BVWire Issue #174-4 | March 22, 2017

Streamlined version of MUM for estimating personal goodwill

During a recent BVR workshop on goodwill, the strengths and weaknesses of the multiattribute utility model (MUM) for separating out enterprise and personal goodwill was discussed. MUM is a scoring approach that David Wood (Wood Forensic/Valuation Services) developed and has been accepted by some courts but criticized by others. It is a very detailed systematic method that is designed to objectively address the otherwise imprecise task of carving up overall goodwill into its personal and enterprise goodwill components. But herein may lie a weakness. The detail is so great that it may open up the expert to aggressive attack on its many elements.

Get simple: While the workshop’s speakers praised the method, they felt that, in some cases, it may be better to use the MUM framework in a more simplified way. For example, instead of using a 1-to-5 scoring scale for each attribute of goodwill, a plus-or-minus indicator could be used. Then you wouldn’t get a pointed question such as: “Why did you choose a ‘3’ and not a ‘4’?” A full-blown MUM analysis may be perceived as an “illusion of precision” that opposing counsel could try to tear to shreds.

A valuation expert and forensic accountant in Florida uses a streamlined version of MUM that has been accepted in court and that may reduce the exposure to severe cross-examination. The expert, Thomas Gillmore, has written an article for Business Valuation Update that explains his version in the context of a recent engagement that involved the valuation of a clinical laboratory.

Read and comment: BVR makes Gillmore’s article available as a complimentary download, and we urge readers to take a look at it and provide some feedback. You can comment via email or go to BVR’s LinkedIn Group where you’ll find a discussion thread on this topic. Thank you!

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Move to exclude damages expert at class certification stage fails

Financial expert testimony is critical to class actions, which are their own breed of lawsuits. What is still an unresolved issue is whether courts must perform a full Daubert inquiry at the class certification stage. A recent contract case illustrates the strategies the parties pursue to achieve or thwart class certification.

A number of medical facilities filed suit on behalf of hundreds of thousands of customers alleging the defendant, a large medical waste disposal company, breached consumer contracts by applying “automated price increases” (API) without providing notice or justification to the customer. The plaintiffs asked for class certification and engaged an accomplished expert to show it was possible to determine damages on a classwide basis. For his analysis and calculation, the damages expert relied on the defendant’s own data.

Defendant disavows own data: The defendant, opposing the class certification, filed a Daubert motion to exclude the testimony. Its primary argument was that the expert’s analysis was unreliable. For one, the defendant’s database system did not adequately track contracts over time, which would make it necessary to do a manual review of each customer file. Also, there was variance in the contracts, undermining many of the expert’s assumptions.

The court noted the question at this stage in the litigation was “whether plaintiffs’ expert evidence is sufficient to demonstrate common questions of fact warranting certification of the proposed class, not whether the evidence will ultimately be persuasive.” It performed a Daubert review, finding the expert was “highly qualified” to testify and there was no real challenge to the expert’s actual method and the calculations he used. Instead, the defendant questioned the underlying data. This line of attack was a losing strategy considering the expert relied completely on the defendant’s own database, the court said.

After finding the testimony was admissible, the court determined the plaintiffs met the requirements for class certification. The plaintiff expert’s testimony showed there was a reliable, common formula for calculating damages on a classwide basis, the court emphasized.

The case is In re Stericycle, Inc., 2017 U.S. Dist. LEXIS 21861 (Feb. 16, 2017). A digest of the decision and the court’s opinion will be available at BVLaw.

Extra: PricewaterhouseCoopers has a study of Daubert challenges involving financial experts that includes a useful discussion of the ways in which different courts have handled Daubert challenges at the class certification stage.

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Pay more attention to corporate mortality in a DCF

The typical DCF valuation assumes that a mature company will survive and grow at a constant rate in perpetuity. Is this a valid assumption? No, says Gil Matthews (Sutter Securities). In a session he presented at the recent OIV Business Valuation International Conference (Milan, Italy), he said that this assumption is invalid because of the impacts of: (1) corporate mortality; and (2) decelerating company growth due to economic changes and/or obsolescence. Not considering these factors may result in an overstated value if you use a constant perpetual growth assumption.

“Not all firms operate into perpetuity—some of them die,” Matthews tells BVWire. He points out that there is research available on firm decline and mortality, but more study is needed. Also, the valuation community needs to consider how to quantify the risks of these factors so they can be reflected in higher discount rates and/or lower long-term growth rates. The risk is greater for younger firms and also smaller firms, he says.

Matthews will expand on these thoughts in a presentation he will give at the ASA’s 2017 Advanced BV Conference in Houston (October 7-10).

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Synthesizing principle’ proposed regarding role of merger price in appraisal

In the wake of the Dell appraisal ruling in May 2016, perceived appraisal risk has increased, believes Professor Guhan Subramanian (Harvard Business School). He was one of the Dell stockholders’ experts in that case, which focused on the M&A deal process. The professor has proposed that courts adopt a presumption that the merger price represents fair value in an appraisal proceeding if the deal process involved “an adequate market canvass, meaningful price discovery, and an arm’s-length negotiation.” If the deal process does not have these features, the deal price should receive no weight, he says. His “synthesizing principle” approach represents a middle ground between the competing approaches 29 law, economics, and finance professors advanced in the DFC Global appraisal, which is currently on appeal to the Delaware Supreme Court. Subramanian’s paper is Using the Deal Price for Determining ‘Fair Value’ in Appraisal Proceedings.”

