BVWire Issue #170-4 | November 30, 2016

Exclusive DLOM survey: Use of benchmark studies declines slightly

While restricted stock studies and pre-IPO studies remain the most cited methodologies for quantifying a discount for lack of marketability (DLOM), their usage has declined a little, according to final results of our DLOM survey. Over 100 respondents participated in the survey, and here are some highlights:

  • Three-quarters (76%) of respondents say they use restricted stock studies (RSS), down slightly from 79% in 2013—but sharply lower than the 90% usage rate reported in 2009.
  • Reliance on pre-IPO studies is also down a bit, to 43% from 47% in 2013. In 2009, over half (52%) said they use this method.

Full results: A complimentary download of the survey results is available if you click here. The survey offered over 20 specific DLOM methods to choose from, and it distinguished between general restricted stock studies as well as restricted stock equivalent analyses (which 21% say they use) and the FMV Restricted Stock database (56% use it, up from 44% in 2013). As for some other methods, the usage of the Quantitative Marketability Discount Model (QMDM) declined from 18% in 2013 to 12% this year, and a third (34%) of respondents use Partnership Profiles (down from 44% in 2013).

The results don’t immediately signal any tidal shift in usage of methods, although we point out that the use of option price models has gained steam. The Finnerty model is used by 20% of respondents (up from 9% in 2013), and the Longstaff model saw similar gains (13% in 2016 versus 6% in 2013). The Chaffee model saw a slight increase, from 9% in 2013 to 10% this year.

Extra: For more on DLOM, attend a special four-hour DLOM Day: An Advanced Workshop on December 8.

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Chancery says control premiums are real and legitimate

The Delaware Court of Chancery recently dismissed a minority shareholder challenge to a going-private merger finding the defendant directors did not act in bad faith when they favored the controlling shareholder’s bid over a third-party buyer’s higher offer.

By the book: The dispute centered on a 2015 merger by which the controlling shareholder of Books-a-Million Inc. (BAM), a retail bookseller, bought the outstanding shares it did not already own for $3.25 per share. A third party had offered to buy 100% of the company’s shares for $4.21 per share. The transaction satisfied the requirements the Delaware Supreme Court had outlined in Kahn v. M&F Worldwide Corp. Specifically, the board set up a special committee that needed to give its approval to the transaction. The special committee retained independent legal and financial advisors. And a majority of the minority shareholders approved the merger.

Two plaintiffs challenged the transaction with the Delaware Court of Chancery, alleging members of the board and special committee had breached their fiduciary duties. No rational director would reject the third-party bidder’s “substantially superior offer,” which was nearly 30% higher than the controlling shareholder’s offer, the plaintiffs said.

Under control: The Chancery noted the two offers were fundamentally different. The reality is that buyers of corporate control have to pay a premium above the market price, the court said. What’s more, “the law has acknowledged, albeit in a guarded and complex way, the legitimacy of the acceptance by controlling shareholders of a control premium.” Here, the third party’s bid incorporated a premium to buy corporate control, whereas the controller’s bid contemplated a discount for the minority shares. The discount here was not so extreme as to suggest any of the defendants tried to enable a sweetheart deal for the controlling shareholder.

The court granted the defendants’ motion to dismiss the complaint under the applicable business judgment rule. Considering a special committee met more than 30 times to negotiate the merger, pursued third-party bids to test the controller’s offer, and achieved a 20% increase in the sales price over the initial offer, the only rational conclusion was to consider the transaction fair to the minority shareholders, the Chancery said.

The case is In re Books a Million Stockholders Litig., 2016 Del. Ch. LEXIS 154 (Oct. 10, 2016). A digest of the decision and the court’s opinion will be available soon at BVLaw. A digest and the court’s opinion in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), are already available at BVLaw.

