September 11, 2013 | Issue #132-1  

Private firms linger longer on the selling block

A newly updated analysis of data from BVR’s Pratt's Stats reveals that the time needed to market and sell a privately held business is 211 days, up from 200 days in the previous analysis.

Population studied: The latest annual update of an ongoing study, Marketing Period of Private Sales Transactions, examines a database of 7,928 private company sale transactions from BVR’s Pratt's Stats database. The population of the transactions occurred from February 1992 through the end of 2011. For each transaction examined, there’s an associated Standard Industrial Classification (SIC) code, sale initiation date, sale closing date, and asking price. The annual study, conducted by Vianello Forensic Consulting, LLC, also analyzes over 10,000 private sale transactions from the BIZCOMPS database.

The business valuation concept of marketability deals with the liquidity of the ownership interest. How quickly and with what certainty an owner can convert an investment to cash are two very different variables, but they work together when determining the value of an investment. For immediately marketable investments, the value of illiquid investments (regardless of the level of value) must be discounted to reflect the uncertainty of the time and price of sale. This uncertainty is reflected in business valuations by the discount for lack of marketability (DLOM).

Many factors contribute independently to the length of time it takes to sell a privately held business. Business appraisers should explore certain key contributors, which the study examines, when reaching conclusions about marketing periods.

A future issue of Business Valuation Update will present the key findings from this study.

Progress report on BV-related rules and guidance

Several developments of note are in the works concerning valuation-related rules and guidance.

Fair value: During this month, a post-implementation review (PIR) team will survey stakeholders about the application and effectiveness of FASB Statement 157, Fair Value Measurements, according to the Financial Accounting Foundation. Statement 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements, is currently being reviewed.

Customer-related assets: Finishing touches are being applied to the exposure draft concerning customer-related assets, which was issued as a discussion draft, The Valuation of Customer-Related Assets, in June 2012 by The Appraisal Practices Board of The Appraisal Foundation. The exposure draft will provide guidance on the valuation of customer-related intangible assets. The exposure draft will most likely be issued in mid-October or so.

Leases: Valuation experts will see very different-looking income statements and balance sheets under proposed changes designed to unite lease accounting around the world (see the May 22 issue of BVWire). The FASB and the IASB are holding several joint public round-table meetings during September and October on their revised joint proposals on leases that were published in May 2013: the revised proposed FASB Accounting Standards Update, Leases (Topic 842), and the IASB’s Exposure Draft, Leases. For more information, and to register, go to the Leases project pages on the FASB and IASB websites.

In Daubert attack, valuation expert portrayed as mere mouthpiece

Valuation experts often build on someone else’s assumptions to make reliable calculations. But can an expert simply evaluate and validate information from others without testing the underlying assumptions or doing an independent analysis? A recent lost profits case illustrates.

The plaintiff, a manufacturer of marine hoist and industrial lift equipment, sued the defendant in federal court (E.D. Wis.) claiming it had breached the parties’ distribution agreement and misappropriated trade secrets and confidential and proprietary information. It retained an economist with significant academic research and teaching credentials as well as 30 years of experience as an independent expert on economic damages. His assignment was to opine on “potential lost profits and damage to goodwill” the plaintiff was “likely” to incur in the future. This meant assessing the “principles and methods of forecasting” the plaintiff’s CEO and CFO had used to calculate loss exposure and lost sales that ranged from $564,000 to $4.1 million.

Just a ‘mouthpiece’: The forecasts reflected a “reasonable, accurate and reliable methodology for assessing potential business damages,” the expert said. He added that the plaintiff “also faces a significant risk of loss of its business goodwill.” He did not question any of the assumptions the executives used and did not outline any valuation for the claimed goodwill damages. He also did not investigate whether the plaintiff sustained actual damages—even though the alleged wrongdoing occurred 18 months previously.

In its Daubert motion, the defendant claimed the expert was simply there to serve as the plaintiff’s “mouthpiece” and that his opinion lacked sufficient facts, data, and independent analysis. The court agreed, calling his testimony irrelevant and unreliable. The expert only spoke to “potential business damages,” the court stated with emphasis. Evidence that the plaintiff actually will suffer damages as a result of the alleged wrongful disclosure is relevant, but “evidence that it might suffer such a loss is not.” As to reliability, he “offered no basis within his knowledge or experience” to support the executives’ key assumptions, including a projected 26% loss exposure.

Finally, the court dismissed the plaintiff’s argument that the expert had a right to rely on the executives’ loss exposure calculations and sales projections because they themselves would testify as experts at trial (and, as such, submit to cross-examination). That was not the issue, the court said. Rather, the question was whether the expert could offer the executives’ projections as his own opinion. Based on the facts, the court said “no.”

Find an extended discussion of Marine Travelift, Inc. v. Marine Lift Systems, Inc., 2013 U.S. Dist. LEXIS 91268 (June 28, 2013) in the October Business Valuation Update; the opinion will be available soon at BVLaw.

Deadline extended for TAF’s new BV panel

The Appraisal Foundation has extended the deadline for accepting applications from volunteers to serve on two resource panels that will report to the board of trustees: the Business Valuation Resource Panel and the Personal Property Resource Panel.

The purpose of the panels is to preserve and improve the public trust in valuation. They will also provide a permanent forum for assembling representatives from diverse backgrounds within each of these two disciplines of valuation, so that the board of trustees: (1) has a centralized, ongoing facility for communication with representatives of the two disciplines; and (2) benefits from information, advice, and recommendations these resource panels develop on issues relevant to these disciplines.

