BVR Logo March 27, 2019 | Issue #198-4

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


Newest survey on private rates of return

Some appraisers are not comfortable using public market data when estimating the cost of capital for a private company. While this method is justified by valuation standards and IRS Revenue Ruling 59-60, many assumptions and adjustments need to be made to convert data from actively traded stocks into proxies for private-company valuation. An alternative analysis is available that is based on an ongoing survey of expected rates of return of providers in the private capital market, which has recently been updated.

Latest report: For the “2019 Private Capital Markets Report,” researchers at the Pepperdine University Graziadio Business School asked private capital market players what returns they project. The players are divided into six segments aligned with the major institutional arms of the private investment world, each with different return, investment, and research characteristics. The project was originally launched in 2007. The median cost of capital rates determined by the latest survey appear in the table below. The full report contains much more detail on each type of funding.

Type of Private
Capital Funding
Pepperdine Median Rate of Return (Range)
Banks 5.0%-6.3%
Asset-based lenders 4.0%-15.0%
Mezzanine financers 13.0%-15.0%
Private equity groups 21.0%-37.0%
Venture capital investors 28.0%-38.0%
Angel investors 28.0%-38.0%

Idea in action: During a recent webinar, business appraiser David Coffman (Business Valuations & Strategies PC) explained how he uses the Pepperdine survey for estimating the cost of capital for owner-operated small businesses. To the median expected return from the survey, he adds a company-specific risk adjustment. He has used this method in hundreds of valuations without being subject to any significant challenges.

Of course, BUM and CAPM are not likely to disappear from the valuation scene any time soon, but that doesn’t mean that experts should not consider adding a private capital markets analysis to their toolbox.


4th Circuit upholds Brundle ESOP valuation and damages findings

The 4th Circuit Court of Appeals just affirmed the district court’s ruling against the trustee in the intensely contested Brundle v. Wilmington Trust ESOP case, including the district court’s valuation and damages findings. The district court concluded that the ESOP trustee had violated its fiduciary duty by causing the plan to overpay by almost $29.8 million.

The case made waves because the independent trustee and valuation firm representing the plan’s interests had extensive ESOP experience. Also, in ruling on the trustee’s motion for reconsideration, the district court conceded some valuation-related errors but found these did not change the outcome. As we reported earlier, outside interests, including the ASA and the Department of Labor, filed amicus briefs with the 4th Circuit: The ASA defended the conduct of the trustee and the work of the ESOP valuator. The DOL, relying on the plaintiff expert’s valuation, claimed the record and case law supported the district court’s decision.

In its much-anticipated ruling, the appeals court found the district court’s inquiry into the trustee’s performance, particularly as concerns the trustee’s engagement with the ESOP appraiser’s value determination, followed the applicable legal principles. The district court “issued extensive factual findings” to support its conclusion that the trustee’s reliance on the ESOP appraiser’s report was not “reasonably justified” and that the trustee had not “thoroughly probed the gaps and internal inconsistencies in that report.”

The district court’s findings that the trustee had failed to question the appraiser’s reliance on management projections, failed to inquire why the appraiser did not address a relatively contemporaneous alternate valuation that had arrived at a much lower per-share price, and failed to probe why the appraiser included a control premium given the sale was specifically designed to ensure the seller’s continuing control over the company’s board were all supported by the record, the appeals court stated.

The appeals court also rejected the trustee’s challenges to the district court’s damages award. It emphasized (as the district court had done) that the plaintiff’s expert was the only expert to offer a comprehensive damages estimate. The appeals court noted the district court independently determined the overpayment (FMV minus inflated price paid by the ESOP) stemming from errors related to the ESOP appraiser’s valuation to calculate damages. The trustee failed to provide an alternative calculation or any evidence the district court could use to devise its own damages calculation, the appeals court said. Therefore, the trustee forfeited its challenge to the district court’s methodology. There was no error in the district court’s damages award, the appeals court said.

