May 11, 2011 | Issue #104-2  

What will most impress the IRS? The answer may surprise you…

Credible data, well-supported conclusions, compliance with applicable professional standards: It almost goes without saying that these are the minimal qualities that any business appraisal must meet in the estate and gift tax setting. But what’s the first thing that happens after a field agent refers an appraisal to an IRS BV specialist? “We will read it,” said Ron Cerruti, Field Service Territory Manager for the IRS, who spoke last week to the Colorado Coalition of Appraisers (CCA) in Denver, CO. “And you may not believe this, but the writing is important to us. I’m particularly interested in it,” Cerruti added (noting also that any views he expressed to CCA attendees were his own, not that of the Service). What does Cerruti look for?

  • Does the report read well; is it easy to follow? (Just one example, taken from a conservation easement appraisal: “The residence was a merely composed of homesteaders, miners, loggers, and cattle and sheep ranchers.”)
  • Does the report logically lead the reader from the initial presentation of the data to the value conclusions? (Another example: “As mentioned several times throughout this review, the valuation of the subject property consisting of 40 acres and should have concluded from the fee simple valuation on page 155 at a value of $110,000 based on the appraiser’s calculations.”)

Such errors can “drive me nuts,” Cerruti said, noting that the IRS has put together writing classes for its own people, in addition to emphasizing compliance with internal standards. (Reminder: The IRS BV Standards are available as a free download from BVR.) What besides a poorly written appraisal might raise a red flag for the IRS? Is there a “magic” minimal threshold for discounts? Is there a preferred methodology in E&G appraisals? We will have a complete, special report in the July 2011 Business Valuation Update on the CCA meeting as well as the 3rd Annual IRS Symposium, sponsored by the ASA LA Chapter on May 18, 2011. Featured speakers include Judge James Halpern of the U.S. Tax Court, IRS Senior Appraisers and Field Managers, and Mel Abraham. For more information, click here.

Valuation analysts may over-estimate the company-specific risk premium when valuing small businesses

Ted Israel (Eckhoff Accountancy Corporation) is one of several valuation practitioners that believe there is strong evidence that the small publicly traded companies that inhabit Ibbotson’s deciles 10y and 10z and Duff & Phelps’s portfolio 25 are plagued with many of the same conditions generally associated with small private companies.  In his article “Risky Business: The Generous Helping of Company-Specific Risk That May Already Be Included in Your Size Premium,” published in the upcoming June issue of BVUpdate, Israel writes:

If the analyst is valuing a small company and the estimated cost of capital includes a size risk premium ….then the incremental premium to address the unsystematic risk posed by the company is very small, if not unnecessary. The reason for this conclusion is the makeup of the companies that compose the smallest deciles or portfolios of size compiled by these data providers: i.e., risky companies.

Download the complete article: Because of the growing interest in this subject, we’ve added Israel’s article to our free downloads page at BVResources.

Israel and Jim Harrington (Duff & Phelps) are speaking on the subject at the CalCPA BV Conference on June 3rd in San Francisco. Also speaking are Warren Miller (Beckmill Research) and Robert Slee (Robertson & Foley).

DCF (plus tax-affecting) is more appropriate for partnership valuation than cap/earnings approach, says post-Bernier court

Back in 2007, the Bernier decision by the Supreme Judicial Court of Massachusetts was among the first to analyze the “bedeviling” issue of tax-affecting the income stream of a closely held corporation in divorce. (See BVWire #60-2)  Recently—the same panel delivered an expedited opinion concerning the present value a husband’s interest in a highly lucrative hedge fund partnership. Three aspects promise to spark as much interest and debate as Bernier:

  • First, the trial court correctly included the present value of the partnership interest in the marital estate, when the asset produced a consistent income stream with annual cash distributions (in some years, return on capital and equity topped $20 million).
  • At the same time, the trial court erred by using the direct capitalization of income method to value the partnership (from which the husband would eventually retire), when a discounted cash flow (DCF) analysis “more accurately reduces a finite period of future cash-flow to present valuation,” the court held, citing Valuing a Business, 5th ed., by Shannon Pratt and Alina Niculita (available at BVResources).
  • The trial court also erred by tax-affecting the partnership at a combined capital gains tax rate without providing its specific reasons, the court held. (Note: At trial, the husband’s expert applied a 40% combined income tax rate to post-retirement income only; the wife’s expert tax-affected pre-retirement income at 31.5% and post-retirement at 38.5%.)

