BVWire Issue #157-2 | October 14, 2015


Spirit of cooperation is high over new fair value certification

A few months ago, BVWire reported that the AICPA was developing new specialty credentials in the area of fair value measurement. The global valuation profession is banding together over this important endeavor.

Joint effort: Representatives of the AICPA, ASA, RICS, and IVSC, along with the large audit firms and regulators, were brought together by The Appraisal Foundation in Washington, D.C., last week for its third Business Valuation Roundtable. A large panel of speakers discussed the coordination of efforts in developing international standards and practices with respect to these new credentials. The certification process would cover two areas of fair value measurement: (1) business and intangible assets; and (2) financial instruments.

Representatives of the large audit firms applauded the progress so far, as an effort is being made to align it with the biggest problems auditors face when reviewing valuation work. Paul Beswick, former chief accountant at the SEC and now in the private sector, advised that efforts be made to get buy-in from the marketplace (investors, users, etc.) along the way. As you may recall, when he was with the SEC, Beswick was critical of the fragmented nature of the profession and made a public call for unification.

BVWire applauds this global coordinated effort around standards and practices that will certainly help enhance the valuation profession and improve the public’s trust. More details on the TAF meeting will be in the December issue of Business Valuation Update (subscription required).

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State tax court trips over its own EO analysis

Quantifying external obsolescence (EO) poses a challenge even for experienced appraisers. No wonder the Minnesota tax court recently got into trouble when it rejected the analyses of the experts and created its own methodology.

Assessment dispute: The owner of an ethanol plant—a special purpose property—attacked the county’s assessment in tax court. One issue was EO, described as “the measurement of a property’s loss in value as a result of factors beyond the physical boundaries of the property and beyond the owner’s control.”

The valuation experts on both sides agreed that, during the three valuation years at issue, the facility incurred losses because of “prevailing negative industry conditions.” The company’s expert proposed a 33.3% reduction in the assessment for each of the years. This proposal was based on a 40% decline in commercial market values generally and industrywide decreases in the profit margin on one gallon of ethanol as a result of overcapacity, lower demand, and the increased price of corn, the main feedstock for producing ethanol fuel. The county’s expert proposed decreasing reduction rates, from 45% in 2009 to 35% in 2010 and 25% in 2011. He considered four transactions involving ethanol plants. To determine the EO inherent in each transaction and extrapolate it to the subject facility, he compared the price paid per gallon of capacity to the cost of construction. He also considered overcapacity and deteriorating profit margins.

The tax court rejected the analyses of both experts. It said the company’s expert failed to tie the claimed industrywide trends to its facility and failed to show that the value of “this particular plant declined simply because the market value of other commercial properties declined.” The county’s expert failed to consider the machinery and equipment included in the sales and differences in market conditions, location, and quality of improvements.

Court knows better? The tax court decided instead to quantify EO by comparing demand for ethanol in the U.S. with the capacity to produce ethanol. For two years, there was unused production capacity; there was none for the third year. Since there was no evidence that the company‘s unused production capacity differed from the level of unused U.S. production capacity, the tax court applied U.S. levels as the measure of EO to the case. They were 16%, 8%, and zero percent.

The company appealed the findings to the state supreme court. The high court noted that even though the tax court need not accept the valuation of either side’s expert, it must “adequately explain its rationale and the factual support in the record for its conclusions.” Here, it was unclear why the tax court decided to base its entire EO calculation on capacity alone when both parties’ experts considered capacity as only one factor in the analysis. Also, it was a mystery why the tax court “rejected entirely the decline in ethanol profit margins that both parties’ appraisers found to be a primary consideration in determining external obsolescence,” the high court said. It ordered the tax court to revalue the plant.

Takeaway: In sending the case back to the tax court, the high court noted “the complex and unique valuation challenges in calculating external obsolescence.” If a tax court decides to brush aside expert opinion on EO, it must articulate why it does so and provide evidence that supports its alternative method.

Find an extended discussion of Guardian Energy, LLC v. County of Waseca, 2015 Minn. LEXIS 437 (Aug. 12, 2015) in the November issue of Business Valuation Update; the court’s opinion appears in BVLaw.

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Value of high-profile eateries escapes limelight

It would have been interesting to see how the value of two food celebrities’ restaurants would have played out in their separate high-profile divorce cases, but both cases have now been settled. Bobby Flay and Giada De Laurentiis have announced settlements in their divorces with their respective spouses. Flay’s ex-wife had argued that she was the reason he became wildly successful with his TV shows, cookbooks, and restaurants, which include Bar Americain, Bobby Flay Steak, and Mesa Grill. DeLaurentiis owns the GIADA eatery in Las Vegas. Interestingly, recent reports imply that Flay and DeLaurentiis are linked romantically.

Of course, not all cases end up settling, and the value of a restaurant can often be a bone of contention, whether for a divorce or other matter. Tomorrow (October 15), tune in to BVR’s webinar, Valuing Full-Service Restaurants, presented by expert Lynton Kotzin (Kotzin Valuation Partners LLC).

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More takeaways from SECBA’s Atlanta conference

Here are more takeaways from the annual valuation conference held by the Southeast Chapter of Business Appraisers in Atlanta. The event was co-sponsored by IACVA, and BVR was the sponsor for the CPE. More information on the conference was reported in last week’s BVWire.

Key issues: On Saturday morning, Bob Morrison discussed international valuation issues, focusing on how to factor volatility into country-specific risk and how to incorporate these risks into the cost of capital. He also covered what the international market is looking for from valuation professionals. Sherry Smith used case studies to illustrate the various types of normalization entries to financial statements. She discussed when different types of entries are appropriate and how the courts have ruled. Barry Baker addressed the issues that arise with off-balance sheet items, both assets and the equally sinister liabilities. Specifically, he discussed the valuation of contingent assets and liabilities in both litigation situations and for milestone payments.

