BVWire Issue #176-3 | May 17, 2017


Time to end the ‘dumping ground’ for cash flow risk?

For years, tax courts have expressed concern about adjusting discount rates for the risks associated with projected cash flows. Language in FASB ASC 820, Fair Value Measurement, suggests a conceptual preference for capturing risk in cash flows rather than in a discount rate adjustment. But there’s a perception that too many valuation experts simply accept the projections they’re given without question and then dump some extra percentage points into the discount rate for the DCF analysis.

As a result, the architects of the Fair Value Quality Initiative have addressed this by including in the Mandatory Performance Framework (MPF) some specific requirements for appraisers pertaining to prospective financial information (PFI). The MPF is designed as best practices for anyone doing fair value for financial reporting, but much of it can be applied to any type of engagement. For example, the MPF lists some of the steps you can use to test PFI for reasonableness. They include, but are not limited to:

  • A comparison of the PFI to expected cash flows;
  • A comparison of the PFI to historical performance;
  • A comparison and evaluation of prior years’ PFI against actual historical results (when prior PFIs are available); and
  • An analysis of the forecast relative to economic and industry expectations.

For more information: The May issue of Business Valuation Update includes an article, “Do You Share Business Valuation’s ‘Dirty Little Secret?’” which provides a checklist to help you better scrutinize PFIs. Also, there will be a session on this topic at the ASA/USC 12th Annual Fair Value Conference in Los Angeles on June 1. The session, Prospective Financial Information and Appraisers, will be conducted by Dave Dufendach (Alvarez & Marsal Valuation Services), who will discuss best practices associated with PFI and its incorporation into the valuation process.

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Florida court rejects active-passive framework in appreciation analysis

When appraisers deal with the issue of appreciation of nonmarital property, they often think in terms of “active versus passive.” A recent Florida divorce case shows that the rigid adoption of this framework may result in an erroneous valuation.

Can’t pick and choose: The parties fought over the valuation of the marital portion of the husband’s separate minority interest in a boat dealership. The company also owned real property whose value had dropped considerably during the relevant time.

In defining “marital assets,” Florida law includes the appreciation in value of nonmarital assets resulting from the efforts of either party during the marriage. Here, the trial court first had to determine the total appreciation in the company’s value during the marriage and then specify the percentage of appreciation that was attributable to the husband’s “marital labor.” The trial court accepted the valuation the wife’s expert proposed, which was about $1 million higher than the value determination of the husband’s expert. The court also largely adopted the expert’s calculation of the marital labor. In valuing the company, the wife’s expert “refused to include” the value of the real estate, believing that any change in value was passive in nature—that is, the result of market forces rather than the husband’s management efforts.

The appeals court agreed with the husband that it was legal error to exclude the value of the real property from the company’s valuation. Florida law requires that the valuation of a company include all of the company’s assets and liabilities, the appeals court explained. “In other words, the sum of all parts, not a select few, is what encompasses a business’s ‘value.’” Further, it is improper to exclude the appreciation or depreciation of certain company assets as “passive” when one party’s marital labor contributed to the change in value of the company as a whole. Even if some of the change in value of some of the company’s assets was passive in nature, the overall appreciation here was the result of the husband’s marital labor, the appeals court noted. Therefore, “the portion of the overall appreciation resulting from the marital labor was subject to equitable distribution.”

The concept of active or passive appreciation might come into play if the husband, not the company, owned the real estate, the appeals court allowed. Then, the passive appreciation or depreciation might be excluded from the term “marital assets.” But here the focus was on valuing the company, which the husband’s marital labor “indubitably” increased. “Because of that marital labor, the law relating to purely passive increases in the value of nonmarital assets simply does not apply.”

The appeals court also found other valuation errors related to double dipping and the treatment of undistributed pass-through income in the determination of alimony and remanded for a recalculation and reworking of the equitable distribution scheme.

The case is Bair v. Bair, 2017 Fla. App. LEXIS 3737 (May 22, 2017). A digest and the court’s opinion will be available soon at BVLaw.

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Why you need to change the way you talk to a judge

We’ve often heard expert witnesses give the advice that you should present information in court in a simple straightforward manner such that a child can understand it. A case we reported on in a prior issue of BVWire is an example of this. One key issue in the valuation was reasonable compensation, and it seemed clear that the expert (who was court-appointed) had done this analysis. Yet, the appellate court wagged its finger at the expert for not doing the analysis and told him to do it in the next go-round. The court remanded the case back to a circuit court for a new valuation.

