BVWire Issue #182-1 | November 1, 2017


Consider a sensitivity analysis in your valuation reports

To improve the quality of your valuation reports, you may want to include a section on critical assumptions and their impact on your conclusion of value. The section can also include a sensitivity analysis for certain variables, such as cost of capital inputs. Not only can this help with your internal review process, but it can also make a big difference in how end users, particularly the courts, receive your reports.

Judge agrees: “Absolutely,” says the Honorable Thomas Zampino when we asked him whether he’d like to see a sensitivity analysis in valuation reports. Judge Zampino, now retired, served more than 20 years as a Family Court judge in New Jersey, including a stint as presiding judge. Speaking during a recent BVR webinar, the judge says this analysis would be very helpful and would streamline the resolution of cases by translating differences in percentages or inputs into current dollars, which everyone understands.

On the webinar, valuation experts Jay E. Fishman (Financial Research Associates) and William J. Morrison (WithumSmith+Brown), co-authors of The Business Valuation Bench Book, a guide for judges and lawyers, joined the judge.

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In unusual business interference case, court upholds loss of value damages

The 8th Circuit recently upheld a sizable jury award in an unusual damages case involving claims of tortious interference with business relations and breach of the duty of loyalty to the employer. What stands out is that none of the defendants were bound by a noncompete agreement. And, although the plaintiff was not completely destroyed, the court found the plaintiff expert’s financial analysis supported a total loss of value opinion.

‘Effectively a total loss’: In March 2012, the seller sold his agricultural commodity trading business, which included a small but profitable freight logistics brokerage, CT Freight. He declined employment with the buyer, but most of CT Freight’s brokers and support staff stayed on. No noncompete or employment agreements were put in place.

A jury found that, soon after the sale, the seller colluded with key CT freight employees to implement a plan that transferred CT Freight’s business to the seller’s new company. The employees secretly moved their largest accounts ahead of their mass resignation to ensure “uninterrupted business.” They also provided customer lists and confidential information to the seller. The buyer obtained a two-month preliminary injunction and sued for damages under a number of legal theories. It prevailed on tortious interference with prospective business relations, breach of the duty of loyalty, and conspiracy. This case was brought in federal court but adjudicated under Nebraska state law.

CT Freight’s expert showed that, as the plaintiff lost sales from its top 20 customers, the new company made those sales in the months immediately following the employees’ mass resignation. He said “that effectively the business of CT Freight at that point was … effectively a total loss.” Just before the mass resignation, the company was worth $2.1 million based on “the value of future profits,” he determined. Further, by October 2013, the plaintiff had suffered $330,000 in actual losses related to its efforts to mitigate the damage from the resignations and rebuild its business. The jury awarded the plaintiff $1.5 million in damages and over $50,000 in forfeited wages based on the disloyalty of nine of the 10 employees.

The defendants unsuccessfully challenged the award in post-trial motions and on appeal. One major argument was that it was error to permit the plaintiff’s damages expert to offer a total loss of value opinion where the plaintiff did not show its business was completely destroyed. The district court found the defendants failed to cite to a Nebraska case that so limited recovery. The general rule was that there had to be a causal connection between the damage and the alleged wrongdoing. Here, the evidence, including expert testimony, showed the immediate and permanent impact of the defendants’ actions on the plaintiff.

The 8th Circuit Court of Appeals later affirmed the district court ruling “in all respects.”

Bill Kenedy (Lutz), the expert for the prevailing party, says he performed a “middle-of-the-road” valuation. He believes the math in this case speaks for itself. As he sees it, when a company has been consistently profitable before the wrongdoing and suffers a loss of essentially all of its customers, resulting in a net loss after the plan was carried out, that’s powerful evidence of the total loss of value stemming from the incident.

A digest of West Plains, L.L.C. v. Retzlaff Grain Co., 2017 U.S. App. LEXIS 16600 (Aug. 30, 2017) (West Plains II); and West Plains, L.L.C. v. Retzlaff Grain Co., 2016 U.S. Dist. LEXIS 86344 (May 9, 2016), as well as the courts’ opinions, will be available soon at BVLaw.

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D&P recommended ERP decreases to 5.0%

Duff & Phelps has decreased its recommended U.S. equity risk premium (ERP) from 5.5% to 5.0% for use as of September 5 and thereafter, until further guidance is issued. This new rate, used in conjunction with a normalized risk-free rate of 3.5% (reaffirmed), implies a “base” U.S. cost of equity capital estimate of 8.5% (5.0% + 3.5%). To read the full report, click here. D&P is the author of The 2017 Valuation Handbook - U.S. Guide to Cost of Capital, part of a series of cost of capital handbooks that includes two U.S. guides and two international guides.

