BVWire Issue #164-3 | May 18, 2016


Progress on new fair value quality initiative

Regulatory concerns over fair value measurements for financial reporting have spurred the valuation profession to come together in an ongoing initiative to improve the quality of financial reporting valuations for U.S. publicly traded companies. Senior representatives from the ASA, AICPA, and RICS have released a new report outlining the progress of the initiative.

New credential: The initiative includes the development and implementation of a credential to be issued by approved valuation professional organizations (VPOs) for individuals performing fair value measurements for financial reporting purposes for SEC-registered U.S. public companies. The first group to be considered for credentialing will be third-party valuation preparers who perform fair value measurements for businesses and intangible assets. Individuals must attain the credential through one of the approved VPOs and adhere to the ethical and membership requirements of that VPO. There are other requirements for attaining the credential, including experience and education.

Extra: An update on the fair value initiative is on the agenda of the 11th Annual Fair Value Conference in Los Angeles on June 8. Conference speakers include individuals from the SEC, PCAOB, FASB, AICPA, and leading valuation firms.

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Idaho Supreme Court issues key ruling on discounts in fair value proceedings

Move over New York and New Jersey! By issuing a precedent-setting decision on the use of discounts in fair value proceedings, the Idaho Supreme Court has shifted the attention of the valuation community from the east to the west. The issue, which was a matter of first impression in Idaho, was whether minority and marketability discounts should be mandatory when determining fair value.

Nonprofessional appraisal wins: The case revolved around a closely held family farming business whose assets included a mill, land, lake property, and homes. Since 1998, the shareholders of the corporation had tried unsuccessfully to effect a split under Section 355 of the Internal Revenue Code. In 2012, they obtained an appraisal that valued the corporation’s net assets at $1.61 million under the cost approach. Shortly thereafter, they hired an attorney to assist with crafting the split. He developed a proposal that assigned a value of about $3.3 million to the corporation as an ongoing business—$3,344 for each of the company’s 1,000 shares. He valued the mill at $1.7 million. His valuation was based on the 2012 appraisal and financial statements from the company’s accountant. Some of financial information turned out to be wrong.

Ultimately, the majority gave up on the 355 split, shut down the mill, and liquidated its assets. This prompted the minority to sue for dissolution of the company. Subsequently, the parties stipulated to a buyout based on the court’s determination of the fair value of the corporation’s shares. The minority’s expert had extensive experience appraising agricultural processing facilities. He used many of the same documents the attorney had used but caught and corrected the errors. He arrived at a value of $3,399 per share. The majority’s expert, who was not a CPA, valued the company in the neighborhood of $1,500 per share. He applied minority and majority discounts.

The trial court adopted the valuation of the attorney notwithstanding his lack of appraisal experience and the problematic financial data underlying his calculation. The court noted that the credited value was “very close” to the value the minority’s expert had proposed. The court rejected the use of discounts.

The majority challenged the decision on a number of grounds with the state Supreme Court. The crux was that there should be a bright-line requirement to apply minority and marketability discounts in fair value proceedings. For support, the majority looked to a comment in the Model Business Corporation Act (MBCA), which is identical to the applicable Idaho statute, and which says that “‘fair value’ should be determined with reference to what the petitioner would likely receive in a voluntary sale of shares to a third party, taking into account his minority status.” The appellant also cited case law from other jurisdictions, including New York, in which courts have sanctioned the use of discounts.

Discounts ‘just another fact’: The Supreme Court was not swayed. The comments to the MBCA, which are at not controlling authority in Idaho, simply say that “minority discounts may be considered,” the high court emphasized. And, the majority “does not cite a case that supports its assertion that minority and lack of marketability discounts must be applied as a matter of law.” In short, the discounts are “just another fact that a court may consider in determining fair value,” the Supreme Court said. It “expressly” rejected the proposition to require their use as a matter of law.

What’s more, the court awarded attorney fees to the minority shareholders, calling the appeal “frivolous, unreasonable, and without foundation,” because the majority failed to identify a jurisdiction that mandates the use of discounts.

