BVR Logo March 6, 2019 | Issue #198-1

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


Survey reveals research tools BV firms rely on most

An exclusive BVR survey collected data concerning the research sources experts depend on most when preparing a defensible business valuation report. Here are some of the research tools respondents cited most often:

  • Transaction database: DealStats (cited by 72% of respondents, down from 76% in the 2016 survey);
  • Risk premium and cost of capital: Cost of Capital Navigator, formerly the Duff & Phelps Valuation Handbook (75%, down from 84%);
  • Industry research: IBISWorld (57%, up from 56%); and
  • Guideline public-company analyses: EDGAR or EDGAR Online (50%, down from 54%).

The survey also examines research sources used for discounts (marketability, control, and liquidity), compensation, valuation-related case law, and other information required to support a valuation. The survey chronicles the changing scene in research sources since 2011, and it shows that, because of the precedential nature of defending valuations, it takes time for a newcomer in the research marketplace to gain share. Also, some tools became available after the survey was taken. For example, BVR’s platform for estimating the cost of capital, the Cost of Capital Professional, was launched at the end of 2018 and has gained traction.

The survey and analysis is in the BVR Firm Economics & Best Practices Guide, 2019-2020 edition, which is based on responses from over 160 business valuation, forensic, and litigation support (BVFLS) firms collected during September 2018 and October 2018. Data on over 330 BVFLS firm owners/partners and over 1,200 professional staff are included in the management and compensation sections.


ESOP court denies discovery of DOL expert's prior work for government

In an ongoing ESOP litigation, the defendant trustee’s effort to obtain information on the DOL expert’s prior valuation work for the government was thwarted. In denying the trustee’s motion to compel, the court found the information was protected under Rule 26 of the federal rules of civil procedure.

The U.S. Department of Labor (DOL) sued the trustee over its performance in an employee stock ownership plan (ESOP) transaction. The trustee, which was responsible for representing the interests of the ESOP, violated its fiduciary duties under ERISA when it caused the plan to purchase the outstanding stock in a graphite processing company (Graphite Sales Inc.) for more than fair market value, the DOL alleged.

Attorney-expert communication: At this stage in the proceedings, the parties fought over discovery issues. Among other things, the trustee asked the court to order the DOL to disclose information concerning the DOL expert’s valuation work for the government on other ESOP cases. Specifically, the trustee wanted to know how many times the expert had concluded that the ESOP appraiser had erred and how often the expert had concluded the ESOP had overpaid. The trustee maintained it was entitled to this information to show potential bias on the DOL expert’s part.

The DOL contended the trustee wanted information related to the expert’s work as a consulting expert. However, Rule 26(b)(4)(D) barred discovery of “facts known or opinions held by an expert … who is not expected to be called as a witness at trial.” Therefore, the court should deny the request.

The court allowed there was some ambiguity. While Rule 26(b)(4)(D) would “undoubtedly” apply if the expert did not testify in the instant case, it was not entirely clear whether this provision would protect the expert from disclosing facts or opinions in “other matters in which he did not testify,” the court said with emphasis.

But the court found this information was protected under the attorney-client privilege. The plaintiff was the holder of the privilege because the Secretary of Labor was the one who retained the expert in the past matters, the court explained. The court said its ruling aligned with Rule 26(b)’s overall aim: “to bar discovery of attorney communications and encourage frank attorney-expert consultation.”

The court denied the trustee’s motion as to this information and certain other information and documents requested.

A digest of Acosta v. Wilmington Trust, N.A., 2019 U.S. Dist. LEXIS 12410 (Jan. 25, 2019), and the court’s opinion will be available soon at BVLaw.

How the IRS turmoil from the shutdown
affects BV

The IRS is doing its best to recover from the government shutdown, but business valuation experts need to be aware of certain issues, according to Michael Gregory (Michael Gregory Consulting LLC), who gave an IRS update during a recent BVR webinar. Gregory, who spent almost 30 years at the IRS, much of the time dealing with valuation matters, points out that the quality of audits may suffer. Because of the shutdown, the IRS lost some personnel and essential training did not occur, including training on the Tax Cuts and Jobs Act. Work has piled up, and, if quantity targets are met, quality will become an issue. Gregory emphasized the Taxpayer Bill of Rights (IRS Publication No. 1), which gives taxpayers the right to be informed and the right to quality service, among others. He also drew attention to the IRS’s LB&I Directive on Information Document Request, which can help improve communication between the parties during an audit.

