BVR Logo May 1, 2019 | Issue #200-1

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include: 


Beware of attack on your transactions method

An article in the Spring 2019 issue of Family Lawyer magazine shows how a lawyer can attack a valuation expert’s use of the guideline company transactions method for a small- to medium-size firm. The author, Jim Hitchner (Financial Valuation Advisors), provides lawyers with several lines of questioning designed to discredit the expert on cross-examination. Of course, these questions can help experts prepare for such an attack. Here is one line of questioning:

Q: The transactions you relied upon do not have anywhere near the sufficient amount of detailed information to support a value, right?

A: It’s the best we have.

Q: You said in your report that you put less reliance on the transactions method of valuation because it was more unreliable than the other methods you used, correct?

A: Yes.

Q: You said it was more unreliable because you didn’t have a lot of information about the transactions, right?

A: Yes.

Q: Did you also state that you used it as a corroborating method, not a primary method?

A: Yes.

Q: OK, is it fair to say, then, that you placed some reliance on a method you deemed unreliable?

A: I already answered your question.

Ouch! The lawyer discredited the expert with surgical precision. You can learn more on this topic at next week’s AAML/BVR National Divorce Conference in Las Vegas May 8-10. The Family Lawyer issue has some articles written by other speakers that are of interest to valuation experts, including one on financial experts and mediation (Lisa Ann Sharpe, Lasher Holzapfel Sperry & Ebberson) and one on key takeaways from the Tax Cuts and Jobs Act and alimony (Michelle Gallagher, Adamy Valuation). BVWire will be at the conference next week—we hope to see you there! If you can’t be there in person, BVR will do a live webcast.

Extra: Just in time to coincide with the divorce conference, BVR has just released the Business Valuation in Divorce Case Law Compendium, 4th edition, which contains the most important legal issues confronting business valuation experts in divorce cases.


Important Utah goodwill ruling concerning one-person business

The Utah Court of Appeals recently examined the nature of goodwill in a one-person business and, in so doing, expanded on the state’s goodwill jurisprudence. The appeals court upheld the trial court’s finding that there was no institutional (enterprise) goodwill in a business that entirely depended on the owner-spouse’s efforts and reputation for competency.

Personal relationships: At issue was the value of a vending machine business that operated throughout Salt Lake City. The husband owned 99% of the business (someone else owned the remaining 1%) and was the only employee. He developed and maintained the relationships with the property owners where the vending machines and kiosks were located. Most of the contracts were month-to-month, making it easy for a property owner to replace one vendor with another.

The company was a marital asset subject to division. But the parties disagreed over the nature of goodwill related to the business. Under Utah law, enterprise goodwill is a marital asset, subject to division, but personal goodwill is not.

The trial court credited the husband’s expert, a CPA and experienced business valuator, who valued the company under the net asset approach and who determined the company had no “institutional goodwill.” The expert noted that, “without the relationships that exist for the places where the vending machines are located, there is no potential for goodwill. There’s no income earning capacity that would be in excess of the value of the assets.”

“[T]he goodwill of [the company] is solely attributable to [the husband’s] work, his efforts, and his reputation for competency,” the trial court said. The goodwill was based on the husband’s “being the face of the business” and his personal relationships with the property owners that allowed him to continue to conduct business on their property on a month-to-month basis.

The wife unsuccessfully challenged this finding in a post-judgment motion and then on appeal. The Court of Appeals agreed with the trial court that the business was essentially a kind of sole proprietorship in which the wife had minimal involvement. The husband was the one who remained in contact with the entities that enabled the business to continue operating, the appeals court noted. While the wife claimed that “anybody could step into [the husband’s] shoes and carry on with the business under its name and with its assets,” she offered no evidence to support this assertion, the court said.

The appeals court found the trial court did not abuse its discretion in finding there was no institutional goodwill to be included in the company’s valuation.

A digest of Marroquin v. Marroquin, 2019 UT App 38 (March 14, 2019), and the court’s opinion will be available soon at BVLaw. This case is also now reflected in BVR’s Charting Goodwill Jurisprudence + Easy Reference Map (free download).

Hat tip to Daniel Rondeau (Sage Forensic Accounting Inc.) for alerting us to this important decision.

Move to make permanent the QBI deduction gains steam

More than 100 business groups have come out in support of new legislation to make permanent the 20% qualified business income (QBI) deduction for pass-through entities (PTEs), according to a release from the S Corp Association. IRC Code Section 199a allows a 20% write-off of QBI for certain sole proprietors, owners of S corporations, and members of partnerships/LLCs. Introduced by Senator Steve Daines (Montana), the “Main Street Certainty Act of 2019”—S. 1149—is the companion bill to H.R. 216, bipartisan legislation introduced by Representatives Jason Smith (Missouri) and Henry Cuellar (Texas) in the House of Representatives.

The QBI deduction in the Tax Cuts and Jobs Act affects businesses’ cash flow, operations, and long-term strategy, which impact valuations of businesses that range from mom-and-pop stores to private equity investors. While the new tax law provided permanent tax relief to corporations, which saw their tax rate slashed from 35% to 21% and an end to U.S. taxes on much of their foreign profits, PTE owners got only temporary relief under the law’s individual tax provisions, which are due to expire after 2025.

USPAP updates explained in free webinar on
May 22

The Appraisal Standards Board of The Appraisal Foundation recently published the "Summary of Actions," which is an overview of the 2020-21 edition of the Uniform Standards of Professional Appraisal Practice (USPAP). Wayne Miller, chair of the Appraisal Standards Board, and John Brenan, vice president of appraisal issues at The Appraisal Foundation, will discuss how the adopted changes are solving current issues, and they will also answer your questions and comments in an upcoming free webinar on May 22 at 1:00 p.m. ET. Send your questions to The 2020-21 USPAP will be released in the fall of 2019 and will be effective from Jan. 1, 2020, until Dec. 31, 2021. The Appraisal Foundation encourages appraisers to acquire the 2020-21 edition before it becomes effective to ensure that all appraisal services are compliant during this transition period.


