BVWire Issue #188-2 | May 9, 2018


Letter to the Editor of BVWire re: control premiums

Your recent announcement about the 13th Annual Fair Value Conference in Los Angeles may leave unwary readers with the impression that the MPAP guidance on control premiums in VFR #3 applies to all business valuation work. In fact, VFR #3 is very clear that it applies only to financial reporting valuations and not to any other type of valuation work. Does this mean that all other types of valuations are off the hook in terms of rethinking control premiums? No. In fact, control premiums were rethought and refought decades ago. The issue was resolved in the 1990s against application of control premiums because no one could ever rebut the arguments against them. It is only with VFR #3 that the possibility of “officially approved” control premiums has raised its ugly head once more.

Ironically, despite copious warnings in VFR #3 that the analyst must “very carefully” analyze any application of control premiums, the guidance itself contains a road map showing unscrupulous management and the valuation professionals who enable them to defraud investors, the SEC, and the PCAOB. As a way to point out this fundamental flaw in VFR #3, I am preparing an article for publication in the next few months explaining how the guidance can be used to enable such fraud. The bottom line: Please warn your readers off using control premiums under any circumstances unless they can provide absolutely bulletproof evidence and ironclad reasoning. Except in the rarest of circumstances, best practices demand that no control premium should ever be applied to a guideline public company analysis.

Respectfully submitted,

Eric Nath, ASA
Eric Nath & Associates LLC
San Francisco, CA

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Sample size debate spills over onto LinkedIn

What’s the minimum number of transactions that should be used from a database such as BIZCOMPS or Pratt’s Stats? This debate, which began on the pages of the April issue of Business Valuation Update, is now a lively conversation in BVR’s LinkedIn group. Toby Tatum (Alliance Business Appraisal) says at least 30 transactions should be used. But Ronald D. Rudich (Gorfine Schiller & Gardyn) and Howard A. Lewis (ENVRS and RiskGuidance Co. LLC) disagree—they say the minimum should be five transactions.

No magic number: Commenters on the LinkedIn group tend to agree that there is no magic number. In a BVULetter to the Editor,” Gary Trugman (Trugman Valuation) said that using five transactions makes no sense in most of the databases, but you shouldn’t blindly be content with 30 transactions. “Be careful and use your head,” he advises. “I think Gary’s advice to ‘use your head’ is spot on,” writes Bob Kleeman (OnPointe Financial Valuation Group LLC ) in the LinkedIn Group. “In 40 years of business valuation, I don’t think I ever found 30 truly compatible entities,” he says. “Volume will never be a substitute for analysis. Until you really define ‘comparable,’ a blind application of a lot of data is no better than a guess.” Malcolm McLelland of Brazil-based McLelland + Palazzi agreed. “I’m with Messrs. Kleeman and Trugman on this,” he writes.

What do you think? Join the group and add to the discussion.

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New guidance for AI fund valuations

The Alternative Investment Management Association (AIMA) and its private credit affiliate, the Alternative Credit Council (ACC), have published new guidance for fund managers in valuing their investments. The new “AIMA Guide to Sound Practices for the Valuation of Investments” contains a series of recommendations regarding valuation governance; transparency; procedures; processes, systems, and sources; models; and methodology. The guide, now in its fourth edition, is sponsored by PwC and is available to AIMA members only, but you can access an executive summary if you click here.

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Flowchart seeks to sort out QBI

Arguably the most puzzling provision of the Tax Cuts and Jobs Act is the New IRC Code Section 199a, which allows a 20% write-off of “qualified business income” (QBI) for sole proprietors, owners of S corporations, and members of partnerships/LLCs. How this provision and other elements of the new tax law are implemented will affect business cash flow, operations, and long-term strategy that will impact all business valuations. Duane Morris LLP, a law firm, has prepared a flowchart designed to make sense out of the new QBI deduction. At some point, the IRS will provide meaningful guidance on this and other provisions of the new tax law.

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Update on the hospice market and valuations

The hospice market is fragmented with many small independent players that are not associated with health systems, say speakers on a recent BVR webinar. Roughly 90% of hospice revenue (reimbursements) comes from Medicare, which has been a steady, increasing income stream, say healthcare valuation experts Darcy Devine (Buckhead FMV) and Will Hamilton (Veralon). That, plus healthy operating margins of 8% to 9% (which look “exciting” to most other healthcare entities that operate on smaller margins), makes hospices attractive M&A targets, they say. Here a few more takeaways from their session:

  • Most hospice businesses are not capital-intensive, and their biggest operating expense is staff salaries (which represents two-thirds of total expense); a very small percentage has a brick-and-mortar inpatient facility;
  • Management integrity is key because hospices (as all healthcare entities) are subject to a huge amount of federal and state regulations, such as anti-kickback rules, which the appraiser needs to understand;
  • While home hospice firms operate much like other home healthcare businesses, nuances set them apart;
  • Hospice care kicks in for anyone certified as having six months or less to live; a major area of fraud is failing to comply with the requirements for recertifying patients who pass the six-month mark; this can trigger stiff penalties;
  • All hospices must have a medical director, and all hospice patients must have 24/7 access to physician services; the fair market valuation and commercial reasonableness of the physicians’ services are important;
  • Average transaction multiples for hospice operations are 1.2 (revenue multiple) and 8.0 (EBITDA multiple), based on recent transactions with publicly available pricing data; and
  • The size of the agency can have a significant impact on the valuation multiple, as smaller hospices typically sell for implied multiples of 4 to 6 times EBITDA, while regional and national hospice platform companies typically sell for 7 to 11 times.

