DMG Financial - Financial Services for Distributors

A Pricless Contradiction

tim — Wed, 09 May 2012 00:04:04 +0000

In it to stay but not willing to make the long-term play

A decade ago when one encountered a prospective buyer who was willing to offer only half of what they thought their own business was worth, such buyers might be dismissed as non-consolidators and/or disingenuous. When bolder distributors made compelling offers and reaped the rewards of consolidation, it was difficult to have much sympathy for these deal-missers. The gap between what these individuals thought their targets should be paid and notion of their own business’ worth was too glaring to be accepted. Today, it’s different. Today there is another class of buyers who are only willing to go halfway, but I have sympathy for these buyers.

I can have sympathy for the distributor who misses a crucial deal based on any number of reasons. I just can’t muster much sympathy when the reason for missing the deal is a financially baseless value gap created by a would-be acquirer’s notion of self-worth and their perception of a target’s value. However, when a buyer’s reluctance is based on their own financial limits, and not their limited perception of a target’s worth, it’s easy to have sympathy given that very real and practical limitation. That said, I would press any distributor presented with an acquisition opportunity to give the question of their financial limits deep consideration because passing on an acquisition can have fateful consequences. A lot of those deal- missers from the last decade aren’t in the industry anymore.

Presently large value gaps are thwarting potential consolidations. This is particularly true for smaller deals. I’d like to pause and acknowledge that part of the gap is seller driven, and then set the seller portion aside because I want to talk about an issue tied to the buyer’s perspective. I want to address the potential conflict between an owner’s desire to stay in the business and their willingness to take on the long-term risks of a substantial acquisition.

I have encountered numerous owners who see a future that mandates grow or go. They acknowledge this imperative. They want to stay in the business and they would very much like to grow via acquisition. However, when they are presented with a consolidation opportunity they fail to pursue the acquisition with appropriate zeal. Higher purchase prices and industry trepidations combine to supplant the owner’s growth ambitions. Effectively these owners decide they will stay in the business for the foreseeable future (aka the long-term), but knowingly pass on doing exactly what they know they need to do to thrive in the long-term.

Beer distributorship prices have risen substantially over the last 10-15 years. Two corollaries of the increased prices are longer payback periods and smaller margins of safety. For buyers the net impact of higher prices are greater financial risks endured over a longer time, and everything else being equal, lower returns.

Current pricing is such that digesting debt from a major acquisition could take more than decade. 10+ years of debt service becomes progressively less appetizing as one goes from their 30s, to their 40s, to their 50s, and beyond. An individual with 15 years to retirement often isn’t eager to spend the last two-thirds of their working life sweating debt service. They’d prefer to just sweat what they absolutely have to – industry threats and supplier relationships. This mindset is understandable, but is it a viable course of action? For many smaller distributors and even some larger operations I expect the answer will turn out to be no.

I believe this mindset is potentially perilous. It’s like dropping into a prevent defense at the beginning of the fourth quarter. You stop playing to win and start playing not to lose. You stop being aggressive and instead start playing it safe. That’s when the opposition starts to pick you apart. The plan is to hold the lead and run out the last fifteen minutes. The result of this overly cautious strategy is often the forfeiture of a healthy lead, followed by a shocking defeat, and profound regrets. An analogous fate awaits the owner who decides to audible out of the acquisition game and ride out the next 15 years of beer industry changes.

The industry faces numerous uncertainties but some sustained trends and informed commentary tell us at least three things:

Retailers will want more from distributors;
Distributors are going to handle more products;
Suppliers are going to reach into distributor profits.

Without considering these three items the typical distributor’s future will likely include low volume growth, modest price increases, and ever growing operating expenses. The net result is modest real earnings growth – before accounting for the items above. Growing scale through acquisition can be the only way to offset these additional costs / investments and produce a healthier and more sustainable earnings trend. Yet, some of those who are fortunate enough to get a look at acquisition don’t pursue the opportunity. The notion of debt kills the acquisition idea.

I have seen owners terminate their pursuit of an acquisition at a very early stage. Distributors generally want to get a look any deal, so they typically don’t balk at debt initially. It’s only after they take their first look at the acquisition and contemplate making a real offer that millions of dollar in debt becomes real, and that is exactly when some owners decide they aren’t willing to take on the debt.

Understand that I am not talking about the owner who drops out of a bidding war because pricing gets too high. I am talking about the owner who drops out the moment acquisition risks become real in their mind. They simply decide $X million of debt is too much for them. They never really dig into the opportunity. They don’t look at synergies. They don’t look at actual debt service. They don’t look at their margin of safety. They just don’t feel good enough about the next ten years to even consider taking on that kind of debt. So that is where their consideration of the acquisition ends. It’s over before they even come up with an offer.

It occurs to me that the reluctance of some would be buyers to generate a purchase offer could be linked to a reluctance to face their own future. If one pursues an acquisition and discovers the only purchase price they find palatable is one based on a weak or highly discounted earnings stream, then certainly there are implications for their existing business. If a distributor finds they are too concerned about the industry’s future to do an acquisition, yet they plan to stay in business another 15 years, there is a conspicuous rational inconsistency between those two positions.

One morning at a Holiday Inn Express buffet I came up with a psychological reason for this inconsistency. The owner doesn’t price the acquisition because they don’t want to contemplate the value of their own operation and their decision to stay in the business. They acknowledge the industry’s grow or go imperative but they aren’t willing to accept the implications of their decision not to grow by acquisition. Consequently, they don’t put a number on either the buy or sell side of the equation. They decide that prices are too high and the industry is too risky to do an acquisition, but the industry is too good to be a seller. It’s a priceless contradiction.

Three M&A related articles are included in this quarter’s Random Links. These articles offer business owners a variety of strategic insights. One article shows that an acquisition strategy based on a series of smaller deals tends to be more successful than a large acquisition strategy. A second addresses the importance of growth when it comes to driving value. The third details how growth can be found in strategic M&A. Taken together there is a suggestion for beer distributors. If you want to increase your business’ value significantly then you need to grow, and growth on that scale will require a strategic acquisition or acquisitions.

These days I have deep sympathy for the intense conflict between an owner’s desire to stay in the industry and their reluctance to swallow a major acquisition. I am particularly sympathetic to the circumstance of smaller wholesalers. Smaller distributors really don’t have a strategy option that involves a series of smaller deals. They don’t have a collection of acquisition targets that are only 30% of their size. Their only acquisition opportunity might be a target larger in size, and that means big-time leverage.

At the end of the day many a smaller wholesaler can find they are simply not in a position to be a consolidator. That’s just a harsh reality. There is no shame in walking away from an acquisition after a thorough look, but missing an opportunity because you weren’t willing to dig in is tragic. It is particularly tragic these days with banks lending money so cheaply. If they were to delve, a lot of distributors would discover their financial capacity is greater than they think. The deal can get done with an adequate margin of safety.

Planning to stay in the industry and failing to explore consolidation opportunities is paradoxical and perilous. If you are too skeptical about the industry and your ability to service acquisition debt to pursue a consolidation opportunity, then you need to ask yourself two questions. Are you correspondingly skeptical about you business’ ability to generate earnings for next 15 years? And, do you think your business will and retain its value over the next 15 years?

If you find that you are too skeptical about debt service to do a deal, but perfectly confident in your ability to ride out the next 15 years, then I suggest you have an inconsistency to reconcile. Putting numbers on both the buy side and sell side of your business can help you resolve the inconsistency. It won’t resolve the tension caused by the grow or go imperative, but you won’t be trapped in a priceless contradiction.

Valuation Tales: 2012 – Q1/Q2

tim — Wed, 09 May 2012 00:03:51 +0000

This quarter I had to wade through far too many patent infringement decisions and reasonable royalty rulings in my quest to find three excerpts relevant to those in beverage distribution. My licensed BVR content is apparently being impacted by the tech folks’ decision to adopt a portfolio approach to suing each other. Remember the industry in which you work and your relative good fortune. That said, as good as beer distributing is, it is still an earthly existence and it has its unpleasant elements. The excerpts below address three issues common to every form of business: managing financial compliance costs, shareholder disputes, and divorce.

If you have done any acquisitions recently and booked goodwill, then generally accepted accounting principles require intangible asset impairment testing. Sounds simple enough but determining what constitutes a sufficient test is not. Small businesses have found satisfying auditors to expensive and a questionable burden. See FASB issues ASU on indefinite-lived intangibles.
The Second excerpt, Ky. Adopts Majority Rule in Statutory Fair Value Determinations, is a case involving marketability discounts, pro rata going concern value and reference to the Model Business Corporation Act [MBCA].
The last excerpt includes several divorce case summaries involving goodwill.

FASB issues ASU on indefinite-lived intangibles

Proposed Accounting Standards Update Addresses Cost Concerns

Recently, the Financial Accounting Standards Board (FASB) issued its proposed Accounting Standards Update 2012-12 on indefinite-lived intangible asset impairment testing. The new update, which is now open for public comment, “is intended to simplify impairment assessment and reduce the recurring costs” of compliance with existing standards “while improving the consistency of testing methods among long-lived asset categories for preparers,” the FASB explains in a news release.

Intangible assets such as indefinite-lived trademarks, licenses, and distribution rights, would be subject to the new standard, which would apply to all public, private, and not-for-profit organizations and would be effective for annual and interim impairment tests performed for fiscal years beginning after June 15, 2012, with the option for early adoption. Comments are due by April 24, 2012, to the exposure draft.

Ky. Adopts Majority Rule in Statutory Fair Value Determinations

Shawnee Telecom Resources, Inc. v. Brown, 2009 Ky. App. Unpub. LEXIS 675 (Aug. 14, 2009); and Shawnee Telecom Resources, Inc. v. Brown, 2011 Ky. LEXIS 159 (Oct. 27, 2011)

After three years working for Shawnee Telecom Resources, a 24% shareholder decided to withdraw. When the parties couldn’t agree on a price under the buy-sell agreement, the company extinguished the shareholder’s interest via a cash-out merger, offering approximately $169,000 for her shares. When the shareholder claimed the fair value was closer to $356,000, the company sued for a statutory fair value appraisal in state court.