New research debunks use of surveys for FMV of physician compensation

Groundbreaking research and data analytics have emerged to challenge commonly held beliefs about survey data, physician compensation, and fair market value. This is all revealed in the new second edition to the book, BVR/AHLA Guide to Valuing Physician Compensation and Healthcare Service Arrangements, by Tim Smith (Ankura) and Mark O. Dietrich along with 42 other contributing authors. The two-volume work is the industry’s only peer-reviewed comprehensive body of knowledge for healthcare compensation valuation, and it provides a complete alternative to reliance on surveys to determine fair market value.

Smith makes the case that this new research calls for the entire healthcare industry to rethink its approach to FMV during a webinar, Data Error: How New Research is Changing the Paradigm for Use of Compensation and Work RVU Data for Fair Market Value. His co-presenter is Ashley Artibee, a data analyst with the Medical Group Management Association (MGMA), a provider of physician compensation survey data.

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Businesses more confident in growth prospects

More U.S. businesses are reporting profits and increased hiring, with greater confidence in their ability to grow over the next 12 months, according to new results from the third quarter 2017 “Private Capital Access (PCA) Index” report from Dun & Bradstreet and Pepperdine Graziadio School of Business and Management. In Q3 2017, 63% of all businesses said they were profitable, up from 56% in Q3 2016, a 12% increase year over year. In terms of growth, 87% said they are extremely or somewhat confident their business will grow this year compared to 80% in Q3 2016. However, demand for financing for planned growth or expansion, including acquisitions not yet realized, was down from 66% in Q2 2017 to 62% in Q3 2017.

This report is part of Pepperdine’s Private Capital Markets Project, which conducts ongoing research to understand the true cost of private capital across market types and the investment expectations of privately held business owners. The Q3 2017 Index report was derived from 1,176 completed responses collected from July 31, 2017, to Aug. 18, 2017.

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New BVR/ktMINE royalty rate benchmarking guide released

A new edition of the BVR/ktMINE Royalty Rate Benchmarking Guide is now available to help analysts develop an accurate IP portfolio valuation. It contains an analysis of data from the ktMINE database of global licensing transactions in 21 industries to help you benchmark IP transactions over a 10-year period. This new edition has three times more analyzed agreements than the previous edition and includes royalty rate trends such as:

  • Royalty rate medians, averages, and interquartile ranges;
  • Royalty rate ranges by deal type;
  • Royalty rate ranges by agreement type (marketing intangibles, patent/technology intangibles, and combination intangibles); and
  • Percentage of agreements made by region (Asia Pacific, Europe, North America, South America, Africa, and Worldwide).

There’s also a real-world example of how analysts have used ktMINE data as a basis for calculating royalty rates used in court cases.

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Houlihan Lokey examines retailers

Is it all doom and gloom for the retail sector? The latest issue of Houlihan Lokey’s Real Estate Valuation Update is devoted to latest market trends, industry insights, and a recent case study. The authors are Cindy Ma, Jeffrey Andrews, Suchit Kumar, Prashant Kamath, and Casey Hancock.

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Insights into the valuation of salmon farmers

A new paper examines the relationship between financial accounting information and market valuation for publicly listed salmon farming companies with a particular emphasis on certain fair value adjustments. The paper’s author is Bard Misund, an associate professor at the University of Stavanger Business School in Norway. He says the results suggest that the fair value adjustments result in higher volatility of profits and lower value relevance for investors.

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Global BV News

First-ever survey reveals BV needs of family lawyers in New Zealand

Business valuation is the most common instruction to forensic accountants and appraisers from New Zealand family lawyers, according to the inaugural “New Zealand Relationship Property Survey 2017.” Relationship property is the property that must be distributed between the parties when a relationship ends.

The right stuff: A joint report of Grant Thornton New Zealand and the New Zealand Law Society, the survey shows that 42% of family lawyers had instructed a forensic accountant in the last two years, and, of those, 40% had instructed one for valuation purposes. “The survey findings also provide clear visibility around the attributes of a forensic accountant (including business valuers) preferred by lawyers practicing in this area,” adds Jay Shaw, Grant Thornton valuations partner. “Practitioners consider a strong forensic accountant as one able to apply critical thinking in preparing effective written reports and evidence but who, above all, has experience of defending their report as an expert witness in court. Or as one respondent said: ‘they need to know their stuff—get the valuation right and stand up for it.’