A great deal more material was presented during the webinar, Hospice Valuation: Trends, Value Drivers and Physician Compensation, which is available in BVR’s on-demand training archive.

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BV standards and the black box

In an interview, Leigh Miller, EY’s global valuation leader, was asked whether a link needs to be made between business valuation standards and the emergence of automation in valuation. “This is something I’ve been thinking about for some time,” says Miller. “I believe there needs to be a professional standard around the obligations of someone using automation, artificial intelligence, or robotic software tools as part of the valuation process. What is his or her obligation to understand what has been done and not to overrely on something that is, in essence, a black box? How do we ensure that accountability isn’t just shifted over to the software or the algorithm? I believe we need professional standards that help us manage the impending growth in new technology and data.”

Miller was interviewed by the International Valuation Standards Council (IVSC) and also talked about his current areas of focus and thoughts on the major challenges and opportunities facing the valuation sector.

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Tomorrow! Live stream of ASA fair value event

BVWire will be in Los Angeles tomorrow, May 10, at the ASA/USC 13th Annual Fair Value Conference. For the first time ever, in-person tickets are sold out, but BVR will webcast the full-day conference. This is the only event that focuses exclusively on fair value for financial reporting, and there is a great lineup of speakers and sessions. The July issue of Business Valuation Update will have full coverage of this event, including key takeaways from all of the sessions.

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Global BV News

Upcoming BV Summit in Mumbai June 6

Ray Moran (MG Valuation) was a speaker at the second of three BV summits being held in India and tells BVWire that he will be providing us with a recap of the event. The sessions included valuation issues in insolvency, valuation of blockchain-based companies, startups, private equity, M&A, and more. The third BV summit in the series will be on June 6 in New Delhi (click here to register). I-Deals Network and the International Institute of Business Valuers (iiBV) organized these events.

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BV movers . . .

People: Christian Heuer has joined Nashville-based accounting and business consulting firm LBMC as senior manager, healthcare valuation services Steven W. Ryan has joined Prairie Capital Advisors Inc. (Oakbrook Terrace, Ill.), a corporate advisory and investment banker, as a director who will focus on new business development initiatives … Bryan Callahan has been admitted as a partner at Springfield, Mo.-based BKD CPAs and Advisors; he’s in the firm’s forensics and valuation services area … Dan Gardiner has transitioned into the role of CEO and managing director of Louisiana-based Postlethwaite & Netterville, succeeding Bill Balhoff, who will remain in a leadership position within the firm … Katherine Whitehead of BerryDunn (Portland, Maine) earned her Certified Valuation Analyst designation from NACVA.

Firms Seigneur Gustafson LLP (SG) in Lakewood, Colo., has formed a subsidiary, Canna Valuation LLC, that is devoted to the cannabis industry; staff includes Ron Seigneur (SG), Brenda M. Clarke, Stacey Udell (HBK Valuation Group LLC), Ryan Cram, Gary Rasmussen, and Chelsea Seigneur … New York-based Alvarez & Marsal launched a new service, global transaction analytics (GTA), to be led globally by Steven Lee, a managing director … Lurie LLP of Minneapolis acquired Hagen Palen & Co., of Fort Myers, Fla. Minneapolis-based CliftonLarsonAllen acquired Laffer & Gottlieb of Beverly Hills, Calif.

Please send your professional and firm news to us at

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CPE events

The ASA/USC Fair Value Conference: A BVR Live Webcast (May 10), 8:00 a.m.-5:00 p.m. PT/11:00 a.m.-8:00 p.m. ET, see agenda for speaker information.

A full-day live-streamed conference with expert speakers on hot topics in fair value for financial reporting.

Fundamentals of Financial Modeling (May 16), with Mark Shirley (V&L Consultants). This is Part 3 of BVR’s Special Series on Advanced Modeling and Methodologies.

An introduction to the logical structure of decision theory (problem solving) applied in constructing financial models, including a mathematical model structure for spreadsheet application.

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New and Trending
LinkedIn Discussions

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Thoughts on the Usefulness of Historical Private Company Transaction Multiples?

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In this issue:

Control premiums

Sample size hubbub

AI fund valuations

QBI flowchart

Hospice valuations

BV black boxes

ASA webcast

Global news

BV movers . . .

CPE events

LinkedIn discussions


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