Both parties presented experts to value the company, an S corporation, as of the merger date. But the trial court appointed a special commissioner to determine fair value, and he disagreed with both experts. Neither had sufficiently explained their reasons for adding 15% to the capitalization rate, when most likely—given the company’s dependence on its one customer and its CEO—the rate should have been steeper. As a result, the commissioner did not prefer the income approach to the same extent as the experts and borrowed from their analyses to find a capitalization of earnings value of $2.3 million and a net asset value of $1.3 million. He declined to apply a tax discount, finding that the company had failed to meet its burden to justify one. The commissioner did adopt the 25% marketability discount, however, relying on Ford v. Courier-Journal Job Printing Co., 639 S.W.2d 553 (Ky. App. 1982), in which the Court of Appeals permitted a 25% marketability discount in a dissenting shareholder appraisal action.

After averaging the two values, giving the net asset value twice the weight of the capitalized earnings value, the commissioner found that the minority shareholder’s 24% interest was worth nearly $354,000. The trial court adopted these findings, and both parties appealed.

Court of Appeals says net asset value is never appropriate. Interestingly, on appeal, the company maintained—contrary to its own expert—that the commissioner should have given no weight to the capitalized earnings approach, but should have valued the company solely on the basis of its net assets. In contrast, the minority shareholder argued that the net asset value carried no weight in fair value cases and that no marketability discount applied to the capitalized earnings approach.

The Court of Appeals sided with the shareholder and was persuaded by precedent from other states, which awarded dissenting shareholders the pro rata value of their shares in the firm as a going concern. Accordingly, it remanded the case for a determination of fair value. The company appealed, and the Kentucky Supreme Court granted an expedited review to consider the question of “fair value” in a dissenting rights action.

“As long as liquidity seemed the purpose of the appraisal remedy, courts often understood ‘fair value’ to mean essentially fair market value and understood their task as identifying a sort of quasi-market price for the dissenting shareholders … shares,” the court said. “Even in states, like Kentucky, that continue to use the 1984 version of the Model [Business Corporation] Act, ‘fair value’ has been construed as the dissenting shareholder’s pro rata share of the company as a whole, without shareholder-level discounts,” the court said (citing cases in Colorado, Wyoming, Utah, Alabama, and South Dakota).

Based on the broad consensus among courts, commentators, and the drafters of the MBCA (including its revisions), the court interpreted “fair value” to mean the dissenter’s proportionate interest in the going concern value of the firm and expressly overruled Ford to the extent that it endorsed shareholder discounts. For that reason alone, the court remanded the case for reconsideration.

The court rejected the Court of Appeals’ findings regarding the net asset value approach. “Net asset value is a standard business valuation approach,” in which the appraiser tries to establish a market value—as opposed to a book value—to the company’s assets, the court explained, citing Valuing a Business, The Analysis and Appraisal of Closely Held Companies, by Shannon Pratt and Alina Niculita (5th ed., 2008).

The net asset value method involves estimating the market value of the company’s assets, but “these entity-level market references are not precluded by the ‘fair value’ standard,” the court held. These could include company-specific discounts for a key manager, a limited customer or supplier base, an embedded capital gains tax liability, an environmental liability, a pending litigation, a small size, etc. The court added a strong caveat, however: Any entity-level discount “must be based on particular facts and authority germane to the specific company being valued; i.e., there can be no automatic 15%-to-20% discount of the whole entity’s value simply because it is closely held and not publicly traded.” Rather, appraisers may only incorporate such entity-level adjustments provided they cite “the relevant facts and authority,” the court held, and remanded the case for a determination of fair value based on “generally accepted” valuation methods and techniques, but precluding shareholder-level discounts.

Buy-Sell Agreements Receive Varying Consideration in Divorce

The recent cases below illustrate the various ways in which courts can consider a buy-sell agreement when valuing a spouse’s interest, and consider the division of goodwill and whether to divide other assets . . .

Effect of law firm dissolution agreement on shareholder’s interest.

In In re Marriage of Restaino, 2012 Cal. App. Unpub. LEXIS 273 (Jan. 13, 2012), the husband owned a 9.7% equity interest in a law firm that specialized in large contingency fee cases. Prior to trial, the law firm began winding down, paying out substantial distributions pursuant to a confidential dissolution agreement. These funds did not represent a “buyout” of shares, the husband insisted, because “it was impossible to value a pure contingency firm.” Instead, the distributions reflected the net fees remaining from any ongoing litigation, to be paid according to the firm’s traditional practice of paying bonuses and income after resolution of cases.

The trial court accepted this characterization of the payouts as income, and the wife appealed, arguing that the law firm’s “settlement agreement” did not control the characterization of the husband’s equity interest as community property. The appellate court agreed, citing cases that permit courts to consider certain factors in deciding whether to rely on buy-sell formulas in valuing a spousal interest in a professional practice. “Merely because [the] husband agreed to alter the manner in which he would receive payment of his equity interest should not affect [the] wife’s right to her portion of it,” the court held. Other than sums expressly designated as salary, the court construed any distributions to the husband as “quantification of his interest in the firm” and remanded the case for further findings on its value.

Swaney v. Swaney, 2011 N.C. App. LEXIS 2648 (Dec. 20, 2011)

In the husband owned and operated an information technology firm during the marriage. At trial on divorce, he presented a business appraisal expert who testified that given its current assets and liabilities, the IT firm was worth a negative $2,230. At the same time, on cross-examination, he conceded that the firm’s goodwill, based on a “reasonable” multiple of earnings over a 10-month period, was worth “in the neighborhood of $30,000,” but this value hinged on the presence of a noncompetition agreement between the husband and any prospective new owner of the firm. The wife did not present a business appraiser; instead, she called on a former employee of the husband’s firm who testified that “there would not be a whole lot of value” in the husband’s firm—and she would not purchase it—without a noncompetition agreement or some other obligation for him to remain and run the business. At the close of the evidence, the trial court valued the firm at $64,000. This included $30,000 in goodwill and $36,000 in fixed assets, minus the $2,000 from the balance sheet approach. The husband appealed.

Held: The appellate court emphasized that in North Carolina, “the net value of a business includes goodwill, which must be valued and considered” in evaluating the business for purposes of marital dissolution. One commonly accepted method to value goodwill is the “willing buyer-willing seller” method, the court observed. In this case, the husband’s expert used this approach and valued goodwill based on a reasonable multiple of earnings. In addition, the wife’s witness testified that she would be willing to buy the husband’s business given the execution of a noncompetition agreement. Under these facts, the court was not persuaded that the lack of an actual noncompete rendered the trial court’s valuation improper. “On the contrary, the inclusion of such assumptions was necessary to fully reflect the value of the goodwill that [the husband] had accumulated as a result of his operation of the business, particularly given the absence of any indication that [he] intended to close or abandon [the firm] at less than its actual value.” As a result of these findings, the appellate court concluded that the $30,000 goodwill value was based on “competent evidence and a sound valuation method” and affirmed the same. Similarly, it affirmed the trial court’s valuation of the fixed assets at $36,000, based on the books and records at the time the husband bought the business. For that reason, the trial court did not have any more specific or current value for the fixed assets. Although the validity of its $36,000 was questionable and could have led to a different conclusion, the appellate court deferred to the broad discretion of the trial court to make factual findings based on the evidence presented, finding a sufficient basis in this case to support the fixed asset valuation.

In re Marriage of Hanscam, 2011 Ore. App. LEXIS 1664 (Dec. 14, 2011)

When the parties married in 1989, the husband, a CPA, already held a 25% interest in his father’s accounting firm. Five years later, he purchased the remaining 75% interest, paying for it over the course of the marriage. During the same time, the husband’s parents gave him (and his siblings) interests in a family limited partnership (FLP), so that, by the time the parties divorced in 2009, he owned just over 26%. Both parties retained experts to value the husband’s solo CPA firm in a small town using standard methodologies. The wife’s expert provided values under the income ($409,000), market ($439,000), and adjusted net asset ($154,000) approaches, but ultimately relied on the market approach and his “personal ‘real-world’ experience” to conclude that the CPA firm was worth $439,000.

Unlike the wife’s expert, the husband’s expert conducted a site visit and concluded the CPA practice was “very standard.” He also rejected the market approach in this case, citing the lack of comparable CPA firms in the databases and the absence of specific identifying information. Accordingly, the husband’s expert put more weight on his income ($313,000) and net asset ($202,000) values. Any value “over and above the hard assets” of the business was attributable to goodwill, he said, and in this case, all of that goodwill was personal, particularly because the husband couldn’t sell his practice or transition his clients without signing a noncompetition agreement. Based on this determination, the expert concluded that the firm was worth $202,000 under the net asset approach.

The trial court relied on the husband’s expert’s income approach to value the firm at $313,000, less the husband’s 25% premarital share but including its appreciation during the marriage (for a total of $55,000 as the husband’s separate property). It also awarded the husband all of his FLP interest as his separate property, and the wife appealed.

Held: Although assets acquired before a marriage are not “marital assets,” the appellate court explained, under state law (Oregon), they are considered “marital property,” subject to a “just and proper division.” As to the CPA firm, the court concluded that under a “just and proper” analysis, the wife was entitled to share equally with the husband’s 25% premarital portion. And when a business has no value beyond its assets, absent the owner promising to continue his or her services after a sale, “there is no goodwill,” the court said. Finally, the trial court correctly rejected the net asset value by the husband’s expert for its failure to include enterprise goodwill, and the appellate court affirmed its $313,000 value under the income approach. It also agreed with the trial court that the husband maintained his separate property interest in the FLP during the marriage, to which the wife made no contribution and from which any appreciation was purely passive.

Disclaimer

All information contained herein is for informational purposes only and is not intended and should not be viewed as legal advice. The purpose of this document is to provide general information to clients. DMG Financial assumes no liability for the contents of any materials provided herein.

