete agreement

Valuators everywhere know that the interplay between goodwill and a noncompete is a tricky issue. A recent California case arising out of the sale of a medical practice complicates the picture but also provides a bright-line rule as to how to value a business so as to ensure the noncompete is enforceable.

Change of mind: A California-based doctor who wanted to sell her medical practice entered into negotiations with a larger healthcare provider. The potential buyer offered $1.7 million for the building, which the doctor owned, but said the medical practice had no monetary or goodwill value. The doctor responded she was not “comfortable with the concept that my business/practice has no value” and that she planned to continue her current practice.

Eventually, the parties came to an agreement. The asset purchase agreement specified a price of about $34,700 for the medical practice. It provided that the assets being sold included “[a]ll of the goodwill of ‘The Medical Practice,” but it allocated 100% of the purchase price to “[f]urniture, fixtures, equipment and supplies.” As part of the sale, the doctor was offered employment with the buyer and in exchange signed noncompete and nonsolicitation agreements.

When the doctor later decided to reactivate her practice, albeit in a different form, the buyer filed a complaint alleging breach of contract, interference with contract, and unfair business practices. It asked the trial court for a temporary restraining order against the doctor. The court granted the injunction as it related to the solicitation of patients but did not prohibit the doctor from starting up a new practice.

No goodwill value. The doctor subsequently challenged the injunction with the California Court of Appeal, arguing the trial court’s ruling was an abuse of discretion.

The appeals court agreed. It noted that, under California’s Business and Professions Code, noncompete and nonsolicitation clauses are generally not enforceable. But there is an exception for persons who sell the goodwill of a business. The law recognizes that it would be “unfair” to allow the seller to compete in a way that diminishes the value of the asset he or she sold to the buyer. Under controlling case law, for the exception to apply, “there must be a clear indication that in the sales transaction, the parties valued or considered goodwill as a component of the sales price.”

Here, the Court of Appeal found that the buyer did not pay anything for the practice’s goodwill. Although the asset purchase agreement stated that the goodwill of the seller’s medical practice was among the assets sold, it allocated no portion of the $34,700 purchase price to goodwill. Also, no part of the compensation offered to the doctor under the employment agreement was for the goodwill of the practice.

Since the buyer gave no consideration for the practice’s goodwill, the noncompete and nonsolitication clauses “were neither necessary nor enforceable to protect the value of the goodwill because the parties agreed the goodwill had no value.”

Takeaway. An appraiser wanting to protect a client’s interest must know that in California a noncompete/nonsolicitation agreement accompanying the sale of a business is only enforceable if the valuation allocates a percentage of the sales price to the business’s goodwill.

Find an extended discussion of Healthcare v. Orr, 2016 Cal. App. Unpub. LEXIS 440 (Jan. 20, 2016), in the April edition of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Mixed reviews for proposed fair value disclosures

The banking and insurance industries have some concerns over the FASB proposal designed to improve the information businesses must disclose about the estimates and assumptions used to determine the fair values of assets and liabilities. The American Bankers Association (ABA) said the proposal will require banks to make significant changes to the way they track some of the assets covered by the disclosure requirements, reports Thomson Reuters. The American Academy of Actuaries, which includes many insurance company executives, said one of the proposed disclosure requirements may be impossible for insurers to put into place for some of the contracts they offer. On the other hand, academics say the proposed disclosures may produce information investors will find valuable.

Extra: BVR kicks off a new webinar series on fair value on March 23. The first installment will be Business Combinations: Case Studies in Purchase Price Allocations, presented by Nathan DiNatale (SC&H Group).

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Kudos for research on valuing ESOs

The AICPA and the Chartered Institute of Management Accountants (CIMA) have recognized three professors for research into the impact of corporate employee compensation programs with the Greatest Potential Impact on Management Accounting Practice Award. The research is contained in a paper, “Employees’ Subjective Valuations of Their Stock Options: Evidence on the Distribution of Valuations and the Use of Simple Anchors,” which explores the benefits of educating employees on how to better understand the value of employee stock options received as part of their compensation. The authors are: Anne Farrell (Farmer School of Business, Miami University), Susan Krische (Kogod School of Business, American University), and Karen Sedatole (Eli Broad College of Business, Michigan State University).

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Pepperdine report reveals optimism for sales of Main Street and LMM firms

Advisors who aid business owners and buyers in selling and buying businesses expect a 60% increase in deals in 2016, according to the “Market Pulse Quarterly Survey Report” for the fourth quarter of 2015 (4Q15). This report is part of the Pepperdine Capital Markets project, which conducts ongoing research concerning the cost of private capital across market types and the investment expectations of privately held business owners. The International Business Brokers Association (IBBA) and M&A Source examine the market conditions for businesses being sold in Main Street (values $0 to $2 million) and the lower-middle-market (values $2 million to $50 million) sectors.

Strong multiples: Deal multiples remain strong, but advisors aren’t optimistic that multiples will climb any higher in 2016. Notably, advisors also suggest market conditions will remain relatively neutral when it comes to debt financing. However, they report some difficulty arranging financing for companies with revenues of $500,000 or less. “Sometimes sellers hear that a business in their industry got a certain multiple and they want the same number,” says Scott Bushkie, CBI, M&AMI, president of Cornerstone Business Services and IBBA chair. “But multiples depend on the size of the business being sold; for Main Street deals the common multiple is based on SDE without working capital (2-3x SDE in 2015), whereas in the Lower Middle market EBITDA including working capital (4-5x EBITDA in 2015) is the most common multiple type.”

