The concept of compensation forfeiture is an option that damages plaintiffs can seek that is not difficult or expensive to prove. Plus, it can be “stacked” onto other remedies, according to George P. Roach, J.D., who practices almost strictly in damages and remedy law. In an interview in the May issue of Business Valuation Update, Roach also points out that, in some cases, compensation forfeiture may end up to be the only form of damages that can be proven with reasonable certainty.
Extensive uses: Compensation forfeiture is based on the doctrine that dishonest or disloyal employees or agents should not be compensated for any service after the wrongdoing first occurs. “The widespread applicability to various claims is not generally appreciated by either lawyers or damages analysts,” says Roach. “Therefore compensation forfeiture represents an opportunity for a damages analyst sometimes to suggest an enhancement to the client’s claims that can be made at a small increase in professional fees.”
Roach is the author of a new chapter on compensation forfeiture in the newly released 4th edition of The Comprehensive Guide to Economic Damages.
A slew of M&A records were broken in 2015, including net M&A announcements (12,012), $100 million-plus deals (1,197), cash payments (78%), average P/E offered (29.6), and more. This is revealed in the newly released 2016 Mergerstat Review, which gives you quick access to selling price multiples and control premiums paid by industry.
BVWire offers a link to a free download of selected data from the guide, which includes more stats and a table of acquisitions of privately owned companies. It was a stellar year! The download also includes a complete Table of Contents and a full List of Tables.
Although ESOP valuation experts have been exempted from the DOL’s final fiduciary rules (see our prior coverage), it’s still not safe to go back into the water, experts say.
Still lurking: In the final rules, the DOL makes it a point to say (several times) that it is very concerned about this matter and will take it up again in separate rulemaking. “I think the DOL is sending a signal … actually a fairly strong one,” says attorney Bruce Ashton (Drinker Biddle Reath LLP). “So the issue is not dead, just on hold—though perhaps an extended hold.” Ashton’s firm was involved in drafting the DOL/GreatBanc Fiduciary Process Agreement, a settlement agreement that covers ESOP transactions and valuation issues.
Valuation experts we spoke with are happy with the outcome so far. “Stern Brothers Valuation Advisors is pleased to see that ESOP valuation experts are exempted from being named as a fiduciary to the ESOP,” says Steven York, the firm’s senior VP. He points out that the GreatBanc agreement offers “guidelines” for a good ESOP valuation.
Attacks continue: In the meantime, the DOL continues to take action against valuations it perceives as faulty. The agency recently obtained a judgment against fiduciaries of a California ESOP in a lawsuit alleging the fiduciaries paid inflated prices for company stock. The DOL also filed a complaint against owners of a Florida company for selling their stock to their ESOP for almost double the alleged fair market value.
An extended discussion of this matter will be in the June issue of Business Valuation Update.
In response to user comments about limitations of his average-strike put option DLOM model, John Finnerty (Alix Partners) has developed a new version that can be generalized to accommodate a restriction period of any particular fixed length. He recommends that his old model be used for restriction periods of up to one year, but his new version should be used for restriction periods of more than two years (either model can be used for periods of one to two years). Finnerty also developed an extension of the new model that will accommodate situations where the length of the restriction period is uncertain, as, for example, when it is unclear when a private company might achieve a liquidity event.
Data needed: Finnerty presented the new model during a BVR webinar and asked the audience for comments and suggestions. He would also like some real data for testing purposes. “If anybody has a sample of private company data, I would love to test this model,” he says. Anyone who provides the data will be listed as a co-author of the paper Finnerty writes on the new model, but, he says, “I’ll do all the work.”
You can contact Finnerty at firstname.lastname@example.org. His webinar, Discount for Lack of Marketability for Any Restriction Period—Mastering the Average-Strike Put Option DLOM Model, can be acquired if you click here.
The issue of active and passive appreciation of business assets in a divorce context is growing in prevalence. A noteworthy Florida ruling further explores the scope of appreciation: Does a nonowner spouse have a claim to the increased value of all nonmarital assets without showing marital effort or the use of marital assets to achieve the appreciation?
‘Middle manager’ in a company: In this case, the husband did not own a business. Instead, before the marriage, he began working for a company and, at that time, also bought a large number of company stock by way of a bank loan. During his tenure at the company he had some supervisory responsibility, but also had a couple of demotions. When he was terminated, his stock was liquidated. The shares sold for substantially more than the outstanding balance on the loan used to buy them.
The trial court determined the stock was separate property and its increase in appreciation was passive; it was, therefore, not subject to marital distribution. The wife appealed the ruling. It seems she asked the appeals court to adopt a rule “that all appreciation of the stock of a company for which a spouse works is a marital asset.” The Court of Appeal rejected the proposition.
Under the existing analytical framework, the court said, the increased value of stock from a company for which the owning spouse works can be a marital asset and subject to distribution. But, it can also be a nonmarital asset. The crux of the matter is “whether the husband exerted the sort of ‘effort’ required to move the appreciation value from the nonmarital category to the marital one,” the court explained.
For the outcome of the case, see the March 23 issue of BVWire.
