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BV News and Trends December 2022

A monthly roundup of key developments of interest to business valuation experts.

Ang Offers SSBV Members More Evidence of the Lack of a Size Effect

Clifford Ang (Compass Lexecon), who offered an impassioned plea to a large group from the UK’s Society of Shares and Business Valuers (SSBV), has become one of the leading proponents of eliminating or minimizing the traditional size premia. Ang has written a number of articles on the size effect and has a new book, Applied Valuation, due out early next year.

Estimating the Extra Risk of Customer Concentration

Interesting comments were made by Roger Grabowski (Kroll), who conducted a session at the American Society of Appraisers International Conference. He discusses the research in this area and how to examine the customer concentration of guideline public companies.

BV News and Trends November 2022

A monthly roundup of key developments of interest to business valuation experts.

2022 Johnson/Park DLOM study is now available

The Johnson/Park empirical method to estimate a discount for lack of marketability (DLOM) is one of the most popular methods business appraisers use for this purpose, according to a BVR survey.

Huge turnout for the AICPA FVS conference

At 800 attendees, the AICPA & CIMA Forensic and Valuation Services Conference in Las Vegas was the largest event we’ve been to this year.

Embracing Subjectivity: The Illusion of Precision in BV

Nothing keeps a valuator up at night more than “squishy numbers.” Everyday someone comes up with another “objective quantitative method” that eliminates subjectivity. But guess what? Many of the methods are actually increasing the subjectivity exponentially and creating the illusion of precision. In this rip roaring session, we will shine a light on all of the subjective areas of the valuation process and learn to embrace it.

DLOM: A Practical Look at a Complex Matter—Part 1

This webinar will cover the theory behind discounts for lack of marketability. We will cover the applicability and the application of using a DLOM on a minority interest as well as on a controlling interest. We will cover the different models and tools that are available for valuators to use when trying to determine the appropriate DLOM.

2022 Discount for Lack of Marketability Study

November 2022

Bruce A. Johnson, James R. Park

Johnson/Park

The 2022 Discount for Lack of Marketability Study provides objective rate of return measures to implement the Johnson/Park Empirical Method for determining a discount for lack of marketability (DLOM) for the valuation of interests in privately held corporations and partnerships.  Learn more >>

Inflation showcased in lead-off session at the AICPA FVS conference

As this issue rolls off the (virtual) presses, BVWire is attending the AICPA & CIMA Forensic and Valuation Services Conference.

Appellate court rules on valuation of inventory in Sears bankruptcy

Sears (the Amazon of its day) recently emerged from bankruptcy after four years and thousands of court filings.

In re Navidea Biopharmaceuticals Litig.

A pharmaceuticals company sued its former CEO for, among other things, breach of contract and for a declaratory judgment establishing the contractual rights and obligations of the parties. This resulted in counterclaims by the former CEO, Michael Goldberg. Goldberg submitted for testimony of damages Terry Lee Orr, CPA. In this matter, the company sought to exclude Orr’s testimony and, absent his exclusion, to present their own expert, William F. Murray, CPA, as a rebuttal expert. Goldberg sought to exclude the testimony of Murray. The court excluded portions of Orr’s testimony and denied the exclusion of Murray as a rebuttal expert.

U.S. District Court Partially Excludes Witness in Securities Value Case and Allows Rebuttal Witness

A pharmaceuticals company sued its former CEO for, among other things, breach of contract and for a declaratory judgment establishing the contractual rights and obligations of the parties. This resulted in counterclaims by the former CEO, Michael Goldberg. Goldberg submitted for testimony of damages Terry Lee Orr, CPA. In this matter, the company sought to exclude Orr’s testimony and, absent his exclusion, to present their own expert, William F. Murray, CPA, as a rebuttal expert. Goldberg sought to exclude the testimony of Murray. The court excluded portions of Orr’s testimony and denied the exclusion of Murray as a rebuttal expert.

Inflation, volatility trigger increase in ERP, per Kroll

Kroll has increased its recommended U.S. equity risk premium (ERP) from 5.5% to 6.0% when developing USD-denominated discount rates as of Oct. 18, 2022.

Prevailing expert comments on ‘moonshine’ case

In an earlier issue, we reported on an appellate court case involving the valuation of an owner’s one-third share in a Tennessee moonshine distillery (click here for the prior coverage).

Buccieri v. New Hope Realty, Inc.

This case arose out of a dispute between the surviving family and a trustee of the founders of New Hope Realty Inc. The parties could not agree on the management and operations of New Hope Realty. On July 7, 2020, a dissolution proceeding was commenced. The defendants elected to purchase the plaintiffs’ shares. Subsequently, the parties could not agree as to the fair value of the plaintiffs’ interest. The plaintiffs asked the court to determine the value. The court held hearings including testimony from expert witnesses from both parties and determined the fair value.