Accordingly, the Mass. Supreme Court rejected the trial court’s $80.1 million present valuation of the partnership interest and sent the case back for a valuation “consistent with this opinion.” Read the complete digest of Adams v. Adams, 2011 WL 1385570 (Mass.)(April 14, 2011) in the July 2011 BVUpdate, the court’s opinion will be posted soon at BVLaw.

Reminder: May 23 deadline to register for AICPA CFF and ABV credential exams 

Forensics and valuation are two of the most sought-after practice areas in the accounting profession. Join an elite community of certified financial professionals when you earn the prestigious CFF or ABV credentials.

Spring 2011 exam registration expires May 23. Register for the CFF Exam or ABV Exam today.

If you miss the spring exam, be sure to register for the fall exam. It’s never too early to prepare for your future with a CFF or ABV credential.

SEC considering new rules for private companies' stock – how will it impact BV?

Last month the SEC sent a letter to a lawmaker stating that the SEC is "moving toward easing decades-old constraints on share issues by private companies, in a sweeping review that could remake the way American start-ups raise capital," says Jean Eaglesham in the Wall Street Journal.

Learn what possible changes could alter both the liquidity and marketability of private company shares – and learn more about firms providing a marketplace for private company shares­ during the webinar “What do the new minority share exchanges mean for private company value and strategy?” on June 7th.   BVResearch, a partnership between Business Valuation Resources and Aranca, has assembled an exclusive panel of leading experts to lead the webinar.  This panel includes:

  • Jeff Thomas, Senior Vice President, SecondMarket
  • Susan Casey, Founder, Square 1 Bank
  • Neil Beaton, Partner in Charge, Grant Thornton
  • Paul 'Chip' Lion, III, Partner, Morrison Foerster
  • Lawrence Lenihan, Jr., CEO, FirstMark Capital

Recent “epic” New York court decision “must” reading for BV practitioners

Peter Mahler (Farrell Fritz) just blogged about a major NY court decision “in a high stakes fair value case in which DLOM and BIG discounts took center stage.”  In his article “Court Rejects Marketability Discount, Applies "Murphy Discount" for Built-In Gains, in Determining Fair Value of Shares in Real Estate Holding Corporations” Mahler writes:

An epic corporate governance and stock valuation battle between rival siblings, fighting over a Manhattan real estate portfolio worth upwards of $100 million, generated an important ruling last week by New York County Supreme Court Justice Marcy S. Friedman.  Justice Friedman's decision in Matter of Giaimo (EGA Associates, Inc.), 2011 NY Slip Op 50714(U) (Sup Ct NY County Apr. 25, 2011), and the underlying, 184-page Report & Recommendation by Special Referee Louis Crespo dated June 30, 2010, are must reading for business appraisers, attorneys and owners of closely held real estate holding corporations who are involved in, or who are contemplating bringing or defending against, a "fair value" proceeding under New York's minority shareholder oppression or dissenting shareholder statutes. 

“The Report at pages 80-117 recites in detail testimony by the parties' respective business appraisal experts as to the fair value of EGA and FAV as going concerns,” Mahler adds. 

Certified Patent Valuation Analyst designation now offered

The Business Development Academy is now offering a new designation for those demonstrating a high level of proficiency in valuing patents and emerging technologies.

The required curriculum consists of four courses:

  • Valuation of Emerging Technologies
  • Calculating Damages in Patent Infringement cases
  • Negotiating Licensing Agreements
  • Advanced Patent Valuation.

There are already CPVAs in the US, the UK, Canada, Japan, Singapore, Germany, the Netherlands, Israel, France, Spain, Portugal, India and Hungary..