Macro Minute: 2012 – Q1/Q2

tim — Wed, 09 May 2012 00:01:21 +0000

This is my fourth Macro Minute. Looking back my sad conclusion is the economy has improved but unemployment remains high and the same risks and headwinds (e.g., sovereign debt, energy costs and international conflicts) threaten to derail what has been a particularly weak recovery. Not quite a year on, my fears of a double dip recession have diminished (and by definition ceased to exist), but my pessimism about the strength and sustainability of the recovery has grown like a central bank’s balance sheet.

First quarter GDP and employment results were a significant economic mojo uh oh. The March employment report was just another example of how wobbly the economy is. April’s report was also disappointing. Economic growth too modest to materially reduce unemployment remains the consensus forecast. The April WSJ Economic Forecasting Survey’s projected GDP would grow at less than 3% for the next two years and employment would not dip below 7% until the end of 2014.

Even if the major brewers invigorate premium lights and the beer industry in general their competitive awakening won’t fix the economy. Brewers turning their sights on wine & spirits won’t repair the housing market, which may be bottoming out but clearly has not recovered. There are over 2 million fewer construction jobs than there were five years ago. Ultimately, the more jobs, the more beer and vice versa, but the jobs won’t be here this year. Not in this election year with the specter of Taxmageddon looming. As such, I expect the U.S beer industry will go sideways in 2012, which will be a happy improvement after three years of volume declines.

The advance estimate of first quarter 2012 GDP came in at 2.2%, which was below a 2.5%-2.6% street expectation. The advance estimate suggests consumer spending was a significant driver of GDP growth, but consumers had to reduce their savings rate to generate this spending. Consumers did all this spending during nation’s warmest three-month start since at least 1895. Some think this unusually warm weather lifted first quarter GDP but the effect will be weaker GDP in the second quarter.
At the end of first quarter of 2012 unemployment stood at 8.2%. Still very high and a drag on the economy, but a notable improvement over the 9.0% employment rate at the same point last year. Unfortunately, expectations of continued unemployment declines were threatened by the March jobs report, which came in well below expectations. There is a suggestion that usually warm weather pulled forward economic activity and therefore March inevitably experienced a fall off. The argument squares with the beer industry’s very strong January and February followed by a March drop. Regardless, high employment is expected to persist, because despite the much talked about strength of corporate balances sheets and an improved outlook, companies simply do not expect to do a lot of hiring domestically outside of some particular industries and skill sets. Many young adults are finding the employment situation very difficult as they face a challenging wage environment.
The CPI all items index was up 2.7% vs. a year ago. Comparing changes in annual inflation rates from the prior quarter shows:
- The all items index, nonalcoholic beverages & beverage materials, carbonated drinks, beer away from home and wine at home all experiencing slower price increases.
- Beer at home, wine away from home, and distilled spirits (including whiskey) both home and away saw pricing grow faster.
Interest rates have remained at historically low levels. One might even venture to say ridiculously low levels. March 2012 marked the 39^th month in a row that the prime rate was 3.25%. The expectation is that central banks will continue to keep rates low; some are concerned about the consequences.
EIA’s April 10, 2012 Short-Term Energy and Summer Fuels Outlook projected U.S. refiner crude oil cost average would $112 per barrel in 2012 and $110 per barrel in 2013. EIA’s forecast of the WTI spot price averaged about $106 per barrel in both 2012 and 2013. EIA’s outlook is full of projections/expectations including: a $3.95 per gallon average retail price for regular gas this summer vs. $3.71 per gallon last summer. Regular gas is expected to peak at $4.01 per gallon in May. Diesel fuel prices are projected to average $4.21 per gallon this summer up $0.27 from the $3.94 averaged from last summer. Diesel is expected to peak at $4.25 per gallon in the middle of the driving season. EIA notes prices can differ significantly from monthly and seasonal averages, and there are significant differences across regions ($0.25+).

Random Links For Financial Kinks: 2012 – Q1/Q2

tim — Wed, 09 May 2012 00:00:18 +0000

Which Acquisition Strategy is Better

A Series of Small Systemic Acquisition or Hunting for Big Deals

The authors concede the science is inexact but conclude, “across most industries, companies with the right capabilities can succeed with a pattern of smaller deals, but in large deals industry structure plays as much of a role in success as the capabilities of a company and its leadership.” (McKinsey Quarterly)

Middle Market Value Gap

Strategic Acquisitions Are Key to Growth

Kenneth H. Marks of Business Finance discusses middle market M&A issues in Finding Growth through Strategic Mergers & Acquisitions. The author never mentions beer but if you do the fortune cookie thing and add words like “beer distributor” to the end of every phrase in bold you’ll see it’s actually quite relevant. Marks writes, “The value gap can be illustrated by the wide difference between what is referred to as ‘Owner Value’ and ‘Market Value.’ Owner value is the required value in the M&A transaction by the shareholders of the selling company, whereas market value is the range of amounts that the market players place on a company based on their perspective and the market dynamics.”

Growth is the Most Important Value Driver

If You Want to Grow You Have to Eat Your Debt

The authors of Why Are Wholesalers Protecting High Returns? conclude, “perhaps our most important insight is that many of the higher ROC wholesalers may be missing a significant opportunity to maximize value creation for shareholders by not investing enough in future growth.” In the context of beer distribution, superior future growth almost always requires acquisitions.

Beer was key to independence from Spain

“The Dutch drank their way to victory”

“Economists Koen Deconinck of the University of Leuven and Johann Swinnen of Stanford University wrote that taxes on beer ‘played a crucial role in financing the revolt … (and) were the single largest revenue source’ for the outnumbered and outgunned Dutch, who were facing “the mightiest empire on earth.” (Reuters)

Goodwill Impairment Testing Pushback

Too Much Time and Money on the Obvious? Take a Step Back

Alfred M. King wrote a nice article concerning recent developments in goodwill impairment testing. As King explains, businesses have protested that goodwill impairment testing costs too much and testing seems unnecessary when an asset’s fair value clearly exceeds its book value. Listening to constituents, FASB recently promulgated a ‘qualitative’ test which is now being referred to as ‘Step 0’. If the company passes in Step 0, no further work is required. The issue, however, is “far from closed.” I have seen the impairment testing problems businesses are complaining about first hand. This issue need to be dealt with promptly.

Megatrends and Beverage Convergence Speculation

Which Beverage Segments are Going to Hook Up?

Will ABI get together with Pepsi? How about that ABI-SABMiller combo? Well “Consumer demand for health and wellness beverages worldwide is leading to greater convergence between soft drinks and dairy beverages, according to Rabobank.” Read more about beverage convergence in this Food Navigator article.

The Art of Wort

Financial Specialist — Wed, 01 Feb 2012 17:04:38 +0000

One day when I was indulging in some paranoid cynicism concerning assaults on the three-tier system I asked myself, if the King of Wu commanded Sun Tzu to tear down the three-tier system, what would Sun Tzu do? I am not an expert on three-tier legal issues or military strategy, and I don’t have the stake in the three-tier system my clients do, yet the question hooked me.

So I bought myself a copy of Sun Tzu on The Art of War The Oldest Military Treatise in the World by Lionel Giles, M.A. Giles’ work is much more than a translation of Sun Tzu. It contains strategy from other military notables and is a kind of Chinese cultural examination. It kindled my desire to explore the question further.

The Art of War begins, “War is a matter of vital importance to the state. It is a matter of life and death, survival or ruin.” As such, Sun Tzu cautions that, “He who wishes to fight must count the cost.” In the context of a war on the three-tier system these vital precepts present two basic questions. First, who might want to demolish the three-tier system, and second, what would be (or could be) the cost to those who chose to attack.

There are probably a fair number of interests that might seek to ruin the three-tier system. However, a short list would have to include free-market purists, retailers and suppliers. Note these are potential three-tier enemies considered in the context of a hypothetical question. Some of these groups are more likely antagonists than others, and some would be more dangerous adversaries if they chose to beset the three-tier system.

Free market purists would, in all likelihood, support the elimination of the three-tier system. If an anti-regulation stance is at the core of your philosophy, you aren’t going to be a fan of a mandated middle-tier and a host of other important three-tier regulations. Free market purists are individuals who would be inclined to label the businesses constituting the middle-tier as “middle men”. And they are people who willfully ignore ugly historical realities while advocating an absolutist free market approach to anything and everything.

These three-tier antagonists are ideologically driven. As such, they would attempt to lay claim to what Sun Tzu believed was the most important of his five fundamental factors for success in war, “moral influence”. However, their claim to social and economic morality would be strained. Their arguments would be appealing in the abstract but ridiculous in the context of reality.

Interestingly, what some Art of War translations refer to as “moral influence” others refer to as “politics”. Those that use the term politics note that for Sun Tzu “politics is what causes the people to be in harmony with their ruler”. Fortunately, we live in a representative democracy and we don’t have a ruler. Instead we have the rule of law. I am confident the American people believe and will continue to believe alcohol regulations are necessary. The American people will always reject a purely laissez-faire approach to the manufacture, sale and distribution of alcohol – if the proper counter arguments are made.

Free market purists exist and they are clearly not supporters of the three-tier system, but they do not strike me as a significant threat. Their strained ideological arguments can be thwarted with solid factual counter-arguments. They are vocal but they are not numerous. Additionally, economic ideology by itself is typically not enough to muster the resources required for victory. An economic incentive is typically required. Further, their style is not consistent with the strategies of Sun Tzu. Their opposition is forthright. They have absolute faith in their world view, so their assaults are transparent. And this is not what Sun Tzu would do.

I’m going to go out on a limb and suggest that at least one individual at Costco is a student of Sun Tzu. A review of the Costco saga suggests a cognizance of Sun Tzu’s statement that “Those skilled in war bring the enemy to battle. They are not brought by him.” And impressively, they found a way to use the court system to do as Sun Tzu instructed, that is, “forage on your enemy”.

It is now abundantly clear certain retailers are a genuine threat to the three-tier system, and despite representations to the contrary they clearly have an economic incentive to see the system dismantled. Of course, retailers are a highly diverse collection of business entities and their attitudes towards the three-tier system are equally diverse. Some would like to preserve it as is. Some would encourage modifications. Some are ambivalent. And a few do not care for it – at all.

