November 2, 2010 | Issue #98-1  

Direct from DE Chancery: Use more than one valuation method

Like so many of the statutory appraisal/entire fairness cases in the Delaware Chancery Court, In re Hanover Direct, Inc. Shareholders Litigation (Sept. 24, 2010) came down to a “battle of experts,” writes Chancellor Chandler in a recent letter opinion. “Unlike most of these cases, however, this decision turns entirely on the fact that one expert’s proffered opinion, for a host of reasons, was totally, completely, unreliable,” Chandler says, referring to the valuation by the petitioner’s expert. One of the most glaring errors: While the respondent’s expert used three different methods—a DCF, comparable companies and comparable transactions analysis, the petitioner’s expert used only one (comparable companies). Chandler writes:

Although there is no single preferred or accepted valuation methodology under Delaware law that establishes beyond question a company’s value, there are commonly accepted methodologies that a prudent expert should use in coordination with one another to demonstrate the reliability of its valuation. If a [DCF] reveals a valuation similar to a comparable companies or comparable transactions analysis, I have more confidence that both analyses are accurately valuing a company.

“In short, the respondent’s evidence of fair value was so convincing, and petitioner’s evidence was so comparatively weak, that the outcome of this case is not in doubt,” the Chancellor concludes. The complete digest of Hanover Direct will appear in the December 2010 Business Valuation Update™ and the court’s letter opinion will be posted at BVLaw™.  We are also working with the attorney and appraiser for the respondents on more insights and analysis of the case. Does the DE Chancery really prefer the DCF over any other method? Does its definition of statutory fair value include synergies from an open and robust auction process? Stay tuned...  

Lost profits analyses also get more scrutiny from the courts

In Monday’s BVR teleconference “Use of Forensic Evidence in Lost Profits Cases,”
attorney Jeffrey Diamond told the audience “over the years I’ve gotten smart.  I know what I don’t know. That’s why I hire good experts and them get in the driver’s seat with me to find all of the issues important in the case…your role as the expert helps us decide if we need to value the business and how we will capture damages.” 

Co-presenter Rebekah Smith (GBQ Consulting, LLC) followed up with the reminder that a lost profits analysis will be subject to great scrutiny, with opposing counsel and the judge challenging the legal theories, assumptions, methodology, the expert’s qualifications, and evidence. The attorneys on the case will want to know what systems the expert has in place for gathering the relevant underlying evidence and applying the appropriate methodology. “This helps attorneys get past the obstacles in accepting you as an expert,” says Diamond.

The two presenters mentioned several important cases that illustrate the role of the expert, two of which are:

  • Nebraska Plastics Inc. vs. Holland Colors Americas Inc. (No. 04-2035 (8th Cir. 2005)) in which the court excluded the expert because the opinion “did not fit the facts.”
  • Marc Z. Edell v. Paula Edell (No. A-1695-02T5 (NJ App. 2005) in which the court found that the expert’s report had adequately supported and explained his opinion. The expert had cited numerous documents and gave detailed explanation of analysis and of alternative methods considered but not relied on.

The full text of these cases are available at BVLaw™.  For more information on the webinar transcript click here.

4th Edition of Cost of Capital released…along with two other cost of capital resources

The Cost of Capital: Applications and Examples, now in its fourth edition, has just been released. Authors Shannon Pratt and Roger Grabowski updated the text to include:

  • A new chapter reconciling various forms of the income approach
  • Expanded material on estimating the ERP and the cost of debt capital
  • An updated chapter covering cost of capital for financial reporting under SFAS 141R, 142, and 144
  • Expanded chapters on risk measures and their relationship to COC and company specific risk, COC for distressed companies, and the COC in transfer pricing related to the valuation of intangible assets
  • Expanded discussions on the Morningstar SBBI data

To order your copy of Cost of Capital, Fourth Edition, click here.

Duff & Phelps have made two other recent publications available: "Cost of Capital Estimation Issues in the Current Environment,” based on a recent presentation by Roger Grabowski (D&P) and Professor Elroy Dimson (London Business School), and “Cost of Capital Estimation in Emerging Markets: What you Need to Know,” co-authored by Grabowski, and James Harrington (D&P).

