BVWire Issue #144-1 | September 10, 2014


‘Flawed’ Tax Court case sparks discussion

The Tax Court’s decision in Estate of Adell (see the August 27 issue of BVWire) includes a number of different business valuation elements, including the issue of personal goodwill. The case has prompted a discussion on BVR’s LinkedIn page (“TCM decision re Personal Goodwill”), and some of the commenters consider the decision flawed.

Pricing deal: Some of the comments center around a pricing agreement between the two business entities involved, both of which were controlled by the same person. A point was made that the court relied on historical earnings, which were overstated because the agreement was never enforced and more payments were made than required. “This is like valuing real estate on the basis of historical rent paid when the rent being paid is non-arm’s length,” comments Bob Dohmeyer (Dohmeyer Valuation Corp.).

The issue of substance versus form is mentioned by Charles Grigsby (Grigsby Forensics & Valuation), who was trained as an IRS revenue agent. He points out that while the IRS drilled “all of us RAs on substance versus form … the decision of this case did not really understand the ‘substance’ at all,” referring to the issue of salaries in the subject entities.

Revised report: There is also discussion about the fact that the estate submitted a second valuation report that failed to sway the court, with the judge saying that the first report was an “admission.” The second report did not provide “cogent proof” that the expert had made an error in the original report (filed with the Form 706), points out Sylvia Golden, BVR’s legal editor.

Former IRS business valuation and engineering territory manager Michael Gregory (Michael Gregory Consulting LLC) tells BVWire that he’s “concerned that some practitioners will read this case and believe that their reports cannot be changed once submitted.” Gregory feels that a new valuation report should be submitted when warranted and it is certainly considered by the IRS and accepted by the courts. In this case, the judge was not convinced that a mistake had been made in the first report.

Find an expanded discussion of Estate of Adell v. Commissioner, 2014 Tax Ct. Memo LEXIS 155 (Aug. 4, 2014), in the October issue of Business Valuation Update; the court’s opinion will be available soon at BVLaw.

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Clippers valuation update

“When you look at tech companies with no earnings and huge valuations and a lot of downside, the Clippers look like a really well valued team to me,” says Steve Ballmer in a video interview on Bloomberg about his $2 billion purchase of the NBA team. Many critics say the price tag was too high (see the August 20 issue of BVWire).

Hubris hypothesis: In a blog post devoted to the Clippers deal, Dr. Aswath Damodaran (Stern School of Business, New York University) estimated the value at $1.61 billion under a set of simplifying assumptions. He also makes an interesting point concerning his hypothesis on “acquisition hubris,” where acquirers overpay due to ego and pride. He says: “While the desire to acquire glamorous assets and pay ego premiums may be clearly visible in sports franchise acquisitions, they are not restricted to them.” He adds: “If Steve Ballmer is overpaying for the Clippers, he is at least overpaying with his own money. When, as CEO of Microsoft, he paid $8.5 billion for Skype, it was Microsoft stockholders who were put at risk from overpayment.”

In our reporting, we mentioned that, in a blog post, Donald Erickson (Erickson Partners Inc.) valued the team at $1.37 billion. However, we’d like to clarify this by pointing out that he did not give an appraisal opinion but simply hypothesized that, if you used the theoretical revised 2014 revenue forecast and applied the highest multiple from recent deals, the result would calculate to $1.37 billion.

Ripple effects? Some people believe that “all boats could rise with the tide,” meaning the values of other teams could increase as a result of the Clippers deal. “But I don’t think so,” says Erickson. “It seems to me that this is a special case of facts and circumstances. We will see.”

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Watch your multiples when valuing a staffing agency

During a recent BVR webinar, Mandeep Sihota (Citrin Cooperman) pointed out some common errors she sees in valuations of staffing agencies. First of all, there’s a misconception that one size fits all when it comes to these types of firms. That “absolutely cannot be true for staffing companies,” she says. There is such diversity in this industry in terms of the type of firm, the services that are offered, and the industries serviced.