The good news is the retailers who value the three-tier system likely far outnumber those who do not. The bad news is those who do not value it are very powerful and their ranks may grow over time. It is essential that those who value the three-tier system do not mistake a retailer’s favorable disposition towards DSD (direct-store-delivery) for support of three-tier regulations. One is a sales and service methodology. The other is a legal framework. The former does not require the latter. It is entirely conceivable that some large retailers might seek to eliminate three-tier regulations while simultaneously demanding more DSD services.

The last of the possible three-tier adversaries on my short list is suppliers. Suppliers could be the most dangerous potential adversary of the three-tier system. Please note I say possible, could be and potential. This is the most profitable market in the world, so if certain suppliers were to attack the system, then those suppliers would be wise to do as Sun Tzu commanded and “count the cost”.

Certainly, I am not the first individual to consider that the superpowers of alcoholic beverages are global entities and that in the preponderance of their markets their direct control over the distribution and sale of their beverages is not encumbered by a three-tier system. Elsewhere they can exercise control over the process from beginning to end. The notion that one such supplier might decide to end their support of the three-tier system in favor of their own corporate interests is not inconceivable. If that day comes and if the teachings of Sun Tzu were followed, the attack would be upon the middle-tier, and the aggression would look nothing like the undisguised aggression of the free market purists.

Any effort to subjugate the three-tier system conceived by Sun Tzu would not begin with a massive violent assault. Sun Tzu would first attempt to win without fighting. Then if fighting was necessary he would seek to preserve the value of the market. His campaign against America’s three-tier system and its middle-tier would not include a scorched earth policy.

Sun Tzu wrote, “Generally, in war the best policy is to take a state intact; to ruin it is inferior to this. To capture the enemy’s entire army is better than to destroy it… For to win 100 victories in 100 battles is not the acme of skill. To subdue the enemy without fighting is the supreme excellence.” A sovereign superpower supplier would not want to ruin the world’s most profitable market. The sovereign would want to capture the market’s bounty for itself. To achieve this end Sun Tzu would employ the skillful use of “deception, wisdom, and strength”.

Sun Tzu said, “In war, practice dissimulation, and you will succeed.” The ancient Chinese general believed “The whole secret lies in confusing the enemy, so that he cannot fathom our real intent.” Reading these statements I can’t help but think of ABI’s non-existent branch policy and MillerCoors’ three-tier doctrine (CARE Lite – great words, less binding). If the sovereign commanded that Sun Tzu bring down the three-tier system, that intension would not be announced. Sun Tzu would instruct the sovereign to continue professing their support of the three-tier system while they sought to undermine it.

It is worth noting that Sun Tzu did not believe every order of the sovereign should be obeyed. Art of War states, “It is essential for victory that generals are unconstrained by their leaders.” “If fighting is sure to result in victory, then you must fight, even though the ruler forbids it; if fighting will not result in victory, then you must not fight even at the ruler’s bidding.” The legendary story of the concubines merits reflection.

Wisdom would suggest a patient approach designed to dissipate the adversary’s strength. Sun Tzu would attempt to “Reduce the hostile chiefs by inflicting damage on them” and “foment intrigue and deceit” among his adversaries and their allies.

If there had to be fighting Sun Tzu would conceal his strategy and objectives. Sun Tzu instructed, “In battle, use a direct attack to engage and an indirect attack to win.” Sun Tzu would “avoid what is strong” and “attack what is weak.” He would force his opponent to reveal himself, so as to find out his vulnerabilities. He would “make you prepare on your left so you would be weak on your right.” I fear the middle-tier might readily fall victim to such tactics.

Lionel Giles’ book had a couple powerful quotes that were not from Sun Tzu. One quote from Frederick the Great’s Instructions to His Generals states, “A defensive war is apt to betray us into too frequent detachment. Those generals who have had but little experience attempt to protect every point, while those who are better acquainted with their profession, having only the capital object in view, guard against a decisive blow.” Another quote attributed to Col. Henderson suggests The highest generalship is to compel the enemy to disperse his army, and then to concentrate superior force against each fraction in turn.

Reading these passages I found myself wondering if these ideas are not something the defenders of the middle-tier should consider. My perception is the middle-tier’s defenders feel every battle must be fought. No protection can be left undefended. The logic being that if X happens, then Y is sure to follow. For example, allowing small brewer self-distribution is a slippery slope [Personally, I’d trade limited self distribution for a stronger franchise law in a heartbeat but that’s another discussion]. Hearing these arguments in the past I’ve quietly thought to myself, they must know the slippery slope argument is on just about every list of logical fallacies ever compiled. Now I know it isn’t just a logical issue. It’s a strategic issue. I find myself wondering what dispensable fortifications are depleting resources from essential protections. I find myself contemplating Sun Tzu’s statement that, “The winning army realizes the conditions for victory first, then fights. The losing army fights first, then seeks victory.”

Sun Tzu writes much about the importance of ground. Sun Tzu says, “How to make the best of both strong and weak—that is a question involving the proper use of ground.” “Therefore, the skillful commander takes up a position in which he cannot be defeated…” Laws and regulations could be considered the analog of ground in the context of a war against the three-tier system. Some of these laws and regulations, like “narrow passes”, are easily defended. Others are not easily defended. Rushing to their defense could be as imprudent as marching to battle in a quagmire.

Those who would preserve the middle-tier should consider the question of when and where to fight and with whom they intend to fight. Several of Sun Tzu teachings should be considered:

“You cannot enter into alliances until you are acquainted with the designs of your neighbors.”
“When the enemy has made a plan of attack against you, you must anticipate the enemy by delivering your own attack first.”
“You will not succeed unless your men have tenacity and unity of purpose, and, above all, a spirit of sympathetic cooperation.”
“On desperate ground fight… If you fight with all your might, there is a chance of life; whereas death is certain if you cling to your corner.”

Among my cynical concerns is the notion that those not truly committed to the three-tier system are more versed in the teachings of Sun Tzu than those who would defend the system. I fear those who might dismantle the three-tier system appreciate Sun Tzu’s use of bait.

Art of War states, “To move your enemy, entice him with something he is certain to take.” “[H]old out specious allurements and make them rush to any given point. By holding out advantages to him, he can cause the enemy to approach of his own accord; or, by inflicting damage, he can make it impossible for the enemy to draw near.” I worry that vague representations and non-enduring commitments will be sufficient bait for the defenders. I fret over the defenders swallowing the bait, becoming infirmed and compromising their defenses.

Sometimes I consider the possibility that the three-tier system’s enemies are masters of Sun Tzu. I contemplate the notion that their plans are already underway. I wonder if they are executing a strategy consistent with Sun Tzu’s recommendations; “Let your plans be as dark as night—Then strike like a thunderbolt.” I wonder if they are already charting a patient methodical course designed to minimize the duration of any conflict because they understand “No nation has ever benefited from prolonged war.” I worry that a plot is slowly unfolding and when it is revealed the ending will come swiftly. Sun Tzu says, “When a falcon’s strike breaks the body of its prey, it is because of timing” and ‘When torrential water tosses boulders, it is because of momentum.”

But these wild thoughts are probably no big deal. I don’t worry about such things every day; only on my more cynical days.

In addition to Lionel Giles’ book, Sun Tzu on The Art of War The Oldest Military Treatise in the World, I also utilized a History Channel program title Art of War and this translation of Sun Tzu from the Brooklyn College website.

Valuation Tales: 2011 – Q4

tim — Wed, 01 Feb 2012 17:03:00 +0000

This quarter’s “Valuation Tales” includes three licensed excerpts provided by Business Valuation Resources (BVR).

The key issue addressed in the article Security Interest Exists in Economic Value of FCC License parallels an important financing issue for the typical beverage distribution acquisition. The holder of an FCC license cannot offer the license as security but the holder can offer the proceeds of the sale of the license as security. Similarly, a lender typically cannot be given an interest in the distribution rights themselves but they can take an interest in the proceeds from the sale of distribution rights.
The second excerpt deals with courts appointing their own experts. I find it a somewhat troubling situation for the valuation profession if courts feel compelled to appoint a valuation expert for the sake independence and as a means of avoiding so called “valuation wars”. The stated role and professional standards of valuation experts dictate their independence. Additionally when opposing experts quantify the valuation impact of factual or legal matters under dispute they serve an important function.
The last excerpt, FASB helps out with ‘market participant’ definitions, notes that fair value guidance could have some relevance for the valuation of private companies. Some of the distinguishing characteristics suggested by the SEC touch on key beverage distributor valuation issues like “financial versus strategic buyers”, “financial capacity”, “acquisition strategy”, and “marketplace synergies”.

Security Interest Exists in Economic Value of FCC License

In re Terrestar Networks, Inc., 2011 WL 3654543 (Bkrtcy. S.D.N.Y.)(Aug. 19, 2011)

The debtors in this Chapter 11 proceeding provide mobile satellite services pursuant to various FCC licenses. Aware that federal law prohibits using the licenses themselves as collateral, in 2008 the debtors granted their secured noteholders an interest in all economic proceeds from the “sale, transfer, or other disposition” of the FCC licenses as well as any related “goodwill or other intangible rights.”

After the debtors filed for bankruptcy in 2010, the Sprint Nextel Corporation (Sprint) sued for $104 million in costs to clear the satellite bandwidth that the debtors previously owned. To satisfy its admittedly unsecured claim, Sprint sought to void or at least gain seniority over the secured note holders’ interest. It filed various motions in federal bankruptcy court, seeking a judicial determination of its claims by essentially arguing that the noteholders’ lien in the economic value of the licenses was invalid under the same law that precludes granting a collateral interest in FCC licenses.

An opportunity for bankruptcy valuation analysts? The bankruptcy court agreed that long-standing federal precedent precluded a lien from existing on the FCC license itself. Beginning in 1992, however, federal courts disagreed whether to distinguish a debtor’s “private” right to receive the economic value generated by its FCC license from the FCC’s “public” right to assign the licenses and regulate their transfer. To clear up the controversy, the FCC issued guidance in 1994 that declared:

If a security interest holder were to foreclose on the collateral license, by operation of law, the license could transfer hands without the prior approval of the Commission. In contrast, giving a security interest in the proceeds of the sale of a license does not raise the same concerns.