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Witnesses descend on Washington, D.C., for IRS Sec. 2704 hearing

BVWire is heading to Washington, D.C., to attend the
December 1 public hearing at the IRS concerning the controversial IRC Section 2704 proposed regulations designed to rein in estate valuation discounts for family-owned entities. Witnesses will each have 10 minutes to make their remarks, and they are expected to urge the Treasury to withdraw or substantially revise the proposed regs. The valuation professional organizations have the following individuals scheduled to speak on their behalf:

  • William Frazier (Stout Risius Ross Inc.) for the American Society of Appraisers;
  • Peter Agrapides (Western Valuation Advisors), Robert J. Grossman (Grossman Yanak & Ford LLP), Mark Hanson (Schenck SC), and Robert M. Weinstock (Strategic Valuation Group) for the National Association of Certified Valuators and Analysts; and
  • Justin P. Ransome (Ernst & Young LLP) and Michelle F. Gallagher (Gallagher, Flintoff & Klein PLC) for the AICPA.

From the valuation world, other experts who requested to speak include Chris Treharne (Gibraltar Business Valuations) and Lance Hall (FMV Opinions), just to name a few. Individual taxpayers, family businesses, attorneys, wealth planners, and other stakeholders have also requested a speaking slot. These include: John W. Porter (Baker Botts), who served as lead counsel for the taxpayers in Kerr v. Commissioner in Tax Court and in appellate court; Brian Reardon (S Corporation Association); Palmer Schoening (Family Business Coalition); Ronald D. Aucutt (McGuireWoods), along with Stephanie Loomis-Price (Winstead PC), on behalf of the American College of Trust and Estate Counsel; and many others.

Hall and Porter are on the editorial advisory board of Business Valuation Update.

Stay tuned for on-the-spot coverage!

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Dietrich talks about what’s on the radar in healthcare

Healthcare valuation expert Mark O. Dietrich is the editor and a contributor to a new edition of the BVR/AHLA Guide to Healthcare Industry Finance and Valuation. He’s also the newest member of the Business Valuation Update editorial advisory board. In an interview with BVU, he talked about some of the current trends and hot topics in healthcare valuation.

Two key matters: There’s a lot going on in healthcare that valuation experts need to know, but two important matters are worth keeping an eye on. One is accountable care organizations in the Medicare Shared Services Program. “Despite reports of success, these groups are not generating a lot of savings and don’t seem to be going anywhere, so this is an area to watch,” says Dietrich.

The other issue is the merit-based incentive payment system, which will move a substantial amount of physician payments under the fee-for-service Medicare system to being merit-based. “A lot of this will be based on data that can only be extracted from electronic medical records,” he points out. “Those practices that have not yet implemented electronic medical records—and there are many of them—will find themselves with substantially reduced payments from Medicare for their services. It’s a very big issue and it’s supposed to be effective in 2017. I did a chapter on it for the next edition of a book that Tim Smith of Ankura Consulting and I are doing on healthcare compensation.” That book is BVR/AHLA Guide to Healthcare Industry Compensation and Valuation.

For the full interview, see the December 2016 issue of Business Valuation Update.

Extra: Dietrich was honored for his career contributions to the profession at the recent AICPA Healthcare Industry Conference in Nashville, Tenn. Congratulations Mark!

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Practice op: Marijuana legalized in eight new states

Amid the hubbub of the presidential election, voters approved marijuana initiatives in eight of the nine states where it was on the ballot, according to an article in the Journal of Accountancy, which lays out the details. Of course, this means new businesses will be created that will need financial services, including appraisal services.

Big business: A total of 31 states and jurisdictions now have legal marijuana in some capacity. If the momentum toward legality includes all states by 2020, U.S. retail marijuana sales could reach $35 billion, according to a new guide, What It’s Worth: Value and Business Challenges in the Budding Cannabis Industry. That’s serious business, but a business fraught with risks, partly because marijuana is still an illegal substance under federal law. There’s also state and local oversight as well as leasing, banking, cash, and security issues. Top valuation experts cover all this in the new guide. Another resource is the Marijuana Licensing Guide, 2017 edition,which provides the latest marijuana laws and licenses by state.

Extra: President-elect Donald Trump's nomination of Alabama Sen. Jeff Sessions to be the next attorney general has raised fears that the new administration could crack down on weed-tolerant states and crimp industry growth.

