BVWire Issue #157-4 | October 28, 2015


Case of first impression on goodwill in divorce in South Carolina

Goodwill has never been considered a divisible marital asset in South Carolina—until now. Divorce courts throughout the country struggle with how to resolve goodwill issues in divorce cases and whether to include the value of enterprise or personal goodwill (or both) as part of the marital estate. The South Carolina Supreme Court recently jumped into the fray by resolving a novel question related to enterprise goodwill.

Online success: The flashpoint was a retail store that sold high-end light fixtures and home furnishings and accessories. The wife founded and built the business. The husband only got involved in the company in 2005, but he was a driving force behind the company’s decision to shift its focus to online marketing. At the time of divorce, the business made 80% of its sales through the Internet.

Three appraisers (two for the wife and one for the husband) agreed that most of the company’s value was in goodwill. The question was what to do with it. The wife’s first expert maintained that “at least” 20% to 25% of the total goodwill was personal to the wife and not subject to marital distribution. She was the one responsible for day-to-day operations, for ongoing product selection, and for monitoring and updating the website.

The wife’s second expert, a nationally recognized business valuator, said that website layout and product selection were critical if a company selling nonexclusive product on the Internet wanted to stand out because “the competition is fierce [and] the barriers to entry here are rather low.” The wife’s creative approach to the website’s layout and her eye for selecting desirable products were key to converting Internet users from visitors to clients. He called the other side’s claim that anyone could assume the wife’s position and could achieve the same good results a “field of dreams.”

The husband’s expert did not specifically determine personal goodwill but on cross-examination admitted there was “some” of it in the business. How much was “difficult to know,” but it might be between “5% and 10%.”

The trial court adopted the opinion of the husband’s expert in its entirety. It decided to attribute only 10% of the goodwill to the wife as personal goodwill. The remaining 90% of the company’s value, excluding the value of its fixed assets, was enterprise goodwill and included in the marital estate.

Novel question of law: Both sides appealed. The threshold issue was how to deal with the enterprise goodwill of the business, the state Supreme Court said. While South Carolina had a “categorical rule” against the inclusion of personal goodwill in the marital estate, this was the first time the high court was asked to consider “whether enterprise goodwill can be a marital asset subject to division.” The court answered “yes” but did so “cautiously, knowing that today’s decision does not and could not possibly answer the myriad questions that will arise.”

In the instant case, there was “undisputed” evidence that some of the goodwill in the business was personal to the wife. Testimony as to her role and involvement in the business supported her experts’ claims. There also were indications of enterprise goodwill, starting with the website’s domain name, which was associated with the business and not the wife.

The high court found the trial court erred in assigning merely 10% of the overall goodwill to the wife personally, and it adopted most of the valuation the wife’s first expert offered, including the proposed 20% for personal goodwill. At the same time, it ruled that 80% of the goodwill was enterprise goodwill, which was subject to marital distribution.

Takeaway: South Carolina adopted the majority approach, distinguishing between personal and enterprise goodwill. Enterprise goodwill, “which inheres in the business itself and is transferrable in the market,” is a marital asset, the Supreme Court says.

Find an extended discussion of Moore v. Moore, 2015 S.C. LEXIS 343 (Oct. 7, 2015), in the December issue of Business Valuation Update; the court’s opinion will appear soon at BVLaw.

Extra: Attend a webinar tomorrow (October 29) for a wrap-up of recent key valuation-related court cases. R. James Alerding (Alerding Consulting) and BVR’s legal editor Sylvia Golden will conduct BVLaw Case Update: A One-Hour Briefing.

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Some golden nuggets from ASA’s Advanced BV Conference in Las Vegas

BVWire is just back from Las Vegas and the annual Advanced Business Valuation conference of the American Society of Appraisers (ASA). Linda Trugman (Trugman Valuation Associates, Inc.), the international president of the ASA, welcomed the 750 attendees to the event, which was actually two conferences—one for business valuators and the other for appraisers of real estate, gems, art, and antiques. Total attendance was up from two years ago (the last time these appraiser groups got together). Of the total attendees, about 425 were business valuation experts, which is 20% more than last time.

