BVR Logo September 25, 2019 | Issue #204-3

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include:

First-ever face-off of cost of capital platforms

BVR’s Cost of Capital Professional and the Duff & Phelps Cost of Capital Navigator went head-to-head for the first time, headlining the annual two-day conference of the Virginia Society of CPAs. Bottom line: Both platforms produce similar results, but they have different attributes, as speakers pointed out during a good-natured “point-counterpoint” session.

Jim Harrington (Duff & Phelps) led off with an overview of the Navigator and demonstrated how the platform incorporates industry-level data in developing a WACC using the buildup method and CAPM. He explained that the platform’s industry data includes “pure-play” companies (those with at least 75% of their revenue coming from a single line of business), and he benchmarked a hypothetical subject company against comparable firms and examined betas (calculated in various ways) in order to estimate industry risk. With all of the multiple options for the various inputs, the platform produced over a dozen calculations of the cost of equity. No doubt about it, the Navigator has a massive amount of data, methodologies, and output.

Ron Seigneur (Seigneur Gustafson LLP CPAs), who co-chairs the advisory board for the Cost of Capital Professional, pointed out there are “no bright-line formulas” and that professional judgment needs to play a big part in estimating cost of capital. Speaking of industry data, he pointed out that the platform has two sources of industry betas: (1) Professor Aswath Damodaran (New York University Stern School of Business); and (2) Salvidio & Partners, a Rome, Italy-based firm. One of the hallmarks of the Cost of Capital Professional is flexibility, and Seigneur noted that the platform gives the user the ability to choose the time horizon for the historical data.

Jim Hitchner (Financial Valuation Advisors Inc.) presented a tale-of-the-tape comparison between the two with respect to the data used for the inputs to the buildup and modified CAPM. (Hitchner is also on the advisory board of the Cost of Capital Professional.) He used a hypothetical subject company and put the two platforms through their paces using various input options. The result was a cost of equity range of from 15% to 17% from both platforms for the buildup method and 15% to 16% for the modified CAPM, which is “not that much different,” he says.

The Cost of Capital Professional is not the mammoth system that the Navigator is, but its appeal to users may lie in its simplicity. In the audience, there were users of both platforms, so they both clearly have a place in the valuer’s toolbox. In fact, some users have both platforms and they compare the results, which is certainly a welcome option in this challenging process. As Harrington pointed out: “None of this is perfect. We’re trying to predict the future.”

The speakers did a great job and kudos also to Harold Martin (Keiter), who put together an excellent conference (now in its 20th year) that covered not only business valuation, but also forensics and litigation services. There will be extended coverage in the next issue of Business Valuation Update.

Extra: BVR is offering a custom-designed trial period for its Cost of Capital Professional. Just contact a member of BVR’s sales team either at or 503-479-8200 (ext. 2).

Columbia Pipeline ruling highlights terminal value flaw in expert's DCF

In the Columbia Pipeline statutory appraisal action, the Delaware Court of Chancery recently rejected the petitioner expert’s discounted cash flow analysis to determine fair value and, in a short but noteworthy discussion, explained why the court has come to question the usefulness of the DCF in many instances.

This case featured a publicly traded company that owned and operated natural gas pipelines, storage, and other related assets. The Court of Chancery, after an exhaustive evaluation of the sale process, found the deal price was the best evidence of fair value despite flaws (some material) in the sale process. There were “objective indicia of deal price fairness,” the court said. The deal price was $25.50 per share.

Problematic ‘back-loading’: The court rejected the use of the trading price, finding that, under the facts, an analysis of the trading price was “comparatively unimportant.”

The petitioners, claiming the sale process was fatally flawed and undermined the deal price for appraisal purposes, advocated for the use of their expert’s discounted cash flow analysis. The DCF valuation arrived at a per-share price of $32.47. While the respondent’s expert critiqued the opposing expert’s DCF model, he did not do his own DCF valuation.

The court, referencing precedent Delaware Supreme Court decisions, declined to give the DCF here any weight. “Dell and DFC teach that a trial court should have greater confidence in market indicators and less confidence in a divergent expert determination.” The court noted the petitioners’ DCF valuation was out of sync with market indicators. It was 27% higher than the deal price and 64% higher than the unaffected trading price.

The court noted the experts disagreed over various inputs. The choice of inputs was a proper subject of debate and the outcome of the debates resulted in large swings in the valuation output, the court observed. Calling the DCF a “second-best method” in this case, the court declined “to call the balls and strikes of the valuation inputs.” At the same time, the court noted that, since Columbia’s business plan projected major capital expenditures between 2016 and 2021, leading to negative cash flow of nearly $4 billion during the five-year projection period, all of the positive value was generated in the terminal period in the petitioner expert’s DCF. The terminal value in that calculation represented 125% of the valuation of Columbia, the court observed. “This court has questioned the utility of a DCF in a case where the terminal value represented 97% of the result,” the court said. In a footnote, it cited other decisions that criticized DCF valuations where the terminal value accounted for over 75% of the total present value or where the terminal value derived from the use of the exit multiples method comprised 70% to 80% of present value. This “back-loading” showed the risks related to the use of the DCF and undermined its reliability, the court said. “This decision therefore does not use it.”