There are up to 10 vacancies on each panel, and terms will last approximately one year. Completed applications must be received by the new deadline, Sept. 20, 2013. For more information and an application, click here.

Summer’s over, but CPE season is here

It’s back-to-school time, and we’ve got a slate of CPE events designed to get you up to speed on some very interesting topics.

On September 12, in S Corps … What a Long, Strange Trip It’s Been, expert appraiser Nancy Fannon (Meyers, Harrison & Pia) traces the history of thought on pass-through entity valuations through the courts, academic research, and various appraisal models to show how the elusive goal of a simple, sound valuation model may be within reach. Attendees will hear that, given the “long, sordid history of ‘it,’” “it” may simply be a cost of capital issue.

During September, we present two installments in BVR’s Advanced Webinar Series on Business Valuation in Divorce. On Friday, September 13, Double Dipping: Incomes, Assets, and Double Counting in Divorce features Stacy Collins (Financial Research Associates), Donald DeGrazia (Gold Gerstein Group), and Adam John Wolff (Kasowitz Benson Torres & Friedman). Attendees will learn how to recognize and avoid the double counting of incomes and assets—so-called “double dips”—as well as what courts have said on the issue.

Then, on September 20, BVR welcomes series curator James Alerding (Alerding Consulting) for Goodwill in Divorce Valuation: Personal, Entity, and the Difference Between. This program will address perhaps the most common challenge in divorce valuation, along with what appraisers can learn from recent court cases and professional guidelines.

Turning to healthcare, Valuing Dialysis Clinics features expert Jim Lloyd (Pershing Yoakley & Associates), who joins BVR for a look at the appraisal challenges inherent in a highly regulated industry, dependent on a variety of patient reimbursement models, and at the mercy of patient mix, geographic location, and relationships with local nephrology practices. This program, taking place on Tuesday, September 24, is Part 9 of BVR’s Online Symposium on Healthcare Valuation.

Valuing cannabiz in wake of new DOJ memo

The Department of Justice will no longer target firms in the legal marijuana business—cannabusinesses—if they are in states that legalize and regulate the drug. A recent DOJ memo says that even though the drug remains illegal under federal law, the agency will not prosecute recreational and medical marijuana dispensaries in states that implement strict and effective controls. Some see this as a major step toward ending the prohibition against marijuana.

Still some conflict: “Prior to this guidance there appeared to be a conflict between federal and state marijuana laws,” Jim Marty (Jim Marty and Associates, LLC) tells BVWire.  “Now, that conflict appears to be resolved, at least in terms of this guide to the exercise of investigative and prosecutorial discretion.  The conflict now is now between two branches of the federal government: the DOJ, which finds state regulations on legal marijuana helpful in meeting its priorities, and the Department of the Treasury, which still considers state legal marijuana sales to be drug trafficking.”

What it means:  In terms of valuation, this new development, which follows the recent legalization of cannabis in Colorado and Washington, has triggered opportunities, challenges, and obstacles—but has prompted many questions. For instance, how can an appraiser assign value in a newly legalized marketplace? Can previously black-market transactions be comparable, let alone admissible?  How do you quantify the risks associated with a product in a hazy and challenging regulatory environment?

Marty and Ronald Seigneur (Seigneur Gustafson LLP), two Colorado-based financial experts, will address these issues in depth in an upcoming webinar, Valuing Marijuana Dispensaries, on October 24. It’s a rare chance to learn the dangers of valuing sellers and dispensaries of medicinal and newly legalized cannabis.

BV community mourns loss of a founding father: Raymond C. Miles

BVWire wishes to extend its deepest condolences to the many friends and family of Raymond C. Miles, who passed away on Sept. 3, 2013.

Ray Miles was a trailblazer in the BV profession and the founder of the Institute of Business Appraisers (IBA) in 1978, the first membership association in the business appraisal profession. His best-known contribution to the business appraisal profession is the development of the direct market data method (DMDM) of valuing small to midsize closely held businesses.

Originally trained as an engineer, he became an independent management consultant and business broker in the mid-1970s. He found a dearth of information and resources, so he did his own research and eventually wrote a book, Basic Business Appraisal. He founded the IBA so that individuals like himself could leave a pathway of knowledge for others to follow. He helped develop the Certified Business Appraiser credential that was so rigorous that even some of the top names in business appraisal struggled to obtain it. He also wrote several BV-related books and many peer-reviewed articles and technical studies. “Retiring” in his 88th year, Ray continued to participate in conversations about business appraisal and the direction of the profession.

Shannon Pratt, one of the lions of the profession, tells BVWire: "I was sorry to hear about the passing of Ray Miles. Ray was a pioneer in the establishment of a private company transaction database, and I dedicated my book, The Market Approach to Business Valuations, to him." 

Also, one IBA governor says: “The roots of mentoring in the business valuation profession stem back to Ray Miles. He is perhaps the main reason why so many people in this profession ‘pay it forward.’”

In lieu of flowers, donations can be made to the Raymond Miles Memorial Fund, to furnish the science lab at St. Jerome Catholic School, in the hope that one more lively mind may be inspired. The school is located at 2601 SW 9th Ave., Fort Lauderdale, FL 33315.

As one of his many friends and colleagues stated: “His spirit will live on in all of us.”


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Copyright © 2013 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by
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