Takeaway: The Idaho Supreme Court says minority or marketability discounts may factor into the determination of fair value, but they are not mandatory.

Find an extended discussion of Wagner v. Wagner, 2016 Ida. LEXIS 128 (April 27, 2016) in the July issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

A shout-out to Keith Pinkerton (Coles Reinstein) for alerting us to this crucial opinion.

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IRS will beef up enforcement ranks

The Internal Revenue Service will hire 600 to 700 new employees focused on tax enforcement, the agency's first significant enforcement hiring in more than five years.  Michael Gregory (Michael Gregory Consulting LLP), former territory manager with the IRS and now a business appraiser, consultant, and author, posted a memo from IRS Commissioner John Koskinen to agency employees. “Each enforcement position typically returns almost $10 to the U.S. Treasury for every dollar spent—and in many instances, much more,” says Koskinen in the memo.

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Any growth areas left in BV?

That’s the title of a new discussion thread started by Lance Hall (FMV Opinions) in the BVR LinkedIn group. He feels the profession will be “plagued by slow growth and significant price competition.”

Thinking outside the box: While commenters generally agree on the gloomy overview, some are able to look for the silver lining during down times. One respondent mentioned a coming wave of insolvencies that will trigger valuation work in that area. The effect of increased work from retiring baby boomers hasn’t hit yet, someone else claims. Another felt that many part-time "wannabe" appraisers will get weeded out and their clients will be picked up by more experienced valuators who will partner with the smaller CPA firms for their BV business. Most agree that specialization is the way to go—pick one or two industry niches or valuation purposes.

What do you think? Join the discussion!

Extra: Hall is doing a webinar today, May 18, Discounts: Beyond DLOM and DLOC, at 10:00 a.m. PT (1:00 p.m. ET). Learn about the “Mafia” discount (the discount you can’t refuse)!

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Top 10 want-to-see industries for passive appreciation analysis

Automobile dealers and full-service restaurants are the industries respondents most want to have analyzed for causal factors and their elasticities, according to a survey carried out by BVWire. This analysis helps develop empirical support for isolating the passive component of a firm’s appreciation in value.

During a recent BVR webinar on active and passive appreciation in a divorce context, Professor Ashok Abbott (West Virginia University) presented an updated version of his method for identifying significant economic environmental factors and their relative contribution to growth in revenues. He demonstrated the method by doing an analysis of several industries. He offered to perform additional analyses based on a survey of want-to-see industries. Rounding out the Top 10 industries are: building materials and supplies dealers; limited-service restaurants; drinking places (alcoholic beverages); supermarkets and other grocery (except convenience) stores; furniture stores; computer and software stores; beer, wine, and liquor stores; and gasoline stations.

Dr. Abbott will now address the industries in the order of preference—stay tuned for the results!

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Global BV news:
Latest data on private company multiples paid in the UK

If you need the latest transaction multiples being paid for UK private companies, take a look at BVB Insights: Data and Analysis on UK Private Company Multiples, 2016 Edition. The report has this information broken down into 11 industry sectors and, where appropriate, 38 industry subsectors for the year ended December 2015.

Highest and lowest: The highest EBITDA multiples paid were in the consumer staples (11.3x), healthcare (11.0x), and energy (15.1x) sectors, according to the guide. Consumer discretionary, financials (excluding banks), and IT sectors also transacted at high multiples on average—9.1x, 9.4x and 8.7x, respectively. All these sectors had, on average, the highest margins among the industry groups. High multiples in the consumer staples industry were largely due to branded food manufacturers. The IT sector saw high multiples in application software, an industry poised for solid growth over the next few years. Consumer discretionary further continued its strong average EBITDA multiples, largely driven by local and foreign private equity acquiring strong branded companies, continued consolidation in the advertising and marketing sector, and leisure businesses that are forecast to grow due to increased consumer confidence and disposable income.

The lowest multiples were paid in the industrials (7.9x), industrials—services (6.9x), and utilities (7.8x) sectors. The lower multiples were largely due to the targets in these industry categories being the smallest and having relatively lower margins among the industry categories.

