A focus on quality control, the improvement of work product output, as well as the support of staff are among the most successful new management practices or policies business valuation, forensic, and litigation support (BVFLS) firms used over the past year, according to a BVR survey. Based on the results of this survey, the BVFLS industry seems to be on an uptick. What are some of the specific practices used to guarantee these great results? Here are a few responses:

• “Investing in our people”;

• “Being focused on what we do well”;

• “Improved valuation templates”;

• “Mentoring and working one-on-one with staff”;

• “Using a long-term perspective through the client ownership life cycle”;

• “Implementation of our strategic marketing plan”;

• “Implementing a valuation software standard and moving away from spreadsheets”; and

• “Focus on industry specialization.”

The survey and analysis is in the BVR Firm Economics & Best Practices Guide, 2019-2020 edition, which is based on responses from over 160 BVFLS firms collected during September 2018 and October 2018. The guide presents a thorough analysis of best practices in financial management, marketing, human resources, compensation, and professional and ownership standards. Data on over 330 BVFLS firm owners/partners and over 1,200 professional staff are included in the management and compensation sections.

Recent Daubert rulings show courts' different takes on the role of gatekeeper

A series of recent Daubert cases illustrate how different courts may interpret the role of “gatekeeper,” which they perform under Rule 702 and Daubert, differently. In assessing the admissibility of expert testimony, some courts believe the law requires them to be inclusive while others believe close scrutiny of the expert’s qualifications and the reliability of his or her testimony is warranted.

Rule 702 of the Federal Rules of Evidence allows a qualified expert to testify if his or her specialized knowledge would assist the trier of fact and the testimony is based on sufficient facts and reliable methods properly applied to the facts. Under Daubert, the evidence must be relevant and reliable.

Ferraro v. Convercent, a contract and tort case revolving around a company that provided software-based services, falls into the first category. The defendants claimed the plaintiff’s expert was unqualified because he lacked the necessary experience valuing that type of company, but the court found the applicable law did not require this degree of specialized knowledge. However, Weinman v. Crowley, a bankruptcy case turning on insolvency, is definitely on the other end of the spectrum. The Bankruptcy Court, on its own accord, examined the insolvency expert’s qualifications and found them wanting, notwithstanding the expert’s experience in international finance. Also, in Ferraro, the court said some degree of speculation is common in expert testimony. In contrast, in Cargotec v. Logan Industries, a Texas appeals court found the damages testimony was inadmissible because the expert relied on management projections that were based on some unfounded assumptions, notwithstanding the expert’s independent work on the case.

The takeaway is that, while valuators and attorneys should study a lot of Daubert cases for a particular court’s take on Rule 702 and Daubert, courts have a lot of leeway in how they come out on admissibility.

Find an extended discussion of this topic in the April Business Valuation Update. Digests of the referenced cases and the courts’ opinions are available at BVLaw.

Series of articles examines physician practice losses

Regulatory as well as financial concerns are driving the need to address the issue of health systems losing money on acquired physician practices. Significant losses lead the government to believe that hospitals are paying for referrals, a violation of the Stark Law that can trigger large monetary penalties. A key issue in these enforcement actions is the measurement of the fair market value of physician compensation. A series of articles by Timothy Smith (TS Healthcare Consulting LLC) examines losses in health system physician practices. Smith points out that, according to cost and revenue data from the Medical Group Management Association (MGMA), nearly all health systems lose money on their physician practices—but nearly all physician-owned practices break even or make a profit. Why the disparity and what are the implications for health systems incurring such losses? The reasons are multiple and complex, and “we have to stop looking for a simple answer or a one-size-fits-all answer” because they do not exist, says Smith. He also did a podcast for MGMA Insider on this issue. Smith is co-author with Mark O. Dietrich of the BVR/AHLA Guide to Valuing Physician Compensation and Healthcare Service Arrangements, 2nd edition, which debunks the current “survey says” paradigm and provides the foundation for a completely new standard for the fair market value of physician clinical compensation.