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WSJ on the CEIV™

The mainstream business press is now covering the new valuation credential related to fair value for financial reporting for U.S. publicly traded companies. Of course, BVWire readers know all about this new credential, as we’ve been covering this exciting development since June 2015 (first coverage here).

On the street: A recent Wall Street Journal article discusses the new credential, Certified in Entity and Intangible Valuations™ (CEIV™), which is a joint effort of the AICPA, ASA, and RICS. These groups want to bring more consistency to the profession and reduce the number of questions auditors raise about the valuations, says Eva Simpson in the article. Simpson is among the managers leading the effort for the AICPA. “We want these professionals to better document their assumptions,” she says. Better documentation will help make auditors more comfortable with valuation estimates, especially for intangibles. And it will ease the concerns of the SEC and PCAOB, the article points out.

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Spotlight on mastering PPAs

The heightened interest in fair value for financial reporting coupled with an increase in M&A activity makes purchase price allocations more important than ever. Nathan DiNatale (SC&H Group LLC) and Mark Zyla (Acuitas) are contributors to a newly released report, Case Studies in Purchase Price Allocations. The report sparks thought and provides insight for those valuation professionals who are interested in providing fair value services related to business combinations. This must-have reference navigates readers through performing fair value engagements, reviewing client reports, and how to maintain quality in reporting.

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Looking for a ‘super’ conference to ring out 2016?

If you are, head to Las Vegas, where NACVA will present the Financial Consultants' Super Conference December 5-7. Jim Hitchner will present one of the keynotes, and some of the featured sessions include Valuing Earn-Outs and Other Performance-Based Contracts (Chris Hamilton), Cost of Capital—Who Cares If You Have It “Right” Up Through the Alleged Size Premium? It’s the Next Step that Makes All the Difference (Peter Butler), and many more.

Can’t attend in person? No problem—it will be streamed online!

Discount code: BVR is pleased to sponsor this event and offers special discount codes to use when you register. The codes are: 16BVR (a $50 discount for a one-day specialty conference registration) and 16BVR2 (a $100 discount for a two-day specialty conference registration). Both codes expire Dec. 7, 2016. Please jot down the code for when you go to register, which you can do if you click here.

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Trump impact on valuation profession explored at ASA-NY

Neil Axler (RSM US LLP), Christine Miller Martin (Engel & Völkers), and Greg Slotnick (Helmsley Spear) will discuss the state of the real estate market and impact to the valuation profession under the incoming Trump administration. This will occur during the ASA’s New York City chapter annual holiday dinner and get together in Manhattan on December 14. This will be an evening event (6 p.m.-9 p.m.), and you don’t have to be an ASA member to attend. To purchase a ticket, click here.

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Global BV News
IVSC unveils new standards board structure

At its annual general meeting in Indonesia, the International Valuation Standards Council (IVSC) announced a newly formed Standards Review Board that will amend and approve international valuation standards. The new Standards Review Board will be chaired by Mark Zyla (Acuitas) and will have two focused subject matter expertise boards reporting to it: a Tangible Assets Standards Board (covering real estate, plant and machinery, and personal property) to be chaired by Ben Elder (RICS) and a Business Valuation Standards Board to be chaired by Andreas Ohl (PwC).

The new boards will become operational once IVS 2017 is issued, and it is expected that the first meetings will take place in March 2017. For a full list of the members of the new boards, click here.

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Are country risks real?

That was a question posed at a conference in Atlanta co-sponsored by the Southeast Chapter of Business Appraisers (SECBA) and the International Association of Consultants, Valuators and Analysts (IACVA). Kevin Madden (Duff & Phelps), who conducted a session on cost of capital, pointed to research from Bekaert and Harvey (2014) that states: “Given the dramatic globalization over the past twenty years, does it make sense to segregate global equities into ‘developed’ and ‘emerging’ market buckets? We argue that the answer is still yes.… emerging market assets still have higher risk than most developed markets—and as a result, continue to command higher expected returns.”