Grabowski's detailed slide presentation from the London meeting addresses:

  • Definition of the cost of capital
  • Estimating beta in the current environment
  • Valuing distressed companies in the current environment

Grabowski and Harrington’s article, “Cost of Capital Estimation in Emerging Markets: What you need to know,” discusses:

  • The risks to consider when investing globally
  • International cost of capital models
  • The relative risk and reward of Europe
  • Diversification and cost of capital

Practice management:  Crain offers responses to increased BV competition

“The business valuation practice area is maturing, and rapid growth is no longer the norm for the profession’s established firms,” writes Michael Crain (Financial Valuation Group) in the November 2010 issue of Journal of Accountancy. “Although demand for valuation services is robust, it is harder for firms entering the field to earn superior returns unless they have a competitive advantage,” he adds.

Crain uses Porter’s competitive forces theory to show how managing partners in BV firms can respond.  “Some or all of the following will likely occur in the future or are already affecting the profession,” he believes:

  • More intense competition for market share
  • More selling to experienced, repeat buyers
  • Competitive focus shifting toward price and service
  • Cautious additions to capacity and personnel
  • Reorientation of a firm’s production processes, marketing and selling
  • International competition increases caused by standardization and price pressure
  • Industry profits falling during the transition to maturity, a change that may be either temporary or permanent

Read the article here.

Social networking marketing by Skoda Minotti on tiered valuation discounts

One way of reaching clients in the competitive BV area is social media. Skoda Minotti is active with social media, using blogging, Twitter, LinkedIn and Facebook to reach current and prospective clients.  Watch this video of one of the firm’s managers, Sean Saari, as he illustrates tiered valuation discounts using the analogy of Russian nesting figurines.  Nice work!

Insiders see marked increase in middle-market private equity deal activity

GF Data Resources pool of 150 active PE firms completed approximately 20 deals in the first quarter of 2010 and 30 deals in the second quarter–“up a bit from the ‘death valley days’ of ’09, but still well off of the 40-plus deals a quarter being closed in 2006-2007,” reports CEO Andy Greenberg. Many deal professionals point to a still-uneven recovery and expect (a) reported third quarter deal volume to be tepid; (b) a spike in 4Q as sellers rush to complete deals in the current tax environment; and then (c) a drop off in early 2011 as that bulge passes and business owners remain confronted with uncertain economic and market conditions,” Greenberg adds.

Read the complete blog post here.

Tapping accountants for BV work referrals just
got easier

BVWire has heard from numerous thought leaders – most recently from Jim Anderson during his webinar with Ron Seigneur on Succession Planning – about accountants comprising a top referral source for BV work and BVR took this fact to heart.  With the recent launch of BVR’s BV Expert Directory – the only directory solely focused on credentialed and accomplished business valuation practitioners – we were able to forge a new partnership with AccountingWEB, a leading news and information portal for the accounting profession.  AccountingWEB will prominently feature the BV Expert Directory on its web site and forums, guaranteeing more traffic from CPAs to those listed in the Directory.  To learn more about listing options, visit and click on the “Join the Directory” tab at the top of the home page or contact Martin Thomas at 503-291-7963 ext. 116.

Top Free Downloads

BVR provides over 100 free articles, papers and standards written by top experts in the field of business valuation.

The top ten downloads last month were:

  • Historic Trends in Private Company Valuation Multiples
  • BVR’s Webinar Series on Damages Essentials: Part 1, Lost Profits Calculations: Methods & Procedures: Elements Requiring Analyses
  • Client Alert Duff & Phelps: Delaware Chancery Court Fails to Adopt the Morningstar/Ibbotson Historical Equity Risk Premium (ERP) Opts for Lower Estimate, Effectively Increasing Valuation
  • Control Premiums: Application & Analysis Special Report Excerpt
  • Reasonable Compensation Data Sources
  • How Much is Your Business Worth - According to Inc. and BVR
  • The Top 5 Free Sources of Automobile Dealership Industry Information
  • Personal Goodwill: A Survey of Definitions
  • FORM PREM14A EF Johnson Technologies, Inc. - EFJI
  • How to Use Transactional Databases for M&A, 2010 Update