In divorce cases, it may be necessary to carve up goodwill because, in many jurisdictions, enterprise goodwill is marital property, but personal goodwill is not. However, overall goodwill should be viewed as having three parts, not two, as per the traditional definition. Personal goodwill can be allocated into two components: (1) transferrable (salable) personal goodwill; and (2) “pure” personal goodwill. In a Wisconsin case, the court broke new ground in divorce law when it held that all the salable personal goodwill in a professional practice (as evidenced by a noncompete agreement) is a divisible marital asset. The case is McReath v. McReath, 2011 WL 2706249 (July 12, 2011), which is available at BVLaw.

Get up-to-date on goodwill issues in divorce in the session, Let’s Get Personal: Enterprise vs. Personal Goodwill, with Joy Feinberg (Boyle Feinberg PC) and Michelle Gallagher (Adamy Valuation) 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!

TAF celebrates women in appraisal

For International Women’s Day, The Appraisal Foundation (TAF) celebrated the women who are advancing the appraisal profession by serving the organization in various ways. Women serve on various boards, educate and train incoming appraisers, and mentor the next generation. For example, women occupy 33% of the 21 seats on the TAF Board of Trustees. On the six-member Appraisal Standards Board, 66% are women. When compared to the overall number of women in the appraisal profession, which the Appraisal Subcommittee National Registry finds is 26%, both the TAF’s boards easily surpass this percentage. TAF sets performance and ethical standards for appraisers in all disciplines.

Extra: The nomination process for The Appraisal Foundation’s Board of Trustees is open. Elected members may include individuals from all appraisal disciplines, users of appraisal services, former appraiser regulators, academics, and business leaders. Completed applications for board vacancies must be received by March 25, 2019.

New CEO for the ASA

After an exhaustive search, the American Society of Appraisers has named Johnnie White, CAE, CMP, as its new CEO effective April 15. He has over 20 years of experience in professional association management and leadership. For the past 18 months, Lee Hackett, ASA, served as interim CEO, bringing his long experience and global prominence to the organization. “As Johnnie transitions into the role of CEO, I thank Lee for his invaluable dedication and contributions to the ASA,” said Robert B. Morrison, ASA international president, in a statement.

Extra: The 2019 ASA Fair Value Conference will be held in New York City April 30 at the offices of Ernst & Young in Times Square.

A special request

Bob Duffy was a friend, colleague, and mentor to many in the BV profession who battled ALS (Lou Gehrig’s disease). He wanted to help other ALS patients, and, in this spirit, a Ragnar Relay team sponsored by the ALS Therapy Development Institute will participate in the upcoming Rainier Trail run in August. Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC) is on the team, and so is Bob’s wife, Karen, who, along with the rest of the team, ask that you donate to fight this horrific disease through this link: fundraise.als.net/fundraiser/1047.

Valuations slanted for squeezeouts in Finland

A paper examines the choices of valuation methods and their association with redemption prices in disputes concerning private-company squeezeouts. The authors investigated valuation approaches and fair value estimates presented in cases of Finnish private companies subject to arbitration proceedings between 1998 and 2014. They point out that the procedure followed in the Finnish arbitration tribunal (which can be regarded as the court) is “ideologically akin to the one applied in Delaware courts.” The results point toward the private company “attempting to exploit insider information by applying strategically the valuation approaches that have a potential to provide low fair value estimates for the business.” The market and asset approaches are typically used by all parties, but they are “less likely to yield reliable fair value estimates.” The authors argue that the courts should “pay attention to the choice of valuation methodology” and that minority shareholders should use forward-looking approaches to arrive at fair value. The paper is “Does the Choice in Valuation Method Matter in the Judicial Appraisal of Private Firms?” by Jani Saastamoinen and Hanna Savolainen of the University of Eastern Finland, which was published in the Journal of Business Finance & Accounting (Vol. 46, Issue 1-2).