Multiple mismatch: If this diversity is not taken into account, it’s common to have a misapplication or misaligning of multiples. “Pulling transactions and blindly applying multiples is what I call mismatching the multiple because you are not taking into consideration the specific unique aspects of the industry that is being serviced or the services offered,” Sihota says. For example, multiples for temporary staffing firms are significantly different than the multiples that you will find for permanent firms, she points out. Likewise, she sees multiples from firms that are offering completely different services or that are servicing a totally different industry being applied to the subject firm.

Therefore, when selecting multiples, make sure you’re comparing apples to apples.

Extra: According to a report from Duff & Phelps, 56 staffing industry M&A transactions were reported in the first six months of 2014, a 14% increase over the 49 transactions announced in the first six months of 2013.

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Will this lost profits case pass the smell test?

According to a report in the Hollywood Reporter, CBS has been sued in federal court over copyright infringement concerning a puppet, Bert the Hippo. Bert gained popularity on the show “NCIS” and is famous for emitting bodily sounds associated with too much intestinal gas.

Relief sought: Bert and his antics got to be so famous that CBS started selling the puppet online. The manufacturer, Folkmanis Inc., is the plaintiff in the case and claims that it was the original creator of Bert and holds the exclusive rights. The plaintiff was working with CBS on a special edition of Bert (with a spiked collar) when CBS allegedly made a deal with a Chinese toy company to make an unlicensed version of the gassy critter. Folkmanis is suing for $733,000 in lost profits from the defendant’s sale of the phony toy.

According to the report, a CBS spokesperson made this comment: “We believe this to be a flatulent abuse of the legal system, and we intend to clear the air on this matter immediately.”

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Two exposure drafts issued for USPAP 2016-17

The Appraisal Standards Board (ASB) of the Appraisal Foundation has released a Third Exposure Draft of proposed changes for the 2016-17 edition of the Uniform Standards of Professional Appraisal Practice. The ASB’s plans include reviewing and revising as needed the following areas of USPAP: definition of report; edits to eliminate confusion regarding report drafts; revisions to STANDARD 3 to enhance consistency with other Standards and to clarify the dates identified and reported; edits to eliminate confusion regarding confidentiality; and other edits to improve clarity and enforceability of USPAP.

The ASB has also issued a First Exposure Draft of proposed new Advisory Opinions and Advisory Revisions in conjunction with the 2016-17 edition of USPAP.

Written comments for both documents are requested by Oct. 10, 2014.

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Updated resource for IP valuation case law

Over 170 case digests—plus online access to the full text opinions—are available in BVR’s Intellectual Property Valuation Case Law Compendium, 2nd Edition.This compendium helps remove the guesswork from understanding what it takes for an effective expert/attorney team to win a case in intellectual property valuation. In addition to the case material, there are in-depth articles for expert witnesses who testify on intellectual property matters, including: damages and lost profits, reasonable royalties, trademark and copyright infringement, comparable licenses, expert witnesses, and much more.

For more details and the table of contents, click here.

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New benchmark resource for industry cost of capital

A companion resource to the 2014 Valuation Handbook—Guide to Cost of Capital is in the wings: the 2014 Valuation Handbook—Industry Cost of Capital, published by Duff & Phelps.  This resource replaces the discontinued Morningstar/Ibbotson Cost of Capital Yearbook—but will include additional methods to calculate cost of equity capital and new statistics previously unavailable that will allow for a more robust analysis.

Over 200 U.S. industries are represented in the 2014 Valuation Handbook—Industry Cost of Capital. For each of these industries, you’ll find:

  • Cost of equity capital estimates--using eight different methods.
  • Cost of debt capital.
  • Weighted average cost of capital.

New statistics: The 2014 Valuation Handbook—Industry Cost of Capital also provides detailed statistics for sales, market capitalization, capital structure, various levered and unlevered beta estimates, valuation (trading) multiples, ratios, equity returns, aggregate forward-looking EPS growth rates, and more. Some of these statistics have not been previously available.