A copy of the full report, which provides many other insights into the practice of relationship (matrimonial) property generally, can be downloaded here.

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India government issues valuation rules

Four years after draft rules were issued, India’s Ministry of Corporate Affairs (MCA) has announced finalized rules on the valuation of unlisted companies. Until now, there have been valuation guidelines for listed companies from the Securities and Exchange Board of India (Sebi), so these new regulations mean that India will have valuation rules for all firms.

The rules do not address valuation methodologies, so international standards will be followed pending the development of guidelines on methodology. The rules do address who can become registered valuers and the extent of the oversight by the Insolvency and Bankruptcy Board of India (IBBI). Unregistered valuers can continue to work until March 31, 2018. The IBBI is the authority responsible for these regulations, known as the Companies (Registered Valuers and Valuation) Rules, 2017. A disciplinary committee will be set up to hear complaints against registered valuers. More details on the rules can be found here.

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Opportunity for financial damages and BV experts

Marcum LLP is actively hiring financial damages and business valuation experts at all levels. Visit Marcum’s booth at the 2017 AICPA Forensic and Valuation Services Conference November 13-15 in Las Vegas to learn more about their opportunities. If you would like to schedule time to meet at the conference, send an email to Erica Marcantonio, PHR.

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BV movers...

People: James A. DiGabriele, managing member of DiGabriele, McNulty, Campanella & Co. LLC (Fairfield, N.J.), received the Bright Idea Award for his published article, “The Expectation of Differences Among Stakeholders in the Financial Valuation Fitness of Auditors” … The American Institute of CPAs has named BKD CPAs & Advisors chief operating officer Eric Hansen as the next chairman; he starts on Feb. 1, 2018, and will serve until May 20, 2019 … Sam Pambah has been named the major market and practice leader for Economic and Valuation Services for the Chicago Metro Business Unit at KPMGHerald-Mail Media readers have voted William Fritts, a member of Smith Elliott Kearns & Co. LLC (offices in Maryland and Pennsylvania), the No. 1 accountant in the Tri-State area for 2017 … Yasmine L. Misuraca has joined New York metro area firm Raich Ende Malter & Co. LLP as the partner-in-charge of its Forensic and Dispute Advisory practice … Stout promoted Emma Bienias to a managing director; she’s a member of the Chicago office’s Intellectual Property practice.

Firms: Grant Thornton LLP has opened its new penthouse office in the KeyBank building in Albany, N.Y.; it previously announced plans to hire 65 staffers over the next few years to fill up the new digs … Mechanicsburg, Pa.-area accounting firm Padden, Guerrini & Associates PC will merge with a Lancaster County firm, RKL LLP, on Jan. 1, 2018. PGA’s five partners and 26 team members will join the RKL team, which employs nearly 400 team members in Pennsylvania and beyond … Lancaster County (Pennsylvania) accounting firm Trout, Ebersole & Groff LLP has bought business valuation firm Wolfe Valuation LLC; founder W. Michael Wolfe will join Trout as a partner … Sikich LLP (Naperville, Ill.) has refreshed its brand with an updated logo and redesigned website to reflect the firm’s confident approach toward the future.

Please send your professional and firm news to us at

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CPE events

UK Case Law Update: Recent Decisions that Impact Your Valuation (November 1), with Andrew Strickland (Scrutton Bland Chartered Accountants) and Luke Morris (Scrutton Bland). Note early start time: 6:00 a.m. PT/9:00 a.m. ET.

An in-depth look at four U.K. court cases that transcend global borders and provide valuable tips for using financial models in contentious valuations.

Applying the Asset-Based Approach? How to Value the Intangibles in a Business or Professional Practice (November 2), with Robert Reilly (Willamette Management Associates). This is Part 1 of BVR's Special Advanced Series on Intangibles.

A discussion on the identification and valuation of identifiable intangible assets as part of an asset accumulation method business valuation analysis.

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In this issue:

Sensitivity analysis

Unusual damages case


FMV of physician pay

Biz growth

Royalty benchmarks

RE valuations

Salmon farming

Global news

Wanted: Damages
BV pros

BV movers . . .

CPE events

LinkedIn discussions


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