BV News and Trends December 2024
A monthly roundup of key developments of interest to business valuation experts.
Appellate court affirms decision regarding overstated projections
A big red flag when using financial projections in a DCF is relying on ones that were prepared for some other purpose, especially if there was a tendency to paint a rosy picture.
Delaware’s Surprising and Inexplicable Appraisal of FairXchange
This appraisal decision has echoes of Edgar Allan Poe: a well-written story with a surprise ending. The sale of a private company was negotiated and forced through by a management that had no relevant experience but failed to use any professional financial advisors. The court expressly stated that the sellers left money on the table but nonetheless ruled that fair value was the deal price.
Jacobs v. Akademos, Inc.
The controlling shareholder of this nearly bankrupt company, which operated online bookstores for colleges and universities, finally threw in the towel and accepted a last-ditch merger, which still left it under water. Some common shareholders asked for a fair value valuation of their common shares, which the court determined to be zero dollars per share. The case emphasized the problems with unreliable projections (i.e., forecasts) and criticized the use of 409A valuations in determining fair value. The case is an excellent tutorial of issues to be considered in determining fair value.
Delaware Chancery Court Determines a Zero Value for Common Stock Shares and Determines That the Merger Triggering the Fair Value Determination Was Fair
The controlling shareholder of this nearly bankrupt company, which operated online bookstores for colleges and universities, finally threw in the towel and accepted a last-ditch merger, which still left it under water. Some common shareholders asked for a fair value valuation of their common shares, which the court determined to be zero dollars per share. The case emphasized the problems with unreliable projections (i.e., forecasts) and criticized the use of 409A valuations in determining fair value. The case was an excellent tutorial of issues to be considered in determining fair value.
BV Myth Busters tackle exit multiple vs. Gordon growth
Is an exit multiple preferable to the Gordon growth model (GGM) for calculating the terminal-year value in a DCF model?
Navigating ESG: The Evolving Landscape and Its Impact on Business Value
Join us to understand the evolving landscape of ESG, including ESG financial reporting developments in the United States and the state of California, as well as some international disclosure requirements impacting U.S. companies. Attendees will also learn how the new International Valuation Standards (IVS) effective January 2025 will address the integration of ESG factors in business valuations. The discussion extends to the significant impacts of ESG on M&A, projected cash flows and the cost of ...
Matthews critiques Delaware’s surprise-ending opinion in FairX
Edgar Allan Poe was a master of the surprise ending, but Judge Laster of the Delaware Chancery Court is giving him a run for his money in his recent decision in the FairXchange (FairX) case.
FairX valuation: from bad to worse
In a statutory appraisal case, the Delaware Court of Chancery rejected two valuation approaches in favor of its own method, which had “seriously flawed” underpinnings.
Hyde Park Venture Partners Fund III L.P. v. FairXchange, LLC
This was a case that, once again, adopted the deal price in a shareholders’ dissent appraisal proceeding. The judge was not satisfied with the experts’ methodologies. He noted the difficulty in valuing a startup in a business model that had not been tried before. Absent compelling evidence of value from either side, the court fell back on the deal price.
Chancery Court (Delaware) Adopts Deal Price—Deplores Valuation Methodologies
This was a case that, once again, adopted the deal price in a shareholders’ dissent appraisal proceeding. The judge was not satisfied with the experts’ methodologies. He noted the difficulty in valuing a startup in a business model that had not been tried before. Absent compelling evidence of value from either side, the court fell back on the deal price.
ECB USA, Inc. v. Savencia, S.A.
This case was an example of the application of Rule 702 as to witness acceptance or exclusion. In this case, the same witness was allowed to testify in part and excluded in part.
U.S. District Court Allows Testimony in Part of Expert Witness on Certain Damages
This case was an example of the application of Rule 702 as to witness acceptance or exclusion. In this case, the same witness was allowed to testify in part and was excluded in part.
A Channel Analysis Is Key When Valuing a Fast-Food Restaurant
There has been a seismic shift in the operations of limited-service restaurants since the pandemic—and there’s no sign of reverting. Channels of revenue have been upended. Therefore, an analysis along these lines is important when valuing these entities, advises an expert in this space.
The CEIV Is Gone But the MPF Will Endure—Here’s an Example
The Certified in Entity and Intangible Valuations (CEIV) credential has been discontinued, but the Mandatory Performance Framework (MPF) will continue to be used. In fact, a revision is expected to make it more streamlined. Here are its guidelines for documenting management projections that are worthy of repurposing.