In a recent webinar, Prof. Ashok Abbott (West Virginia University), a consultant to top valuation firms who testifies in cases involving active and passive appreciation, discussed his empirical methodology for isolating the passive component of a firm’s appreciation in value. He presented his analysis of causal factors and their elasticities for several industries. For example, for the period 1992 to 2014, 88% of the change in grocery sales was due to factors over which the industry had no control.
A webinar attendee asked: “Are there any published sources of causal factors and elasticities by industry?” Dr. Abbott replied “no,” but he offered to provide some of this analysis in future issues of Business Valuation Update.
Vote now: Take a quick survey to tell us which industries you’d like to see analyzed for causal factors and their elasticities, and Dr. Abbott will address them in the order of preference. Thanks in advance for helping us help you!
In a prior post, we highlighted the article “NY’s Unfair Application of Shareholder-Level Marketability Discounts,” written by Gil Matthews and Michelle Patterson (both with Sutter Securities). The article has rekindled the debate over New York’s out-of-step position with respect to the discount for lack of marketability in fair value proceedings. It has also sparked calls for the BV profession to speak with “one clear voice” on this issue.
“This is a topic that is dear to my heart,” says Chris E. Best, a managing director at Acclaro Valuation Advisors. “I have a number of cases going on right now that involve this issue and just testified in a couple of cases last month. I can tell you that even in a state where this is settled law, many of the judges still do not understand the concept of fair value and need education on it.” Best goes on to say that many judges are not familiar with the case law in the state, much less such learned treatises such as O’Neal and Thompson’s “Oppression of Minority Stockholders.” Best continues: “Many of them do not have a good understanding about valuation or valuation theory. It would be great for the BV community to come out and take a consistent stance on the topic.”
William C. Quackenbush (Advent Valuation Advisors), former chair of the ASA’s business valuation committee, is not surprised there are calls for the BV profession to speak with one voice on this issue. He has written a follow-up article, “DLOMs in N.Y. Statutory Fair Value Cases—A Follow-Up to Matthews.” Among other points, he suggests that the “valuation profession needs to continue its discussion regarding control level DLOMs.” The article appears in the March issue of Business Valuation Update.
Forty percent of respondents to a recent BVWire poll cite practice management as their biggest concern for 2016. This includes issues such as competition, fee pressures, hiring, succession planning, and the like.
A number of respondents included write-in comments, and several noted an increased level of competition and a pressure on fees. One insightful comment: “Prospects seem to increasingly focus on the lowest bids under the assumption or misunderstanding that they are buying a commodity product. This problem is compounded by competitors’ apparent willingness to undercut one another to win projects. Are there too many valuation professionals chasing too few opportunities?” Another respondent mentions the same issue and offers a suggestion: “Customers will ‘shop’ us all. However, we should be alluding to the specialized nature of the work we perform and should get paid accordingly.”
For the other concerns cited by valuation practitioners, please click here.
New York’s out-of-step position with respect to the discount for lack of marketability in fair value proceedings is a hotly debated issue—and it’s getting even hotter. A “new note” in the debate was sounded in an article in the January issue of Business Valuation Update, according to a blog post by attorney Peter Mahler (Farrell Fritz) in the New York Business Divorce blog.
Stands alone: In the article, “NY’s Unfair Application of Shareholder-Level Marketability Discounts,” Gil Matthews and Michelle Patterson (both with Sutter Securities) write that New York “stands alone in that it favors (and some lower courts believe requires) the imposition of a marketability discount on dissenting shareholders in fair value determinations. There is broad consensus that DLOMs should seldom, if ever, be permitted in appraisal or oppression cases.” Matthews points out that New York is out of line with both the Model Business Corporation Act (MBCA) and the American Law Institute (ALI) “as well as the widely accepted view in other states and in legal literature.”
Mahler gives his perspective on the issue and says that it “would be nice if the business valuation community could speak with one, clear voice on the issue, which would then facilitate consideration by legislators or, should they defer to the courts, appellate judges, of any needed changes to New York’s policy toward DLOM in fair value proceedings.”
Each month, BVWire includes trademark comparable data provided by Markables, which has a database of over 6,500 trademark valuations published in financial reporting documents of listed companies from all over the world. The database reports value solely for the use of trademarks (not bundled with other rights). This month’s data snapshot is for full service and fast food restaurants (fully owned and operated restaurants only, not franchised operations). Some of the larger restaurant brands in the sample are LongHorn Steakhouse, The Capital Grille, O’Charley’s, Yard House, Roman’s Macaroni Grill, Mimi’s Café, and Einstein Bros. Bagels, among others.
Two key points: The analysis reveals two noteworthy issues. First, restaurant brand value multiples depend on the price positioning of a particular brand. Full service, sit-down restaurants generate a higher brand value premium than fast food restaurants. The same observation can be made within each group. Second, pure play trademark royalty rates must not be confounded with franchise royalty rates, which are most often in the area of 4% to 6% on revenues. As a rule of thumb, the value of the trademark makes up for approximately 50% of the franchise, with the remainder for the operating system, recipes, and trade secrets.
Trademark royalty rates range from 1.5% to 5% on revenues, with median rates of 2.3% for full service and 2.0% for fast food restaurants. The trademark accounts for about 25% of enterprise value of full service restaurants and 35% for fast food restaurants. Average enterprise value multiples for the sector are 0.85x revenues for full service and 0.75x for fast food restaurants.
For more information and a chart of the data analysis, please click here.