Are goodwill impairment analyses during intense market conditions useful?
Mark Donahue (Duff & Phelps) wrote in a recent issue of Value Examiner that “in periods of extreme market conditions, the usefulness of goodwill impairment analyses and their conclusions are questionable at best.” Donahue addresses the general application of ASC 350 and ASC 820 in the context of stockprice swings between late 2008 and late 2009—a period “that ostensibly indicated significantly different values for many companies (depending upon the date of measurement) despite the fact that many of those companies’ fundamental risks and prospects did not substantially change.” As a result, Donahue advises practitioners to beware of goodwill impairment analyses during such times.
To access the article on the Duff & Phelps website click here.
Potential future financing rounds present challenges for early stage company valuations
When valuing an equity interest in an early stage technology or life sciences company, valuation practitioners need to reflect the impact of future rounds of equity financings, writes Carl Saba (Burr Pilger Mayer) in his recent white paper Valuation Challenges for Early-Stage Companies: The Need for Future Equity or Debt Contributions Introduces Complexities Into the Business Valuation Process.
Saba suggests that practitioners address this variable by answering the following questions, at a minimum:
- What is the likelihood that the subject company will need additional financing in the future, and if so, when and how much?
- Will the financing take the form of preferred equity, debt, or some type of hybrid debt/equity security?
- Will the future financing be dilutive to existing shareholders, at a fair value (neutral), or possibly overpriced (will enhance existing shareholder value)?
- Are the terms of the future financing known or unknown?
- Are there any circumstances where the future financing can be ignored in a valuation model?
- What is the most appropriate way to model a future financing based on facts and circumstances, and the specific valuation techniques being applied?
Click here for the white paper.
Divorce court limits personal goodwill value to non-compete
In the third case in as many months to decide the value of a dental practice in divorce (see BVWire # 96-2 and BVWire #96-4), the Ohio Court of Appeals just considered the effect of the sale of the practice during the proceedings. For reasons the court does not detail, the husband sold his solo cosmetic dentistry practice for $580,000. In the purchase agreement, the parties allocated specific amounts to the tangible assets ($126k), patient records ($20k), agreement not to compete ($15k), and “goodwill” ($416k). For purposes of divorce, however, the husband’s BV expert said that the value attributed to the non-compete was “arbitrary” and that the appropriate value was $215,000. The expert reached this amount by applying the Multi-attribute Utility Model (MUM), developed by David Wood, to analyze all of the husband’s personal goodwill attributes, as distinguished from those attributable to the enterprise.
The trial court expressly acknowledged MUM’s utility in determining the fair market value of a professional practice—but said the model was not necessary in this case, due to the arm’s length sale of the business and the assigned value of the non-compete. Accordingly, it determined the husband’s personal goodwill was worth $15k and divided the remainder of the sale proceeds ($565,000) between the parties. The husband appealed, arguing that the trial court should have deferred to his expert’s opinion, but the appellate court disagreed, finding that “it was simply unnecessary to determine the value of the covenant-not-to-compete through the use of a business model pertaining to the hypothetical case of a hypothetical business” when there was evidence of an actual sale. Further, the appellate court also felt that the court correctly found the $15k non-compete was the husband’s separate property (personal goodwill).
Read the complete case digest of Banchefsky v. Banchefsky, 2010 WL 3527578 (Ohio App., Sept. 9, 2010) in an upcoming Business Valuation Update™. The court opinion will soon be available at BVLaw™.
IRS’ increased scrutiny of noncontrolling ownership interest valuations calls for additional analyses
In his recent article “The Consideration of Projected Income in the Valuation of Noncontrolling Ownership Interests,” Timothy J. Meinhart (Willamette Management Associates) says “most valuations of nonmarketable, noncontrolling ownership interests in family holding entities are prepared using only one valuation approach—the asset-based approach.” However, appraisers often ignore the projected income associated with the subject noncontrolling ownership interest. The income approach valuation method can incorporate the projected income and required holding period and can provide additional support for the asset-based approach value conclusion.
Read the article here.
Building a credible model in a lost profits case
“Quite often we’re assuming liability when we’re being asked to calculate lost profits,” James O’Brien and Robert Gray (Parente Beard) told listeners during the recent BVR webinar “Lost Profits Calculations: Methods & Procedures” —the first installment of BVR's Webinar Series on Damages Essentials.
The two experts listed four important factors when connecting causation and the burden of proof with the liability of the damages:
- Credible lost profits include economic damages that are natural, proximate, probable, or a direct consequence of an act, excluding remote consequences
- Courts generally rule that Plaintiffs must establish lost profits damages to a reasonable degree of certainty
- Calculations can’t be speculative, vague or contingent or some unknown, unreasonable, or unforeseeable factor
- Financial models and analyses should be supportable by relevant facts, data, and reasonable assumptions.