“This is not your father’s ASA,” Bill Johnston (Empire Valuation Consultants), chair of the BV committee, said in his update on what’s going on at the organization. He was referring to current modernization efforts. For example, the ASA is updating many education courses and will have all of its BV certification training online next year. It also has a new technical committee that will put out several papers on technical issues by the end of the year. These are not large papers such as those put out by The Appraisal Foundation or AICPA but smaller ones on niche topics that may be considered controversial. The ASA also has some free webinar forums coming up for members in an ask-the-experts format, the next one being on S corps. Johnston also mentioned the new credential that’s in the works for fair value measurement for public companies in the U.S. The ASA, along with AICPA, RICS, and other stakeholders, are part of the effort by the valuation profession to work together to develop a common set of standards and practices with respect to these new credentials.

Here are some takeaways from some of the early sessions:

  • Keynote speaker G. Scott Clemons (Brown Brothers Harriman) pointed out that current U.S. monetary policy and low interest rates are coming to an end as the Fed mulls a move back to more normal monetary policy;
  • The lack of a clear explanation in a valuation report is a big red flag for IRS agents looking to pull estate and gift tax returns for audit, says Theresa Melchiorre, who is with the IRS Office of the Associate Chief Counsel;
  • If you have questionable management forecasts for an ESOP valuation, ask the trustee to get a quality of earnings report, advises attorney Ted Becker (Drinker Biddle & Reath LLP);
  • Using decision tree modeling instead of traditional probability weighting results in a 20% higher calculation of IP damages, according to a case study presented by John Taylor and Yuka Itami, both with Houlihan Lokey;
  • When valuing complex equity and hybrid instruments, do it in the context of the sale of the security—not the sale of the company, says Amanda Miller (Ernst & Young); and
  • To justify the amount of entrepreneurial profit used in a cost approach for intellectual property, the company’s gross profit margin is typically used, says Mark Zyla (Acuitas).

Next week’s BVWire will continue with more takeaways from this excellent conference. Gary Trugman (Trugman Valuation Associates, Inc.) will chair next year’s conference in Boca Raton, Fla.

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MPAP exposure draft comment period extended to November 30

A session on The Appraisal Foundation’s exposure draft on its control premium standard, The Measurement and Application of Market Participant Acquisition Premiums, was held at the ASA conference in Las Vegas. Dayton Nordin (Ernst & Young), a member of the work group that developed the standard, conducted the session. The public comment period has been extended to November 30, says Jay Fishman (Financial Research Associates), who is co-chair of the TAF’s subject matter expert group on best practices for valuations in financial reporting. The exposure draft contains instructions for submitting comments.

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M&A surge fuels fair value audit deficiencies

Fair value measurement audit deficiencies attributable to mergers and acquisitions activity increased to 49% in 2013, up from 45% in 2012 and an average of 9% from 2008 to 2011. This is according to a new analysis of recent Public Company Accounting Oversight Board inspections from Atlanta-based consulting firm Acuitas. These results suggest that auditors are still having trouble keeping up with the increase in M&A activity in the wake of the financial crisis.

Big picture: Overall, the 2015 Survey of Fair Value Audit Deficiencies finds that 43% of all audits inspected by the PCAOB in 2013 had deficiencies (compared with 16% in 2009), with fair value measurement (FVM) and impairment deficiencies representing 31% of the deficiencies. The number of deficiencies caused solely by failures to assess risk and test internal controls remained high in 2013, at 45% of all deficiencies for the top 25 firms. In comparison, such failures were present in 22% of fair value measurement deficiencies between 2008 and 2012.

“We have seen a significant shift from the years where FVM deficiencies were largely the result of financial instruments to the current trend of business combinations and a failure to test or understand financial assumptions,” Mark Zyla, managing director of Acuitas, says in a news release. “This shift has likely been caused by audit improvements for financial instruments that resulted from the PCAOB inspection process and by increased merger activity in recent years,” he explained. “The auditing community should certainly be concerned about the continuing increase in deficiencies caused by a failure to assess risk and internal controls, and the PCAOB’s assessment that they are caused by ‘a lack of due professional care,’” says Zyla.

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Hospital ducks crippling penalty over FMV of physician pay

When valuing a business arrangement or transaction between a healthcare entity and physicians, the valuation must not include a consideration of anticipated referrals. If it does, the hospital or healthcare system making payments under the arrangement could face huge penalties for making illegal kickbacks to physicians. This was the case of the nonprofit Tuomey Healthcare System in South Carolina, in which an appellate court upheld a $237 million judgment against the hospital.

Settlement: The hospital has agreed to settle with the government for $72.4 million, avoiding a penalty that would have been the largest levied against a community hospital. The $237 million penalty was about double the amount of the hospital’s net assets, so it would have been devastating.