The 176-page guide, compiled by Business Valuation Benchmarks Ltd., is available from BVR. For details and how to order, click here.

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Preview of the June issue of Business Valuation Update

Here’s what you’ll see:

  • DLOMs in N.Y. Fair Value Cases: Private Company Discounts Are Not Caused by Lack of Marketability (Gilbert E. Matthews).  The author believes no private-company discount is attributable to closely held or private company status as such, and he presents his thinking in this ongoing discussion over DLOM in fair value proceedings.
  • Definitional Problem Underlies N.Y. Courts’ Unfair DLOM Stance (Chris E. Best). In this Letter to the Editor, the managing director of Acclaro Valuation Advisers supports a call for the BV profession to take a consistent stance on this issue.
  • ESOP Valuations in the Wake of ‘Final’ DOL Rule (BVR Editor). Experts comment on the recent DOL final rule that removed ESOP appraisals from fiduciary treatment. But the appraiser-as-fiduciary issue is not completely put to rest.
  • Attorneys Reveal Seven Surprising Views on Expert Depositions (Sylvia Golden). A recent workshop on expert testimony offered some unusual views from two experienced litigators on how to work with and against experts.
  • Book Review: What’s New and Noteworthy in the DP 2016 Valuation Handbook (Ronald L. Seigneur). Refinements and addition to the Duff & Phelps 2016 Valuation Handbook – Guide to Cost of Capital.
  • Valuation and Forensics Expert Provides Tips on Damages Engagements (BVR Editor). An interview with Lee D. Sanderson, founder of Valuation Forensics LLC.

The issue also includes:

  • Regular Features: BV News At-a-Glance, Ask the Experts, Tip of the Month, Pratt’s Stats MVIC/EBITDA Trends, Economic Outlook for the Month, and Cost of Capital Center.
  • BV Case Update and Analysis: The latest court cases that involve business valuation issues.

To read these articles, regular features, and case digests, see the June issue of Business Valuation Update.

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BV movers

People: Bob Broxson joined the BDO Consulting firm as managing director in the dispute advisory services group and will be based out of the firm’s Houston office … Chris Geier was elected as the next managing partner and CEO of the Naperville, Ill.-based Sikich, succeeding James Sikich, who led the firm for over four decades … David Hern recently joined the Atlanta office of RSM US LLP as a manager in the firm’s financial advisory service practice focusing on forensic and business valuation services … Taylor Herzog took on a new role as manager of advisory services at Ahuja & Clark of Houston … Robert Ling became senior managing director in the Houston office of HSSK and will provide valuation consulting in a range of specialties including financial and tax reporting, transactions, and dispute advisory … Seth Webber, a principal at BerryDunn, based in Portland, Maine, was honored with NACVA’s “Outstanding Member Award.”

Firms: The Alabama firm Warren Averett was honored by the Birmingham Business Journal as among “The 2016 Best Places to Work” … Erharter Wirtschaftstreuhand tax and audit GmbHs, based in the Tyrol region of Austria, and Morrison & Associates, located in Accra, Ghana, have joined the global accounting network HLB International … The Seychelles accounting firm Premier Financial Services Limited has joined global accountancy network UHY and will rebrand as UHY Premier Financial Services Limited.

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CPE events for the rest of May

Discounts: Beyond DLOC and DLOM (May 18), with Lance Hall (FMV Opinions).

Changes in Urgent Care Center Valuation: Are you keeping pace? (May 24), with Elliot Jeter (VMG Health) and Corey Palasota (VMG Health). This is Part 1 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

Advanced Rebuttals Using Financial Forensic Techniques, (May 25), with Darrell Dorrell (Financial Forensics).

Valuing Trucking Companies: Assessing Risk and Return (May 31), with Erin Hollis (Marshall & Stevens) and Andy Manchir (Katz, Sapper & Miller).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

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

Fair value initiative

Key Idaho decision

IRS ups enforcement

Growth areas in BV

Passive appreciation

Global BV news

June BVU preview

BV movers

CPE events



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