Preview of the April 2019 issues of Business Valuation Update

Here’s what you’ll see:

• “New Study Reveals BV Research Sources of Choice” (BVR Editor). A survey of business valuation firms asked about research tools used for industry analysis, transactions, premiums and discounts, cost of capital, guideline public company analyses, compensation, valuation-related case law, and more.

• “How the Healthcare Industry Misuses and Abuses Survey Data” (Mark O. Dietrich and Timothy Smith). Compensation survey data do not provide a complete and precise depiction of the physician marketplace for any physician deal. The authors debunk the current “survey says” paradigm and provide the foundation for a completely new standard for the fair market value of physician clinical compensation.

• “Evolving Issues in Proving Lost Profits in Commercial Litigation” (Stanley P. Stephenson, Gauri Prakash-Canjels, and David A. Macpherson). The authors provide a formal model of lost profits with a special focus on measurement of expenses, how “time” is a factor, and special efforts the expert needs to make to reduce the chances of failing a Daubert challenge.

• “VRC Mixes Valuation Work With Giving Back to the Profession” (BVR Editor). Senior members of Valuation Research Corp. (VRC) give an update on the firm’s work in M&A advisory, transactions, portfolio valuations, and more, but they also talked about the role the firm plays in the development of the valuation profession itself.

• “The Secrets to Expert Testimony That Engages and Persuades a Court” (Deborah Johnson). Some techniques to help prevent experts from imploding during fierce cross-examination.

• “Daubert Rulings Reflect Courts’ Disparate Views on Gatekeeping Role” (Sylvia Golden, Esq.). As several recent court decisions show, different judges interpret the gatekeeping role, which they assume under Rule 702 and Daubert, very differently. Some courts take a liberal approach, while others favor close scrutiny of the expert’s qualifications and proposed opinion.

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/EBITDA Trends,” “ktMINE Royalty Rate Data,” “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 April issue of Business Valuation Update.

BV movers...

People: San Francisco-based Valuation Research Corp. (VRC) has added five financial reporting professionals: Samuel Roman, CPA/ABV, joins VRC’s Chicago office as vice president; Joe Lee, CPA, CFA, vice president, and Aaron Ping, analyst, join the San Francisco office; and Sean Poynton, CPA, and Adam Goldstein, CPA/ABV, join the Yardley/Princeton office as associates … Adam C. Nihmey, CFA, CBV, has joined Canada’s WelchGroup Consulting as managing director, valuations and litigation support … Angela Newell, a national assurance partner at BDO USA’s Dallas office, has been named as the new chair of the AICPA’s Financial Reporting Executive Committee, succeeding Crowe partner Jim Dolinar … Joseph Ucuzoglu has been elected CEO and Janet Foutty has been elected chair of the board of New York-based Deloitte with both terms beginning June 2; they will succeed current Deloitte US CEO Cathy Engelbert and chairman Mike Fucci at the conclusion of their four-year terms.

Firms: Several firms are increasing their activities in the cannabis industry: Anticipating rapid expansion of the hemp and cannabis industry at the federal, state, and international levels, New York-based EisnerAmper is expanding its services in this area; DeJoy, Knauf & Blood LLP (DKB), based in Rochester, N.Y., has launched a Cannabis and Hemp Advisory practice area; and Deloitte announced a partnership with data analysis companies Nielsen and Headset to develop insights into the legal cannabis market in Canada.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

• Valuing Closely Held Farms and Ranches with Economic Reality (March 21), with Ericka Heiser (Ketel Thorstenson).
  
  Is there a Ponderosa or Southfork in your valuation future? Learn how to mix appraisal theory with economic reality when valuing a minority interest in an entity that owns or operates a farm or ranch.
  
  

• FREE WEBINAR: Vertical IQ: Very Smart Industry Research for Business Appraisers (April 4), with Susan Bell (Vertical IQ).
  
  Take a tour of a platform for industry research that reveals your subject company’s market presence, financial metrics, benchmarks, and local economic data. Vertical IQ currently has 390 industry profiles: 280 “full-length profiles” plus 110 specialty spotlights on niche industries.

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

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