A jury had found the hospital guilty under the Stark Law and False Claims Act of providing illegal kickbacks to a group of local doctors under part-time employment contracts that the government said paid well above fair market value. Although the deals made no mention of referral fees, the government argued that the excess amount was paid to ensure that they would continue to get those fees for clinical procedures. The hospital argued that it had both legal and fair market value opinions that backed up the appropriateness of the employment agreements. However, the jury disagreed, and the appellate court upheld the ruling. The case is U.S. ex rel. Drakeford v. Tuomey, No. 13-2219 (4th Cir. 2015).

The case was originally filed in 2005 by a whistleblower who declined to enter into an agreement offered by the hospital. Under the law, the whistleblower will receive $18.1 million from the settlement.

Extra: A recent BVR webinar included a discussion about the Tuomey case (and others) and issues surrounding the FMV of physician compensation. The webinar, conducted by Mark O. Dietrich (Mark O. Dietrich, CPA, PC) and Timothy Smith (Ankura Consulting Group LLC), is available if you click here (purchase required).

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New royalty rate benchmarking guide from BVR and ktMINE

BVR has recently released the BVR/ktMINE Royalty Rate Benchmarking Guide, 2015 Global Edition, which was produced to help analysts develop an accurate IP portfolio valuation. It contains an analysis of data from the ktMINE database of global licensing transactions in more than 25 industries to help you benchmark IP transactions over a 10-year period. For more details on the guide plus an excerpt, click here.

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Global BV news:

New research offers more accurate way to measure political risk

The standard method of incorporating political risk into the calculation of cost of capital is flawed, according to a new paper. The authors offer an alternative procedure to more accurately reflect political risk in a net present value (NPV) analysis.

Double counting: The paper, “Political Risk and International Valuation,” is by Geert Bekaert (Columbia Business School), Campbell R. Harvey (Duke University), Christian T. Lundblad (University of North Carolina), and Stephan Siegel (University of Washington). The authors explain: “One popular approach [to measure the impact of political risk] is to assume that the sovereign yield spread captures political risk and to augment the project discount rate by this spread. We show that this approach is flawed. While the sovereign spread is influenced by political risk, it also reflects other risks that are likely included in the valuation analysis—leading to the double counting of risks. We propose to use ‘political risk spreads’ to undo the double counting in the evaluation of international investment projects.”

This paper is posted on the website of the Social Science Research Network, where you’ll find all kinds of interesting research being done related to business valuation. Economics and finance are considered to be social sciences, so they fall under the realm of SSRN.

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BV movers . . .

People: Tim Christen, chairman and CEO of Baker Tilly Virchow Krause, was elected new chairman of the board of directors of the American Institute of CPAs … Michael Kerwin, partner at Stephano Slack LLC, was named as one of this year’s top 10 rising stars in the public accounting profession in Pennsylvania by the National Academy of Public Accounting Professionals … Alfred Pruskowski, former partner in charge at Rosen Seymour Shapss Martin & Co., has joined Prager Metis CPAs as a partner in the Forensic Accounting and Valuation Services Group and will be based out of the firm’s New Jersey office in Basking Ridge … Srikant Sastry, national managing principal of advisory services at Grant Thornton LLP and based in the Alexandria, Va., office, was honored as business leader of the year by the Alexandria Chamber of Commerce.

Firms: In last week's “BV Movers,” we had the incorrect location listed for Raiche & Co. CPAs. The firm's correct location is Rochester, N.H. … McGladrey LLP has changed its name and rebranded itself to RSM US LLP.

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CPE events to kick off November

Valuing Real Estate Holding Companies: A Deeper Look at the Underlying Data with Case Study (November 3), with Russell Glazer (Gettry Marcus CPA, PC).

Valuing Clinical Co-Management Arrangements (November 5), with Gregory Anderson and Schaeffer Smith (both with Horne LLP). This is Part 7 of BVR's 2015 Special Series on Healthcare Valuation.

DLOM: Volatility Models and Restricted Stock Discounts (November 10), with John Stockdale (John Stockdale Business Valuations). This is Part 1 of BVR's 2015 Special Series on Discounts for Lack of Marketability.

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:

Goodwill in divorce

ASA takeaways

MPAP comments

FV audit troubles

FMV of physician pay

IP benchmarking

Global BV news

BV movers

CPE events












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