On the brink of ending its long run, the Private Capital Markets Project from Pepperdine University has secured funding to continue its ongoing survey of expected rates of return of providers in the private capital market.

“I am very pleased to announce that we are back up and running due to generous underwriting from the ESOP Association and Employee Ownership Foundation,” says Dr. Craig R. Everett, the project’s director. This has enabled the project to launch a new cost of capital survey. “We know how important this study is to the ESOP and valuation communities, and we are pleased to ensure that this important independent source of data will continue to be provided to ESOP companies and valuation experts alike,” Patrick Mirza, director of communications for the ESOP Association and Employee Ownership Foundation, told BVWire.

Alternate analysis: Using public market data to estimate the cost of capital for a private company requires many assumptions and adjustments to convert data from actively traded stocks into proxies for private-company valuation. Pepperdine’s project, which produces the annual “Private Capital Markets Report” (available for free), provides an alternate analysis. The analysis is based on an ongoing survey of expected rates of return of investors, lenders, and business owners with respect to private companies.

A BVWire poll in 2019 found that 40% of respondents use the Pepperdine reports. Some practitioners use the reports as a sanity check on more traditional methods, and some use them as a primary method for estimating small private-company cost of capital.

Goodwill analysis ignoring specifics crumbles
on appeal

A divorce expert’s failure to link the facts related to a successful insurance company to his personal goodwill analysis was one of the reasons a Florida appeals court recently overturned the trial court’s valuation findings, which, the reviewing court said, were not based on competent, substantial evidence.

Principal revenue generator: During the marriage, the former spouses bought an insurance agency from the husband’s parents. The husband served as the company’s CEO, managed all aspects of the business, and was the largest generator of revenue. The wife worked as the agency’s bookkeeper.

The husband and wife initially paid $1.5 million for the business and also assumed the significant outstanding corporate debt. During the marriage, the business’s gross revenue nearly doubled. During divorce proceedings, the former spouses, relying on expert testimony, disagreed on the agency’s fair market value, the value of goodwill attributable to the husband, and the income available for alimony.

As for personal goodwill, under Florida case law, it is not a marital asset and excludable from the value of assets available for equitable distribution. Here, the husband’s expert analyzed the agency’s revenues and how much each employee generated for the business. He also considered how much business the husband could take with him if the agency were sold and the husband were not subject to a noncompete agreement. Based on this analysis, the expert concluded the value of personal goodwill in the company was about $1.6 million, which was 68% of the company’s fair market value (almost $2.1 million).

In contrast, the wife’s expert considered 30 transactions of insurance companies from the DealStats database. The transactions were not limited to Florida, and a few went back to 1997. Some of the transactions reported the value of a noncompete agreement—most assigned a value of less than 10%. The expert found the average of those values was 7.3% and used that figure to value the husband’s personal goodwill.

The trial court adopted the 7.3% value the wife’s expert proposed. The appeals court reversed, noting the expert “did not provide any specific knowledge about the particulars of the insurance businesses that reported transactions in the DealStats database.” The court said the expert did not disclose how involved the owners of the businesses he considered were in the company’s affairs, whether they sold insurance, as the husband here did, what the day-to-day operations were. The court also found it problematic that some of the analyzed transactions took place outside Florida and some were almost 20 years old. Importantly, the court pointed out that the husband here was the CEO of the company, was involved in all aspects of the company, and was its largest generator of revenue.

The testimony of the wife’s expert was not competent evidence to support the trial court’s personal goodwill value, the appeals court found. It overturned on this and other valuation issues.

A digest of King v. King, 2021 Fla. App. LEXIS 3170, 2021 WL 822476 (March 4, 2021), and the court’s opinion will be available soon at BVLaw.

Extra: Last week’s coverage of the Columbia Pipeline case, in which the Delaware Court of Chancery recently ruled in the now active breach of fiduciary duty action, omitted the case citation. The citation is: In re Columbia Pipeline Grp., Inc., 2021 Del. Ch. LEXIS 39, 2021 WL 772562 (March 1, 2021). The online version of the article now includes the citation.

Be on the lookout for BI misrepresentations

Business interruption (BI) insurance claims are on the rise, and there are “great opportunities” for analysts on both the business owner side as well as the insurance company side, according to Michael Haugen (JS Held), in an article in the April issue of Business Valuation Update. The demand for valuation and forensics experts is partly due to a great deal of misrepresentations in the claims. Haugen stresses that a misrepresentation does not necessarily mean fraud—it can simply mean an honest mistake. But a great deal of real fraud is going on in this area.