Head-scratcher: In his valuation report for the lower court, the expert, Mark A. Hanson (Schenck SC), had written: "Based on our own analysis, we have concluded that the historical officer’s compensation is within industry ratios. We also note that an executive compensation expert … concluded that executive compensation was not excessive.” This seems very clear that Hanson did the analysis. But the appellate court says it’s not clear and that this wording only “suggests Hanson may have performed an independent analysis.” (emphasis added)

The court also noted that the valuation report did not include enough detail about the analysis, so it could not conclude that any analysis was done at all. We point out, however, that the lower court had instructed Hanson to assume that compensation was reasonable, so he didn’t have to address it in the first place. If this all sounds like a bad dream, it’s not—it happens in the surreal world of the court. The trouble is, these things can cause additional work even when an expert does his or her best to follow the court’s instructions.

What to do: Pretend you’re telling a child a bedtime story and make it absolutely clear what you’re saying. Use simple direct language and go one step at a time. For example, you could write: “We conducted an independent analysis and determination of the reasonableness of compensation.… We compared the compensation to industry ratios…. Our analysis is on page X, and our data are included in Appendix Y.… We also reviewed the analysis of an executive compensation expert…. We concluded that compensation was reasonable and not excessive.” And so on. Of course, the judge may still be confused, but there’s only so much you can do.

There are more lessons to learn from this case, and we’ll present them in an article in a future issue of Business Valuation Update. The case is Swiderski Equip. v. Swiderski, 2017 Wisc. App. LEXIS 91 (Feb. 14, 2017). A digest of the decision and the court’s opinion are available at BVLaw.

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BCG comments on turmoil in oilfield firms

Oilfield services and equipment (OFSE) companies are having a worse downturn than expected, and they are looking to cut costs and create new alliances, according to an article in the latest issue of bcg.perspectives from The Boston Consulting group.

“Amid the industry’s challenges, however, there are reasons for encouragement. These include the improvements in efficiency that the industry has already achieved and continues to pursue,” the article says. “In parallel, there has been a new emergence and acceleration of alliance activity, including JVs and M&A, among OFSE companies as they rethink their business models and try to improve the attractiveness of their offerings in response to this environment.”

For insights into the valuation of oil and gas firms (including oilfield services firms), see What It’s Worth: Valuing Oil, Gas, and Alternative Energy Assets.

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Check out these healthcare articles in latest AHLA guide

The AHLA Transactions Resource Guide is a collection of articles from leading healthcare experts that discuss significant transaction issues in the healthcare industry. Some of the articles of particular note include:

  • “Fairness Opinions and Fair Market Value Opinions in the Health Care Provider Setting,” by Todd Kaltman and Dan Platten (Duff & Phelps);
  • “VMG’s Health Care Transactions and M&A Report: 2016 Trends and 2017 Expectations,” by John Meindl and Winston Smart (VMG Health); and
  • “Goodwill: Why It Shouldn’t Be a Dirty Word in the Acquisition of Physician Practices,” by Lisa M. Cribben (Wipfli).

Individuals with the Coker Group, Elliott Davis & Decosimo, Sullivan Cotter & Associates Inc., and Stroudwater Associates wrote other articles.

The AHLA also offers (with BVR) the Guide to Healthcare Industry Finance and Valuation, 4th edition, written and edited by Mark O. Dietrich.

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Willamette focuses on family law in new Insights issue

The Spring 2017 issue of Insights from Willamette Management Associates is devoted to family law financial and valuation issues. Just a few of the 11 articles in the issue are:

  • “Evaluating Key Person Risk When Valuing a Closely Held Company for Marital Dissolution Purposes,” by Michael A. Harter;
  • “Income Taxes and Value Considerations,” by Robert P. Schweihs;
  • “Estimating Discount Rates and Direct Capitalization Rates in a Family Law Context,” by Stephen P. Halligan; and
  • “Implementing Normalization Adjustments,” by Benjamin H. Groya.

We point out that, although these articles are geared to family law, some of what’s discussed is applicable in other contexts.

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Global BV News

New study on valuation techniques for EU transfer pricing

Deloitte has prepared a study that provides a view on how valuation techniques can practically and most efficiently be used for transfer pricing purposes in the EU. The information to support the study was gathered through desk research and interviews with transfer pricing and corporate finance valuation specialists from all EU member states and nine of the EU’s main trade partners. The study investigates the differences between valuations for transfer pricing purposes and valuations for other purposes, and the state of play in terms of experience of the EU member states and trade partners. The report concludes with considerations of potential policy actions that could offer helpful guidance to both tax administrations and taxpayers regarding the valuation of intangibles for transfer pricing purposes in the EU.

