Last week’s BVWire covered the 9th Circuit decision in the Amazon case that affirmed the U.S. Tax Court’s 2017 decision in favor of the company in a transfer pricing case. The IRS had challenged the valuation of certain profitable intangibles, including website-related technology, marketing intangibles, and customer lists and related information the company had transferred to its European subsidiary. Valuing the intangibles, experts for the company used the comparable uncontrolled transaction (CUT) method to whittle down market transactions into those that most closely compare to the subject.

Inside look: An article, “Three-Step Analysis to Manage the ‘Noise’ in IP Royalty Rate Data,” contains details of the CUT method used by Robert Reilly (Willamette Management Associates), an expert in the case for Amazon. He found over 7,700 agreements in his initial search of the ktMINE database and identified 865 to be in the “marketing intangible” category. Narrowing his search to the retail and internet industries yielded 167 agreements, all of which he reviewed to find CUTs. To do this, he used a three-step approach where you: (1) eliminate; (2) adjust; and (3) assess the data. In the end, he selected six comparables to determine a royalty rate.

The article, with a hypothetical example (using real-world data), is available as a complimentary download (click on the article title above—free registration required for new visitors). It originally appeared in Business Valuation Update, and BVU subscribers already have access to this article as part of a searchable archive of over 20 years of articles that represent the collective wisdom and practical advice from the top experts in the valuation profession.

Calculation engagements receive mixed reactions from courts

If the appraisal profession is conflicted over the validity of calculation engagements, so are courts, as a brief review of court decisions on the BVLaw platform shows. Courts have responded in different ways to questions about the reliability and usefulness of calculation engagements depending on the circumstances of the case. The cases do not offer a bright-line rule that appraisers can follow; acceptance seems to be situational.

In Rohling v. Rohling, an Alabama divorce case that centered on the valuation of the husband’s dental lab, only the wife offered expert testimony from a certified valuation and financial forensics analyst. The expert worked pursuant to a calculation engagement. The trial court rebuffed the husband’s efforts to discredit the testimony, noting the expert was well qualified to provide an opinion based on the requirements of a calculation engagement as well as a valuation engagement and he used “methods recognized and accepted by [the] accounting industry for accountants conducting ‘calculation engagements.’” Importantly, “the Husband did not employ his own expert or pay the increased fee to [the expert] to conduct the more rigorous ‘valuation engagement.’” The appeals court affirmed.

In an article in the November 2019 BVU, Michael Paschall (Bannister Financial), a critic of the use of calculation engagements, says, “[T]he case does not represent a legitimate victory for calculation engagements as much as a win by forfeit.” He warns, however, that it “represents further evidence of ‘calculation creep’ in the business valuation field.”

In Surgem, LLC v. Seitz, a 2013 New Jersey appellate ruling on a buyout dispute, the court rejected the defendant expert’s calculation of value. The expert testified that the defendant had not provided the materials necessary to perform a valuation and said “more work should have been done” to prepare a fair valuation of the company. Importantly, the plaintiff offered countervailing expert testimony. The plaintiff’s expert said the opposing expert’s per-share price was an “arbitrary amount” based on unreliable projections. The trial court noted that, by the defense expert’s own account, the work fell far short of an “actual fair valuation of [the company].” Upholding the trial court’s ruling, the appellate court said the lower court had given sound reasons for rejecting the calculation of value.

In contrast, in Hipple v. SCIX, LLC, a 2014 case litigated in federal district court, the former wife sued her ex-husband and his business for fraudulent transfer of the company’s assets and the proceeds of the assets. She offered expert testimony on the value of the company’s assets. The expert had done a calculation of value, explaining that he had limited information about the company’s financials and therefore was not able to do a full appraisal. The defendants filed a Daubert motion to exclude the testimony, which the court denied. It found the AICPA approved of both calculation and valuation engagements and there was no reason to prevent the trier of fact from hearing the expert’s testimony. The expert explained why he did not perform a full valuation. Questions about the specifics of the testimony went to weight not admissibility, the court decided.

Finally, in A.C. v. J.O., a 2013 New York divorce case, the husband offered a preliminary report from a financial expert who had done valuations of the wife’s professional practice at the beginning of the divorce proceedings, while the wife still cooperated with the expert. The expert explained that he never had been authorized to do work beyond the initial report. Had he prepared a final report, he would have audited the spouses’ books and records to confirm the accuracy of the earlier information.

When the wife contested the validity of the preliminary appraisal, saying it was only a “calculation report,” the trial court noted the expert was qualified and his work was preliminary because the wife had decided to stop cooperating. Her uncooperative attitude should be held against her interests, not the husband’s, the court found.

Digests of the cases discussed above and the courts’ opinions are available at BVLaw.