Court Determines Fair Value of 50% Interest in Real Estate Company—Parties Could Not Agree on Value

This case arose out of a dispute between the surviving family and a trustee of the founders of New Hope Realty Inc. The parties could not agree on the management and operations of New Hope Realty. On July 7, 2020, a dissolution proceeding was commenced. The defendants elected to purchase the plaintiffs’ shares. Subsequently, the parties could not agree as to the fair value of the plaintiffs’ interest. The plaintiffs asked the court to determine the value. The court held hearings including testimony from expert witnesses from both parties and determined the fair value.

Valuation Considerations in High Inflationary Environments

After more than a decade of modest price increases, the U.S. Consumer Price Index increased by 9.0 percent in June 2022 which is the largest increase since January 1982, the tail end of The Great Inflation which began in 1965 and lasted for approximately 17 years. With inflation at its highest level since The Great Inflation, valuation analysts will have to consider macroeconomic factors that have not been present in the U.S. economy in over ...

Champions Retreat Golf Founders, LLC v. Comm’r

The Tax Court, on remand from the 11th Circuit, which decided that the taxpayer was entitled to a charitable donation for donation of a conservation easement, now valued that interest to determine the amount of the donation deduction. Both parties presented valuation opinions from expert appraisers. The Tax Court determined that the highest and best use of the property before and after the grant of the easement was the key to the determination of the value of the easement. The Tax Court then analyzed the evidence from the expert appraisals to arrive at a value of the easement.

On Remand, the Tax Court Determines the Value of a Conservation Easement From a Golf Course

The Tax Court, on remand from the 11th Circuit, which decided that the taxpayer was entitled to a charitable donation for donation of a conservation easement, now valued that interest to determine the amount of the donation deduction. Both parties presented valuation opinions from expert appraisers. The Tax Court determined that the highest and best use of the property before and after the grant of the easement was the key to the determination of the value of the easement. The Tax Court then analyzed the evidence from the expert appraisals to arrive at a value of the easement.

Esl Invs., L.P. v. Sears Holdings Corp. Debtor-Appellee (In re Sears Holdings Corp.)

Second-lien holders, entitled to payment only after the debts of first-lien holders have been discharged, argued that the value of the collateral that secured their claims, as measured on the petition date, vastly exceeded what they had been paid and that they were accordingly entitled to priority payment of the difference. At trial, all parties put on evidence as to the value of the assets at the petition date. The differences varied widely. “The differences among these values turned primarily on how the experts calculated the revenue Debtors could expect to earn from selling their inventory.” The appeal dealt primarily with this inventory issue and how it should be valued. The Bankruptcy Court, affirmed by the district court, used a net orderly liquidation value (NOLV) to determine ...

Valuation of Inventory Key to Decision on Collateral Value in Bankruptcy

Second-lien holders, entitled to payment only after the debts of first-lien holders have been discharged, argued that the value of the collateral that secured their claims, as measured on the petition date, vastly exceeded what they had been paid and that they were accordingly entitled to priority payment of the difference. At trial, all parties put on evidence as to the value of the assets at the petition date. The differences varied widely. “The differences among these values turned primarily on how the experts calculated the revenue Debtors could expect to earn from selling their inventory.” The appeal dealt primarily with this inventory issue and how it should be valued. The Bankruptcy Court, affirmed by the district court, used a net orderly liquidation value (NOLV) to determine the value at the petition date. The appellate court affirmed the judgments of the two lower courts.

Another call to discard CAPM

“Unfortunately—and I write this with a heavy heart—the CAPM is not just imperfect; it is so badly wrong that it is best ignored,” writes Ivo Welch (UCLA Anderson Graduate School of Management) in an article “The Cost of Capital: If Not the CAPM, Then What?”

Tennessee moonshine formula caught up in business divorce

A partner in a Tennessee distillery making flavored moonshine felt the other two partners improperly disaffiliated him.

Official Comm. of Unsecured Creditors of LB Steel, LLC v. Steelcast Ltd. (In re LB Steel, LLC)

The Bankruptcy Court in this case dealt with an adversary complaint from the Official Committee of Unsecured Creditors. The committee sought to avoid and recover payments the debtor made within the 90 days leading up to the bankruptcy filing to the parent company. For reasons including that the debtor was insolvent during that 90-day period, the court decided in favor of the committee and ordered the payments avoided and ordered the parent company to repay the debtor’s estate.

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