Also for each industry there are new statistics that can be used to gauge the impact of “debt-like” off-balance sheet items on the capital structure of the subject industry. The analysis is calculated two ways: with and without these liabilities so the user can ascertain how material they are for the subject industry.

The 2014 Valuation Handbook—Industry Cost of Capital is published with data through March 2014. Quarterly Updates (June, September, and December) will be available, but they are an optional add-on and not sold separately.

The 2014 Valuation Handbook—Industry Cost of Capital and Quarterly Updates will be available from BVR. Look for more announcements soon about availability. In the meantime, please email with inquiries.

New chief accountant at the SEC

James Schnurr, recently retired from Deloitte LLP, will replace Paul Beswick as the SEC’s chief accountant, the agency announced in a news release. Schnurr, who will begin his new job in October, was vice chairman and senior professional practice director, specializing in financial and SEC reporting for public companies at Deloitte.

Stance on BV? The business valuation community had been slammed by Beswick, who made a public call for unifying the BV profession under a single set of standards and credentials. Schnurr’s position on this issue remains to be seen.

One main issue facing Schnurr is whether to give U.S. public companies an option to use IFRS for financial reporting. His opinion on this is not clear, but the Journal of Accountancy reports that in 2007 Schnurr commented on the issue during an appearance at an SEC roundtable meeting. He said that having some issuers reporting in IFRS and others using U.S. GAAP would have “a positive impact to a neutral impact” on U.S. markets.

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BV movers . . .

People: Vin Batra has been named managing director at Deloitte Corporate Finance LLC in the New York City office … Troy Cardinal is the new chief technology officer for McGladrey and will be based in the firm’s Minneapolis office … John Elmore has joined Willamette Management Associates of Atlanta as a manager and will provide valuation consulting, forensic analysis, and litigation support services … Travis Irving has been promoted from senior manager to shareholder at Perkins & Co. of Portland, Ore. … Warren Martin has joined Cherry Bekaert’s Technology & Life Sciences group as a manager in its Washington, D.C., office … Patrice Sebastian has been promoted to director in the Forensics and Valuation Services Group at WebsterRogers in Columbia, S.C.

Firms: Accounting and advisory firms Baker Tilly Virchow Krause LLP and ParenteBeard LLC will merge, with an anticipated effective date of Oct. 1, 2014. The name of the combined firm will be Baker Tilly Virchow Krause LLP.

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CPE events

Want to learn about price versus value? Valuing private minority interests? ESOP valuation? Here’s your chance with these upcoming CPE events.

Price and Value: Discerning the Difference, an Advanced Workshop (September 10), featuring Dr. Aswath Damodaran (New York University Stern School of Business). Don’t miss the preeminent BV training event of the year: an intensive three-hour lecture on the differences between price and value and the consequences of feedback between these two concepts.

Time to Abandon Discounted NAV? Why the Income Approach Should Be the Cornerstone for Valuing All Private Minority Interests (September 18), featuring Eric Nath (Eric Nath and Associates). Conventional appraisal wisdom says that the value of a noncontrolling, illiquid interest in a private company or holding company is the net equity or net asset value, discounted for lack of control and lack of liquidity. But is this how markets for these types of interests really work?

ESOP Regulatory Update: The DOL Fiduciary Process Agreement (September 24), featuring Jeff Tarbell (Houlihan Lokey), Theodore Becker (DrinkerBiddle), and James Staruck (GreatBanc Trust Co.). In recent years, ESOP appraisals and fairness opinions have received increased scrutiny from the U.S. Department of Labor and the plaintiffs' bar. Earlier this summer, in connection with the settlement of litigation brought by the DOL, an institutional trustee agreed to implement certain policies and procedures that have been commonly referred to as the "DOL Fiduciary Process Agreement." Join valuation expert Tarbell and attorneys Becker and Staruck for a panel discussion on the processes, procedures, and implications of the DOL Fiduciary Process Agreement.

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We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963
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In this issue:

Court case debate

Clippers comments

Valuing staffing agencies

Lost profits in the air

USPAP exposure drafts

IP case law update

New cost of capital guide

SEC staff change

BV movers

CPE events







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