BVR Logo September 23, 2020 | Issue #216-3

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

10 Takeaways From the AAML/BVR Virtual Divorce Conference

Family law attorneys, valuation professionals, and industry experts shared advice during the AAML/BVR Virtual Divorce Conference, which is ongoing and will continue tomorrow, September 24. Here are just a few of the many interesting points covered already:

  1. Beware of reductions in salary. In a session on executive compensation, the panel noted that there are many questions to ask if you see a salary reduction, such as: Was the reduction permanent or temporary? Did the employee spouse volunteer for the reduction (i.e., was there an ulterior motive to have less income for divorce purposes)? Is there a time frame for recompensation (if so, when)? Is the reduction limited to the employee spouse or was it across the board?

  2. Pre-COVID-19 valuations are getting updated. There seems to be a consensus among attorneys and appraisers that simply offering to the court a Dec. 31, 2019, valuation without more is not a good idea. Some analysis of what happened to the industry and your subject company needs to be provided. Many judges have opted to hold over cases to 2021, at least in part to see what happens to a company in the meantime.

  3. More scenario analyses being used. There is a lot more scenario/probabilistic analysis in the income approach to deal with cash-flow uncertainty. This can be the time-tested best-base-worst case analysis or a two-pronged approach with one scenario that sees a second wave of the pandemic and one that does not. Use Monte Carlo? Yes, but it’s hard to explain to some courts.

  4. Dealing with PPP loans. By now, a company should have an idea of how much will be forgiven. Also, ideally, the PPP money was placed in a separate account and used for expenses as they occurred (which are not deductible).

  5. Check out McKinsey. Good, free material is available from McKinsey on economic and financial analysis of the COVID-19 crisis. One particularly good chart shows projected small-business recoveries by industry (click here to view).

  6. Pick up the phone! It’s prudent to assume there is no attorney-client privilege for communication with the financial expert and that written documents, including texts and emails, are discoverable. To avoid discovery, attorneys and experts should communicate as much as possible using old-fashion telephone calls.

  7. Make a good online appearance. Some law firms have used consultants to tutor attorneys on lighting, camera position, makeup, and other aspects related to on-camera presentations. Experts should ask attorneys about this and learn from their technical insights.

  8. Watch your background. No, we’re not talking about your experience—this is about what’s in the background when you are testifying online. One attorney advises that the background be neutral and quiet with nothing to distract the viewer. Just as she was saying this, a cat wandered in right behind her!

  9. Use pictures. Financial charts and graphs that visualize the impact of COVID-19 on the industry in which the company operates and the specific company tend to be much more persuasive to the court than narration.

  10. Landscape will keep shifting. Speakers made it a point to say that what they say related to the pandemic may change in the coming months. This is a shifting landscape, so you need to keep up-to-date on legislative initiatives and developments.
The conference continues tomorrow, September 24, with a session, Myths and Realities of Using a Discounted Future Benefits Method in Family Law Business Appraisal. Plus, there will be a special session of online one-on-one speed networking.

‘Overstated’ projections sink plaintiff’s fair value determination

Earlier this year, a New York trial court presiding over a buyout dispute featuring an online wholesaler of faucets, sinks, and fixtures rebuffed the departing shareholder’s valuation. His expert’s discounted cash flow analysis collapsed on account of unreasonable projections that the company had used to secure a loan from a bank.

Dubious loan application: The company, founded in 2007, was an importer and distributor of sinks, faucets, plumbing fixtures, and accessories. It conducted online sales through retailers and, at the relevant time, was working on branding and getting major retailers such as Home Depot to feature its products. The company showed considerable early growth in sales (from $21 million in 2012 to $36 million in 2015) but also negative cash flow.

The petitioner owned 24% of the company’s shares. The other two owners (individual respondents) held a 25% and a 51% interest. After business relations broke down, the petitioner initially asked for dissolution of the company and damages. Under New York’s BCL 1118(a), the remaining owners elected to buy out the petitioner. The issue at trial was the fair value of the petitioner’s interest as of Sept. 20, 2015, the day before the petition was filed.

Both parties offered testimony from valuation experts who used both an income and a market approach but reached very different value conclusions. Under the income approach, the petitioner’s expert valued the company at $21.9 million; under the market approach, he arrived at a value of almost $38.8 million. Averaging the two values, he said the company was worth $30 million; the value of the petitioner’s interest (undiscounted) was $7.2 million. In contrast, the respondents’ expert, using a single-period capitalization method and cash flow, valued the company in the range of $5.9 million to over $6.1 million; under the market approach, using Pratt’s Stats (now DealStats), he generated a value range of between $5.3 million and $6.1 million. Giving greater weight to the income approach, he valued the company at $6.05 million.

Projections were a major flash point in the valuation proceedings. The petitioner’s expert used a DCF model based on projected earnings the company had used a few months prior to the valuation date to qualify for a bank loan up to $7 million that could be extended to $10 million. The petitioner noted one of the respondents, a CFA who served as the company’s controller, prepared the projections. The projections and other representations from all owners to the bank put the value of the company at about $30 million. It’s a federal crime to provide false statements to a bank. The petitioner argued the bank relied on this information to grant the loan; he suggested that, therefore, this $30 million valuation must be credible.

The respondents’ expert noted that the company had never met a single projection, not in 2014 or 2015. Based on his examination of financial evidence, the projections were not reliable, making the opposing expert’s DCF model unreliable.

