Are calculation engagements a good thing or bad thing for the valuation profession? In last week’s issue, we presented two articles: one urging valuation experts to avoid calculation engagements like the plague and a rebuttal article that disagrees with this view. You can read the two articles if you click here.
Two camps: The comments we’ve received so far fall on both sides of the table: Some say they don’t belong in the valuation expert’s toolbox, and others say they have a rightful place.
“With all due respect to the authors of the rebuttal article, a calculation of value can never be used in a USPAP engagement because all USPAP engagements involve an appraisal, which is defined in USPAP as an ‘opinion of value.’ USPAP scope of work is irrelevant,” one commenter says. “The resulting work product from a calculation of value is the issue; it is simply a calculated result and not an opinion of value. Therefore, a calculation of value has no place in situations where an opinion is needed, such as situations where a USPAP engagement is required and trial work in litigation.”
“Calculation engagements could be used in much the same analogy as compilation engagements are to audit engagements,” says another commenter. “Not everyone has the funds to [spend] up to $25,000 for a small-business valuation. Instead, analysts are called on to provide an experienced third-party assessment of the calculation value of a company.”
One commenter had a few choice words about the recent AICPA guidance on this matter. “It is unfortunate that the authors of the AICPA [guidance on] calculation reports use the term ‘value.’ The Appraisal Foundation and ASA should have objected to the use of that term, which is proprietary to the appraisal industry,” he says, suggesting that the term “calculated amount” should be used instead. “The term ‘calculated value’ is misleading to the users of these reports and it misrepresents the role of the author.”
We’d love more comments on this! Also, there will be dueling rebuttals on this topic from the authors of both articles. Plus others will be chiming in, so please stay tuned!
Courts are alert to valuations unmoored from the facts
Perhaps experts feel pressure from the hiring attorney or the client, perhaps they are unable to access key documents or information, or perhaps they simply lack valuation and litigation experience. Whatever the reason, case law provides too many examples in which valuation and damages experts have proffered opinions that were plainly counterfactual and in which the court called them out on it. The lesson for experts is simple. Don’t be an ostrich. Deal with the facts of the case (especially so-called “bad facts”) and keep your calculations real.
Two recent decisions illustrate the point. Cristofano v. Chahal is a buyout dispute in which the plaintiff’s expert augmented income by developing projections based on the plaintiff’s forecast, resulting in an estimate double that of the actual profit for that particular year. The expert’s projections also assumed ongoing income from a lucrative contract, even though it was known that the contract likely would end in 2018. The court found there were other ways in which the expert inflated income and by extension the value of the company. In contrast, the defense expert analysis relied on historical data and properly accounted for the facts of the case, the court said, adopting his value conclusion.
Zaffarkhan v. Domesek concerned a shareholder dispute involving a short-lived software startup whose one product, a medical software application, never got beyond the beta stage of development. The plaintiff, a founding member, rejected a buyout and sued the other founders, alleging various breaches. The plaintiff’s expert claimed the company’s “most likely” value was $6 million. A defendant shareholder described the company as “a very Mickey Mouse operation,” with “poor documentation, poor record keeping, poor legal counsel, and naïve team members.” The trial court awarded zero damages, noting the plaintiff’s expert had no experience valuing software companies, misapprehended basic facts, and developed multimillion-dollar valuations for a company with no product, no revenue, and no investors. The appeals court affirmed.
Digests for Cristofano v. Chahal, CL17-1291 Circuit Court of Fairfax County (Honorable Jan L. Brodie), Judge’s Ruling (March 26, 2018), and Zaffarkhan v. Domesek, 2018 Cal. App. Unpublished LEXIS 3559 (May 18, 2018), as well as the courts’ opinions, are available at BVLaw.
BVR is very sad to note that the eminent David Laro, a senior judge of the United States Tax Court, passed away on September 21. Valuators in particular looked up to Judge Laro for his unique understanding of the field of valuation and the role it plays in many tax cases. Judge Laro was the author of the groundbreaking Mandelbaum decision, in which he developed a list of factors valuators could use to perform a defensible DLOM analysis. In doing so, he gave valuators invaluable guidance. Judge Laro’s gift for communicating what Tax Court judges are looking for in expert testimony and his warm personality made him one of the most sought-after speakers at appraisal conferences. “I had the privilege to get to know David fairly well from the times he volunteered to be a judge for our AICPA Expert Witness Workshop, as well as on a few other encounters,” says Ron Seigneur (Seigneur Gustafson LLP). “His passion for business appraisal in the context of tax matters was always evident in his published opinions.” Judge Laro also was a proponent of an expert testimony technique called “hot tubbing,” which has become an important alternative fact-finding approach. Recognizing the limitations of the adversarial system, with its “battle of the experts” approach, Judge Laro favored a collegial discussion in which experts would sit around the table with the judge present and work out their honest disagreements. Ever concerned over achieving a just outcome and preserving the integrity of the judicial process, Judge Laro believed hot tubbing was the way forward. His vision and his presence on the court will be missed.
