April 6, 2011 | Issue #103-1  

Should net operating losses be valued in fair market value analyses?

Rick Warner (Edward G. Detwiler & Assoc.) started a discussion in LinkedIn’s Business Valuation Professionals group last week that generated diverse feedback. He asked:

How are folks handling the existence of NOL carryforwards, when the company being valued is expecting to have positive earnings in the future? Standard of value is FMV. If you assume a hypothetical transaction, it is less likely that such NOLs would ever get used given the limitations on the ability to transfer them. Clearly however, these NOLs will have value to the current company if indeed earnings turn positive.

Mark Krickovich (MK Appraisal Group) said “one approach would be to utilize an NOL table for the subject company, where the NOL balance is used-up during future positive earnings periods - however, this perhaps ignores the hypothetical transaction notion in favor of the ‘value as a going-concern’ premise.”

John O’Brien (Business Valuation & Consulting Group) responded “there is definitely value there. We reduce the taxes during the projection period for the NOL's. If there are still remaining NOL's at that point, we do not include the NOL as part of the TV calc."

Don May (Marks Paneth & Shron) said “my understanding is that the NOLs can not be used to offset the acquirer’s net income but can be carried forward for the subsidiary. Hence the NOLs should always be valued in calculating the FMV. All respondents agreed that the NOL should be a part of the valuation."

New custom research service from BVR
and Aranca

BVR continues to try to support business valuation firms via premier research tools, practice development guidance, and now custom white-label business research via a new partnership with Aranca, Inc.  “In addition to our practice development advisory services with YS Advisory, this partnership with Aranca gives our customers access to 250 trained researchers and analysts,” said Lucretia Lyons, BVR’s president.

The new BVResearch will focus on business and intellectual property projects that can be used by business appraisers, analysts, and their clients to support competitive and financial analyses.  “Because Aranca has such a huge international research staff, BVResearch can be cost-effective and fast,” said Lisa Davis, Aranca’s vice president who is in charge of the initiative.

Contact Lexie Gross at BVR or Lisa Davis at Aranca for more information.

Standard of value in ‘reverse stock split’ cases?

In two recent cases, majority shareholders in private enterprises used a reverse stock split to “squeeze out” the minority. When the minority shareholders sue for the “fair value” of their shares, what standard of value applies?

The issue was one of first impression in both cases—and in both, the answer sounds all-too familiar: It depends…on the controlling statute. In Reis v. Hazelett Strip-Casting Corp., 2011 WL 303207 (Del. Ch.)(Jan. 21, 2011), the Delaware Chancery Court found—after an extensive discussion of the remedies available in an entire fairness case versus a statutory appraisal proceeding—that “the fair value standard is . . . economically efficient and should be applied consistently to freeze-outs, regardless of form.” The same policies that “animate using a fair value standard” to evaluate a squeeze-out merger “calls for its use when the freeze-out is implemented by a reverse split,” the court held.

Compare Rolfe State Bank v. Gunderson, 2011 WL 480685 (Iowa)(Feb. 11, 2011), in which a bank claimed that the controlling provision of the state banking code (which permitted discounts under an FMV standard) applied not only to bank mergers but to any bank transaction, including its own reverse stock split (notwithstanding the FV standard available generally to minority shareholders under the state’s appraisal proceedings). The court found the banking statute ambiguous, and—after a lengthy discussion of its legislative history—concluded that it extended the FMV standard in a reverse stock split to the valuation of a bank holding company, but not to a bank, thereby precluding discounts in the valuation of the minority’s shares.

The lesson is also familiar: It’s critical to know the applicable law in any particular case. Read the complete digests of both decisions in the May 2011 Business Valuation Update; the court’s decisions will be posted soon at BVLaw.

Patent valuation requires knowledge of relevant inventions, market conditions, and patent law

David Wanetick (Incremental Advantage) just published “The Role Of Patent Licensees And Acquirers On Patent Value,” the third article in a three-part series on patent valuation and the importance of intellectual property when valuing and selling privately held companies.  In this article Wanetick reviews how a patent is valued from the perspective of the licensee. Part 1 of the series introduces how patents impact business valuation; part 2 outlines 10 specific factors that impact a patent's value.

The need for healthcare execs to understand valuation is increasing

In “Structuring Competitive Physician Compensation ModelsKim Mobley (Sullivan, Cotter and Associates) and Claire Turcotte (Bricker & Eckler LLP) emphasize the need for healthcare financial executives to understand valuation methodology to ensure legal and regulatory compliance.  Writing in the current issue of Healthcare Financial Management, Mobley and Turcotte add:

The federal Stark law, antikickback law, and for federal tax-exempt organizations, IRS requirements should be understood and followed to ensure that compensation models are legal to avoid compliance problems down the road. These laws generally require healthcare organizations to pay physicians an amount that is fair market value (FMV) and reasonable for their services. One way to make sure that your organization is compliant from a regulatory perspective is to understand market benchmark data and the valuation methodologies commonly used to calculate FMV for physician services.

Join James Pinna and Matthew Jenkins (both from Hunton & Williams) on April 26th for “The Anti-Kickback Statue and Stark Law: Avoiding Valuation of Referrals,” part four of BVR’s Online Symposium on Healthcare Valuation. During the webinar the attorneys will provide an in-depth look at laws regulating medical referrals and what they mean for your valuation practices.  Two CPE credits are available.

