New case: the ‘Mandelbaum’ of reasonable compensation Many in the estate/gift valuation community cite the landmark Mandelbaum v. Commissioner (1995) primarily for the Tax Court’s ten-factor holding on the determination of marketability discounts. (A full-text copy of Mandelbaum is available to subscribers of BVLaw.) Equally important was the dicta conveying the Court’s disenchantment with the proffered valuation reports. “Having found limited refuge in the opinions of either expert,” Judge David Laro wrote, “we proceed to determine the value of the marketability discount.” At this past weekend’s LEI National CLE Conference in Snowmass, Colorado—which offered a business valuation track for the first time—presenter Ron Seigneur (Seigneur Gustafson & Knight, LLP), distributed a copy of Ackerman v. Ackerman (Dec. 27, 2006), which he predicted will become the “Mandelbaum” of reasonable compensation cases. In this California divorce, the parties litigated the value of the husband’s plastic surgery practice. To support a determination of goodwill, the wife’s expert looked to regional breakdowns from the MGMA (Medical Group Management Association) survey, while the husband’s expert relied on broad national data from the AMA (American Medical Association).The trial court found problems with both experts’ data; neither was sufficiently “fine-tuned” to the Newport Beach area where the husband practiced, and the judge was forced to apply his own “quality control” in its valuation determination. The appeals court affirmed, citing a list of business/professional attributes to include in goodwill determinations. For a copy of the case, click here. For more on the LEI National CLE Conference, now in its third decade sponsoring first-class confabs in world-class ski resorts, click here. Top Ten data sources used by BV professionals The Ackerman case prompted a lively debate on the quality of data generally available to business valuation professionals for goodwill and other determinations, including discounts and capitalization rates. “The use of raw medians is the first no-no,” observed Ron Seigneur. Concurred co-presenter Bob Duffy (Grant Thornton, LLP, Seattle), “You outrun your data very quickly. This is the real difficulty of these cases.” A participant asked attendees what data they relied on most often. As BVR had just finished compiling its 2007 Business Valuation Firm Economics & Best Practices Survey, we were able to offer the “Top Ten” research sources used by responding BV practitioners (below). Notably—although courts have recently criticized RMA® (Risk Management Association) studies, they rank number four. Ibbotson’s SBBI is still number one, while Duff and Phelps’ Risk Premium Report just misses the list by taking the eleventh spot.
To pre-order your copy of BVR’s full survey—which will be ready by mid-February, click here. New updates available for #3 We’ve just posted new updates to BIZCOMPS, number three on BVR’s list, now available at BVMarketData.com. Additions include 274 new transactions of “Main Street” businesses, bringing the database total to 9,534 transactions. These transactions have median revenues of $365,000 and a $140,000 median selling price. In addition to over 1,590 transactions in the restaurant industry, the database also contains 905 deals in business services and over 740 deals in the area of personal service. For more information on all BVR databases, including #2 Pratt Stats™ and #6 Mergerstat/Shannon Pratt's Control Premium Study™, click here. Options for valuing early-stage companies In another LEI session on Intellectual Property valuations, presenter Neil Beaton (Grant Thornton) bemoaned the dearth of relevant data. The Mergerstat database provides some IP data, and of course there’s Royalty Source®. Beaton also mentioned real options as another approach—a “lattice/option model similar to Black Scholes,” most often used in venture capital (VC) and early stage company valuations. In fact, when Beaton moderated BVR’s recent telephone conference on the topic, panelist Gregg Watts (CBIZ Valuation Group, LLC) offered that real options valuations take place most frequently after the second stage, when start-ups have received their initial round of financing but still may not be generating a lot of revenue or profit. At this point, an asset approach “just doesn’t make any sense,” Watts says, and “we’re going to be doing a lot of either traditional DCFs, VC DCFs, or real options,” as well as market approaches that look at venture data, IPO data, public company data, or M&A data. For a CD or transcript of “Early Stage Company Valuations,” also featuring Chris Kutsor (Motorola), click here. Do defense experts in economic loss cases save $$$? And last from the LEI conference: Tom Burrage (Meyners & Company) and Nancy Fannon (Fannon Valuation Group) provided a fascinating double session on the minefield of lost profits valuations. In particular, the presenters noted the dicey tactical decision in any lost profits case whether to present a damages expert for the defense. Some defense attorneys believe that it’s a concession of liability—while others prefer to give the jury an alternative to the plaintiff’s claim for (usually) multi-million dollar losses. To help make the decision based on real data, Fannon noted an article by Robert Trout (Lit Econ, LLP). Studying 100 cases involving economic damages, the author found that those without defense experts averaged $418,000 in plaintiffs’ awards, while those using defense experts averaged $98,000. To purchase a copy of Trout’s article, "Does Economic Testimony Affect Damage Awards?" from the Journal of Legal Economics (Vol 1., No. 1, March 1991), click here. FASB open meetings now available live (and by recording) You can now listen to “live” meetings of The Financial Accounting Standards Board (FASB). To monitor by audio is free; to listen in by telephone involves dialing an 800-number and paying $0.45 per minute (credit card required). Recording of past meetings are also available by the same means. For more information on FASB’s open access, click here; for a current FASB calendar of meetings, click here. What’s behind the current private equity boom? On just one day in November 2006, $52 billion in private equity deals were announced—adding to the nearly $200 billion of PE deals that 2006 saw. Are public markets being eclipsed? Listen to more from Professor Josh Lerner (Harvard Business School), who offers a 15 minute podcast on what’s driving the current private equity bonanza. To listen, click here. To ensure this email is delivered to your inbox, Copyright © 2007 by Business Valuation Resources, LLC Business
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