We will have more analysis of the appeals court ruling, Brundle v. Wilmington Trust, N.A., U.S. Court of Appeals for the 4th Circuit, No. 17-1873 (March 21, 2019), here and at BVLaw.

Digests of Brundle v. Wilmington Trust N.A., 2017 U.S. Dist. LEXIS 35811, and Brundle v. Wilmington Trust N.A. (Brundle II), 2017 U.S. Dist. LEXIS 97752, and the court’s opinions, are available at BVLaw.

A sad note ...

BVWire has learned that Lynne Z. Gold-Bikin, a nationally renowned family law attorney, has passed away. She was on the editorial advisory board of BVR’s Business Valuation Update, contributing articles and participating in valuation conferences and webinars. Gold-Bikin frequently appeared on the major networks and had been quoted in prominent newspapers and magazines discussing domestic issues. She literally wrote the book on divorce law in 1994 when her Divorce Practice Handbook was published. She taught at the Houston Family Law Trial Institute in South Texas College of Law and gave seminars for the Pennsylvania Bar Institute. Gold-Bikin won numerous awards including 50 Best Business Women in Pennsylvania, KYW Women of Achievement Award, and the Pennsylvania Honor Roll of Women Award. In 2014, she received the Eric Turner Memorial Award from the Family Law Section of the Pennsylvania Bar Association in honor of her 40 years of exceptional work and her teaching others in the field.

Do you have a Rube Goldberg cost of
capital process?

Wildly complicated gadgets designed to do very simple tasks was the specialty of Rube Goldberg, the Pulitzer Prize-winning cartoonist, sculptor, author, engineer, and inventor. Presenters on a recent webinar noted that the process to estimate the cost of capital has come to resemble one of Goldberg’s contraptions. This complexity means that the risk of making errors has increased greatly, they note. The process has become too much of a “black box” of applied mathematics that takes judgment out of the process. But it doesn’t have to be that way, say Dr. Michael Crain (Florida Atlantic University) and Ronald Seigneur (Seigneur Gustafson LLP), who conducted the webinar. They demonstrated BVR’s Cost of Capital Professional platform, which is designed to bring simplicity and flexibility back to the process. That is, the platform provides the raw materials that practitioners can use along with their professional judgment to shape the final result. Crain and Seigneur are two of the individuals involved in the development of the new platform. To access a recording of the free webinar, go to the Cost of Capital Professional webpage and click on “Free Webinar & Demo.”


Valuing luck in a business caught up in divorce

In most states, the active appreciation of a premarital asset is includible in the marital estate while passive appreciation is not. Therefore, distinguishing between the two for a business interest can make an enormous difference in the outcome of the case. The arguments come down to a skill-versus-luck premise. The nonowner spouse will argue that the owner-spouse was the driving force behind the firm’s increase in value, while the other side will argue that external market forces are the cause. The analysis is very tricky because of jurisdictional differences and lack of empirical data. Also, there is very little professional or academic research on this topic, but it has been found that broader market forces often have a bigger impact on a company’s success than an executive’s actions.

A comprehensive overview of the process of performing an active/passive appreciation analysis plus an examination of jurisdictional issues will be offered at the National Divorce Conference in Las Vegas May 8-10. Bill Dameworth (Forensic Strategic Solutions) will conduct the session at the conference, which is presented by BVR and the American Academy of Matrimonial Lawyers (AAML). BVWire will be there—will you?

Strong agenda for ASA Fair Value Conference in New York City April 30

Nationally recognized speakers and timely topics will be featured at the 2019 ASA Fair Value Conference in New York City April 30. Conference Chair Bill Johnston (Empire Valuation) and other profession leaders (including a Big Four panel) will discuss a range of fair value measurement and valuation topics, including the valuation of debt, inventory, and estimating the size premium, as well as current and future expected trends regarding the FASB, SEC, and international accounting standards. The full-day conference will be held at Ernst & Young in Times Square. BVWire will attend, and we hope to see you there.