A digest of In re Appraisal of Columbia Pipeline Grp., Inc., 2019 Del. Ch. LEXIS 303 (Aug. 12, 2019), and the court’s opinion are at BVLaw. Digests of the various DFC Global and Dell rulings and the courts’ opinions also are available at BVLaw.

Entrepreneurial skills are key for BV

Unlike an audit or tax practice, recurring clients for business valuation services are not common, so having an entrepreneurial spirit is critical, writes Shaun Maloney, a senior manager at EisnerAmper, in an AICPA blog post. “Building a vast network and finding creative avenues to develop leads and referrals are very important,” he says. “This is difficult for just about everyone, so getting in as much practice as possible is best.” Other soft skills he says are needed in BV involve organization, communication, professional skepticism, and intellectual curiosity.

New editor of Business Valuation Review
gives retrospective

In his first issue as editor of the Business Valuation Review, the journal of the American Society of Appraisers (ASA), Victor Jarosiewicz takes a look back at some notable articles that have appeared throughout the years. These range from the very first article from 1982, “Goodwill and Excess Earnings” (James Schilt, the founding editor) to “Capital Charges and the Valuation of Intangibles” (Lawrence Gooch, 1992), “Regression Analysis in Valuation Engagements” (George Hawkins, 2008), “The Biggest Business Valuation Myth” (Eric Nath, 2011) and a number of others. The original versions of some of the articles mentioned are reprinted in the issue (Spring 2019).

In an interview in the June 2019 issue of Business Valuation Update, Jarosiewicz describes the publication as the quarterly peer-reviewed journal of the Business Valuation Committee of the ASA. “This is a really important distinction: the journal is a peer-reviewed journal, not a newsletter,” he says. “Each has their place and their valuable purpose, and each can educate their readership. Both keep members updated, but the journal needs to use its structure and peer-reviewed process to help elevate the profession.”

Business Valuation Review is part of the BVResearch Pro package from BVR, which includes a full archive of back issues. It’s also available as a stand-alone print/PDF subscription (no archive) if you click here.

The main reason experts get KO'd by Daubert

Lack of reliability continues to be the main reason for financial expert witness exclusions under Daubert, according to the PwC survey, “Daubert Challenges to Financial Experts.” The annual study analyzes challenges to financial expert witnesses (appraisers, accountants, economists, and others) under the Daubert standards from 2000 to 2018. These are the years following the U.S. Supreme Court’s Kumho Tire decision, which expanded Daubert’s reach to financial expert witnesses. Exclusions most commonly result from the lack of sufficient data or the use of methods that are not generally accepted, the study says.

IVSC examines goodwill impairment vs. amortization

What are the potential consequences of a change from the current impairment model to goodwill amortization? That’s just one of the questions asked in a series of three articles designed to explore whether principles underlying business valuations are compatible with the concept of goodwill amortization. The first article in the series, “Is Goodwill a Wasting Asset?” examines whether goodwill is economically a wasting asset and, if so, whether the life and implicit decline in value can be reasonably estimated and supported.

In the U.S., the issue of annual impairment testing versus amortization of goodwill is being revisited with the Financial Accounting Standards Board (FASB) issuance of an Invitation to Comment (ITC) on how to account for certain identifiable intangible assets acquired in a business combination. Private companies and not-for-profit organizations got relief from the rules after struggling with the burden of annual testing. In preliminary outreach with public-company stakeholders, the FASB received mixed feedback “indicating that the benefit of certain intangible asset and goodwill impairment information might not justify the cost of preparing and auditing that information,” according to the 34-page ITC. Comments on the ITC are due by October 7.

BV movers ...

People: Jon Donnel has joined Los Angeles-based B. Riley Financial Inc. in the firm’s Great American Group Advisory and Valuation Services LLC subsidiary as managing director of oilfield services based in Houston; he specializes in business valuation, investment appraisal, and financial planning for companies and lenders across the oilfield services industry … Veteran IRS agent Shari Schindler, CFE, CPA, has joined StoneTurn as a partner based in its Chicago office; she is a financial expert in corruption and white-collar criminal cases, as well as multijurisdictional business disputes.

Firms: Citing the continuing M&A trend, Atlanta-based Windham Brannon has created a separate division for its business valuation services due to growing interest and client needs; the practice offers management planning, estate planning, litigation support, financial reporting, and transaction analysis … As a result of rapid growth in advisory services for middle-market businesses, Farmington Hills, Mich.-based UHY has doubled the size of its Ann Arbor office and will expand it further by acquiring more space and adding more employees; the office opened in 2017 and has grown to 20 employees … Chicago-based RSM US LLP will acquire Gregory, Sharer & Stuart (St. Petersburg, Fla.), adding more than 60 professionals to the firm’s broader Tampa Bay team; the transaction is expected to close on October 1.

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Upcoming BVR training events

  • DCF Modeling for Early Stage Enterprises: A Fair Value Update (October 2), Antonella Puca (BlueVal Group LLC), Andreas Dal Santo (BlueVal Group LLC), and Shilpa Chandra (BlueVal Group). Part of BVR’s Special Series on Fair Value.

    How to address a number of challenging issues that arise with a DCF analysis for early-stage firms, such as cost of capital and investor commitments.

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:

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