“It’s easy for us to get into Excel and build a model but how does that model relate to the liability issues and the data that supports that calculation,” asks O’Brien.
O’Brien and Gray also presented a checklist of elements requiring analyses in calculating net lost profit damages, which BVWire readers can get here.
Part three of BVR’s Webinar Series on Damages Essentials, “The Use of Forensic Evidence in Lost Profits Cases,” has been rescheduled for Monday, November 1 at 10:00 am PT/1:00 pm ET. For more information on this program, click here.
With this scheduling change comes the oddity that part four of BVR’s Webinar Series on Economic Damages Essentials, “Legal Contexts of Lost Profits Cases & Case Law Update” will now precede part three of our series, this Friday, October 29 at 10:00 am PT/1:00 pm ET. Join attorney Jonathan Dunitz (Friedman Gaythwaite Wolf & Leavitt) and expert appraiser Nancy Fannon (Fannon Valuation Group), series curator and editor of The Comprehensive Guide to Lost Profits Damages. Two CPE credits are available. Click here for more information.
Valuations involving decedents who died in 2010 require special treatment
There is a new estate property transfer procedure for decedents who died in 2010, “Generally, for decedents who died in 2010, the transferee's basis in the acquired property is the lessor of the decedent's basis in the property or the fair market value of the property on the date of death,” says Robert F. Reilly (Willamette Management Associates) in the latest issue of WMA’s Insights.
“The transferee property modified carryover basis procedures became effective on January 1, 2010, and they are effective only for 2010. Lawyers, accountants, and other estate advisers will have to become familiar with a complex set of procedures related to the administration of a 2010 decedent’s estate. The burden on estate executors and other estate advisers to gather the necessary information to comply with the carryover basis procedures, especially finding the decedent’s basis in certain transferred property, may be quite significant,” adds Reilly.
Click here for the article “Transferee’s Basis in Estate Property Acquired from a Decedent Who Died in 2010.”
Free sections of the Valuation Handbook available from Lexis/Nexis
Lexis/Nexis is providing free access to sections of the Valuation Handbook. The authoritative guide is written by Professor Joni Larson (Thomas M. Cooley Law School in Auburn Hills, Michigan and formerly with the Office of Chief Counsel at the IRS).
Click here to download the following sections:
- Background; Sec. 1.01 “Definition of Fair Market Value” (part 1 of 4)
- Background; Sec. 1.02 “Bargain Method of Valuation” (part 2 of 4)
- Background; Sec. 1.03 “Valuation Methodologies” (part 3 of 4)
- Background; Sec. 1.04 “Fair Value” (part 4 of 4)
Decrease in the under $50M transactions segment drags
“Merger and acquisitions transaction activity dropped slightly in the third quarter of 2010 after a strong second quarter performance, almost solely to the decrease in under $50 million transactions,” says Mike Rosendahl (PCE Investment Bankers). “The decrease in activity is somewhat surprising given reports that financial and strategic buyers across multiple sectors are reporting an uptick in deal flow.”
For the full report, “State of the M&A Markets, Third Quarter 2010,” including the latest, year-end, summary transactions data, check PCE’s Investment Banking page .
Free BVR’s Webinar: A Guided Tour of BVLaw
If you’re reading this before 10:00 am PT/1:00 pm ET on Wednesday, October 27, it’s not too late to sign up for “A Guided Tour of BVLaw™.” This free one-hour webinar, featuring BVR’s publisher Doug Twitchell, and Legal Editor, Sherrye Henry Jr. will showcase this comprehensive library of cases and case abstracts specifically designed for those involved in the appraisal profession. One CPE credit is available. To register or find out more, click here.
Two Grant Thornton experts speak on IRC 409A Compliance
Join experts Neil Beaton and David Dufendach (Grant Thornton) on Thursday, November 4 for “Valuations for IRC 409A Compliance.” This 100-minute webinar will cover this complex regulation’s past, present, and future, as well as those all-important details of the methods and applications with which it is associated. Click here for more information or to register.
Attend the Advanced Summit on Business Valuation and Tax—and get a year of IBA membership free!
The leadership of the IBA has made a generous offer to BVWire readers: join US Tax Court judges and IRS officials in Washington, DC on November 10, 2010 for the Advanced Summit on Business Valuation: Resolving Tax & Legal Issues co-sponsored by BVR, the Institute of Business Appraisers, and the Georgetown School of Law. Discussions include: precedent-setting tax court decisions, expert witness strategy and testimony, and new standards of appraisal, all of which impact how you can best represent your clients.
New registrants will receive a free IBA Membership* and a $100 universal bucks voucher which may be used towards the purchase of any product, course, or conference IBA offers (some conditions apply). Click here to view the full conference agenda.
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