In addition to consulting on valuation matters, Gregory specializes in conflict resolution and has launched a new entity, The Collaboration Effect™, to help associations, societies, and organizations to apply this method and other leadership techniques to help firms that want to grow their business faster and more efficiently.

Valuations steady for A/E firms, per new study

Valuations of minority interests in privately held architecture, engineering, and environmental consulting firms (A/E firms) held steady from 2017 to 2018, according to a new study.

Enterprise values as a multiple of gross revenue, net service revenue, and prebonus earnings before interest and taxes (EBIT) were virtually unchanged (see table below), according to the Architecture and Engineering Business Valuation and M&A Transaction Study, 6th edition. The study, conducted by Rusk O’Brien Gido + Partners, contains the latest transactional data from 167 distinct stock transactions along with supplemental data from publicly available sources. The prior editions of this study are also available for comparison purposes.

Minority Interests in Private
A/E Firms
2017 2018
Median enterprise value/gross revenue 47.6% 47.6%
Median enterprise value/net
service revenue
38.3% 38.2%
Median enterprise value/prebonus EBIT 3.98 3.87


Should you assume your clients are
totally clueless?

Amid the ongoing debate over the use of calculation reports (see prior coverage), the author of the original article that sparked the discussion made an intriguing point. In his experience, clients are astute enough about business valuation to know what factors influence the outcome. The implication is that you need to be alert to the possibility of management’s attempts to steer you into a valuation it sees as more favorable. The author feels that calculation engagements amplify this risk.

Watch out: Authors of a rebuttal article say the notion that the average client knows enough about valuation to be able to manipulate the results is “preposterous” and “ridiculous.” Some would have a problem with this response, feeling that the expert should not assume the client has absolutely no idea as to what factors may influence a valuation. You don’t have to be a genius to realize that higher management projections mean higher value. True, clients won’t understand all of the nuances of valuation, but don’t underestimate their intelligence. In the interest of the profession’s increased focus on “professional skepticism,” you must be more diligent than ever in verifying any information management gives you.

Both articles are available from BVR as a free download titled “Calculation Report Controversy.”

Technology impacts valuations of
dialysis centers

The latest article in a series that examines the valuation of dialysis centers focuses on the technological environment in which these enterprises operate. In healthcare, advancements in technology have had a significant impact on medical processes. For dialysis centers, these developments “may significantly change how kidney disease is diagnosed and treated. It may serve to greatly reduce the need for these services, at least in dialysis facilities, in the face of increasing demand and decreasing supply,” the article says. “Dialysis providers must continually adjust to deal with pressures related to changes in the utilization levels, stagnant reimbursement levels, increasing regulatory scrutiny, and technological developments in the dialysis industry.” The article is from Health Capital Consultants (HCC).

Paper says CEO wealth affects company risk

There is evidence that, as CEOs become wealthier, they take less risk with their firms to the detriment of shareholders, according to a new paper. It explains that pay-for-performance models are designed to align the goals of managers with the goals of owners, but these models do not consider the total amount of wealth the managers hold outside the firm and its effect on their actions. The paper considers the total wealth of the CEO and proportion of it held in the firm and then tries to find how they affect his or her decision-making. The paper is “How CEO Wealth and the Composition of Their Wealth Affects the Riskiness of the Firm,” by Bhagaban Panigrahi (Norfolk State University), Sonik Mandal (Old Dominion University), Charles Swartz (Old Dominion University), and Sanjib Guha (Christopher Newport University), and it appears in the Journal of International Finance and Economics.

Tricks of the trade in detecting rigged valuations

Did you ever read a business valuation report where you knew the valuation was rigged to obtain a higher or lower value? Unfortunately, some valuation analysts manipulate the process in order to please their client and/or win at all costs. This can often happen in contentious divorce engagements.