Tax-related valuations are the most common “specialty” for BV firms

BVR’s 2011 BV Firm Economics and Best Practices Guide will be out this month.  Here’s an analysis of the percent of valuation firms that performed engagements in each major practice area in 2010.  The table below shows that 83% of firms offering valuation services in 2010 conducted an engagement intended for tax purposes, making it the most common “specialty.”  This was followed by valuations conducted for general corporate work. The biggest change in the last two years: only a sixth of responding firms did financial reporting valuations in 2008—now, almost half do.  And, many more firms report doing transfer pricing now work compared to two years ago.

Firms performing valuations in each specialty in 2010

Practice Specialty

Percent of firms

Tax, Gifts and Estates


Shareholder/Corporate (buy/sell agreements, shareholder disputes, etc.)


Transactional (Including brokerage, mergers and acquisitions)




Fair Value for Financial Reporting (FASB/ASC compliance, etc.)




Incentive compensation arrangements


Bankruptcy and Restructuring


Transfer Pricing


Other revenue sources not listed above


Boilerplate language problematic in Tax Court opinion

Lance Hall (FMV Opinions) just reviewed the recent Tax Court opinion Schrimsher v. Commissioner (T.C. Memo. 2011-71), in which a primary issue concerned unusual language within the agreement between the taxpayer and a nonprofit organization.  In his article Dotting the i’s and Crossing the t’s” Hall writes:

While it remains uncertain as to whether the Taxpayer could have sustained their determination of value, the Taxpayer did not get that opportunity because of poorly written language that failed to satisfy the strict and exacting requirements of section 170.  When dealing with conservation easement donations, “dotting your i’s and crossing your t’s” is critical.

Damodaran, Faust and bank valuation

Aswath Damodaran (Stern School of Business, NYU) reflects on how our shaken change in faith in both bankers and regulators prevents us from assuming “that having regulatory rules on risk taking will result in sensible risk taking at individual banks.”

“So, what do we do now?” the professor asks in his recent blog post “Breach of Trust: Bank Valuation after the Banking Crisis”.  “In intrinsic valuation, we have two choices.” One is to use a modified version of the dividend discount model, and the other, more complicated choice “requires knowledge of regulatory capital requirements and involves several steps.”

Bank valuation is a hot topic given the current economic environment. Look for an article on valuing unprofitable banks in the next issue of Business Valuation Update.

A BV blog posting goes “viral”

You may wonder if blogging is worthwhile.  Whether it produces any business or not, there was an example this week of a post by a valuation firm that has reappeared in several legal websites and was picked up by a content syndicator, JD Supra. On March 23 Mark Gottlieb (MSG Accountants Consultants & Business Valuators) wrote the article “Using Business Valuation Experts to Your Best Advantage in Divorce” for his blog Forensic Perspectives. Attorney Daniel Clement summarized Gottlieb’s article in “Four Advantages of Using a Business Valuation Expert in a Divorce,” in his blog  New York Divorce Report, which was then picked up by JD Supra for other attorneys to read.  BVR also cited Mark’s post at www.bvresources.com

Improved M&A and aftermarket IPO performance drive venture-backed liquidity activity

The National Venture Capital Association (NVCA) and Thomson Reuters just published their quarterly Exit Poll report on venture-backed IPOs. The report indicates “this quarter marked the strongest opening three-month period for venture-backed IPOs since 2007. For the first quarter, 109 venture-backed M&A deals were reported, 45 which had an aggregate deal value of $5.9 billion.” Access the detailed report here (under “Recent News”).

Over 110 free ways to stay current in business valuation

Loyal BVWire readers are quite familiar with the phrase we often include in many of our articles—“…that is posted to the Free Downloads page.”  Are you curious what your fellow business valuation professionals are downloading?  Well, here’s a list of the top ten free downloads for March:

Document Title


Excerpts from 2011 Mergerstat Review


More Problems With Using Preliminary Valuations in Divorce


How Much is Your Business Worth - According to Inc. and BVR


Historic Trends in Private Company Valuation Multiples


Reasonable Compensation Data Sources


Control Premiums: Application & Analysis Special Report Excerpt


Economic Outlook Update Monthly - December 2010


Goodwill Hunting in Divorce


Court Case Abstract: In re Marriage of Hagar


FORM PREM14A EF Johnson Technologies, Inc. - EFJI

What does valuing companies under $2 million have in common with the Theory of Relativity?

In a recent response to a recent question on small business valuation in LinkedIn’s Business Valuation Professionals group, Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) said “I like to equate valuation to the theory of relativity. It's all about finding a reference point and adjusting it so that it works with the subject company.” You may not want to use this quote in your next small business valuation report, but you can learn more small business valuation wisdom from Yeanoplos, Ron Seigneur (Seigneur Gustafson), and Michelle Gallagher (Gallagher & Associates) during the BVR webinar “Valuing a Business Worth Less than $2 Million” on April 28.  Two CPE credits are available.

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BVR Education
and CPE
View Complete Calendar

The Anti-Kickback Statute and Stark Law: Avoiding Valuation of Referrals
April 26, 2011
10:00am - 11:40am PT
Featuring: James Pinna and Matthew Jenkins

Valuing A Business Worth Less than $2 Million
Thursday, April 28, 2011, 10:00am - 11:40am PT Time
Featuring: Ron Seigneur, Kevin Yeanoplos, and Michelle Gallagher


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