BVWire attended the ASA 2020 International Appraisers Conference held online October 12-13, and it was about as close as you could get to the experience of actually being on-site. The platform (vFairs) had a great “look” to it and was very easy to use and hook up with colleagues. From a virtual lobby, you could head into the session rooms or wander into the exhibit hall or the networking lounge. The sessions were excellent as well. Here are just a few takeaways of note:

1. New PAPM model builds on CAPM. In an interesting session, Roger G. Ibbotson (Yale, Zebra Capital Management) presented the popularity asset pricing model (PAPM), which builds on CAPM. The PAPM model assumes that equity prices are established for many reasons and that any attribute that makes a stock “more popular” makes it more desirable, which reduces its future expected returns. Ibbotson co-wrote a monograph on this, which you can read if you click here.
   
2. Watch out for the ‘big market delusion.’ The allure of a big market for an emerging business is hard to resist and causes “irrational exuberance” that initially overprices companies and triggers an inevitable correction, according to Bradford Cornell (UCLA). The lesson for valuation professionals is that pricing based on multiples and the peer group can lead to significant overpricing. Cornell co-wrote a paper on this with Aswath Damodaran (New York University—Stern School of Business), which you can access if you click here.
3. Rethink your long-term growth rate assumptions. Are you using a long-term growth rate based on real GDP growth plus inflation? The trouble is, GDP includes both existing firms and new firms, whose growth is driven by acquisition. The expected long-term growth rate in the terminal value should reflect organic growth, so the effect of the acquisitions should be backed out. That’s what new research by Roger Grabowski (Duff & Phelps) and Ashok Abbott (West Virginia University) has done, and they also reveal that all industries do not grow at the same rate. They have a paper in the works but wanted to share their important findings with the ASA audience.
4. Research underway on impact of voting rights on value. The experts at Houlihan Lokey are conducting new research into discounts or premiums for voting rights. In their session, the firm’s John Taylor and Yuka Itami went over the findings to date, which appear to indicate that a discount for lack of voting rights may not exist in the marketplace. A member of the IRS was in the audience and commented that he regularly sees a 3%-to-5% discount in taxpayer appraisals for small nonvoting interests. But, based on the new research, should there be no discount applied if, say, a company was valued using a GPC methodology? While the researchers did not see the need to apply a discount or premium in the particular cases they examined, they noted that each case is different and the decision would be dependent on the specific facts and circumstances.
5. FASB deliberating on goodwill project. An important but controversial project by the FASB concerns how to account for certain identifiable intangible assets acquired in a business combination. The FASB is looking at whether annual goodwill impairment tests should be eliminated for public companies and whether to subsume other assets into goodwill (see our last coverage here). Joy Sy, a supervising project manager at the FASB, reported that the board will continue to deliberate on varying approaches into 2021 and is monitoring a project on the same topic launched by the International Accounting Standards Board. She also noted that, while the scope of the project focuses on public entities, the FASB board will also look at whether or not a new model would make sense for all entities.

More coverage of the ASA event will be in the December 2020 issue of Business Valuation Update. Next year’s conference is scheduled to be held in Las Vegas Oct. 25-26, 2021.

Court of Chancery sanctions use of asset approach in complex appraisal case

A low-profile appraisal case in front of the Delaware Court of Chancery raised important valuation questions, including how the court should determine the fair value of a nonoperating entity and how it should deal with the value of claims both parties brought on behalf of the company prior to the contested merger. One party’s BV expert was well-credentialed and credible, but the opposing expert proffered a valuation that was “not suited for the task at hand,” the court said.
 
Squeeze-out merger: This long-running litigation involved a daycare center that the petitioners, Medhat and Mariam Banoub, set up in 2002 at the urging of and with funding from an Egyptian businessman, Boraam Tanyous. Tanyous was the majority shareholder, and the Banoubs were minority shareholders. He provided most of the capital, and they ran the facility’s day-to-day operations, from 2002 until 2008.

Communications and recordkeeping problems existed early on. In 2007, Tanyous sued over inspection of the books. After this litigation closed in July 2008, Tanyous promptly replaced the Banoubs with his own family members. Each side asserted claims of wrongdoing against the other side, alleging damage to the company.

After the Banoubs’ departure, the center’s financial performance worsened and it ran into compliance problems with the state regulatory agency. In August 2012, Tanyous unilaterally executed a merger of the company into another entity. The Banoubs’ shares in the company were cancelled, and Tanyous offered to buy them out for $8,500. They declined and petitioned for statutory appraisal. The squeeze-out merger gave rise to the court’s review under the heightened entire fairness standard.

Also, in mid-August 2012, the facility closed down operations. A month later, the state revoked its operating license. A few months earlier, Tanyous decided to lease out the facility’s real estate for a year and to decide whether to reopen the facility later.

Bring in a specialist: The court said the case was “complicated” in that it combined the petitioners’ statutory appraisal claim with an additional entire fairness claim. But it said, regardless of different “analytical rubrics,” ultimately the question asked was the same: Was the merger price was fair? Another consideration was that, under the applicable statute, the company must be valued as a going concern based on the operative reality at the time of the merger. Here, the center was not operational at the time of the merger and its future business model was uncertain.

Tanyous’ expert valued the company one month prior to the closing of the merger (the valuation date) under a capitalization of earnings approach and net asset value approach. Weighting the results equally, he achieved a fair value for the company’s equity of $85,400. He explained the use of the asset approach by noting the facility was not operating as a daycare center at the time of the merger. Its “only significant asset” was a parcel of real estate with improvements. The court agreed with this analysis and the weighting. It also noted, with approval, that the expert, recognizing he lacked expertise in real estate valuation, brought in a real estate appraisal expert.