Since this ruling, “it appears to be settled law that a creditor may perfect a lien in the private economic value of an FCC license to the extent that such lien does not violate the FCC’s public right to regulate license transfers,” the bankruptcy court observed. Applying federal precedent to the current case, the court concluded that the noteholders had a valid secured interest in the “economic value” associated with the debtors’ license, “even if they cannot hold a lien on the FCC license itself.”

In denying Sprint’s motions, the court also found that: 1) Sec. 552 of the Bankruptcy Code did not prevent the noteholders’ prepetition liens from attaching to the post-petition sale proceeds of the licenses; and 2) the court—and not the FCC—was the ultimate arbiter of the validity and priority of claims related to the economic value of FCC licenses. Given this clear ruling, the opportunity exists for analysts to appraise the economic value of FCC licenses not only in the bankruptcy setting, but in general valuation and transfer contexts as well.

Courts appoint their own experts to deal with valuation

It’s not unusual for a federal court to appoint a technical expert as an independent advisor pursuant to Rule 706 of the Federal Rules of Evidence. But now, in two high-pressure and high-profile legal settings, judges have taken the unusual step of appointing a 706 expert to testify specifically on valuation—in one case, to calculate damages directly for the jury.

Last month, in the closely watched Oracle v. Google litigation, when Judge William Alsup couldn’t convince the parties to select (and pay for) an independent expert, he went ahead and appointed an economics professor to calculate damages—plus a lawyer to represent him. “Far from complicating the jury’s decision on damages,” the judge wrote, in defending his decision, “the testimony of a 706 expert would assist the jury by providing a neutral explanation and viewpoint,” particularly when—as in this case—“both sides have taken such extreme and unreasonable positions regarding damages.” Patent litigators are concerned, however, that the case will turn into a “one witness trial,” as one recent blog reports. Plus—if the jury is aware of the appointment, the 706 expert’s testimony could carry a “powerful stamp of court approval and objectivity.”

Objectivity may be precisely the goal of appointing a 706 expert—and time will tell whether Alsup’s move was an aberration (and an attempt to force settlement) or an expanding trend. In federal bankruptcy cases, for instance, the judges are increasingly troubled by the “gangs of bankruptcy debt buyers” whose “abusive tactics” threaten to embroil the cases in valuation disputes and potentially erode the Chapter 11 process, says a bankruptcy blog. At least one bankruptcy judge “has taken some unprecedented and unique actions to combat the problem of valuation wars,” and one of these weapons, “appointing valuation experts to cases, can be used across the nation.”

FASB helps out with ‘market participant’ definitions

In most valuations, the question of “market participant” can influence the ultimate conclusion. So businesses need to be careful to avoid entity-specific synergies in most of their business valuation work—if one specific buyer in a group of likely market participants has a competitive advantage over the others, this fact generally should not influence the ultimate determination of value for compliance or other appraisals.

This “market participant” concept can be difficult to grasp since it’s very different from concepts of value that come from the M&A world. One place to turn: FASB gives us some help in its guidance to ASC 820 on business combinations. Even though these are standards for SEC companies, the definitions help when doing private company appraisals, too.

FASB has defined concepts of the “principal market,” but also concepts of highest and best use and most advantageous market. Generally, the principal market is the market with the greatest volume and level of activity for the asset or liability. For financial reporting (and many other) purposes, if the entity is able to access this market, the fair value is the price in the principal market, even if there is another market with a better price.

This distinction cannot be ignored by business appraisers or their clients. Again, unlike valuations done for acquisitions, financial reporting “fair value” is determined in the most advantageous market only when there is no principal market, or the entity cannot access the principal market.

Your appraisers will want to consider whether the principal market is active–but also whether there are distinct groups of market participants (strategic versus financial buyers, for example), whether there are clusters within the groups, and whether the market is fragmented or a monopoly or has other competitive characteristics.

The SEC suggests some of these distinguishing characteristics when looking at potential market participants—and appraisers are trained to understand how these characteristics impact any determination of business value.

financial versus strategic buyers;
national versus regional competitors;
financial capacity;
acquisition strategy;
marketplace synergies;
market share;
complimentary assets–a group of assets might be worth more than the sum of its parts; and
management capabilities–if the principal market acquired the assets, do they have the management capability to develop them?

Valuation Tales

The “Valuation Tales” portion of the DMG Financial (DMGF) newsletter contains content licensed from Business Valuation Resources. Each quarter, BVR sends DMGF a broad selection of valuation-related excerpts. We wade through them all to provide the best, most relevant excerpts about the range of issues our clients face today. It is important to remember, however, that court proceedings discussed in the newsletter can turn on individual facts and circumstances—which might or might not be conveyed in the condensed excerpts.

Disclaimer

M4 – Malted Minds Macro Minute: 2011 – Q4

tim — Wed, 01 Feb 2012 17:02:10 +0000

The final quarter of 2011 offered an assortment of positive economic results. This collection of encouraging data generated a fresh round of green shoots talk, and a slightly more hopeful economic outlook as 2012 began. However, serious economic headwinds and risks persist and even the typical optimist still only expects a protracted recovery. In this context I have chosen to take a where are we now (pre-recession v. post-recession) approach for this quarter’s Macro Minute.

GDP rose 2.8% in the fourth quarter of 2011 according to the advance estimate. The increase was the best in a year and half and strong enough to improve the employment situation. Good news certainly, but a comparison of real GDP at the end of 2007 and 2011 provides a slash of cold water. 2007 GDP was $13,206.4 (in billions of chained 2005 dollars). Four years later 2011 GDP was $13,313.4. That’s a compound annual change of only 0.2%.
The Unemployment rate dropped to 8.5% in December 2011. That made it four months in a row with a decline in the employment rate. The markets responded positively but looking past the headline rate drop many analysts delivered tempered optimism because the drop in the unemployment rate was partially due to a decline in the labor force. In fact, BLS data indicates that the December 2011 labor force was slightly smaller than the December 2007 labor force (153,887,000 vs. 153,918,000), despite census estimates suggesting the nation’s population grew 3% during this period. The unemployment rate stood at 5.0% in December of 2007 with roughly 7.65 million people unemployed. At year-end 2011, roughly 13.1 million people were unemployed; a 70%+ increase in the number of unemployed.
Inflation wise, the CPI All Items index finished up 3.2%. Carbonated Drinks, Beer, Wine and Spirits prices all lagged the comprehensive index in 2011. The story is different if you look at the 2007 to 2011 time frame. Over this time period price increases for carbonated drinks, beer, wine away from home and spirits away from home all grew substantially faster than the All Items Index; wine and spirits at home grew notably slower. See chart at bottom of post.
The DOW finished the year up but the S&P 500 was flat and the NASDAQ was down 1.8%. Versus their 2007 closing points the DOW, S&P and NASDAQ were down 13.7%, 14.4% and 1.8%, respectively. Clearly unimpressive performance, but if you were brave and bright enough to have jumped on these indexes near their March 9, 2009 lows you’d have about doubled your money.
Interest rates finished the year the way they started it – low. When 2011 came to a close the price rate was still 3.25% and the fed funds target rate upper limit remained at 0.25%. During 2011 3-month T-Bill rates fell from a nominal 0.15% rate to an absurd 0.01% rate and 10-year bonds went from 3.39% down to 1.98% (as of 12-1-11). Based on Federal Reserve expectations, low rates will be around for a couple more years. To continue the comparisons at the end of 2007, the prime rate was about 7%, 3-month T-Bills were yielding about 2.75%, and 10-year bonds were about 3.75%. The low rates have inspired bond offerings and some analysts predict low rates will help drive M&A activity.
Bureau of Labor Statistics Major Sector Productivity and Cost data shows business output was up 2%, employment was up 1.3%, hours were up 1.5%, labor productivity was up 0.6% and unit labor costs were up 0.7% on a year over year basis (Qtr3 comparisons; 2011 data revised). Again, relatively good news, but employment, hours, and output remained down relative to 2007 levels; -6.9%, -7.4%, and -0.5%, respectively. Labor productivity and unit labor costs were up versus 2007 levels, +7.5% and +1.2% respectively.
Per capita disposable income fell 50% in 2011; from $1,800 to $900, which is over 60% below the $2,400 figure BEA shows for 2007.
Finally, a smattering of other noteworthy 2007-2011 comparisons:
- December sales of new single family were down about 50%; 307,000 vs. 604,000.
- Construction spending was down about 30% ($1.165 billion vs. $807 million)
- In 2011 Monthly Sales for Retail and Food Services were only about 4% higher than they were in 2007.
- In December 20110 Industry Production was about 95% of what it was 2007, and capacity utilization was down (78.1 v. 81.4).

Random Links For Financial Kinks: 2011 – Q4

tim — Wed, 01 Feb 2012 17:01:11 +0000

The 2011 yearend version of Random Links has a slightly different look. There are more links and some of the links are grouped within topics. Topics include: 2012 trends and predictions, tax and regulatory issues, profitability and productivity tips, merger & acquisition news, and an odd New Year’s resolution.

The Outlook for 2012 is Mixed

Is Small Business Poised to Increase Hiring and Will Employment Gains Continue?

Small business owners were more positive in December according to a Small Business Authority Market Sentiment Survey. This upbeat attitude may have been due to better employment figures and robust holiday spending. Unfortunately, employment momentum waned as 2012 began and the bump in consumer spending at yearend was associated with increased debt, suggesting the consumer spending trend won’t continue in 2012 unless employment and wages grow. There are positive signs, like growth in small business lending but the better jobs trend at the end of 2011 wasn’t nearly good enough to produce an employment recovery in the near-term.