Click here for more information.

More power to the Public Stats subscriber

Public Stats at BVMarketData has just added even more functionality to its search engine.  In response to user requests, visitors and subscribers can now search the over 2,800+ public company acquisitions by the buyer and seller names. In addition to the buyer and seller information, subscribers also gain access to five valuation multiples, an income statement and balance sheet, profitability ratios, leverage ratios, earnings information, liquidity ratios, activity ratios and details on the sale terms. 

Interested to learn the top five acquirers in Public Stats?  They are:


# of Acquisitions

BB & T Corporation


International Business Machines Corporation


Oracle Corporation


Johnson & Johnson


Tyco International, Ltd.


Click here to learn more about Public Stats or call an Account Executive at 503-291-7963 ext. 2. 

Free BVR webinar on licensing agreement comparables

Though now in appeal, the recent Uniloc v. Microsoft ruling striking down the “25% rule of thumb” has placed a burden on appraisers to perform more due diligence when performing royalty rate calculations.  In the May 17 free webinar, “A Guided tour of ktMINE,” BVR welcomes Jeffrey Cozzo (ktMINE).  BVR believes ktMine is the best source for licensing/royalty rate comparable summaries and source documents–and further improvements in the database that will help appraisers and auditors will be announced soon. One CPE credit is available for this free BVR event.

Hourly billing rates for business valuation services

While hourly billing is not the most common method of communicating fees to clients in the BV profession, it’s used quite commonly, and these hourly rates are nearly always part of the project fee budgeting process, whether the client is aware of them or not.

The highest billing partner who provided data for the new 2011 BV Firm Economics and Best Practices Guide (available in June) reports an hourly rate of $900.  There are 18 firms in this new Survey database that bill partners at rates over $450 per hour—and five that bill senior analysts at that rate or higher.  The 2011 Guide includes average billing rates for partners, senior analysts, junior analysts, and all “clerical” staff (including report writers, researchers, designers)—sample rates for partners are show below.

These data should be helpful to all firms when discussing pricing strategy for their BV services.  The range and variation in billing rates is extremely high, leaving a lot of room for adjustment.   There’s no such thing as a “standard” hourly billing rate for a business valuation firm.

Billing Rates for Partners at Firms Providing Business Valuation Services









BV Firms




BV Partners at CPA Firms




Large BV practices > $1MM




Can you afford to stay in the ESOP valuation business?

As announced in the January, 2011 issue of BVUpdate, the Department of Labor seems committed to it’s proposed regulation defining ESOP appraisers as fiduciaries.  This may drive many business valuation firms out of the ESOP business–or will it?  On May 19 BVR welcomes attorney Jared Kaplan (McDermott Will & Emery LLP) for “The Appraiser’s Role in ESOP Valuations: The New Regulation That Makes Appraisers ERISA Fiduciaries,” a one-hour webinar examining how these new regulations will affect both the valuation process and the appraiser’s liability.

Laro and Pratt hit the market with their updated Business Valuation & Federal Taxation

This is the must-have text in the field from Judge David Laro and Shannon Pratt.

Besides the essentials the 2nd Edition (the first came out in 2005) includes coverage of:

  • Personal versus enterprise goodwill
  • New materials on transfer pricing and customs valuations and how recent markets have affected both the income and market approaches
  • Coverage of the new fair value requirements
  • Review of the new penalties and sanctions affecting both taxpayers and appraisers
  • All the new US Tax Court and related cases, and
  • Much, much more.

Order this standard reference source from BVR here.

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Copyright © 2011 by Business Valuation Resources, LLC
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View Complete Calendar

A Guided tour of ktMINE
Tuesday, May 17, 2011 10:00am - 11:00am PT
Featuring: Jeffrey Cozzo

The Appraiser's Role in ESOP Valuations: The New Regulation That Makes Appraisers ERISA Fiduciaries
Thursday, May 19, 2011, 10:00am - 11:00 am PT
Featuring: Jared Kaplan


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