In the afternoon, Seth Webber discussed how to deal with several of the most common accounting problems business valuators encounter, illustrating the issues with both a case study and DuPont analysis. Through the case study, he demonstrated different accounting methods used to manipulate financial statements. And to round it out, Jim Lurie covered the topic of the much-misused growth rate. Information collected in the client interview, including a discussion of strengths, weaknesses, opportunities, and threats, should be integrated into the valuator’s process. He discussed how the economy and industry are relevant to the process of assessing a growth rate and the importance of reasoned logic in reaching a relevant conclusion.

Congratulations to SECBA for a fine conference.

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Global BV news:

Brand values of global retail pharmacies

Healthcare is a growing sector and is generating a lot of interest in the valuation profession because of the number of M&A deals and high levels of profitability and valuation multiples. This month’s brand value snapshot from Markables presents trademark comparable data for retail pharmacies. In a benchmarking study, the brand valuations of 14 retail pharmacy brands between 2002 and 2014 in six different countries were analyzed. Firms in this industry typically operate a chain of pharmacy stores. Canadian Shoppers Drug Mart is the largest business in the sample of data. The sample does not include online pharmacies, specialty pharmacies, or chemist’s stores.

Healthy metrics: The interquartile range analysis shows a median trademark royalty rate on revenues of nearly 1.4%, and a median trademark value of 9% of enterprise value, for mean sales multiples of 0.7x revenues and higher (see the table below). Six of the 14 cases have finite useful lives with an average of 11 years. Grocery store chains compare closely to retail pharmacies in certain aspects, such as location, proximity, range of products, and, sometimes, even shared premises. But it is no surprise that retail pharmacy brands show higher brand value multiples than grocery stores—although not by much (0.8% royalty rate, 7% of enterprise value).

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See you at the AICPA FVS conference in Las Vegas?

BVWire will be attending the AICPA Forensic & Valuation Services Conference 2015 in Las Vegas, November 8-10. Seven tracks, special training for fledgling valuation experts, and some excellent preconference workshops highlight this essential event. The tracks are: valuation case study, general valuation, general forensics, hands-on forensics, litigation, cutting edge, and industry. The preconference workshops are: Fair Value Workshop, Surviving Cross-Examination, and the NextGen FVS Professional Workshop (special training for individuals with fewer than five years of BV or forensic accounting experience).

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Preview of the November issue of Business Valuation Update

Here’s what you’ll see:

  • The Black-Scholes Model Can Overvalue ESOs and Other Options (Martin Greene). The Black-Scholes model was not originally intended for many present-day uses. It’s a common formula used to value employee stock options (ESOs) and other options, but it may overvalue those with long holding periods.
  • Key Issues in Debate Over the Cost Approach for Healthcare Intangibles (Mark O. Dietrich and Timothy R. Smith). The interplay of the ongoing controversy over the reliance on the cost approach to value intangibles in the healthcare industry, a recent AICPA white paper, and the ongoing tough government crackdown on fraud in healthcare valuations is explored in this eye-opening article.
  • Compensation Normalization and the Double-Dip: The Discussion Continues (Bryan P. Robertson). The author takes issue with an earlier BVU article on the double-dip concept.
  • Levis Responds to Double-Dip Misconception (Robert W. Levis). A response to the critique of the author’s double-dip article.
  • BVU PROFILE: Insights Into the Business Valuation Profession and Practice in Australia. An interview with John-Henry Eversgerd, a valuator who trained and worked in the US before moving to Australia seven years ago.
  • New Features: Ask the Experts and Tip of the Month. Valuation experts answer puzzling questions and give some practical advice on a wide variety of topics.

To read these articles—as well as digests of the latest valuation-relevant court cases—see the November issue of Business Valuation Update (subscription required).

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BV movers …

People: Jamie Keith has joined Tom J. Keith & Associates Inc. of Fayetteville, N.C., as a business appraiser and will focus on the valuation of going concerns such as sole proprietorships, limited liability companies, and C and S corporations … Bober Markey Fedorovich based in Akron, Ohio, expanded its management team in the firm’s transactions, litigation, valuation, and forensics department with the addition of Bryant Petersen and the promotion of Mindy Marsden … Jason Tuffs was named the new CEO of MNP, one of Canada’s largest accounting firms, succeeding Daryl Richie, who will remain chairman of the board.

Firms: The North Dakota firms Drees Riskey & Vallager, which specializes in services to closely held businesses and agriculture-related entities, and Brady Martz, a regional powerhouse, merged October 1, giving the combined firm 220 people, including 41 shareholders … Expanding its geographic footprint in the Gulf Coast, the New Orleans-based LaPorte CPAs will merge with the Houma, Louisiana firm Beyer, Stagni & Co., effective December 1.

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CPE events

Valuing IP Using Apportionment Models (October 20), with Brian Buss (Nevium Intellectual Property Solutions). This is Part 7 of BVR's 2015 Special Series on Intellectual Property.

Case Studies in Purchase Price Allocations (October 22), with Nathan DiNatale (SC&H Group, LLC).

Valuing Oncology Centers (October 27), with W. James Lloyd (Pershing Yoakley & Associates, P.C.) and Tynan Olechny (PYA GatesMoore). This is Part 6 of BVR's 2015 Special Series on Healthcare Valuation.

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 the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
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In this issue:

Joint FV effort

Court trips over EO

Eatery values

More SECBA recap

Global BV news

AICPA conference

BVU preview

BV movers

CPE events












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