What to do: It’s difficult to incorporate country risk into cash flows because there’s typically a lack of reliable data. That means you need to adjust the discount rate. It is no longer acceptable to add an ad hoc country risk premium to the discount rate. Several international cost of capital models are available, but it can be challenging for practitioners to find the appropriate underlying inputs. Plus, there is no consensus among academics and practitioners as to the “best” model to use. When choosing a model, the goal is to balance several objectives: acceptance and use, data availability, and simplicity.

For more guidance, the CFA Institute will present a webinar, Quantifying Country Risk Premiums, on December 6 from 1:00 p.m. to 2:00 p.m. EST. The presenters will be James P. Harrington and Carla Nunes, who are both with Duff & Phelps. You can register for the webinar if you click here.

Harrington and Nunes are co-authors (with Roger Grabowski) of the 2016 International Valuation Handbook - Guide to Cost of Capital, which provides country-level country risk premia, relative volatility factors, and equity risk premia that can be used to estimate country-level cost of equity capital globally, for up to 188 countries, from the perspective of investors based in up to 55 countries. A companion guide is the 2016 International Valuation Handbook - Industry Cost of Capital, which provides industry-level cost of capital estimates.

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BV movers . . .

People: Jonathan Carter has joined HDH Advisors in Atlanta as a managing director … Trevor McClain-Duer has joined Cendrowski Corporate Advisors’ Chicago office as a senior manager … William McGarrity was promoted to Tax Controversy partner in Mayer Brown’s Chicago office … Palisades Hudson Financial Group announced the promotion of Eric Meermann to vice president. He’ll remain head of the firm’s business valuation practice in its new Stamford, Conn., office … Jay Shaw, a partner at Grant Thornton New Zealand, has been appointed to the Business Valuation Board of the IVSC … Springfield, Mo.-based KPM CPAs & Advisors promoted Travis Walker to shareholder.

Firms: Carr Riggs & Ingram has added Dallas-based Vogel CPAs, who will now operate under the CRI name … The Detroit Free Press named Southfield, Mich.-based Clayton & McKervey a “Top Workplace” for the fifth year in a row … Eide Bailly has acquired Daines Goodwin & Co., whose partners and staff will join the Salt Lake City office … Baker Tilly Virchow Krause’s litigation, valuation ,and matrimonial consulting group has been recognized as one of the top three in the categories of Best Business Accounting Provider, Best Forensic Accounting Provider, and Best Litigation Valuation Provider in the seventh annual New York Law Journal reader rankings … Weyrich, Cronin & Sorra, headquartered in Lutherville, Md., has added Elkton, Md.-based Greenberg Ettlin & Associates … Milwaukee-based Wipfli has opened a downtown Chicago office, its fifth in the area.

Please send your professional and firm news to us at

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Upcoming CPE events

Sell-Side Advisory Services: A Savvy Way to Excel in the ESOP Market (November 30), with Brian Bornino (GBQ Consulting) and Tracy Woolsey (Horizon Trust & Investment Management).

Science and Uncertainty: Valuation in the Bio-Medical Industry (December 6), with John Elmore (Willamette Management Associates).

Valuing CINs, ACOs, PHOs, and IPAs: Bringing Clarity to Healthcare Combinations (December 7), with Karin Chernoff Kaplan (Veralon), Stu Schaff, and Jessica Stack (Veralon). This is Part 8 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

SPECIAL FOUR-HOUR EVENT: DLOM Day: An Advanced Workshop (December 8), with Chris Treharne (Gibraltar Business Valuations), Alina Niculita (Morones Analytics), William Quackenbush (Advent Valuation Advisors), Martin Greene (Greene Valuation Advisors LLC), and Bruce Johnson (Munroe, Park & Johnson Inc.).

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:

DLOM survey

Control premiums

2704 hearing

Healthcare radar

Cannabiz expands

New FV credential

PPA guidance

NACVA ‘super’ event

Trump effect

Global BV news

BV movers

CPE events

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