NOVEMBER/DECEMBER 2009 - NACVA.com

NOVEMBER/DECEMBER 2009

Announcing the NACVA/IBA 

2010 Annual 

Consultants’ Conference 

June 2–5, 2010 

Fontainebleau Miami Beach 

Miami, FL 

 

Save the dates!

A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 

On The Cover 

In This Issue… 

7 F R O M T H E E D I T O R 

Thanks to Our Guest Peer-Reviewers 

9 

LETTERS TO THE EDITOR 

Greed Blamed for Economic Crisis 

A reader responds to last issue’s editorial regarding the role 

greed played in causing the economic crisis of 2008–09. 

10 

The Capex Adjustment 

by John F. Coffey, 

MAS, CPA/ABV, CVA, CFF, PFS 

In applying the income method, a 

valuator will normalize cash flows by 

adjusting the financial statements of 

a business to more closely reflect its 

true operating results. An assumption of 

future capital expenditures (capex) is one 

of the typical normalization adjustments. 

At times, the valuator may accept prior 

depreciation as a proxy for future capex. 

Without a clear understanding of the fixed 

asset schedules and underlying assumptions, 

however, such an oversimplification can lead 

to an erroneous conclusion. This article 

explains the methodology for making the 

capex adjustment. 

15 V A L U A T I O N 

Size Matters: How to Apply Size Premium 

Metrics When Size-Based Category 

Breakpoints Overlap 

by Michael W. Barad 

When using cost-of-capital statistics in the buildup method and 

capital asset model, valuators must choose the appropriate size 

premium category. For the smallest companies, the micro-cap, 

10th decile, 10a, and 10b size premia represent overlapping 

options from which to pick. This article helps valuators choose 

between overlapping size premium categories. 

27 P R A C T I C E M A N A G E M E N T 

Optimize Your Website Content 

by David M. Freedman 

How to attract clients, prospects, and referral sources to your 

website through social media. 

The Value Examiner November/December 2009 3


DEPARTMENTS 

20 

24 

30 

L I T I G A T I O N C O N S U L T I N G 

Court Corner 

by John Stockdale, Jr., Esq. 

Summaries and analyses of the most important 

cases that involve valuation issues, in both federal 

and state courts. 

FORENSIC ACCOUNTING 

The Fraud Files 

by James Martin, CMA, CIA, CFFA; 

Austin Marks, CPA, CFF, CFE, CFFA, CFD; 

and Todd Michael Jolicoeur, CFFA 

P R A C T I C E M A N A G E M E N T 

Use Active Voice to Earn Trust 

by David N. Wood, CPA/ABV, CVA 

In valuation reports, active voice is usually more 

persuasive than passive voice. Report Righter shows 

you how to change passive to active, and when to 

make an exception. 

EDITORIAL STAFF 

CEO & Publisher: Parnell Black 

Executive Editor: Doug Kirchner 

Senior Editor: David M. Freedman 

EDITORIAL BOARD 

Chairman: David N. Wood, CPA/ABV, CVA 

Elsie Enninful Adu, CVA (Ghana) 

D. Larry Crumbley, PhD, CPA, CrFA, CFFA 

Darrell D. Dorrell, CPA, MBA, CVA, 

ASA, CMA, DABFA, CMC 

Willis E. Eayrs, CVA, CM&AA (Germany) 

Mark G. Filler, CPA/ABV, CBA, AM, CVA 

Edward J. Giardina, MSA, CPA/ABV, CVA 

Michael Goldman, MBA, CPA, CVA, CFE 

Z. Christopher Mercer, ASA, CFA 

Odalys Lara, CPA, CVA, CFFA, CFF 

Neil Paschall, CPA/ABV, CVA, CFFA 

Keith Sellers, DBA, CPA/ABV, CVA 

Sandra M. Shell, CPA/ABV, CVA 

Edward Wandtke, CPA, CVA 

Susan Yi, CPA, CVA 

The Value Examiner ® 

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Valuation Analysts (NACVA) 

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Tel: (801) 486-0600, Fax: (801) 486-7500 

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ANNUAL SUBSCRIPTION 

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please visit www.millspub.com. 

SUBMISSION DATES 

Issue Submission Dates Publish Dates 

May/June 2010 March 1, 2010 May 1, 2010 

July/August 2010 May 1, 2010 July 1, 2010 

ALL SUBMISSIONS 

The Value Examiner is devoted to current, articulate, 

concise, and practical articles in business valuation, 

litigation consulting, fraud deterrence, matrimonial 

litigation support, mergers and acquisitions, exit 

planning, and building enterprise value. Articles 

submitted for publication should range from 500 

to 3,000 words. Case studies and best practices are 

always welcome. 