Make 2102 More Profitable and Productive

Technology is Driving Sales and Warehouse Productivity

I don’t think the concept of big data (as it is typically used) applies directly to the average beer distributor like it does for major suppliers but the notion of using hard data to overcome personal biases and utilizing today’s powerful IT tools certainly do. Check out the WSJ pieced titled So, What’s Your Algorithm? and consider how your company might drive sales by doing something analogous to what The Schwan Food Co. did with its 6,000 roving sales people. Then check out Raise a glass! and Tips for quicker product picking for warehouse productivity ideas and inspiration. Because “The fact that productivity, or output per employee, has shot up since the beginning of the recession is no secret”.

New Regulations and Shifting Tax Law

Moving Targets, Confusion, Uncertainty & Anxiety

Some of the “sweeping changes to the rules governing federal estate taxes, gift taxes and generation-skipping transfer taxes” for the 2010, 2011 and 2012 are summarized in this Overview of 2011 and 2012 Estate Tax and Gift Tax Laws from about.com. Are you looking for a compact summary of some key 2102 tax facts? Well here it is thanks to some Georgia CPAs. Here is a similar offering from the good people at the IRS. And don’t forget, there are new W-2 reporting requirements for W-2s.

Cultural and Consumer Shifts Driving Food and Beverage Trends

Foods/Ingredients: The In and Out Lists

Marketing Daily kicked of the new year with an article titled 12 Consumer Trends Affecting Food/Beverages. The brief article doesn’t offer a lot of specifics but it does hit on some of the shifts in consumer behaviors that distributors are already confronting like niche products, usage occasions, local sourcing and engendering loyalty among Millennials. The article contains a link if you want to sign up and receive the full report.

Distribution Deals Get Bigger

Are Small Deals Less Appetizing or Are Big Deals Just More Satiating?

Back in October of 2011 Modern Distribution Management noted that Acquirers Were ‘Taking Chunks’ Out of the Middle. The article quoted David Gordon, president of Channel Marketing Group, who said, “Those large companies have historically gone after the smaller players to grow incrementally… Now they’re acquiring larger companies, from about $75 million to $400 million and taking big chunks out of the market.” Think of Southern Beverage and the other big liquor distributors, some of the big Anheuser-Busch distributor acquisitions, and ABI’s branch acquisitions.

The Most Peculiar 2012 New Year’s Resolution

It’s Not About Improving Yourself – It’s Protecting Yourself

Cindy Perman at CNBC suggests we all make improving this skill a new year’s resolution. It is an interesting piece with disturbing statistics on the frequency of lies, myths about the behaviors of liars and a link to a test of your lie detecting skills. Perhaps if we were all better at this skill the world would be a better place.

Valuation, It’s All Relative

Financial Specialist — Mon, 31 Oct 2011 17:05:04 +0000

“So Tim, what is a beer distributorship worth these days?”

For me, this is a recurring question; and I’m sure it’s a recurring question for others who determine the value of beer distributorships.

“It depends,” is the short and somewhat vague response I’ve provided in the past. Making that particular statement is not an attempt to be coy, unresponsive, or irksome. The “it depends” answer is provided because professional standards prohibit analysis-free valuations and, more importantly, because the “right” answer is, “It’s all relative.”

A cynic could suggest that valuation standards prohibit off-the-cuff valuations as a fee-mitigation defense, but that would be wrong. Professional standards prohibit such offerings simply because the old adage about what happens when you assume becomes horrendous when the assumptions profoundly affect someone’s generational enterprise and livelihood.

Simple answers to valuation questions appear compelling but they actually provide a potentially dangerous disservice. Valuation questions cannot be answered without context. The answer, “it depends” is not intended to avoid the question—it is intended to start a conversation.

Historically, I have followed the “it depends” answer with a series of my own questions. Are you talking about your entire business, or are you just asking about a particular brand? What are you contemplating selling, stock or selected assets? Are you asking, “What is the maximum amount that a strategic buyer might possibly pay, or could afford to pay?” If so, who is that buyer? What kind of synergies can be generated by the combination? How much equity can they bring to the table? What is their disposition towards acquisition? Is there a single strategic buyer with material synergies or are there multiple strategic buyers with material synergies? Or are you really asking me what you need to pay for an acquisition, but are doing it in an inverse manner?

This is a conversational dance I’ve performed so many times that I’ve worn a path on my speakerphone. There was a time when I could have the conversation waiting for a cab outside the Denver Convention Center after the Great American Beer Festival, but then came 2008. The gaps between buyers and sellers and risk and reward became chasms. The need for an augmented response hit me. Ultimately, the notion struck me, “it’s all relative.”

If you look up the definition of “relative” you’ll find that Webster’s lists nouns first. At the top of the list of definitions for “relative” is, “a person who is connected with another or others by blood or marriage.” Blood relations are good place to start when you consider the relative nature of valuation perspectives. You can encompass the entire value spectrum (a past DMGF seminar topic) while covering the range of issues a family business might have to deal with over the course of a generation.

At the low-end of the valuation spectrum is the tiny nonvoting stock interest that might be gifted or sold near the beginning of the succession process. The following is an exaggeration (almost a cartoon) of such a situation.

Joe Senior tells Joe Junior that he’s getting a tiny, insignificant stake in the family business for his 21st birthday. Joe Junior can get excited about that tiny, insignificant stake in the company because—for Junior—there is an implicit expectation of increasing interest and ultimately control. Joe Junior might even manage to retain that excitement when Joe Senior explains the details.

“Here’s the deal son. You’re getting one of the 1,000 nonvoting shares in the company. Your mom and I are going to keep the other 999 nonvoting shares and I’ll keep all 100 of the voting shares. I want you to come to the annual board meeting, even though you’re not going to be on the board and won’t be allowed to speak. I want you to see how the chairman of the board, the president, the director of HR, and the compensation committee (i.e., me, me, me, and me) make decisions. As a preview, I can tell you that your annual distribution will only cover your tax liability and your annual bonus will be based on my mood. This, my son, is going to be a great deal for you.” And for Joe Junior, if all goes as planned, in the end it will be.

As a relative of Joe Senior, Joe Junior can be comforted by the intimate knowledge that this first gifting of shares is just the beginning, and that there is a long-term plan to get Junior to a point of significant interest and, ultimately, to a position of control. So, that first control-free, zero-net-divided share he’s getting should have some significant personal value to Junior. If Junior loses sight of his future and decides to liquidate his interest in the family business, however, then he might find that the market value of that single insignificant share is rather disappointing.

One can imagine what might happen if Junior attempted to find a buyer for his single nonvoting share. Junior—knowing that it is a consolidating industry—might decide to reach out to someone he perceives to be a strategic buyer. Let’s call that hypothetical potential buyer John Doe. Further, assume that this John Doe character is known to be an eager beer consolidator. So, in Junior’s mind, John Doe could be a wonderful potential buyer for his single nonvoting share.

Outside of Junior’s mind and in the world of practical reality, however, Mr. Doe is not a relative of Joe Senior. Therefore, Mr. Doe has no expectation of benevolence from Joe Senior and there is no implied path by which Mr. Doe will garner a more significant stock position. John Doe sees Joe Junior’s single share as a nonvoting (discounted), noncontrolling (discounted), and illiquid (discounted) investment. Perhaps more importantly, a single share doesn’t garner the interest of a consolidator like John Doe. Mr. Doe buys whole businesses, not fractional interests. John Doe understands that a single nonvoting share could well be a zero-return investment until Joe Senior decides otherwise. John Doe sees three reasons to discount from what DMGF calls stand-alone fair market value and zero reasons to pay a premium. Relative to John Doe’s perspective, Junior’s single share is about as uncompelling as is possible.

Now let’s move from the low end of the spectrum to the middle of the spectrum, and go from cartoon to conflict.

Imagine that, simultaneous with his gift to Joe Junior, Joe Senior gifted an identical share of stock to Junior’s older sister Kathy. Thereafter, Kathy and Joe Junior work for the distributorship. They both perform well and contribute to the ongoing success of the family business. Ultimately, Joe Senior sees that Junior and Kathy are ready to take over. Through a long, well-planned effort involving gifts to and purchases by his children, Joe Senior liquidates his entire ownership interest in the family business and leaves Joe Junior and Kathy as equal 50-50 partners; each owning 50 voting shares and 500 nonvoting shares. Joe Senior now is free from day-to-day business distractions. He can turn his attention to reducing his golf handicap and improving his fly-tying skills.

Then tragedy strikes: One of the two 50-50 partners dies. Although Joe Senior did a good job taking care of his own estate, Joe Senior, Joe Junior, and Kathy did not concern themselves with the estates of the next generation. Now, a 50-50 partner’s surviving spouse—who has never worked in the business and doesn’t know the industry—wants to be bought out.

The shareholders’ agreement gives the company and existing shareholders a right to buy out the deceased shareholder’s interest at “fair market value.” Unfortunately, however, the shareholders’ agreement does not clearly define “fair market value.” Complicating matters, the shareholders’ agreement includes other language consistent with an investment value standard. Consequently, the intent of the buyout provision is both ambiguous and conflicted.

This is a potentially volatile situation. Especially if you inject some long-standing mistrust and bitterness. This is the type of circumstance that generates what I only half-jokingly call an “everybody hates me engagement.”

Consider a cynical construction of the dynamic. The buyer wants the absolute lowest price and seller wants the highest imaginable price. Both perspectives could have relevance and might well be considered by both parties, but neither might be what Joe Senior had envisioned or intended when he was in control and had the shareholders’ agreement drafted.

As the appraiser, I can assess the value of business and I conceivably could value it using a standard that is favorable to the buyer, a standard favorable to the seller, or some other standard of value. The ultimate question is which standard of value is appropriate (i.e., what Joe Senior had hoped for and intended). Unfortunately, in this case, that answer is unclear.

Sometimes contracts or statutes include terminology that—either by mistake, omission, or intent—is not clearly defined. An appraiser can put parameters on a valuation using potential interpretations, but an appraiser should not attempt to decide which interpretation is appropriate. The appropriate interpretation is a legal question with a valuation consequence. If, perhaps, you are an appraiser with a J.D. and a law license then you could “go there,” but otherwise it’s not the appraiser’s turf.