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409A valuation ‘shell game’: New York Times

An article in the New York Times pulls back the curtain on 409A valuations and reveals how hot private tech firms use them to “control the market for the stock while rewarding themselves and key employees with cheap shares that seem instantly worth a lot more than the price at which they were issued.” The article also talks about the lucrative nature of a 409A engagement (“$50,000 a pop”) and having the meter running while valuation firms and auditors are “arguing over false precision.” The article’s author contacted the SEC to ask whether it has examined the “odd discrepancies” in 409A valuations, but the agency would not comment.

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What makes the FASB tick?

Ever wonder why the FASB takes on certain rule-making projects? Now we know! The most frequently cited reason a project is undertaken is to reduce diverse practice and inconsistent guidance, according to a new study. The authors examined 211 financial accounting standards issued over a 40-year span—from 1973 to 2014. They also found that accounting for financial instruments is the most frequent theme across accounting standards, which may explain the growth in fair value measurement in U.S GAAP. The study is “How Does the FASB Make Decisions? Agenda Setting, Individual Board Members, and Fair Value Accounting.”

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BIZCOMPS private-firm database gets beefed up

We’ve just added over 475 new private-company transactions to BIZCOMPS, bringing the total in the database to 13,160-plus. BIZCOMPS focuses on small-company transactions; the majority of transactions record less than $500,000 in gross revenue. Therefore, it’s a perfect resource for market comparables when your subject company is a “mom and pop” or sole proprietorship.

2016 data: As for the recent data additions, the average selling price for 2016 is $473,000. The average annual gross sales for transacted businesses in 2016 is $1.2 million. Companies with annual gross sales greater than $700,000 had a median sale price/annual gross sales multiple of 0.37; the harmonic mean multiple was 0.23. Firms of this size tended to have the lowest median and harmonic mean multiples than their smaller counterparts. For instance, companies with less than $300,000 in annual gross sales had a sale price/annual gross sales multiple of 0.51 (median) and 0.42 (harmonic mean).

Why use a harmonic mean instead of an arithmetic mean? As per the BIZCOMPS Frequently Asked Questions (FAQs), the harmonic mean is the preferable method for averaging multiples, such as the price-to-earnings ratio, in which price is in the numerator. If these ratios are averaged using an arithmetic mean (a common error), high data points are given greater weights than low data points. The harmonic mean, on the other hand, gives equal weight to each data point.

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Global BV News

Singapore still at helm of deal-making in Southeast Asia

Singapore recorded a total of 800 deals (M&A, PE/VC, and IPOs) worth US$88 billion for 2016, which compares with 685 deals (M&A, PE/VC, and IPOs) worth US$103.8 billion for 2015, according to the Transaction Trail report from Duff & Phelps. M&A comprised the bulk of the deal volume in Singapore, registering 684 deals valued at US$82.7 billion in 2016 compared to US$101.2 billion in 2015. The biannual report, which takes an in-depth look at transaction and capital markets activities in Singapore, Malaysia, and Indonesia, is summarized in the Duff & Phelps Valuation Insights First Quarter 2017. “Asia has emerged as a strong player in the M&A arena, overtaking Europe, driven by large outbound acquisitions by China, Singapore and other Asian countries in their ambition to increase their global footprint,” says Srividya Gopalakrishnan, managing director of Duff & Phelps’ Singapore office.

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BV movers . . .

People: Nene Glenn Gianfala of New Orleans-based Chaffe & Associates has earned a specialty in business valuation of intangible assets, designated by the ASA. Gianfala is the first to receive this specialty in the state of Louisiana … Paul Mangum has been admitted as shareholder at Lowrey Powell & Stevens of San Antonio, who has changed its name to Lowrey Powell Stevens & Mangum.

Firms: Chicago-based firm Bronswick Reicin Pollack announced a name change, to Bronswick Benjamin PC … Gorfine, Schiller & Gardyn of Owings Mills, Md., has merged with Columbia, Md.-based Morice, Layton & FaganPlante Moran has entered into a multiyear partnership with the NFL’s Detroit Lions. Plante Moran, headquartered in Southfield, Mich., becomes the official tax, audit, consulting, and public accounting firm of the team and gets naming rights to newly built terrace suites at the Lions’ Ford Field … Restivo Monacelli, a firm based in Providence, R.I., has opened an office in Boca Raton, Fla. … St. Louis-based RubinBrown is adding Las Vegas-based Stewart Archibald & Barney, effective June 1 … Saltmarsh, Cleaveland & Gund of Pensacola, Fla., has added healthcare specialists Reingruber & Co., and its St. Petersburg, Fla., and Nashville, Tenn., offices.

Please send your professional and firm news to us at

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CPE events

Valuing Undivided Interests in Real Estate (March 30), with Ted Israel (Israel Frey Group LLP).

NEW DATE: Monte Carlo 101: Start Modeling in Excel (April 11), with John Elmore (Willamette Management Associates).

Regression Analysis: Fundamentals for Appraisers (April 20), with G. William Kennedy (FTI Consulting).

CEIV: Ready, Set, Go! (April 25), with William A. Johnston (Empire Valuation Consultants).

Advanced Bankruptcy Valuation (April 27), with Robert Reilly (Willamette Management Associates).

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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In this issue:


Daubert issue

Firm mortality

Deal price as FV

409A exposé

Inside FASB


Global BV news

BV movers . . .

CPE events

LinkedIn discussions



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