The value of the private companies in the Carta 100 Index has jumped 60.3%, to 252.36 (as of Sept. 10, 2018), since Carta began tracking firms on June 30, 2017. Carta, a technology firm that helps other companies manage their equity shares held by various owners, is using data it has collected to create what it calls “the most thorough measurement of U.S. private companies’ performance.”
The S&P Healthcare Services Index increased 6.3% over the last month, outperforming the S&P 500, which increased 3.0% over the same period, according to the “August 2018 Healthcare Services Sector Update” from Duff & Phelps. Over the past month, the best performing sectors were: consumer-directed health/wellness (up 17.0%), government managed care (up 15.8%), and HCIT (up 13.0%). The poorest performing sectors were: specialty managed care (down 9.1%), hospital vendors (down 6.5%), and healthcare staffing (down 4.9%). The current average LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 2.42x and 15.4x, respectively.
Now is your chance to contribute to the largest and most thorough analysis of best practices in the business valuation and forensic litigation services (BVFLS) profession. Join your peers in responding to BVR’s Firm Economics Study to see how growth and change are accelerating in the profession. Once all responses are compiled, the Firm Economics Study will show you where your firm falls in relation to your peer firms’ performance, compensation, billing rates, marketing and practice development, and more. The survey, which is now open, will result in the largest and most thorough analysis of best practices in financial management, marketing, human resources and compensation, and professional and ownership standards that you will find anywhere. BVR conducts this confidential survey regularly to help you benchmark and improve your practice management. Those who participate will receive a free Executive Summary of survey results, plus a special offer to purchase the full report for $99 (regular price is $299) and a chance to win a free year of BVResearch Pro (a $1,595 value). The deadline for responses is October 19. Click here to participate now.
Our thanks to those who have responded so far to our survey designed to narrow down the methods most frequently used for determining a discount for lack of marketability (DLOM). We’d love a few more responses, so please take a few minutes to take the short survey (click here). We will compare the results to the last surveys we did on this issue and will present the results here in BVWire. Thank you!
Two options for streaming the AICPA FVS Conference
If you can’t travel to Atlanta for the AICPA Forensic & Valuation Services Conference November 5-7, you can still attend it online with two options. You can access the entire main conference and select your concurrent sessions to build your schedule just as if you were on-site (20 credits available), or you can choose any seven (7) sessions from the online conference (CPE varies). Either way, you won’t miss what is shaping up to be the most talked-about event of the year. Click here to see the interactive agenda and start planning your learning experience today. BVR will have a booth there, so please stop by and say hello!
The IVSC Standards Review Board, together with the Business Valuation Board and the Tangible Assets Board, have decided to publish targeted revisions to IVS 2017 based on feedback received during the agenda consultation process conducted in 2017 and 2018. The deadline for comments is October 16, and you can download a copy of the consultation document if you click here.
Extra: The IVSC is now seeking applications for members of its Standards Review Board and Business Valuation Standards Board. For more details and how to apply, click here.
People: Daniel Bugg, ASA, has joined Financial Research Associates in the firm’s New York City office … Vanita Spaulding, ASA, has been named as managing director in the valuation practice at Los Angeles-based SingerLewak; she is based in the firm’s Woodland Hills, Calif. office … Tim Koch has joined Atlanta-based Frazier & Deeter as a partner; he will be leading the firm’s transaction advisory practice … New York-based PKF O’Connor Davies announced that it has hired Cheri Mazza, CPA, ABV, CFF, CVA, MAFF, who will serve as a business valuation and financial forensics partner specializing in forensics, valuation, and litigation support.
Firms: William Vaughan Co., based in Maumee, Ohio, and Davenport Hanf & Co. of Perrysburg, Ohio, will merge effective November 1, under the name William Vaughan Co.; the Davenport Hanf staff will move into expanded offices in Maumee in early 2019 … Miami-based Berkowitz Pollack Brant Advisors and Accountants has renewed its membership with PKF International, a network of independent accounting firms … Lexington, Ky.-based Dean Dorton Allen Ford has launched Dean Dorton Wealth Management … UHY Advisors, based in Chicago, has formed an alliance with MinerEye, which uses artificial intelligence to track and protect sensitive data … Atlanta-based Aprio expands its Georgia footprint by combining with Magoon Freeman Spain & Jones (MFSJ) of Alpharetta, Ga.
The legal, financial, and economic risks triggered by complex, long-term heavy construction projects can be significant when valuing a firm of this type; also the use of specialists is important in these engagements.
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