DealStats adds 35 new fields of data, other enhancements

As of October 16, DealStats, the leading database of transactions in the private and public sectors, will have 35 new fields of data, including:

• Up to four years of historical net sales, SDE, and EBITDA values;

• A next-year forecast of net sales, SDE, and EBITDA;

• Up to four years of historical net sales growth figures and profit margins;

• A next-year forecast of growth and profit margins; and

• Metrics related to the acquired company’s leased property (including sales per square foot, rent/EBITDAR, rent/sales, and more).

DealStats was launched in 2018 and combined Pratt’s Stats and Public Stats into one database that now has over 30,000 private-company and 4,000 public-company transactions. With this latest update, the platform now includes 4,000 transactions with historical/forecast growth and profit margin information, as well as 18,000 transactions with the additional leased property information.

The user experience has also been enhanced with a modified Excel export file so that the field names properly wrap when columns are resized. You can find a new mapping file on the DealStats FAQ page. Also beginning October 16, DealStats will implement new download limits on all single-user accounts, but these limits will affect very few users.

How to address cyber risk in a business valuation

According to Inc. Magazine, 60% of successful cyberattacks force the target business to close. This is a material risk that needs to be considered and captured in a business appraisal. Do you put it into company-specific risk for the income approach? Adjust multiples for the market approach? Treat it as a contingent liability? Use option models? How have stock values been impacted due to public-company breaches? All this—and more—will be discussed during ‘Don’t Make Me Call Security!’: How to Consider Data Security in a Business Appraisal, a webinar on October 30. The presenters will be appraiser Mike Blake (Brady Ware & Co.) and cybersecurity expert Charles Hoff (Data Security University).

BVR is pleased to sponsor the Tennessee Society of CPAs Forensic and Valuation Services Conference October 21-23 in Brentwood (just south of Nashville). There is a terrific lineup of speakers and topics of interest to valuation experts. Here are a few:

• Robert Vance (Forensic & Valuation Services PLC) will do a session dealing with goodwill, Goodwill in a Tennessee Divorce—You’re Making It Personal, and also participate in a panel on goodwill. He will also do Complex Divorce Applications From Report to Testimony.

• Dermot O’Neill (P. Dermot O’Neill, CPA PC), will do a double session, Lost Profits—Are the Damages Reasonable?

• Ronald L. Seigneur (Seigneur Gustafson LLP), will do two sessions: BVR’s Cost of Capital Professional: What Is It and How to Use It? and Emerging Issues in the Cannabis and Hemp/CBD Industries: Hot Buttons, Lessons Learned and Challenges.

• Kevin R. Yeanoplos (Brueggeman and Johnson Yeanoplos PC) will present Stranger Things: The Hidden Horrors of Determining Reasonable Compensation and will do a session on the new tax law, Back to the Future: The Impact of the TCJA Revisited.

• Harold G. Martin (Keiter) will discuss the three major sources for empirical cost of capital data in his session, Cost of Capital—1, 2, 3, and will also present Professional Judgment in Valuation Engagements.

• Scott A. Womack (Mercer Capital) will discuss the important S corp tax-affecting case in his session, Will Kress v. US Change Your Life? Or Will It Change Your Valuation Practice?

Check out the full agenda if you click here. Can’t attend in person? No problem—you can sign up for live streaming.

Extra: BVR’s Shelly Seger will be at the conference to answer questions on any BVR products, including the Cost of Capital Professional and its newest offering, the Valuation Benchmarking Platform.

At the annual general meeting of the International Valuation Standards Council (IVSC) in Singapore, the organization, its members, and sponsors thanked Sir David Tweedie as he stepped down after seven years and two terms as chair of the board of trustees. Tweedie joined the IVSC in 2012, following more than a decade leading the International Accounting Standards Board from its inception in April 2001. “His commitment and dedication to standard setting has seen the International Valuation Standards now translated into ten languages and applied in more than 100 countries,” says the IVSC in a statement. “We are immensely grateful to Sir David for his energy and dedication to the IVSC and the global valuation profession over the last seven years,” says IVSC CEO Nick Talbot. “He departs with the IVSC in a great position, working with our members and sponsors, to further elevate the valuation profession in the public interest.”

Former UK Chancellor of the Exchequer Alistair Darling will be the new board chair. Darling brings further celebrity and visibility to the business valuation and financial instruments standards world, having served as chancellor during the last economic crisis from 2007 to 2010. And he embodies the organization’s commitment to building confidence in valuations. When he joined the board earlier this year, Darling’s initial response to the appointment was this: “Getting valuation right matters,” he said. “Valuation data plays a vital role in so many aspects of the global financial system. It acts as an enabler for prudent business and investment decisions, as an important element of company financial reporting, and as part of the mechanism for managing macro prudential risk.” Darling also held UK ministerial roles at Treasury, as Secretary of State for Work and Pensions (1998-2002); Transport (2002-06); and Trade and Industry (2006-07). He was appointed to the House of Lords in 2015.