The court agreed. The success of the company, as shown by the rapid growth in sales, “was not as great as petitioner contended … nor was it accurately predictive of future success or of the true value of [the company],” the court said. It added that the projections “were, put mildly, ambitious, and, in fact, were overstated. In reality, the value of the business was never $30 million.”

The court declined to comment further on the statements made to the bank or their significance in obtaining the loan. But the court noted, “[T]he representations were not accurate.” It said the respondents’ expert used a sound methodology and provided “a realistic assessment” of the company’s fair value that was consistent with evidence as to the company’s “successful business model as well as its debt and cash flow issues.”

Adopting the $6.05 million valuation and applying a 5% DLOM, the court concluded the petitioner’s interest was worth about $1.4 million.

A digest of Magarik v Kraus, Index No:606128-15, Nassau County, Supreme Court of New York, J. Destefano (April 10, 2020), as well as the court’s opinion and the parties’ post-trial briefs (providing further valuation details) will be available soon at BVLaw.

Hat tip to Paul Marquez (BizValue Ltd.), the expert for the prevailing party, who directed our attention to this case and provided the parties’ post-trial briefs.

Dietrich updates his landmark briefing
on COVID-19

An important part of understanding the impact of COVID-19 on business value is understanding the virus itself. Exhaustive research and analysis has gone into the BVR Briefing, “The Real Story of COVID-19 for Valuation and Litigation Experts,” which author Mark Dietrich (Mark O. Dietrich CPA, PC), a nationally known healthcare finance and valuation expert, has just updated with current data. The briefing includes a focus on healthcare entities, but Dietrich’s insights into how the virus originated, how it spreads, protection methods, testing, and so on are important to all valuation and financial experts. His update includes a look at the dramatic changes in the evolution of the virus since the briefing was first issued, disputes over new research, conflicting opinions over proposed treatments, testing issues, and the current status of vaccine development. “My goal here is to inform readers, not direct them to one conclusion or another,” says Dietrich, whose research goes directly to the source data in various scientific journals and fact-based websites. “I offer my view of things but encourage readers to conclude for themselves and to fact-check as they see fit.” The updated BVR Briefing is available if you click here.

Note: If you have already purchased the briefing, you will receive the update as a separate document from BVR. If you are a first-time purchaser, the update is included in the briefing you will receive.

In court, facts are not enough—it’s the nonverbal that counts

If you think that the facts speak for themselves in court, think again, says Deborah Johnson, MC, president of High-Stakes Communication. It’s really how you speak about those facts that influences judges and jurors. Johnson was the lead-off speaker at this year’s Business Valuation, Fraud & Litigation Services Virtual Conference sponsored by the Virginia Society of CPAs.

Nonverbal speaks volumes: Johnson points out that fully half of what you are communicating is through body language—and the judge or jury is watching you like a hawk. Is your body language telling them they can believe you because you are confident and comfortable? Is your posture open and welcoming? Are you making eye contact with opposing counsel even when he or she challenges your expertise?

Johnson points out that many people have no idea how they come across, so she will record the experts she works with, and many of them are shocked at what they see. They had no idea they leaned away when they were nervous or did a funny thing with their mouth or said “um” or “ah” too many times. Armed with this evidence, it’s much easier to clean up the problems that the court will judge as negative. One minute of video is more instructive than one hour of coaching, she says.

Online testifying: In today’s virtual world, you will probably be called upon to testify online. A question from the audience: How much of yourself should be seen on camera? Johnson advises that you need to show more of your body so they see your body language. Therefore, a close-up shot (head and shoulders) would not be a good idea. Rather, use a medium shot—one that shows the third button on your shirt or blouse.

BVWire attended the full conference—which was excellent—and we’ll have more coverage in the next issue.

New module added to Duff & Phelps Cost of Capital Navigator

A new international industry benchmarking module will be available in late October for the Duff & Phelps Cost of Capital Navigator. The module provides subscribers with comprehensive global industry-level statistics for approximately 90 industries in four global regions, with data to support valuation dates from March 2015 to the present. (A basic version lacks trend analysis and includes data for the last two years only.) For more information and to preorder the module (at a 25% discount), click here.

BV movers . . .

People: Carl Carande has been selected as the global head of advisory, KPMG International, effective October 1; he succeeds Mark Goodburn, who has led the global advisory function for nearly 10 years.

Firms: Gainesville, Fla.-based James Moore & Co. will provide exit planning services for businesses looking to sell under a new partnership with Cornerstone Business Services and Velocity Advisory Group Boston-based Walter & Shuffain has acquired Russell Brier & Co. of Boston … Two divisions of New York-based Marcum LLP, Marcum Financial Services and Marcum Wealth Management, have merged with Aurum Wealth to form Marcum Wealth, to be headquartered in Cleveland … Two firms have joined CPAmerica: The Hobbs Group, PA, headquartered in Columbia, S.C., and R.D. Hoag & Associates LLC, headquartered in Carnegie, Pa.; CPAmerica, an association of independent CPA firms, is a member of Crowe Global, which has members in more than 750 offices in more than 130 countries.

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CPE events

A discussion of the increasing prevalence of joint ventures and other strategic affiliations in the current environment and the unique valuation considerations related to these arrangements.

A different framework of thinking is required when valuing small owner-operated businesses. This is a discussion of the different perspectives, including rate of return and personal goodwill.

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


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