“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.
“People do business with people they know, like, and trust … and can find!” says Rod Burkert (Burkert Valuation Advisors, LLC). “A killer profile on LinkedIn and presence on other social media platforms can help when the barriers of physical location and time zones are crumbling.”
Poll results: A recent survey of 250 participants in the Practice Builder Academy reveals that BV professionals are lacking when it comes to using social media to build their practices. Of the 75 individuals who responded, 73% say they are not using social media to grow their sphere of influence.
The Practice Builder Academy (PBA) is a 12-month mentoring program that teaches proven strategies to BVFLS professionals who want to build their practices and re-design their lives. A second program will be opening for the next wave of PBA participants at the NACVA Conference in Las Vegas (June 17-20). Burkert and co-creator Mel Abraham, a valuation and entrepreneur expert, will have a booth in the exhibit hall, so if you’re attending the conference, stop by for more information.
Learn more: Burkert offers more practice building tips in the upcoming July issue of Business Valuation Update (subscription required).
Several top business valuation thought leaders tell BVWire that, in terms of career advice, valuation analysts should develop a specialty, whether it be related to an industry or a particular type of valuation (such as lost profits, intellectual property, ESOPs, etc.).
“Find a niche where you can position yourself as an expert as early as you can in your career,” advises Rod Burkert (Burkert Valuation Advisors LLC). “The temptation is to say you can do all valuations,” observes Lance Hall (FMV Opinions). However, the profession has advanced to the point where being a generalist may not be the best idea. “Business valuation has become a true specialty,” says Gary Trugman (Trugman Valuation Associates). “It is not meant for the practitioner who wants to do a little of this and a little of that. When you’re sick, you go to a specialist—not the family doctor.” Specialization can also enhance the value of your services, as Hall points out: “Once you invest in specialization, it’s easier to differentiate your services and maintain higher fees.”
Time to go “hot tubbing,” said U.S. Tax Court Judge David Laro to chuckles in the audience at a recent presentation, according to a report in the BVWire. No, he doesn’t mean to go soak in a warm bath. He’s talking about a very different method of giving expert testimony that he favors over traditional cross-examination. He sits at a table with the two experts flanking him and opens a conversation. Without fear of being attacked over their credibility, the experts feel free to have a collegial discussion about their work on the case. Judge Laro believes this technique can lead to a more equitable outcome.
Judge Laro, the author of the seminal Mandelbaum decision, made his remarks at a recent luncheon sponsored by the Business Valuation Association. More coverage appears in the June issue of Business Valuation Update. Judge Laro’s Mandelbaum v. Commissioner, T.C. Memo 1995-255 (1995), is available at BVLaw.
BVWire reminds us that comments are due June 2, 2014, on the Second Exposure Draft for the 2016-17 edition of the Uniform Standards for Professional Appraisal Practice (USPAP).
If you recall, the Appraisal Standards Board put off making changes to the definition of “report” in the 2014-15 edition of USPAP to allow enough time to consider this important topic. Those changes are now being proposed and are included in the draft. There are also proposed revisions to eliminate confusion regarding report drafts, revisions to Standard 3 to enhance consistency with other standards and to clarify the dates identified and reported, changes to eliminate confusion regarding confidentiality, and other edits to improve clarity and enforceability of USPAP.
Written comments can be sent to ASBComments@appraisalfoundation.org.
BVWire attended the 21st Annual Current Topics in Business Valuation conference presented by the New York City chapter of the ASA. Here are a few highlights from this very fine event:
A DLOM toolkit is now in beta testing, announced Jim Hitchner (Financial Valuation Advisors). The toolkit is designed to develop a supportable DLOM using existing research studies, databases, and models. But it’s “not a black box,” he says. You can drill down and see exactly how it all works. He developed it with Jim Alerding and Josh Angell.
Using an option model to value startups is the subject of a paper presented by John Finnerty (Alix Partners). His new model expresses the value of an emerging growth firm’s common stock as a call option on the firm’s assets struck at the cost of the future investment to make the product viable plus the cost of retiring the debt that’s needed. While the model could use some simplification, he demonstrated it with several real-life examples and urged users to “try it out and improve on it.” For a copy of his paper, click here.
More opportunities for fund valuations are on the horizon, says Craig Ter Boss (Eisner Amper). He says the ongoing scrutiny on fund valuations by the PCAOB and SEC will trigger increased use of third-party valuation experts by fund managers.
For more highlights, see the May 7 issue of BVWire.
Dealing with the IRS, DLOM update, detecting errors in transactional databases, and valuation issues in divorce are among the topics covered at the 16th Annual Business Valuation Conference in New York City on May 19, 2014. Hosted by the New York State Society of CPAs, this is the premier event for valuation and forensic professionals in the NYC area.
All-star cast: Speakers include two former IRS managers who specialized in business valuation and engineering issues on a national level, Michael Gregory (Michael Gregory Consulting, LLC) and Howard A. Lewis (RiskGuidance Co., LLC). Other top-notch speakers are: Ashok Abbott (West Virginia University), Jaime d’Almeida (Duff & Phelps), Christine L. Baker (Meyers, Harrison & Pia), C. Fred Hall III (Affordable Business Valuations), and Fred D. Weinstein, Esq., (Kurzman, Eisenberg, Corbin & Lever, LLP).
BVWire News will be there, so we hope to see you! For details and to register, click here.