The Banoubs’ expert said he “determined [total fair market value] on a going concern basis stated as the gross asset value of the Company’s Tangible and Intangible Assets.” The court noted the valuation was as of 2008, even though the merger date was August 2012. Also, the statute requires a fair value determination. According to the court, he “solved for the wrong problems.” It also found problematic that the expert decided to value the real estate himself, although he “admittedly lacks that expertise.” The expert valued the company’s assets at $790,600. “I have no confidence in these assessments,” Vice Chancellor Slights said.

Finally, the court noted a fair value determination had to account for the value of the parties’ premerger damages claims as none of the claims arose out of the merger. The claims were assets of the company on the merger date and, in a statutory appraisal, were a “relevant factor” the court would consider. Accordingly, before calculating fair value, the court adjudicated and valued the parties’ competing claims and incorporated their values into its calculation. In Step 2, the court adjusted the petitioners’ appraisal recovery to account for the liability they had to the company.

A digest of In re Happy Child World, Inc., 2020 Del. Ch. LEXIS 302, 2020 WL 5793156 (Sept. 29, 2020), and the court’s opinion will be available soon at BVLaw.

Food for thought in BVR’s new guide to valuing restaurants

There is no magic formula for doing valuations for firms impacted by the pandemic—especially in the hard-hit restaurant sector. It takes a back-to-basics approach steeped in fundamentals laced with a much greater dose of professional judgment. To help you with this, BVR’s new guide, What It’s Worth: Valuing Full-Service Restaurants, gives you the tools you need to build a foundation on which to develop a valuation in today’s volatile environment. The report includes a special section on what to think about in terms of the impact of the virus, such as how to dig deeper into the operations, modifying the DCF, adjusting pre-COVID-19 market multiples, analyzing and layering in the extra risks, and more. The report also gives you the fundamental value drivers for full-service restaurants, case studies, historical market trends, and sources of the best industry data. True, your valuation today will be much more difficult than before, but this new guide will help make it just as reliable as ever. You can take a look at the table of contents if you click here.

Free webinar to unveil new Control Premium Study platform

Mark your calendar for November 5 for the very first look at BVR’s new Control Premium Study platform. The architects of the new platform will cover the basics of the control premium study, discuss the basics of the data, the move to the new platform, and how to use it to get the data you need. The webinar is free and qualifies for one CPE credit. For more information and to register, click here.

New book on Colorado valuations for family lawyers and judges

The Financial Expert Guide for Family Law Judges and Attorneys, Colorado edition, goes a long way toward educating triers of fact, attorneys, and experts on the key valuation cases and legal principles in Colorado. The book provides the fundamentals of business valuation concepts in family law cases, the essentials of attorney-expert coordination, and the critical techniques and approaches for supporting or attacking a valuation report in court. The book’s authors are attorney John H. Tatlock, Esq. (Epstein Patierno LLP), and valuation experts Ronald L. Seigneur (Seigneur Gustafson LLP) and Kevin R. Yeanoplos (Brueggeman and Johnson Yeanoplos PC). For more information and to order, click here.

Significant variations in Europe regarding intangibles accounting

A new survey reveals that there are significant variations between jurisdictions in Europe in the accounting treatment of intangibles by small and midsize enterprises (SMEs). While there is overall agreement on the treatment of purchased intangibles, it’s another story for internally generated intangibles, with some jurisdictions requiring capitalizing such costs. The report includes a nice country-by-country chart that shows the accounting treatment for various types of intangibles by entity size. “Against a backdrop of the growing importance of intangibles, for regulators and legislators there is clearly scope for improving comparability between European company accounts by increasing the harmonization of the treatment of intangibles by SMEs,” the report says. Issued by the European Federation of Accountants and Auditors for SMEs, the report, “The Financial Reporting of Intangibles by SMEs in Europe,” is available if you click here. Our thanks to Marianne Tissier of Valuology for alerting us to this report.

BV movers . . .

People: Carla Nunes, managing director and head of the valuation digital solutions group at Duff & Phelps, has been named a Duff & Phelps Institute Fellow; the institute provides thought leadership on issues related to fairness, integrity, ethics, transparency, and good global citizenship—with the goal of sustaining equitable markets, responsible business decisions, and sound public policy … Angela Sadang, principal and valuation practice leader at New York City-based Marks Paneth LLP, has been named to Crain’s third annual list of “Notable Women in Accounting and Consulting.”

Firms: CliftonLarsonAllen LLP is adding Irvine, Calif.-based White Nelson Diehl Evans LLP in a deal expected to close on November 1; this will increase CLA’s southern California team to more than 300 people … In Canada, Calgary, Alberta-based MNP, looking to expand its reach in south central Ontario, has acquired local firms Furtney Crysler and PJ Partners … Miamisburg, Ohio-based Brixey & Meyer Inc. has acquired LAMP CFO & Accounting Services of Galena, Ohio … Warren Averett LLC has launched Warren Averett Engage, which allows the firm to conduct remote services and host collaboration with clients, all in a virtual environment.

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

CPE events

• Family Matters: Standard of Value, DLOM/DLOC Discounts and Drama in BV. October 28, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Ronald Seigneur (Seigneur Gustafson LLP), Stacey Udell (HBK Valuation), and Neil Beaton (Alvarez & Marsal).

A new court case involving a buried body and sex surrogates kicks off a compelling discussion of key issues in valuing family-owned businesses.

• American Business Appraisers and BVR Annual Key Issues Update. October 29, 10:00 a.m.-2:00 p.m. PT/1:00 p.m.-5:00 p.m. ET.

This special four-hour webinar recaps all the key issues in business valuation this year, including some best practices that have emerged concerning the impact of COVID-19.