Here’s what you’ll see:

• “BVR and Duff & Phelps Cost of Capital Platforms Go Head-to-Head at VSCPA” (BVR Editor). Both platforms give similar results when estimating the cost of capital for private firms. They were put through their paces at a recent conference presented by the Virginia Society of CPAs.

• “Highlights of 2019 Delaware Valuation Decisions” (Gilbert E. Matthews, Sutter Securities, Inc.). This year to date has been another active period for valuation cases in the Delaware courts. Six cases are reviewed, and the predominant theme is that, in arm’s-length transactions, appraisal value continues to be based primarily on the transaction price rather than on discounted cash flow.

• “Do You Really Know Your Data for Determining Discounts?” (Carsten Hoffmann and Philip Schwab, Stout). A popular data source used in determining discounts for asset-holding entities is analyzed. An advanced understanding of the data is critical in order to avoid overvaluing your client’s investments by understating the discounts.

• “Tales From the Trenches: Buildup Approach: The Data May Be Correct, But Is the Conclusion Appropriate?” (Robert E. Kleeman Jr., OnPointe Valuation). This is an article in a series of valuable lessons to be learned based on the experiences of seasoned valuation experts. While you may be able to find some of this advice in books, only real-life experiences can highlight the nuances that can only be found in the minds of the experts who have lived through many engagements.

• “Rohling the Dice With a Calculation Engagement” (Michael Paschall, Banister Financial Inc.). In a divorce case in Alabama, an appeals court affirmed the trial court’s acceptance of a calculation engagement. But the case does not represent a legitimate victory for calculation engagements as much as it represents a win by forfeit.

• “Survey of Daubert Challenges to Experts Suggests Red Flags to Avoid” (BVR Editor). In 2018, appraisers had the lowest exclusion rate among all types of financial experts facing a Daubert challenge, reveals the current edition of an annual PwC survey. The article also presents some tips on how to avoid a challenge.

The issue also includes:

• An expanded section of “BV News and Trends/Global BV News and Trends.”

• Regular features: “Ask the Experts” and “Tip of the Month.”

• BV data spotlight: “DealStats MVIC/Revenue Trends,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and “Stout Restricted Stock Study and DLOM Calculator.”

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the November issue of Business Valuation Update.

BV movers ...

People: David Larsen, managing director in Duff & Phelps’ Alternate Asset Advisory Service practice, and Greg Franceschi, managing director and global leader of the firm’s Financial Reporting Practice, have been appointed to the AICPA working group responsible for updating the AICPA Valuation of Privately-Held-Company Equity Securities Issued as Compensation—Accounting and Valuation Guide … Alex Martin has joined Pasadena, Calif.-based KBKG as a principal to lead the firm’s new transfer pricing practice for cross-border businesses … Stuart McCallum, ASA, has joined Chattanooga, Tenn.-based Henderson Hutcherson & McCullough as a partner in the firm’s Management Advisory Services (MAS) department … Westborough, Mass.-based AAFCPAs has expanded its cannabis practice with the addition of Kevin Michaelan, MST, CPA, who will lead the growing niche from the firm’s Boston office … The AICPA recently awarded Dave Gilmer, a CPA valuation expert with JCCS PC in Montana, the Accredited in Business Valuation (ABV) credential; he is director of tax, shareholder, at the firm’s Missoula office … FTI Consulting Inc. has appointed Marion Duffy as a managing director in the SEC Accounting & Advisory Services practice within the firm’s Forensic & Litigation Consulting segment; she will be based in the firm’s San Francisco office.

Firms: Timonium, Md.-based KatzAbosch announced that Maureen McCarthy and her healthcare consulting firm, Medical Business Advisors, have joined the firm’s medical practice service group … Atlanta-based Aprio LLP has combined with Administrivia, an outsourced accounting firm in Atlanta … Chicago-based UHY Advisors has opened a new office in Melville, N.Y., to serve its Long Island clients in technology, financial services, manufacturing and distribution, real estate, and professional services; the new office covers about 6,000 square feet, including 20 workspaces … Chicago-based Crowe LLP opened its first office in Houston to accommodate its growth in Texas and the South, bringing its total offices to 41 … Naperville, Ill.-based Sikich has agreed to acquire Freyberg Hinkle Ashland Powers & Stowell, a CPA firm in Brookfield, Wis.; the transaction is scheduled to close November 1.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

• Demystifying the Complex World of Discounts for Lack of Marketability (October 24), with Pasquale Rafanelli (Empire Valuation Consultants).
  
  Valuation experts have almost 75 methods to choose from for estimating a discount for lack of marketability (DLOM). This session will go over the most prominent methods, when they should be applied, and how to apply them.
  
  

• Healthcare Valuation Legal Check Up: Top Issues, Cases, and Hot Topics (October 29), with Joe Wolfe (Hall Render Killian Heath & Lyman). This is part of BVR’s Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance.
  
  In the healthcare industry, the government is still very aggressive in pursuing Stark Law and False Claims Act violations. Get an update on what’s going on with these and other regulations that impact valuations in this industry.