BVWire Issue #182-2 | November 8, 2017


Ten tell-tale signs that a forecast is unreliable

One of the benefits of attending a live conference is the chance to network with all sorts of practitioners. You can sometimes glean as much valuable information during a lunch break or an evening reception as you can during the formal conference sessions. During the recent ASA Advanced Business Valuation Conference in Houston, we randomly asked attendees about a topic that has triggered much attention recently: prospective financial information (PFI). We asked about their experiences in spotting warning signs that management prepared forecasts and projections may be unreliable. The following list is certainly not exhaustive, but it gives you a few of the things to look for that came to the minds of the experts we asked.

  1. Ulterior motives. That is, the forecast was prepared with an eye toward the valuation outcome (e.g., optimistic forecasts for bank financing; pessimistic forecasts for a business caught up in a divorce).

  2. Past forecasts have been inaccurate—they don’t compare with historical results. If they’re always off the mark, why are these new ones reliable? Maybe the preparer just doesn’t have the skill to do this.

  3. Forecasts are prepared with no input from business unit heads.

  4. Growth rates and margins are inconsistent with analyst expectations for public firms in the same market. What assumptions are behind these inconsistencies?

  5. Forecasts produce a value that is way out of whack from values through other methods. Unreliable forecasts can be the major reconciling item between methods.

  6. No assumptions back up the projections, especially when the future is expected to be different from the past.

  7. Only income statement forecasts are provided. This shows a lack of concern about capital expenditures or financing needs. Maybe the forecasted growth is outstripping the company’s capacity to finance that growth.

  8. The forecast does not cover an entire business cycle. How did the business do during peaks and troughs?

  9. The forecast is predicated on some unusual assumption. Be extremely skeptical and examine this assumption very carefully. Maybe the assumption relies on the ability to obtain financing or make an acquisition.

  10. An excessive amount of the overall value lies in the terminal value. Carefully examine the inputs to the terminal value.

Finally, we asked what should be done if you can’t obtain a reliable forecast or are unable to create your own that can be agreed on by management. Advice: Reject the income approach or walk away from the engagement.

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Rethink your use of physician compensation survey data

In establishing reasonable or fair market compensation for physicians, most valuation experts focus on survey data. But this practice is often flawed because it is based on several false premises, according to Tim Smith (Ankura), who has done extensive research on this topic.

These false premises include:

  • The surveys have statistical significance for the 90% or so of physicians not included in the surveys;
  • Survey compensation per work relative value units (wRVU) is always fair market value and commercially reasonable—the common wRVU technique utilized virtually assures that the employing institution will lose money on the practice, something that appears to be commercially unreasonable based on the recent court cases;
  • Physicians will relocate to earn the median and therefore everyone should earn the median—an idea that is both statistically incoherent and not borne out by academic research; and
  • The 75th percentile of compensation per wRVU or compensation-to-collections ratio is a mythical ceiling on fair market value.

During a recent webinar, Smith also pointed out that local-market conditions not measurable in the surveys may necessitate losses on physician practices due to factors such as supply and demand, payer contract rates, local-market competition, and national shortages of high-demand specialties. The commercial reasonableness of these losses should be documented in advance and can, in fact, be documented through use of a different method as well as other techniques. Ashley Artibee, a data analyst with the Medical Group Management Association (MGMA), a provider of physician compensation survey data, joined Smith on the webinar.

Smith is co-editor along with Mark O. Dietrich on the newly released 2nd edition of the BVR/AHLA Guide to Valuing Physician Compensation and Healthcare Service Arrangements.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.

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Financial firm and valuation expert settle SEC charges

A financial services firm and one of its former valuation experts have agreed to a settlement over charges the U.S. Securities and Exchange Commission brought that they deceived a client about how they were valuing certain options. Without admitting or denying the SEC’s findings, the expert agreed to be barred from the securities industry with a right to reapply after one year and to pay a civil penalty of $50,000. The firm agreed to pay disgorgement, prejudgment interest, and a civil penalty, also without admitting or denying the SEC’s findings.

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Your help is needed with some academic research

Researchers at the University of Wisconsin School of Business are conducting a survey, Valuation Practitioners' Opinions About the Development of the Profession, as part of their ongoing study of fair value. Please take five to 10 minutes to take the survey, which is designed to provide some empirical data for their upcoming paper, which we will make available by the end of this year. Your responses will be confidential, and neither your name nor any other identifiable information will be recorded. All data collected will be stored on secure servers within the Wisconsin School of Business and accessible only by the principal investigator. If you have any questions, there is contact information in the survey introduction. Thanks in advance for your help!

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FASB acts on intangibles project

After considering feedback on a yearlong agenda consultation project, the Financial Accounting Standards Board (FASB) voted to remove a holistic project on intangibles from its research agenda and maintain a component on its research agenda focused on developing qualitative disclosures about intangibles as part of the overall disclosure framework project.