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IACVA to teach new M&A valuation course in China

The China Appraisal Society (CAS) will present a CPE training course for its members, Valuation for Mergers & Acquisitions, that the International Association of Consultants, Valuators and Analysts (IACVA) will conduct. William Hanlin, IACVA’s prexy, recently presented the course, which is new, to 35 attendees at the Korea Valuation Association in Seoul. CAS may also become a sponsor of IACVA’s International Business Valuation Conference in Shenzhen, China on November 2-3.

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Preview of the June 2017 issue of Business Valuation Update

Here’s what you’ll see:

  • Looking to Private Markets for Private Firm Cost of Capital” (BVR Editor). Will CAPM and BUM disappear anytime soon? Not likely, but that doesn’t mean that valuation professionals can’t benefit from adding a private cost of capital analysis to their toolbox. This article gives a review of the latest data in the Private Capital Markets Project from Pepperdine University.
  • Probing the Values of Professional Service Firm Brands” (Christof Binder, Capstone Branding GmbH, Germany; and Stefan Rüssli, Assessa GmbH, Switzerland). Prompted by the recent case of a French firm challenging the rights to the Arthur Andersen trademark, this article discusses if, when, and why the brand names of advisory firms have value.
  • 12 Ways to Build a Program That Ensures Quality Fair Value Measurements” (BVR Editor). Anthony Aaron, formerly with Ernst & Young, is the chair of the performance requirements work stream of the Fair Value Quality Initiative. He explains how valuation firms can take actions to help improve the quality and consistency of fair value measurements for financial reporting.
  • Recent Developments Trigger a Fresh Look at DLOM” (BVR Editor). There is no consensus as to an overall approach in reaching a conclusion as to a discount for lack of marketability (DLOM), but emerging evidence and tools shed new light on this issue.

The issue also includes:

  • Regular features: “BV News At-a-Glance/Global Perspective,” “Ask the Experts,” and “Tip of the Month.”
  • BV data spotlight: Pratt’s Stats MVIC/EBITDA Trends, ktMINE Royalty Rate Data, Economic Outlook for the Month, and Cost of Capital Center.
  • BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the June issue of Business Valuation Update.

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BV movers . . .

People: Christine Fenske has been named managing partner of Baker Tilly’s New York City practice … CohnReznick announced the selection of Stephanie Pervez to lead the Private Client Services Practice in its New York City office … Steve Rodman, president of Rodman CPAs of Newton, Mass., was appointed to serve on the Alliance Partners’ Advisory Council for BDO USA.

Firms: Armanino is adding two firms, effective June 1: managerial accounting firm Team Jenn Corp., whose San Jose, Calif., staff will join Armanino’s San Jose office, and technology financial management specialists The Brenner Group, who will continue to operate in Menlo Park, Calif. Charter Capital Partners was honored as one of West Michigan’s 2017 Best and Brightest Companies to Work For. The middle market investment banking firm is headquartered in Grand Rapids, Mich. … Cleveland-based Cohen & Co. announced the opening of an office in downtown Detroit … CohnReznick established a new subsidiary in The Hague, CohnReznick Netherlands B.V. Marc Altena, the EMEA advisory services leader, will lead the practice … RSM US is relocating its Southfield, Mich., office to Detroit, which will create an estimated 50 additional jobs … Sikich jumped 15 spots and ranked as one of the largest privately held companies in Chicago on the annual list from Crain’s Chicago Business.

Please send your professional and firm news to us at

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CPE events

Write Like an Expert Witness: Reports that Excel in Court (May 23), with R. Christopher Rosenthal (Ellin & Tucker) and Zachary Reichenbach (Ellin and Tucker).

Narrative and Numbers: The Value of Stories in Business (Keynote Quarterly) (May 31), with Professor Aswath Damodaran (Stern School of Business, New York University).

The Power of PWERM (June 1), with Annika Reinemann (Brittan Park Valuation). This is Part 8 of BVR's Special Series on Fair Value.

Emerging Markets for Minority Interests (June 13), with Christine Baker (Charter Capital Partners) and Charles Sheridan (Huron Capital).

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

PFI trouble


Court tip

Oilfield firms

Healthcare M&A

Family law issues

Global news

BVU preview

BV movers . . .

CPE events

LinkedIn discussions


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