I’m not a lawyer, so I don’t go there. I can calculate values under multiple interpretations (i.e., using different standards of value), but I decline to opine on which interpretation is the correct legal (e.g., contractual or statutory) conclusion. Consequently, when I refuse to resolve the legal question in favor of either the low-value buyer or the high-value seller, sometimes both parties end up disappointed—even if they understand and accept my reasoning, methodologies, and separate value conclusions.

Family business owners should do their utmost to avoid this unpleasant circumstance. When drafting their buy-sell or shareholders’ agreements, they should have their lawyers seek valuation advice from a qualified appraiser. They also should consider the fundamental purposes of their buyout provisions. If the primary intent is the continuation of the family business via orderly share purchases, then maximizing shareholder value is an element that might need to be subordinated.

In a 50-50 scenario such as that described above, it can be difficult (or even impossible) for an owner to match the price that a strategic buyer might be willing pay for the family business. This is because strategic buyers typically don’t look at the company’s existing earnings stream. Instead, strategic buyers look at their own post-acquisition earnings streams. The acquirer’s post-acquisition earnings can be far greater than the earnings generated by the existing business. For a distributorship with average profitability, the synergistic buyer might be able to double profitability by reducing the seller’s current operating expenses by say 25%. An illustration of this scenario is provided by the table below.

The owner who wants to buy out an equal partner doesn’t possess the means by which reduce operating expenses by 25%. Relative to the synergistic acquirer’s earnings, the current owner’s potential earnings are a mere 50%. If the acquirer offers a price based on a profit of $1,500,000, it would be an extremely dubious financial proposition for an existing owner to attempt to match that offer when having only half these earnings. It could be a bankable transaction for the existing owner, given the existing equity stake, but the payback would be extended and the investment return would be correspondingly (or even absurdly) small.

It is the same at the top end of the value spectrum; valuation is a relative matter. Two eager potential synergistic buyers can price the same target company differently. One of the two companies might have greater synergies. For example, due to the proximity of existing operations one acquirer might be able to eliminate a warehouse. As a result, that buyer might be able to reduce the seller’s operating expense structure by a third. The other buyer might not be so advantageously situated. That second buyer might be able to reduce the seller’s operating expense structure by only 25%. Using the illustration above, that 33% versus 25% difference results in nearly a quarter million dollars a year more profit. This equates to more value for one acquirer relative to the other.

Alternatively, two competing acquirers could perceive a target’s purchase price differently even if their potential synergies are identical. The balance sheets of the two potential consolidators could be the factor that makes the difference. If one potential buyer is debt-free and the other is levered up from one or more recent acquisitions, then the later is going to see the acquisition as a relatively more risky proposition because that buyer has a notably smaller margin of safety. If things unexpectedly go bad, then the company with the tighter balance sheet trips their bank covenants and stumbles into financial difficulties that much sooner.

For sellers there also is a variety of issues relative to value. An often-discussed issue is the attractiveness of dollars in the bank versus the intangible pleasures of owning your own company and staying in a highly enjoyable business. Another long discussed issue for sellers is the “What Next” factor. Historically, this dilemma primarily has related to what a distributor plans do with his or her life after an exit from the business. Recently, however, the financial question of what to do with after-tax sales proceeds has become a more pressing problem. Compared to the beer industry, other investments have become relatively uncompelling.

Finally, I would like to illustrate the relative nature of multiples. The table below shows how three different companies might have different gross profit multiples even if they sold the same number of cases, generated the same amount of EBITDA, and were valued using the same EBITDA multiple. Assume that the three companies all sell a million cases, all generate slightly more than a million dollars worth of EBITDA, and (for illustration purposes) all were valued at 10 times EBITDA. Despite these commonalities Company A garners a higher GP multiple than Company B, and Company B’s GP intangible multiple is greater than that of Company C. This is illustrated in the table (below).

Why the different gross profit multiples? In the case of companies A and B, the difference is entirely attributable to the higher margins and higher operating expense levels of Company B. Company B generates just as much profit as Company A, but a smaller percentage of each gross profit dollar generated by Company B survives operating expenses to become profit. Relative to sales, Company A and Company B each have the same level of profitability. Relative to gross profit dollars, however, there is a notable difference. For Company B and Company C, the difference in intangibles gross profit multiples is entirely attributable to the tangible asset base. In short, Company C needs more tangible assets to generate the same million dollars of earnings (think: accounts receivable in a noncash state). Note that only Company B’s and Company C’s intangible gross profit multiples are different. In terms of the values of the entire companies, Company B and Company C have the same multiple of gross profit.

Answering valuation questions requires perspective; a frame of reference. Questions of value must be answered relative to the interest being sold and the valuation purpose. The relative perspectives and objectives of buyers and sellers need to be considered. Without accounting for these essential elements, a valuation conclusion could be relatively inaccurate and inappropriate.

Valuation Tales: 2011 – Q3

Financial Specialist — Mon, 31 Oct 2011 17:04:07 +0000

This quarter’s “Valuation Tales” includes four licensed excerpts provided by Business Valuation Resources (BVR).

In S. Muoio & Co., LLC v. Hallmark Entertainment Investments, the Delaware Chancery Court stresses the use of multiple methods. The case supports the principle that multiple methods should be used, including cost, income (e.g., DCF), and market (i.e., multiples).
A review of several cases involving Lost Profits Damages and Lessons Learned from Daubert, including discussion of comparable cohorts, yardsticks, and other valuation techniques. These cases illustrate how contracts, statutes, and other factors can dictate damages.
Hendrix v. Commissioner details a tax court’s decision to uphold a defined value clause. This is the type of case that might provide food for thought if you are working on a buy-sell agreement or shareholders’ agreement.
The Estate of Cohen v. Booth Computers asks the question, “Is a Buy-Sell at Book Value Unconscionable, When FMV is 60 Times Greater?” This case offers an out-of-proportion lesson on how not to integrate accounting, valuation, and a buyout provision.

DE Chancery Advocates ‘Triangular’ Approach to Business Valuation

S. Muoio & Co., LLC v. Hallmark Entertainment Investments, 2011 WL 863007
(Del. Ch.)(March 9, 2011)

In its recent letter opinion, In re Hanover Direct, Inc. Shareholders Litigation, Consol. C.A. No. 1969-CC (2010), the Delaware Chancery court confirmed that “there is no single preferred or accepted valuation methodology . . . that establishes beyond question a company’s value.” At the same time, “there are commonly accepted methodologies that a prudent expert should use in coordination with one another to demonstrate the reliability of its valuation,” the court said, in rejecting an expert’s opinion that relied solely on a discounted cash flow (DCF) analysis.

Another company on the brink. Like the troubled company in Hanover, Crown Media Holdings, Inc. (the owner of the Hallmark Channel) was foundering under declining revenues, and it couldn’t find a buyer to cover the $1.1 billion debt to its controlling stockholder, Hallmark Cards. In 2010, a special committee approved recapitalizing the debt, based on an independent appraisal that said the company was worth only $750 million and on the brink of bankruptcy. A single minority stockholder sued to rescind the deal, claiming that both the process and the price of recapitalization were unfair and drastically undervalued the company—which was worth nearly $3 billion, according to its expert’s DCF.

Under an entire fairness review, however, the Delaware Court of Chancery found that the special committee was independent and had negotiated the Hallmark recapitalization at arm’s length. Further, the plaintiff’s $3 billion DCF valuation failed to explain why no other potential buyer came forward during the company’s bidding process to capture the alleged excess value. It also failed to recognize “the brute facts” of the company’s near-bankruptcy, the court held.

Finally, the plaintiff’s expert failed to incorporate any other valuation method into his conclusions. In fact, the expert had performed a comparable companies analysis ($803 million) and a comparable transactions analysis ($1.3 billion), but he rejected those approaches as “absurdly low.” Such an outlier valuation reinforced its lack of credibility, the court said, citing Hanover. A DCF approach is only reliable when it can be verified by “alternative methods” or “real world valuations,” particularly valuations by potential third-party buyers, the court explained:

Thus, it is preferable to take a more robust approach involving multiple techniques—such as a DCF analysis, a comparable transaction analysis . . . and a comparable companies analysis . . . to triangulate a value range, as all three methodologies individually have their own limitations.

The court also rejected the expert’s DCF for ignoring contemporaneous management projections in favor of his own, and dismissed the plaintiff’s suit.

Roundup: Lost Profits Damages and Lessons Learned from Daubert

Three recent decisions illustrate the ways in which a pre-trial Daubert motion can make or break a plaintiff’s case for lost profits damages, based solely on the reliability and relevance of its expert evidence.

Victory Records, Inc. v. Virgin Records America, Inc., 2011 WL 382743 (N.D. Ill.) (Feb. 3, 2011) In this first case, the plaintiff sought millions of dollars for the defendant’s alleged interference with its multi-album recording contract with a rock ’n’ roll band. Its expert, a music industry accountant, calculated damages based on a “before and after” approach, comparing what the plaintiff’s sales would have been absent the alleged interference, as well as the “yardstick” analysis, which looks to profits produced by industry comparables. Both methods must rest on “adequate” assumptions and “cannot be the product of mere speculation,” the federal district court observed.

However, the expert’s “before and after” approach relied almost exclusively on the plaintiff’s internal sales projections, without independently verifying whether they were accurate. When a party’s internal projections rest on its “say-so” rather than statistical analysis, they are unreliable under Daubert, the court held. Similarly, the expert relied on the plaintiff to recommend a single rock band to use as a yardstick comparable. This “paltry foundation” failed to meet the reliability requirements of Rule 702 of the Federal Rules of Evidence, the court held, and excluded the expert’s evidence.

Insignia Systems, Inc. v. News America Marketing In-Store, Inc., 2011 WL 167259 (D. Minn.)(Jan. 14, 2011) The plaintiff’s expert in this case also used two approaches to estimate damages (ranging from $121 million to $214 million) for the defendant’s antitrust violations. Under the first, he selected “a cohort” of comparable, publicly traded firms to serve as a proxy for the plaintiff’s “but for” market performance and market capitalization. Under his second approach, the expert calculated separate categories of the plaintiff’s lost profits based on management’s “best estimates” of future performance.