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Consider staff growth opportunities when merging

It seems that each week in the “BV Movers . . .” section of the BVWire there is news of a merger between valuation firms or CPA firms involved in valuation. Of course, there are many issues to consider when merging, and Nancy Fannon (Marcum) discussed these in an article in Business Valuation Update where she gave insights into the merger of valuation and litigation services firm Meyers, Harrison & Pia (MHP) with Marcum. One of the issues is the availability of career advancement opportunities for staff. “A firm can only grow and promote staff if the growth of the firm allows it,” she writes. “MHP was doing this: Our revenues and profits had grown for many consecutive years, and we were actively seeking valuation firms to acquire in order to maintain our growth trend. However, Marcum presented an opportunity for exponential growth, far beyond what we believe we could have achieved on our own, as a small, boutique firm. In turn, this presents extraordinary career opportunities for our staff, ‘in at the ground floor’ of what we intend to build into a significant national practice.”

Staff expansion: In the wake of the merger, the practice building continues—Marcum is actively hiring financial damages and business valuation experts at all levels. The firm will have a booth at the 2017 AICPA Forensic and Valuation Services Conference November 13-15 in Las Vegas where you can learn more about the opportunities they have. If you would like to schedule time to meet members of the firm at the conference, send an email to Erica Marcantonio, PHR.

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Global BV News

U.K. seeks to promote hidden value of IP

A study from the United Kingdom Intellectual Property Office (UK IPO) shows a low awareness of IP valuation within U.K. businesses. The purpose of the study was to understand why companies do not consider the hidden financial value of their intangible assets—particularly intellectual property—more routinely. To overcome this, the study puts forward the following recommendations:

  • Highlight the benefits to businesses of valuing their IP through a series of case studies;
  • Extend UK IPO’s finance toolkit to include an open directory of IP valuers and their specialties;
  • Introduce a tailored UK IPO outreach program of education and incentives, targeted individually for businesses and intermediaries, to include direct discussions with lenders and investors;
  • Conduct further research to gain a more sophisticated understanding of the links between intangible asset valuations and IP strategy, how valuations of the same assets have varied by purpose and/or over time, and a comparison of valuations carried out by buyers versus sellers; and
  • Initiate dialogue between UK IPO and accounting and industry bodies on the possible introduction of voluntary IP statements and/or labelling, potentially as part of corporate social responsibility reporting or in annual financial statements.

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AMA to do BV training in Dubai

The Department of Expertise and Dispute Settlement at the Dubai Ruler’s Court announced that it will organize a training course on asset and business valuation for its employees. The two-day session is being held in collaboration with the American Management Association.

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Deloitte examines impact of IFRS 16 (leases) on BV

The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016, effective for financial periods beginning in 2019. IFRS 16 replaces the previous leases standard, IAS 17 Leases, and related interpretations. Its introduction will lead to an increase in leased assets and financial liabilities on the balance sheet of the lessee. A publication by Deloitte is the latest that examines the impact of these rules on business valuation.

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BV movers . . .

People: Stephane Oury has joined Stout as managing director of its new office in Geneva, and Christophe Lapaque has joined in a similar capacity in the firm’s new office in Lausanne, also in Switzerland … Montana CPA firm Anderson ZurMuehlen has promoted a number of staffers, including Steven Johnson to senior manager; he’s a CPA who also consults on economic damages cases … James P. Liddy has been named chairman of KPMG's Global Financial Services practice … Mike Harlan, Bruce Taylor, and Allen Weingarten are new partners at Kutchins, Robbins & Diamond Ltd. in Illinois in the wake of its merger with Rockoff, Harlan, Rasof Ltd. Assistant Secretary of the Treasury for Tax Policy David Kautter has been named as acting commissioner of the IRS; he’s formerly with RSM US LLP and Ernst & Young.

Firms: The American Society of Appraisers (ASA) and the National Association of Independent Fee Appraisers (NAIFA) have reached an agreement on the merger of NAIFA into ASA; the merger will add nearly 800 new members to ASA's more than 5,000 multidiscipline credentialed valuation professionals in over 75 countries and 63 chapters throughout the world … Allied Business Group, based in Overland Park, Kan., will broaden its business to include advising registered investment advisory firms (RIAs) on M&A transactions; it will also rebrand itself as Mariner Capital Advisors to better reflect its relationship with its parent company (Mariner) … Ankura, a national business advisory and expert services firm, has a new logo with the subtitle “Collaboration Drives Results” … Objective Capital Partners, a middle-market M&A advisory firm in Southern California, has been awarded four Advisor of the Year awards including one for valuation advisory Fargo, N.D.-based Eide Bailly expands to Texas with the acquisition of Davis Kinard & Co. of Abilene, which will add 11 partners and 80 staffers to the firm.

Please send your professional and firm news to us at

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CPE events

Getting Better Probability Estimates from Your Clients: A Practical Approach (November 9), with James Walling (Accretive Strategies Consulting Group).

How to understand the hidden bias in most probability estimates and how to help your clients get past these biases and provide better estimates.

Hospital Valuations: Issues and Perspectives (November 16), with G. Don Barbo (VMG Health) and John Meindl (VMG Health). This is Part 11 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

An extensive overview of recent hospital transaction activity, reimbursement trends, and hospital valuation metrics.

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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:

PFI red flags

Physician comp

Valuer settles

FV research

FASB intangibles

Staff needed

Global news

IFRS 16 leases

BV movers . . .

CPE events

LinkedIn discussions


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