BVR Logo March 4, 2020 | Issue #210-1

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

Valuation underpinning contested stock sale reflects fair value, Court of Chancery says

In a breach of fiduciary duty action arising out of a controversial stock sale, the Delaware Court of Chancery dismissed the plaintiff’s attacks on the underlying valuation, noting the appraiser was “exceptionally knowledgeable about the industry” and held “informed beliefs” as to the company’s specific structure. His methodology generated a reliable indicator of the company’s value, the court said.

Highest level of scrutiny: The case centered on a real estate investment services company that the plaintiff’s late husband had formed with two other partners. One partner eventually left the company. The remaining partner was a defendant in this suit, as were two board members. The company comprised three subsidiaries that specialized in property management, general contracting, and asset management. The main customers were high-risk, high-reward special purpose entities (SPEs) in which the company’s principals had invested their own money besides capital from third-party investors. The record showed that the principals did not expect the operating companies to generate their own value—they were designed to manage the risk associated with the SPEs.

The plaintiff inherited the husband’s 50% interest after his death. Eventually, relations between the plaintiff and the defendants deteriorated to the point where she felt compelled to sue for the appointment of a custodian, ostensibly to resolve a shareholder impasse between the parties. The plaintiff’s action prompted the remaining principal to arrange for the sale of one-third of the company’s stock to one of the co-defendants based on a valuation that was done just prior to the sale. The defendants essentially argued the stock sale resolved the deadlock and obviated the need for an outside custodian. The plaintiff then filed a second lawsuit, alleging the stock sale represented a breach of fiduciary duties. The court consolidated the actions.

The court applied the highest level of scrutiny—entire fairness review—in assessing the validity of the stock sale. Overall, the court found, the process was fair. The court explained that the fair price aspect of the entire fairness inquiry required a valuation analysis equivalent to the fair value determination in an appraisal. Here, the plaintiff, among other things, claimed the valuation was compromised because the valuator, shortly after corresponding with the defendant, expressed to a third party the belief that “there is no value” to the operating companies. The court said a cynical view would be that the valuation that followed was “results-driven window dressing on an uninformed gut reaction.” But this conclusion was not justified here, the court said, noting the valuator held a senior position as well as professional licenses, including accreditation as a business valuator and also had extensive experience valuing real estate entities.

The court found the appraiser explained why he chose an income approach to value the company and, in performing a capitalized cash flow analysis, looked closely at facts specific to the company. In contrast, the plaintiff’s rebuttal expert, by his own admission, approached the analysis more like an “academic exercise” and, in attacking the valuation, at times, engaged in “a theoretical dart throwing exercise that seemed untethered to any real world considerations,” the court said.

It found the valuation produced a fair price and the stock sale “must stand.” “Fairness and justice do not compel the appointment of a custodian” over the company, the court said.

A digest of Coster v. UIP Companies, Inc., 2020 Del. Ch. LEXIS 36; 2020 WL 429906 (Jan. 28, 2020), and the court’s decision will be available soon at BVLaw.

IRS ruling on subsequent events and valuation

In a private letter ruling, the IRS says that a pending merger is to be considered in valuing a company’s stock for gift tax purposes. In this case, a hypothetical purchaser could have reasonably foreseen the merger, so “to ignore the facts and circumstances of the pending merger would undermine the basic tenets of fair market value and yield a baseless valuation,” the IRS says in the ruling. For a copy of the ruling (201939002), click here. Note: The IRS issues a private letter ruling at the request of a taxpayer for the purpose of getting the agency’s opinion on a specific transaction or issue facing the taxpayer. Although anyone else can’t use it as precedent, it is useful in that it usually reflects the attitude of the IRS toward a particular tax matter.

New paper offers improvement to the Gordon growth model

Capitalization 2.0—Terminal Value Under Changing Capital Structure” is a new paper by Mike Adhikari (Business ValueXpress Software), a valuation and M&A advisor. The Capitalization 2.0 methodology is designed to improve on the simple Gordon growth model (GGM) and uses a recently developed advanced growth model (AGM) formula. GGM assumes that the capital structure of the business will remain constant and that the debt principal will never be repaid. Because of this, GGM can overvalue a business by 10% to 50%, according to Adhikari. AGM considers that, even when the business is growing at a constant rate, the debt principal may have to be paid down, and hence the capital structure will change. Unlike the GGM formula, the AGM formula is complex (although it has only three more input variables), so the paper includes a link to a spreadsheet of both the GGM and the AGM formulas that can be downloaded for free.

‘Giving back’ differentiates appraisers

One factor that differentiates one valuation expert from another is giving back to the profession, either by volunteering, teaching, writing, and so on. A recent list of “Questions to Ask Your Business Appraiser” from UHY Advisors contains three questions that relate to this:

  • Have you done any presentations on valuation-related subjects? If so, when and to whom?
  • Have you written any articles on valuation-related subjects? If so, please describe.
  • Have you ever held a position as officer or board member for a professional organization involved in business valuation? Please describe.

These activities also help to establish your authority in a particular niche, whether it be an industry or specific area of valuation.