The defendant challenged the evidence under Daubert, claiming that the expert’s market approach used companies from different industries and failed to account for alternative causes of loss; and his projections came from “biased” and unverified sources. In response, the expert noted that in a market with so few players, it would make little sense to compare the plaintiff’s performance against competitors that were unaffected by the defendant’s antitrust violations. Nevertheless, he submitted a supplemental report, which recalculated damages by using a set of comparable companies in the plaintiff’s same industry, resulting in a range of damages similar to his original calculations.

“The law is clear that comparable companies must be as similar as possible,” the court held. However, in this case, his rebuttal evidence met the required standard. Further, even though the expert attributed the plaintiff’s entire market loss to the defendant’s misconduct (instead of its earnings drop), these determinations were better subject to cross-examination at trial than dismissal under Daubert, the court held. Likewise, the expert may have relied on “optimistic” management forecasts, but any alleged bias could be tested at trial, and the court admitted the expert’s lost profits conclusions.

The Citrilite Co. v. Cott Beverages, Inc., 2011 WL 284915 (E.D. Cal.)(Jan. 25, 2011) In this last case, the federal district court confirmed that the expert’s use of a statistical regression analysis to calculate losses for breach of a distributorship agreement was both relevant and reliable under Daubert. At the same time, the court rejected any calculations by the expert that were based on a term longer than the contract’s 60-day termination provision. As a result, the expert’s calculations were relevant only to the extent they projected lost goodwill value based on the plaintiff taking over the defendant’s sales after the expiration of the contract. These calculations must be based on “sound” projections and include the plaintiff’s tangible costs, the court ruled, and ordered the parties to submit additional briefing on the merits of the expert’s “lost goodwill value” analysis.

Tax Court Upholds Defined-Value Clause

Hendrix v. Commissioner, T.C. Memo 2011-133, 2011 WL 2457401
(U.S. Tax Court)(June 15, 2011)

A wealthy Texas couple wanted to transfer non-voting stock in their private S corporation to their three adult daughters (through trusts) and also to a charitable foundation. Because the stock was difficult to value, their attorney suggested that instead of gifting percentages, they use a formula clause to establish a dollar value at the time of the transfer, which would also fix the value of the stock transfer for federal gift tax purposes.

Three times appraised. After retaining a reputable appraiser to estimate the value of the non-voting stock (at nearly $37 per share), the couple transferred nearly 288,000 shares pursuant to a defined-value formula clause. The daughters’ trusts retained the same appraiser, and the foundation, represented by independent counsel, also required the donors to obtain an independent review of the appraisal and to assume responsibility for any additional tax liabilities. The foundation and trustees subsequently allocated the transfers amongst themselves according to the $37 per-share value.

The IRS disputed the validity of the transfers, claiming that their fair market value was closer to $49 per share and, further, that the defined-value clauses were not negotiated at arm’s length and were contrary to public policy.

The Tax Court rejected the IRS’s arguments on both points. The close relationship between the taxpayers and their daughters (and their trusts) did not necessarily mean that the formula clauses fell short of the arm’s length requirements of the code and case law, the court held. Moreover, the taxpayers had no prior history with the foundation, which assumed the potential risks of receiving the gift, including the loss of its tax-exempt status if it failed to exercise due diligence; thus its insistence on independent counsel, an independent appraisal, and the donors’ assumption of tax liabilities.

“We also note economic and business risk assumed by the daughters’ trusts as buyers of the stock,” the court said. That is, the trusts could receive less stock if it turned out to be overvalued, which placed them at odds with the taxpayers and the foundation. Finally, the defined-value clauses did not impose a subsequent condition that would defeat the charitable transfers, but actually furthered the fundamental public policy of encouraging charitable gifts, the court held, in confirming the taxpayers’ valuation of the stock transfers to the trusts and the foundation.

Is a Buy-Sell at Book Value Unconscionable, When FMV is 60x Greater?

Estate of Cohen v. Booth Computers, 2011 WL 2694288 (N.J. Super) (July 13, 2011)

A father created an income-producing partnership on behalf of his three grown children, funded in part with Palm Beach property originally purchased for $750,000. In keeping with its closely held nature, the partnership agreement provided that, on a partner’s divorce or death, the remaining partners “shall” repurchase the divorced/deceased partner’s shares at the “true value” of the partnership, defined as “net book value” based on the most recent financial statement, plus $50,000.

In 1997, one of the partners died, and the partnership paid the estate $97,650 for the decedent’s interest, based on the buyout provision. By the time one of the two remaining partners died in 2007, the oceanfront property had appreciated to $45 million. An appraiser for the deceased partner’s estate estimated the “full” or fair market value of the partnership at just over $23 million, based on the net asset approach, which, when added to the appraised value of all the partnership’s properties, exceeded $68 million.

Nevertheless, the partnership paid the deceased partner’s estate just over $177,800, based on the buyout provision and the financial information as of the date of death. The estate sued the partnership, requesting specific performance of the buyout provision at its “true value” of $68 million. Given the gross disparity between fair market value and net book value, any other interpretation was unconscionable and voided the buy-sell provision, the plaintiffs said.

At trial, the partnership presented a CPA expert, who concluded that the purchase price of $177,800 accurately reflected the partnership’s book value. Moreover, the partnership’s books shouldn’t have reflected the fair market value of the Palm Beach property, the CPA expert explained, because the tax code and generally accepted accounting principles require investment property to be recorded at cost.

The trial court agreed, finding that the partnership had always booked its assets at cost rather than market value. This historic treatment comported with the “plain language” of the partnership agreement, which clearly pegged the buy-out price to book value (as it did when one partner died in 1997). Under these facts, there was nothing “inherently offensive” in the buyout formula, the trial court held, and the estate appealed.

“We recognize the disparity between net book value and fair market value,” the appellate court observed, yet the disparity, alone, was not was not sufficient to “shock the judicial conscious.” The controlling factor is the language of the partnership agreement, which in this case was clear and comported with standard definitions of book value, the court held, and affirmed the buyout at net book value.

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Valuation Tales: 2012 – Q1/Q2

FASB issues ASU on indefinite-lived intangibles

Proposed Accounting Standards Update Addresses Cost Concerns

Ky. Adopts Majority Rule in Statutory Fair Value Determinations

Shawnee Telecom Resources, Inc. v. Brown, 2009 Ky. App. Unpub. LEXIS 675 (Aug. 14, 2009); and Shawnee Telecom Resources, Inc. v. Brown, 2011 Ky. LEXIS 159 (Oct. 27, 2011)

Buy-Sell Agreements Receive Varying Consideration in Divorce

Effect of law firm dissolution agreement on shareholder’s interest.

Swaney v. Swaney, 2011 N.C. App. LEXIS 2648 (Dec. 20, 2011)

In re Marriage of Hanscam, 2011 Ore. App. LEXIS 1664 (Dec. 14, 2011)

Disclaimer

Macro Minute: 2012 – Q1/Q2

Random Links For Financial Kinks: 2012 – Q1/Q2

Which Acquisition Strategy is Better

A Series of Small Systemic Acquisition or Hunting for Big Deals

Middle Market Value Gap

Strategic Acquisitions Are Key to Growth

Growth is the Most Important Value Driver

If You Want to Grow You Have to Eat Your Debt

Beer was key to independence from Spain

“The Dutch drank their way to victory”

Goodwill Impairment Testing Pushback

Too Much Time and Money on the Obvious? Take a Step Back

Megatrends and Beverage Convergence Speculation

Which Beverage Segments are Going to Hook Up?

The Art of Wort

Valuation Tales: 2011 – Q4

Security Interest Exists in Economic Value of FCC License

In re Terrestar Networks, Inc., 2011 WL 3654543 (Bkrtcy. S.D.N.Y.)(Aug. 19, 2011)

Courts appoint their own experts to deal with valuation

FASB helps out with ‘market participant’ definitions

Valuation Tales

Disclaimer

M4 – Malted Minds Macro Minute: 2011 – Q4

Random Links For Financial Kinks: 2011 – Q4

The Outlook for 2012 is Mixed

Is Small Business Poised to Increase Hiring and Will Employment Gains Continue?

Make 2102 More Profitable and Productive

Technology is Driving Sales and Warehouse Productivity

New Regulations and Shifting Tax Law

Moving Targets, Confusion, Uncertainty & Anxiety

Cultural and Consumer Shifts Driving Food and Beverage Trends

Foods/Ingredients: The In and Out Lists

Distribution Deals Get Bigger

Are Small Deals Less Appetizing or Are Big Deals Just More Satiating?

The Most Peculiar 2012 New Year’s Resolution

It’s Not About Improving Yourself – It’s Protecting Yourself

Valuation, It’s All Relative

Valuation Tales: 2011 – Q3

DE Chancery Advocates ‘Triangular’ Approach to Business Valuation

S. Muoio & Co., LLC v. Hallmark Entertainment Investments, 2011 WL 863007 (Del. Ch.)(March 9, 2011)

Roundup: Lost Profits Damages and Lessons Learned from Daubert

Three recent decisions illustrate the ways in which a pre-trial Daubert motion can make or break a plaintiff’s case for lost profits damages, based solely on the reliability and relevance of its expert evidence.

Tax Court Upholds Defined-Value Clause

Hendrix v. Commissioner, T.C. Memo 2011-133, 2011 WL 2457401 (U.S. Tax Court)(June 15, 2011)

Is a Buy-Sell at Book Value Unconscionable, When FMV is 60x Greater?

Estate of Cohen v. Booth Computers, 2011 WL 2694288 (N.J. Super) (July 13, 2011)

Valuation Tales

Disclaimer

S. Muoio & Co., LLC v. Hallmark Entertainment Investments, 2011 WL 863007
(Del. Ch.)(March 9, 2011)

Hendrix v. Commissioner, T.C. Memo 2011-133, 2011 WL 2457401
(U.S. Tax Court)(June 15, 2011)