Normalizing exec pay can be tricky—in and out of court

Doing normalization adjustments can be a very sensitive issue during a valuation engagement—and also in court, if the matter ends up there. Some executives are defined by the amount of compensation they receive, so explain to your client early on what normalizing pay means and that you may have to do it, advises Stephen D. Kirkland (Atlantic Executive Consulting Group LLC). Kirkland is a compensation consultant and expert witness who works with valuation experts on reasonable compensation issues. In court, opposing counsel will question you to make sure that you have a reliable basis for your adjustments, he points out. Kirkland has been a subscriber to RCReports for a while, he says in a video. He notes that he’s gotten to know the “people behind the numbers” at RCReports, how they put together the data, and the quality control process they have in place. He also says that it is much more user-friendly than some of the other databases he’s used.

Extra:  RCReports is available to BVWire readers for a discount (scroll to the bottom of the page for your offer).

D&P debuts report on China multiples

Duff & Phelps has published its first edition of “Industry Multiples in China.” The report, which provides an overview of the trading multiples of companies across 11 key industries within the MSCI China Index as of Dec. 31, 2018, finds that every industry saw median P/E ratios decline during 2018. The report provides a detailed overview of the P/B, P/E, EV/EBITDA and EV/sales multiples for nonfinancial services industries, and P/E, P/B, market cap/revenue, and P/TBV multiples for financial industries. More than 400 companies were observed over a two-year period ending Dec. 31, 2018.

Free webinar on international discount rates

A panel of renowned international experts takes a deep dive into estimating the cost of capital based on several global case studies in a free webinar presented by the International Institute of Business Valuers (iiBV). A few of the topics discussed include which currencies to use in cash flow projections, company size and country risk adjustments, forward-looking inflation and exchange rates in hyperinflationary countries, and analyzing pools of buyers from a market-participant perspective. The panel, moderated by Michael Badham, iiBV executive director, includes Carla Nunes (Duff & Phelps), Andrew Strickland (Scrutton Bland LLP), Luis Eduardo Pereira de Carvalho (Setape), Rajeev Shah (CEO, RBSA Advisors LLP) and Anton Lezhja (Value Consulting). The panel raises a diversity of issues from the perspectives of Brazil, U.S., Eastern Europe, U.K., and India. The webinar is now available for free viewing.


BV movers...

People: Christopher E. Anderson, CPA, ABV, CFF, AIF, has joined the Bluegrass Institute Board of Directors as treasurer of Kentucky’s first and only free-market think tank; Anderson is former director of business consulting services of Lexington-based Dean Dorton Allen FordTeresa Polley, the longtime president and CEO of the Financial Accounting Foundation, will be stepping down after 11 years of running the organization that oversees the Financial Accounting Standards Board, the Governmental Accounting Standards Board, and the Private Company Council; she will remain at the organization until the details of a leadership transition plan are finalized … Richard Lawrence, head of accounting and valuation policy at RBS (U.K.), has joined the Financial Reporting Council’s audit and assurance council; he also sits on ICAEW and U.K. finance industry committees.

Firms: Dayton, Ohio-based Brady Ware & Co.’s Dealership Advisors announced that auto industry CPA Sean McCarthy has merged his practice into the firm and has joined as a director; the firm has also launched a new business model that offers comprehensive consulting services to its 90-plus auto dealership clients throughout the Midwest and the Southeast … New York-based Citrin Cooperman has expanded its healthcare practice with the hiring of Josh Berlin and Heather Spillman, who have joined as principals; they were both formerly with the Watson Health division of IBM … To allow for expanded growth, Mathieson, Moyski, Austin & Co. LLP, based in Wheaton, Ill., has moved into renovated space on the fourth floor of its building … Fargo, N.D.-based Eide Bailly has acquired Xerva, a data analytics and data warehouse as a service company effective May 1 … New York City-based Friedman LLP is relocating its office from midtown (1700 Broadway) to downtown (1 Liberty Plaza at 165 Broadway) on May 6 … Chicago-based BDO USA LLP has expanded its capabilities in the life sciences industry by acquiring BioProcess Technology Consultants (BPTC), a chemistry, manufacturing, and controls consulting service.

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Upcoming BVR training events

  • Houston’s ASA Energy Valuation Conference: A BVR Webcast (May 2). A full-day live webcast that will feature presentations from nationally recognized speakers covering a range of important valuation topics in the energy industry. Up to 8.5 CPE credits are available. See conference agenda for speaker information.

  • Valuation of Technology Companies: A Fair Value Update (May 16), with Antonella Puca (BlueVal Group LLC), Andreas Dal Santo (BlueVal Group LLC), and Adam Kindreich (BlueVal Group LLC). This is part of BVR’s Special Series on Fair Value.

    Get an update on the guidance to fair value measurement under ASC 820 as applicable to the valuation of software companies, based on the guidance in the AICPA Guide on the Valuation of Portfolio Investments of Venture Capital and Private Equity Funds and Other Investment Companies and other best practices.

New and trending LinkedIn discussions

Using a Calibration Model for an Early-Stage Enterprise Investment

The Absence of a Size Effect Relevant to the Cost of Equity

OPM Backsolve and Convertible Debt Financing

Your discussion could be featured here—BVR’s LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you’re not already a member, request to join today.

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

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