The Tax Court’s decision in Estate of Richmond set the appraisal community abuzz. Since then, many have commented on the two most obvious points: (1) the use of the net asset value method to determine the value of a holding company whose assets are mostly marketable securities; and (2) discounting for the built-in capital gains (BICG) tax by determining the present value of the future BICG tax liability.
But, in his recent BVR webinar, Prof. Jack Bogdanski (Lewis & Clark Law School), a long-time observer of the Tax Court, offered a unique perspective beyond the technical details. He called the decision a significant win for the IRS—if not from a numbers point of view, then from a theoretical standpoint.
For instance, even though the court agreed that a BICG liability discount was appropriate, it plainly rejected the estate’s proposed dollar-for-dollar approach, which was based on rulings in the Court of Appeals for the 5th and 11th Circuits. The Tax Court could do so, Bogdanski explains, because it is not bound by those decisions. What matters is the law of the circuit in which the executor resides. Here it was Pennsylvania, which is in the 3rd Circuit. Since the 3rd Circuit has not yet ruled on the issue, the Tax Court was free to come up with its own method. Assuming the estate will appeal—which it still has time to do—the 3rd Circuit would weigh in. But, Bogdanski stresses, don’t count on its overturning the Tax Court on this issue, particularly since the 2nd and 6th Circuits have disagreed with the 5th Circuit.
For more comments from Bogdanski, see the BVWire (free registration required).
BVWire attended the NACVA conference in Las Vegas that had some great sessions with speakers who generated a slew of new ideas and actionable takeaways. Example:
Watch what you write, advises Mel Abraham (Practice Builder Academy). You never know where it may end up. He mentions a colleague who, at the request of an attorney, wrote a letter explaining the concept of the blockage discount. Unbeknownst to the writer, the attorneys used the letter as the basis for adjusting a valuation—and the letter got attached to a tax return! Later, when the valuation was called into question, the expert got a surprise phone call asking him to explain what he wrote. The idea here is to state explicitly what the document you’re preparing is for and how it can—and cannot—be used.
For more tips, see the BVWire (free registration required).
BVWire reports that a Canadian trial judge’s ruling on expert draft reports is sending shockwaves through the legal and expert witness communities. Even though this opinion carries no weight in U.S. courts, it merits attention from practitioners in this country.
In a medical malpractice case, the Ontario Superior Court of Justice wrestled with a number of evidentiary issues related to the admissibility of expert evidence under Rule 53.03 of the Ontario Rules of Civil Procedure. The most controversial was whether it was appropriate under the rule for counsel to review draft reports of experts and provide input to shape expert reports. The court ruled that “counsel’s prior practice of reviewing draft reports should stop. Discussions or meetings between counsel and an expert to review and shape a draft expert report are no longer acceptable.”
The Canadian Bar Association (CBA) has criticized the opinion. The case is currently on appeal, and The Canadian Institute of Chartered Business Valuators has filed a notice to intervene. The participation of valuators shows that, even though the case involved a medical expert, the judge’s ruling is seen to affect all areas of expertise.
For more on this case, see the BVWire.
The second edition of a survey by Rusk O’Brien Gido + Partners is gathering transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries. The questionnaire analyzes the valuations of stock from actual transactions, including those between employee-owners and in ESOPs and mergers/acquisitions. The compiled data will include financial performance benchmarking data, valuation multiples for internal (minority interest) stock transactions, ESOP transactions, and merger/acquisition transactions. M&A data will include pricing data as well as data on transaction structures.
While the survey is designed to gather information on firms in the industry, valuation analysts and other advisers with industry clients can certainly participate with or on behalf of their clients. Survey participants will receive a discount on the completed study. BVWire (free registration required) has more information on the survey and how to participate.
If you are a subscriber to Business Valuation Update, you can take advantage of a free trial offer to test out a new DLOM Calculator designed by Marc Vianello (Vianello Forensic Consulting). The July issue of BVU contains an article by Vianello,“How Probability Affects Discounts for Lack of Marketability.” This article presents a methodology for determining DLOM that combines probability-based time and price volatility variables in conjunction with the formula put forward by Francis Longstaff, Ph.D. The new DLOM Calculator embodies this methodology.
Free trial: The article contains a promotional code that allows for free access to the DLOM Calculator. The code was originally good through July, but it is now extended through August. And, once you activate the code, it will give you 30 days of free access. You must be a BVU subscriber to receive this free trial offer. If you are not a BVU subscriber, you can subscribe by clicking here.
The terms “valuing” and “pricing” mean very different things, but, in a recent interview with BVWire, Dr. Aswath Damodaran (Stern School of Business, New York University) points out that they get used almost interchangeably. “I think when we do that we misstate two very different concepts.” This difference is often highlighted by the sale of a recently appraised business at a price far from its assessed value.
Join the discussion: Dr. Damodaran will join BVR for an exclusive special event, Price and Value: Discerning the Difference, an Advanced Workshop, on September 10 in New York City. He will give his overview of the valuation process, but then he’ll focus on “something that we don’t spend enough time on—the pricing process.” What is it that drives the pricing process? How does this differ from the valuation process?
“I’ll use the companies I’ve been valuing for the last few years because they’re the lab experiment to show how value and price can diverge,” he said. He’ll focus on factors that affect price and how this creates a gap between price and value. “There is no question there’s a gap,” he says. “This is the core of the problem. If you are doing the wrong thing given your mission for the valuation, then you’ll come up with the wrong number.”