What’s new in the 2020 Mergerstat Review

New tables of global transaction rankings and the reincorporation of the Industry Analysis feature highlights the 2020 edition of the Mergerstat Review. The 2019 edition had the Industry Analysis feature as a supplement, and, based on user feedback, it is now included as a standard section going forward. The feature allows you to choose either the Mergerstat Industries or FactSet sectors to compare and perform your M&A analysis. This section provides users with the familiarity of doing their own analysis based on industry spotlights, multiples, premiums, and cross-border activity. The 2020 edition will be available in mid-April in PDF format and early May for the print edition.

Mergerstat Review is an annual publication (with monthly updates) that presents compiled statistics relating to U.S. and cross-border mergers and acquisitions that involve both publicly traded and privately held companies. Data on M&A announcements and purchase prices are presented annually and quarterly, for the current period and historically, including details on individual deals and trends in prices, methods of payment, multiples, and premiums.

Final call for candidates for TAF board

Applications are due March 6 to The Appraisal Foundation (TAF) for qualified candidates to fill three at-large seats on its board of trustees. The TAF’s board oversees the funding, work, and members of the Appraisal Standards Board and the Appraisal Practices Board. The TAF board meets twice a year, and appointed members will serve three-year terms beginning Jan. 1, 2021. For information regarding applications, click here.

ASA Houston hosts expert witness workshop and mock trial

ASA Houston hosts the Expert Witness Workshop & Mock Trial on April 16, 2020 in Houston, 8am to 5:30pm.

This full-day expert workshop and expert-focused mock trial will take place at the South Texas College of Law and is hosted by the Houston chapter of the American Society of Appraisers. The Honorable Devon Anderson will give the keynote address and session topics to be presented by attorneys include: Depositions and Testimony Disasters, Implicit Bias on the Stand, The Expert Witness Report, and Social Media and The Expert. After an afternoon of “court episodes,” there will be a happy hour for all attendees from 6:00 p.m. to 7:00 p.m.

Early bird pricing is available through March 31; however, seating is limited. For more information and registrations, click here.

IVSC issues exposure draft on inventories

The International Valuation Standards Council (IVSC), the independent standard-setter for the global valuation profession, has issued proposed new standards for the valuation of inventory. Comments on the draft, IVS 230—Inventory Exposure Draft, are due April 30 and can be sent to “The valuation of inventory project resulted from feedback received during the agenda consultation process conducted by the IVSC in 2017 and 2018,” writes Mark Zyla (Zyla Valuation Advisors) in a cover letter to the exposure draft. The project has been led by the Business Valuation Board, with support from the Standards Review Board, which is chaired by Zyla. Depending on the comments and feedback, a final standard could be issued in mid-2020 with an effective date no earlier than January 2021.

IVSC launches new Europe Board

To give a greater European voice to the International Valuation Standards, the IVSC has appointed a number of experts to its new Europe Board, which met for the first time in Paris on February 26, according to an announcement. The board, which is chaired by former Duff & Phelps European leader, Yann Magnan, is comprised of valuation, finance, and regulatory experts who will “encourage and support the implementation of internationally-agreed valuation principles.” The formation of this new board also helps to ensure that European-specific input continues to the IVSC's standards boards and standards consultations.

BV movers ...

People: Bjorn Midtlyng, CFA, has joined AltaView Advisors’ New York City office as a principal.

Firms: New York City-based Prager Metis CPAs has relocated its White Plains, N.Y., team to its Rye Brook, N.Y., office, which was part of the firm’s combination with three of seven offices of D’Arcangelo & Co. this past January … Cincinnati-based Clark Schaefer Hackett has increased its investment in managed service solutions by acquiring Business Management Resources (BMR), a managed accounting services provider to a global restaurant chain; the firm will pursue opportunities with other franchise systems … Columbus, Ohio-based GBQ Partners LLC has expanded to Toledo with the acquisition of Weber Clark; the merger adds 41 employees and brings the total staff count to 219 … Savannah, Ga.-based Hancock Askew & Co. has created Clarity Capital Advisors LLC, a new entity that will focus on providing strategic advice to small and medium-size businesses and specializes in interim/fractional CFO solutions, M&A, and general corporate finance advice … Greensboro, N.C.-based DMJ & Co. has joined Geneva Group International (GGI), an international alliance of accounting, consulting, and law firms; it is the only accounting firm in the GGI network in North Carolina.

Please send your professional and firm news to us at

Upcoming BVR training events

  • Emerging Issues in Cannabis and Hemp/CBD: Buckle Up as It Is Just Getting Interesting! Tuesday, March 10, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET Featuring: Ronald Seigneur (Seigneur Gustafson LLP) and Ryan Cram (Seigneur Gustafson).

    Includes a discussion of recent developments in state and federal legislation, license rights (including sources of data), and other unique elements of appraising cannabis and hemp businesses and intellectual property.

  • Incorporating Industry Research Throughout the Engagement Process (Free Webinar), Thursday, March 12, 10:00 a.m.-11:00 a.m. PT/1:00 p.m.-2:00 p.m. ET Featuring: Bobby Martin (Vertical IQ).

    Industry research can be used for much more than the typical valuation engagement. It can be used to have more value-added discussions with the business owners you already advise and increase new client percentages.

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

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