Tax and BV experts convene in Georgetown

Time is running out to register for the Advanced Summit on Business Valuation: Resolving Tax and Legal Issues, presented by BVR and the Georgetown School of Law.  On Wednesday, November 10, in Washington, D.C., this one-of-a-kind program will focus on the intersections of the business appraisal, legal, and estate planning professions with a faculty of U.S. Tax Court judges, IRS officials, attorneys, and, of course, business appraisers.  This conference represents the only chance to hear from thought-leaders and regulators in the same sitting.  Attend for just the day, or extend your stay from the AICPA’s Business Valuation conference, also in our nation’s capital. 

For more information, or to register, click here.

And, for new staff looking for certification:  ASA announces new BV201 course

The American Society of Appraisers announces the new BV201 course, Introduction to Business Valuation - Part I, and encourages attendance at the forthcoming course in Chicago (Skokie, IL) November 11 – 14.  The course, written by Gary Trugman, deals with valuation theory and the market approach, including guideline public companies and transactional analysis.  This course is designed for students seeking a better understanding of market evidence in business valuation assignments as well as for those seeking the premier accreditation in business valuation.  Click here for more information or call ASA at 800.ASA.VALU.   Members $995, non-member $1,195.

It’s a tough time to sell a company

“When it comes to the market for small companies, what's true in the best of times remains true in one of the worst: Businesses with strong profits and cash flow attract buyers,” reports Darren Dahl in this month's Inc. magazine,” in its annual feature on business valuation. “And for the rest of us, it's really, really hard to sell a company. That's certainly the case as 2010 draws to a close. The market for small businesses remains tough for most sellers. And even the most eager buyers are having a hard time raising cash,” Dahl adds.

Inc. has partnered with BVResources for several years to map out the marketplace for private companies.  How Much Is Your Company Worth? – a graphic based on 3,666 transactions recorded by BVR from January 2007 to March 2010, is available as a free download here.  BVR thanks Inc. magazine and Tommy McCall for the graphic.

Fannon and Dunitz on preparing and defending lost profits calculations

During last week’s BVR teleconference “Legal Contexts of Lost Profits Damages and Case Law Update,” Nancy Fannon (Fannon Valuation Group) and Jonathan Dunitz (Friedman Gaythwaite Wolf & Leavitt) discussed how necessary it is to understand lost profits claims and their context across varying legal theories in order to prepare and defend lost profits calculations.

Of the many points the two experts shared, one was how the party seeking an award of lost profits must show three things:

  • That the lost profit damages were caused by the conduct upon which the claim is based.  Proximate cause requires that the plaintiff tie damages to the wrongful act. “Failure to tie the loss calculation to the wrongful act is a common reason for expert exclusion,” explained Fannon.
  • That the parties contemplated the possibility of lost profit damages, or that the lost profit damages were a foreseeable consequence of the conduct. “Foreseeability requires that the losses resulting from a breach of contract, a tort, or other actionable conduct are foreseeable and probable,” Fannon added.
  • That the lost profit damages are capable of proof with reasonable certainty.This rule recognizes that lost profits damages “cannot be calculated with absolute exactness,” says Dunitz.

For more information on this webinar click here.

Confronting a valuation “fresh start” valuation assignment?  Here’s some ASC 852 guidance from PCE

Brett Cooper (PCE Valuations) reports “Accounting Standards Codification (ASC) 852 addresses the financial reporting requirements required by U.S. GAAP for fresh start reporting.  It requires that the value of the emerging entity be determined using the Fair Value standard and specifically discusses use of the discounted cash flow (DCF) method of valuation.”  Cooper  adds: “When forecasting the outcome of an emerging entity, it would not be good to rely on pre-petition financial statements.  The pre-petition entity is likely to be radically different from the emerging entity.”

Cooper outlines the elements that should be considered in his article here.


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November Events

Advanced Summit on Business Valuation: Resolving Tax & Legal Issues
Presented by BVR and Georgetown School of Law
November 10, 2010

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