In the article, Haugen gives over a dozen ways to “sniff out” misrepresentations. One of them is to look for corroborating evidence to confirm the narrative about the loss with other sources, such as data from accounting records or other documents. In one case, Haugen was measuring the loss at a manufacturer that had two different plants. A fire shut down one of the plants, and the work was shifted to the other plant. The business income loss claim included increased labor expenses due to outsourcing to third-party labor, which was more expensive than in-house labor. To corroborate this, budgets were examined that revealed that outsourcing was planned in the normal course of business. This did not match the narrative told to the analysts about the extra expense due to the damage.

But just how far do you go in trying to detect misrepresentations? After all, it takes time and effort, which means extra costs. Haugen advises that you work with the insurance carrier and business owner when sorting out potential misrepresentations and whether to try to flush out the correct answer.

April 15 deadline for call for papers on new Stark regs and healthcare valuation

BVR is seeking proposals for papers on issues of fair market value, general market value, and commercial reasonableness under the new Stark regulations. The Centers for Medicare & Medicaid Services (CMS) released a final rule that modernizes and clarifies the regulations that implemented the Medicare physician self-referral statute (the Stark Law). The papers will be peer-reviewed, and we would like to see proposals from experts in all valuation disciplines, including experts not only in business and compensation valuation, but in machinery and equipment (M&E) and real estate as well. Please send an email with a summary of the topic of your proposed paper to andyd@bvresources.com. The deadline for proposals is April 15.

Fingertip guides to valuation cases in new BVR compendium guides

BVR’s valuation and case law compendium guides contain a very helpful feature: a handy summary table of hundreds of cases (by jurisdiction) that gives you the case name, date, specific court, and the main valuation issue in the case. From the table, you can quickly refer to the case digest section for an analysis and other details, such as the names of the judge and valuation experts involved (when known). You can also access the full court opinions from BVR’s BVLaw database. The guides also have a section of recent articles from top practitioners.

PwC examines working capital in DACH and Benelux regions

An interesting analysis of how the COVID-19 pandemic has put cash and working capital into the limelight is in the 2021 edition of PwC’s annual “Working Capital Report,” DACH and Benelux regions. DACH is comprised of Germany, Austria, and Switzerland, while the Benelux region is made up of Belgium, the Netherlands, and Luxembourg. The report points out an important fundamental: “Cash tied up in working capital provides no yield.” Stockpiling cash to ease the way to recovery is certainly valid, but the key to driving value will be the optimal management of working capital. “Now is the right time to focus on cash and working capital management,” the report says. “Not prioritizing cash is both ignoring an opportunity to drive value and risking a negative impact on cash flow."

BV movers . . .

People: Karen Nevins has joined New York City-based CohnReznick LLP as head of strategic growth and marketing for its rapidly growing transactions and turnaround advisory practice, which encompasses project finance and consulting, restructuring and dispute resolution, transaction advisory, and valuation … Andrew Kahn has been named business development manager of the Northeast region for CBIZ Valuation Group; he will be responsible for helping professionals throughout the region deliver a full range of valuation services … Steven Schuetz, ASA, CFA, senior managing director at Valuation Research Corp. (VRC), has retired after nearly four decades in the valuation and banking industries.

Firms: FON Advisors LLC has announced the addition of Patrigest S.p.A. (Patrigest), a Gabetti Group company in Italy specializing in advisory and valuation services, to its FON Global Alliance, a network of 25 affiliated companies located throughout the Americas, Europe, the Middle East and Africa, and Asia-Pacific … Stambaugh Ness (York, Pa.) has launched an architecture and engineering (AE) practice area and service line that will focus on transition strategies including M&A, ownership and leadership transition, and business improvement strategies … RubinBrown of St. Louis will relocate to Centene Plaza in Clayton, Mo., by 2022; the firm employs 192 accountants in St. Louis and 385 nationwide … Tulsa, Okla.-based HoganTaylor is moving its Northwest Arkansas operations to new office space nearby to allow for growth and foster more collaboration and innovation; the new location will open April 12 … Hertz Herson CPA LLP has signed a 12-year lease for the entire 34th floor of 575 Lexington Ave. in New York City; the firm will move from its present location at 477 Madison Ave. in the fourth quarter of this year.

CPE events

• Evaluating and Applying Control Premiums. March 31, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Timothy Meinhart (Willamette Management Associates) and Nate Novak (Willamette Associates).

Amid greater scrutiny on valuation analysts’ selection and use of control premiums, the speakers will discuss the proper quantification and application of acquisition premiums and control premiums.

• Power Panel: Live Expert Answers for Today’s Tough BV Questions. April 6, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Jay E. Fishman (Financial Research Associates) as moderator.

Feel free to ask anything and everything during this very special panel session of top business valuation thought leaders.