Energy Valuation Conference May 2: Attend live in Houston or BVR webcast

BVR is pleased to partner with the Houston Chapter of the American Society of Appraisers (ASA) to present a live webcast of the Energy Valuation Conference, which will take place on May 2 in Houston. The conference agenda will feature presentations from nationally recognized speakers who are profession leaders, covering a range of important topics in the industry.

Evolution of legal valuations in Germany

A study from I-ADVISE describes the evolution of valuation practices in Germany related to squeeze-outs, control and profit-and-loss transfer agreements, mergers, and legal changes between 2010 and 2018. The study is designed to serve as a reference point for the most important parameters of valuations and offers an overview of solutions to a multitude of questions valuation professionals have. “The new tendency to derive the terminal value from average margin estimates or long-term projections by the valuator has a high potential value impact,” explains Dr. Jochen Beumer, head of valuation services of I-ADVISE AG.

New on-demand global BV education courses

A Black-Scholes option modeling course has been added to the slate of eLearning courses from the International Institute of Business Valuers (iiBV) and Business Valuation Resources (BVR). This course is led by Andrew Strickland (Scrutton Bland Chartered Accountants, UK) and features a robust student manual and certificate of knowledge upon passing the test. Four other eLearning courses cover intangible assets, early-stage companies, minority interests, and international cost of capital. These courses are designed as a second step in knowledge for those who have taken some valuation education, such as ASA 100-level courses or valuation classes in college. The courses include non-U.S. examples and are based on IVSC international valuation standards.


BV movers...

People: Eric Teo will lead a new business valuation and advisory team at Savills Singapore to meet growing demand across Southeast Asia; Teo is currently chairman of the International Valuation Standards Council’s (IVSC) Membership and Standards Recognition Board and founding chairman of the Council of the Institute of Valuers and Appraisers of Singapore (IVAS) … Todd Polyniak will head a new transaction advisory practice at Clifton, N.J.-based Sax LLP; he has more than 30 years of auditing, accounting, and advisory experience … James Hickey will be the new CEO of PKF International, a global association of independent firms; he succeeds John Sim, who helmed the association for six years … Dayton Benway is the new managing principal at Baker Newman Noyes, succeeding Carl Chatto; Benway will continue to lead the firm’s growing healthcare advisory practice group … FASB member Mike Cheng has joined Atlanta-based Frazier & Deeter as the national professional practice partner in the firm’s accounting advisory practice; at FASB, Cheng served as the private company council coordinator … Betina Dufault has joined UHY LLP in its Columbia, Md., office as the national director of financial reporting and quality control; she was formerly an associate director at the PCAOB in the Division of Registration and Inspections … Henrik Wiberg has joined Skokie, Ill.-based MichaelSilver as director of consulting services, which includes valuation services … Reading, Pa.-based Herbein + Co. has announced that David W. Stonesifer will succeed Michael J. Rowley as the firm’s managing partner effective October 1.

Firms: Atlanta-based Aprio LLP has launched a new forensic and investigative services team within its litigation support and forensic accounting services group … Heaven and Associates (Norcross, Ga.) and Alvarez CPA and Associates (Berkeley Lake, Ga.) have merged to become Heaven and Alvarez; the combined firm will be located in Norcross and have about 10 staff … The professionals of Kling & Pathak LLP of Cerritos, Calif., have joined New York-based EY in Irvine, Calif. … Tulsa, Okla.-based HoganTaylor recently celebrated the 10th anniversary of the merger that formed the firm … Dixon Hughes Goodman relocated its offices in Tampa, Fla., to a new 8,500-square-foot space in the heart of the downtown area.

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Upcoming BVR training events

  • 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.

  • BVLaw Case Update (April 9), with Sylvia Golden (Business Valuation Resources) and R. James Alerding (Alerding Consulting LLC).

    The speakers review a number of significant recent court decisions related to valuation and damages, explaining the methodologies that worked—and those that did not.

New and trending LinkedIn discussions

Using a Calibration Model for an Early-Stage Enterprise Investment

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

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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