Barnes v. Barnes
The trial for this divorce case was extended almost eight months because the parties had assured the court it would be a three-day trial and it took four days. The fourth day was almost eight months after the end of the third day of trial. As a result, the husband argued that the value of his business should have been updated and consideration given to the effect of splitting the business’s real estate from the operations of the business. The appellate court noted that this issue had not been raised at trial and was, therefore, not appealable. Other issues not related to the business were issues for the appellate court.
Tennessee Appeals Court Affirms Trial Court Valuation and Trial Court’s Skepticism of Husband’s ‘Projections’
The trial for this divorce case was extended almost eight months because the parties had assured the court it would be a three-day trial and it took four days. The fourth day was almost eight months after the end of the third day of trial. As a result, the husband argued that the value of his business should have been updated and consideration given to the effect of splitting the business’s real estate from the operations of the business. The appellate court noted that this issue had not been raised at trial and was, therefore, not appealable. Other issues not related to the business were issues for the appellate court.
Confident Projections: Knowing & Implementing FP&A Methodology Into Projections
Financial experts use projections in business valuations, economic damages, and a multitude of other scenarios in practice. Understanding the source of data is one step, but assessing the quality of the data along with projections is critical for data quality as well as assessing the sufficiency and accuracy of management’s projections. Learn how to understand and assess the quality of projections and the quality of the professionals providing those inputs by joining Josh Shilts, who ...
Internal billings trigger M&A damages; GPCM prevails
A case in Delaware Chancery Court shows that the court will not award damages from an M&A transaction gone bad when the calculations are based on speculative lost synergies.
Gore v. Gore
The key element in the appeal of this divorce case revolved around the valuation of the wife’s business, selling dietary supplements online. The wife failed to produce in a timely manner the documents the husband requested. She also failed to timely declare an expert who could testify as to the value of her business. “Wife appealed the circuit court’s award of monetary sanctions and the court’s exclusion of her and her expert’s testimony regarding her company’s valuation, as well as her attempts to testify regarding the value of her business. Husband cross-appealed the court’s distribution of marital property and the resultant monetary award.”
Appellate Court (Maryland) Affirms Trial Court’s Decision to Exclude Testimony of Wife’s Expert
The key element in the appeal of this divorce case revolved around the valuation of the wife’s business, selling dietary supplements online. The wife failed to produce in a timely manner the documents the husband requested. She also failed to timely declare an expert who could testify as to the value of her business. “Wife appealed the circuit court’s award of monetary sanctions and the court’s exclusion of her and her expert’s testimony regarding her company’s valuation, as well as her attempts to testify regarding the value of her business. Husband cross-appealed the court’s distribution of marital property and the resultant monetary award.”
Chancery Court Determines Value of Shares by Applying Average of GPCM and DCF Methodologies
In a long and complex opinion, the Delaware Court of Chancery determined the value per share of stock in a former stockholder’s appraisal action. The per-share value was reached by ascribing equal weight to adjusted versions of the comparable companies analysis (GPCM) the stockholder advanced and the discounted cash flow analysis the company advanced. The other methodologies were rejected. The use of the GPCM represented the first use of that method in some years.
HBK Master Fund L.P. v. Pivotal Software, Inc.
In a long and complex opinion, the Delaware Court of Chancery determined the value per share of stock in a former stockholder’s appraisal action. The per-share value was reached by ascribing equal weight to adjusted versions of the comparable companies analysis (GPCM) the stockholder advanced and the discounted cash flow analysis the company advanced. The other methodologies were rejected. The use of the GPCM represented the first use of that method in some years.
NetApp, Inc. v. Cinelli
The defendant hid improper recording of revenue from use of internal software in unaudited financial statements that were represented to be GAAP-compliant. The defendant was held to have breached the merger/sale contract in a manner that resulted in fraud. The plaintiff was awarded damages. The court accepted the expert’s GPCM as the most “responsible estimate” of the private company’s value as it was presented to the plaintiff.
Seller Breached Terms of Merger Agreement Including That Statements Were GAAP-Compliant—Expert’s GPCM Accepted
The defendant hid improper recording of revenue from use of internal software in unaudited financial statements that were represented to be GAAP-compliant. The defendant was held to have breached the merger/sale contract in a manner that resulted in fraud. The plaintiff was awarded damages. The court accepted the expert’s GPCM as the most “responsible estimate” of the private company’s value as it was presented to the plaintiff.