Your homework: In preparation for his “class,” he suggests that you review the last five valuations you did. “Think honestly about what your mission was with each of them,” he says. Were you doing a valuation for a transaction? A legal setting? Goodwill amortization? Outline the motive you had when you did the valuation. Then ask yourself: Was my mission—given that motive—to price the company or to value the company? “Look at the actual valuation that you did and see if it was consistent with your mission—and whether your mission was consistent with what you started off doing.”
Bring this all with you to his session to stimulate the discussion. “I’m not saying that everybody has the same mission,” he says. “But each of us has a mission and what I’m pushing for is to be honest about what the mission is before we start putting numbers down and drawing on rules about the right things to do.”
Space is limited: Exclusive premium seating is available on a limited basis for a select group to attend this presentation live in New York while it’s being webcast worldwide. For those who attend the live event, there will be a pre-event luncheon with Dr. Damodaran and an extended 30-minute live Q&A session. You’ll also receive a complete recording and transcript of the event.
To reserve your spot to attend in-person, contact BVR today: email@example.com; (503) 291-7963 ext. 2.
“Explain everything” when writing a business valuation report, advises Howard Lewis (International Society of Business Analysts; RiskGuidance Co. LLC). Lewis, formerly with the IRS, spoke at the recent NYSSCPA Business Valuation Conference in New York City, which was covered by BVWire. He says the most common problem with reports is the failure to explain certain conclusions, especially discounts and multiples. “Don’t just state—explain.”
Court cases are a great resource to understand how to craft a report. He asked conference attendees whether anyone knew or could explain what the Gallagher case says about report writing. No one raised his or her hand. “I was shocked that no one appeared to know this case,” Lewis said later. “It’s a great report-writing case.” The judge destroyed both sides over their reports.
Free download: The full text of the case, Estate of Gallagher v. Commissioner, T.C. Memo.2011-148, is available from BVR on its Free Resources page (registration required).
A working draft of a new tool to calibrate the cost of capital for small companies is now available for use—and your feedback is wanted!
The tool, the Build-Up Method/WACC Calibrator, was developed by the team that gave us the implied private company pricing model (IPCPM). This is a cost of capital methodology for the valuation of small privately owned businesses (up to $50 million in revenue). IPCPM is powered by the implied private company price line (IPCPL), which uses a statistical sample of 500 small- and lower-middle-market transactions reported in the Pratt’s Stats database.
The IPCPM/IPCPL team, Bob Dohmeyer (Dohmeyer Valuation Corp.), Pete Butler (Valtrend), and Rod Burkert (Burkert Valuation), joined forces with Toby Tatum (Alliance Business Appraisal) to develop the tool, which is designed to calibrate your cost of capital developed with other sources (build-up method, total beta, etc.).
How to get it: The BUM/WACC Calibrator and user’s manual are available for download on the BVR website’s IPCPL page. The tool will expire every month, so you will need to download the updated version. Also on the IPCPL page, you’ll find links to more information on IPCPM and IPCPL, including free downloads of articles that explain the new methodology.
Feedback wanted: This tool is a work in progress, so your feedback is important. Download the Calibrator and try it out. Then, go to BVR’s LinkedIn page and join in the ongoing discussion about this tool and share your thoughts. The discussion is: The Implied Private Company Pricing Model: New Developments. Others are already trying it out, so you can see what they have to say.
If an expert loses a Daubert challenge, is it the finish for his or her career? Not necessarily. There are many reasons why a court may find testimony inadmissible, according to a report in BVWire.
One reason is that the trial court simply gets it wrong. Instead of being a gatekeeper and scrutinizing the qualifications of the expert and the methodology used, the court looks at the underlying data, disapproves of it, and excludes the expert’s testimony. With any luck, the expert is vindicated on appeal, as was the case in the 2013 Manpower case (available at BVLaw), in which the 7th Circuit found the trial court overstepped its bounds and reversed. Whether the testimony is good enough to withstand cross-examination and convince the jury is a different issue. Chances are good that an expert facing this situation works again.
Share your experience: How have you avoided or dealt with Daubert losses? Give us your comments!
Extra: BVR is working on a new special report on Daubert cases that will present a wealth of case law and in-depth analysis of the admissibility issues facing experts.
Promising young business valuators competed in the third annual BVR/SPU Valuation Challenge at Seattle Pacific University (SPU). This year, for the first time, university teams and faculty from across the U.S. competed in the challenge. Also, unlike other finance competitions, students valued a real U.S. private company using special appraisal information in a contest judged by 20 of the nation’s senior valuation experts. The experts selected six teams from among 18 U.S. university first-round entrants to come to Seattle for the final round.
Top teams: The competition was won by the University of Denver. Portland State University took second-place honors, and SPU was third. Middle Tennessee State University, University of Maryland (University College), and William Paterson University were the other participants.
BVR provided research support to the competing student teams. Moss Adams provided a full valuation report with only names and some locations changed. Three local experts—Willis Eayrs, deputy chairman of the International Association of Consultants, Valuators and Analysts (IACVA); Joseph Maas, principal of Synergetic Finance; and Miranda Rickert, senior analyst at Moss Adams—judged the competition’s final round. William Hanlin, CEO of IACVA, participated as a consultant.
BVR congratulates all of the students who competed in this year’s Valuation Challenge and gives its thanks to Dr. Herbert Kierulff, SPU professor, who runs the event. They’re all winners in our book. For more information on the BVR/SPU Valuation Challenge, click here.