Where to look: One place to look for evidence of rigging is in the discount rate, which has several inputs susceptible to manipulation. The size premium is one input that appears to be a good candidate for abuse. However, the size premium differs depending on the data breakdown you use and the historical time frame of the data, which can explain the difference. But where the discount rate can be manipulated the most is in the company-specific risk adjustment, which is based purely on the judgment of the expert. This is a prime area where opponents will try to detect valuation bias and try to discredit the analysis.

To learn more, attend How to Rig a Valuation in a Marital Dispute, a session Jim Hitchner (Valuation Products and Services) will conduct at the National Divorce Conference in Las Vegas May 8-10. Presented by BVR and the American Academy of Matrimonial Lawyers (AAML), the conference will bring together the leading matrimonial attorneys and financial and valuation experts. Don’t miss it!

IVSC interviews Brand Finance CEO

Brand Finance was the first brand valuation consultancy to become a member of the International Valuation Standards Council (IVSC). In an interview, David Haigh, the firm’s CEO, noted that IVSC valuation standards played a role in creating ISO 10668, the international standard in monetary brand valuation that was published in 2010. This standard is now being supplemented by ISO 20671 (scheduled to be published this month) and independent standards from the Marketing Accountability Standards Board (MASB) in the U.S. and the Certified in Entity and Intangible Valuations (CEIV) credential, which the AICPA, ASA, and RICS created. “All of these are professionalising the industry, and we at Brand Finance feel it is important for anyone involved in this area to support these initiatives for the benefit of all businesses as well as the valuation industry.”

Registration open for New Zealand valuation conference September 9-11

The ICVPME will host its 11th International Valuation Conference in Auckland, New Zealand, on September 9-11. The theme is “Valuation in the Digital Age,” and topics include valuation regulation and standards, valuation education, valuation in the international context, and more. Speakers include Lee Hackett (ASA, USA), Bob Brackett (IACVS, Canada), Dana Ababei (ANEVA, Romania), Jeff Tarbell (Houlihan Lokey, USA), Roger Grabowski (Duff & Phelps, USA), Alexander Lopatnikov (AAR, Russia), and many others. The IVSC, RICS, ASA, CAS, API, TAQEEM, iiBV, IACVS, CICBV, and other groups sponsor the conference.

BV movers . . .

People: J. Richard Claywell has been named vice chairman of the International Association of Certified Valuation Specialists (IACVS); he has been in the valuation profession for over 34 years and has earned many professional designations, including CPA, ABV, ASA, CBA, ICVS, CVA, CM&AA, MAFF, CFD, ABAR, CMEA, and CVGA … The Securities and Exchange Commission named Giles Cohen Acting Chief Counsel, Office of the Chief Accountant; he has served as OCA’s deputy chief counsel since May 2016.

Firms: HFM Alt Credit Intelligence has named Berkeley Research Group LLC (BRG) “Best Valuation Service” provider for the second straight year; the award is designed to reward illiquid and complex asset valuation specialists that have shown true growth and a commitment to client service … FD Fund Administration (FD-FA) has opened a new office in Minneapolis, expanding the firm’s geographic footprint beyond existing offices in Philadelphia, New York, and Atlanta; FD-FA is a subsidiary of Atlanta-based Frazier & Deeter … Indianapolis-based Katz, Sapper & Miller (KSM) has been named among the Best Places to Work in Indiana for the 14th consecutive year; the Indiana Chamber of Commerce gives the award based on employer reports and employee surveys … Warren Averett’s Tampa, Fla., office has relocated to a new, state-of-the-art workspace in the downtown area; the new space is completely round, consistent with the “Warren Averett 360” approach to client solutions.

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Upcoming BVR training events

  • FREE WEBINAR: Cost of Capital Professional: Gain the Edge with New Enhancements (March 6), with Dr. Michael Crain (Florida Atlantic University) and Ronald Seigneur (Seigneur Gustafson LLP).

    The newest resource for developing cost of capital estimates now includes beta-adjusted size premiums, the ability to compute weighted average cost of capital (WACC), choice of arithmetic or geometric averages, and more. The webinar will provide a conceptual overview and practical demo of the platform.

New and trending LinkedIn discussions

The Absence of a Size Effect Relevant to the Cost of Equity

Is a Merger Causing a Culture Clash in Your Organization?

OPM Backsolve and Convertible Debt Financing

Your discussion could be featured here—BVR’s LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you’re not already a member, request to join today.

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

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