Additional key findings:

  • Year over year, buyers are increasing their advantage in the Main Street market, particularly for the smallest businesses. Meanwhile, the seller’s market sentiment has improved, year over year, in the lower middle market.
  • Main Street businesses sold for approximately 91% of their asking price in Q4 2015. By comparison, lower-middle-market businesses—which typically aren’t marketed with an asking price—received 99.5% of the internal benchmark set by the advisor and seller.
  • In the smallest deal category (businesses valued at less than $500,000), first-time buyers accounted for the largest buyer segment. In the largest deal category (businesses valued between $5 million and $50 million), private equity made up the largest buyer group. PE groups were not active at all in the less-than-$500,000 segment, while individual buyers accounted for only 14% (7% first-time buyers, 7% repeat owners) of the larger sector.
  • Service companies (business and personal) continue to lead Main Street market activity in Q4 2015, with a strong showing in the lower middle market as well. Manufacturing companies led the lower middle market.

The survey for 4Q15 was completed by 348 business brokers and M&A advisors representing 38 states who completed 410 transactions.

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Record prices, low cap rates for skilled nursing/assisted living

After a record-setting year across all senior care sectors in 2014, average skilled nursing facility prices soared again to a new record of $85,900 per bed, or 12% higher than in 2014, according to a soon-to-be published study from Irving Levin Associates, The Senior Care Acquisition Report, 21st edition, 2016. In the assisted living market, the average price paid per unit just topped the previous record set in 2014 by less than 1.0%, reaching $189,200 per unit in 2015. Average skilled nursing cap rates dropped to 12.2%, just 10 basis points above their record low, and assisted living cap rates stayed the same as in 2014 at 7.7%.

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Global BV news:

Duff & Phelps designs valuation and review standards for Mexico

The Instituto de Administración y Avalúos de Bienes Nacionales (INDAABIN) engaged Duff & Phelps to design and establish a “Code of Ethics and Valuation and Review Standards” to be utilized by all appraisers and reviewers in Mexico. The standards encompass real and personal property as well as business and intangible assets. The work was undertaken as part of a federal valuation reform initiative to raise the quality, transparency, and standards required for valuations in Mexico.

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IACVA finalizing quality control standards

BVWire hears that the International Association of Consultants, Valuators and Analysts (IACVA) and the World Association of Valuation Organizations (WAVO) will issue a final version of global quality control standards for valuations imminently. An exposure draft was issued last year and comments were solicited (the exposure draft is available on BVR’s Global Business Valuation Resource Centre under the “Articles” tab). The standards put forth a peer review process similar to what’s used in the accounting profession and that can also serve to head off government regulation in this area. “The Quality Control standards are the first step in having firms adopt a system of quality controls to ensure that all of the firm’s practitioners adhere to the same requirements for documenting each engagement,” said IACVA and WAVO in a joint statement when the exposure draft was issued.

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New members at the IVSC

The International Valuation Standards Council (IVSC) has several new members: TDUB (Turkish VPO)—VPO; IFC (World Bank)—institutional member; INDAABIN (Mexico government department)—institutional member; and AEV (entity promoting standards, ethics, and appraisal quality in Spain)—institutional member.

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BV movers . . .

People: Aaron Gilcreast was appointed U.S. valuation services leader in the assurance practice at PwC US and will work out of the Atlanta office … Gonzalo Hordeñana, founding partner of Baker Tilly Uruguay, was appointed Latin American regional chairman for Baker Tilly International … Robert Moritz was named as chairman of PwC’s international network starting July and will succeed Dennis Nally, who in June will retire after a 42-year career with the organization … Matt Nadeau, supervising senior focusing on fraud investigations, litigation support services, construction, manufacturing, and M&A at the New Hampshire firm Nathan Wechsler & Co. was elected treasurer of the Associated Builders and Contractors Young Professional Group.

Firms: Deloitte has acquired the San Francisco advertising agency Heat with plans that this new acquisition will operate as a full-service advertising agency within Deloitte Digital. Heat, pegged last year by Adweek as the “Breakthrough Agency of the Year,” will work across traditional, digital and social media … The Wichita, Kans., firm Regier Carr & Monroe RCM merged with the Tulsa, Okla., firm Cross and Robinson, CPAs and plans to keep the Oklahoma office.

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March CPE events

Valuation in Divorce Litigation: Winning Clients and Testifying in Court (March 15), with Melissa Gragg (BDO USA) and Kristin Zurek (Cordell & Cordell).

Forecasts and Projections for Small Companies (March 17), with George Levie.

Business Combinations: Case Studies in Purchase Price Allocations (March 23), with Nathan DiNatale (SC&H Group). This is Part 1 of BVR's Special Series on Fair Value.

Business Combinations: Valuation of Intangibles (March 24), with Nathan DiNatale (SC&H Group) and Mark Zyla (Acuitas Inc.). This is Part 2 of BVR's Special Series on Fair Value.

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 Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

Goodwill snafu

FV disclosures

ESO value

Main St. multiples

Sr. healthcare values

Global BV news

BV movers

CPE events












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