SUBMISSION STANDARDS 

All articles should be thoroughly edited and proofread. 

Submit manuscript by e-mail (in standard 

word processing format) to David M. Freedman: 

davidf1@nacva.com. Include a brief biography to 

place at the end of the article, a color photo of the 

author (resolution 300 dpi). See authors’ guidelines 

and benefits at www.nacva.com/examiner/Publishing_Articles.pdf. 

The Value Examiner accepts some 

reprinted articles, if accompanied by appropriate 

reprint permission. 

• Editorial . . . . . . . . . . . . . . . . . . . Gray 

• Valuation . . . . . . . . . . . . . . . . . . . Blue 

• Forensic Accounting . . . . . . . Green 

• Litigation Consulting . . . . . Orange 

• Practice Management . . . . . . . . . Red 

• Academic Research . . . . . . . . Purple 

REPRINTS 

Material in The Value Examiner may not be reproduced 

without express written permission. Article 

reprints are available; call NACVA at (800) 677- 

2009 and/or visit the website: www.nacva.com. 

4 

November/December 2009 

The Value Examiner

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F R O M T H E E D I T O R 

Thanks to Our Guest 

Peer-Reviewers 

Occasionally we invite valuation 

analysts and other 

professionals outside of our 

Editorial Board to peerreview 

articles that have been submitted 

to the Examiner for publication. In some 

cases, after an article has been approved 

pending requested revisions, a reviewer 

works directly with an author by phone 

and e-mail to improve an article. I’d like 

to thank the following professionals who 

have served as guest reviewers in the past 

six months or so: 

John E. Barrett, Jr., 

MBA, CPA/ABV, CVA, CBA 

(Cranston, RI) 

Vincent Covrig, PhD, CFA 

(Northridge, CA) 

Jonathan P. Friedland, Attorney 

(Chicago) 

Gilbert E. Matthews, CFA 

(San Francisco) 

Dan McConaughy, PhD 

(Long Beach, CA) 

Susan Saidens, 

CPA/ABV, ASA, CVA, CFE, CFF 

(Exton, PA) 

ARE YOU LINKED IN 

Over 50 million people in 200 countries 

have profiles on LinkedIn (www. 

linkedin.com), the Internet’s top businessoriented 

networking site. Sooner or later, 

you will get an invitation to “connect” with 

a LinkedIn member, and you have to become 

a member to accept the invitation. 

Each member can set up a profile, 

invite others to connect, manage connections, 

conduct research, build a 

reputation, hunt for jobs, recruit talent, 

generate sales leads, find advisers 

and subject matter experts, participate 

in group discussions, and more. 

One of the most useful features of 

LinkedIn is groups. There are thousands 

of affinity groups within LinkedIn, organized 

by industry, profession, special 

interest, etc. Each LinkedIn member 

can join up to 50 affinity groups, to 

network, collaborate, and share information 

with colleagues, customers, 

community, and people who share the 

same interests. In fact, any member can 

start his or her own group, and set policies 

and membership criteria. To find a 

group you might want to join, you can 

search the group directory. 

One of the LinkedIn groups is 

Business Valuation Professionals, with 

231 members in November 2009. It is 

managed by Lloyd Brown, MBA, AVA, 

of Memphis. 

The AICPA’s official LinkedIn group 

has 7,936 members. There is a group 

called United Against Fraud, with 1,044 

members who include forensic accountants, 

information security professionals, 

investigators, lawyers, law enforcement 

officials, and experts from related 

fields. The Expert Witness Network, 

with 487 members, hosts discussions, 

offers marketing advice, and lets members 

refer business to each other. Other 

groups include the Mergers & Acquisitions 

Network (6,567 members), American 

Divorce Lawyers (708 members 

including some valuation analysts), and 

so on. 

To benefit from LinkedIn membership, 

you need to spend time participating 

on the site. It’s an effective way 

to network for some professionals, a 

time waster for others. 

You don’t have to wait until you’re invited 

to join. You can sign up and lurk before 

you decide whether to get involved. 

I wouldn’t say that you need to join 

a business network like LinkedIn (there 

are others) to succeed. But online networking 

skills will serve you well in 

the future, even within your own company, 

as social networking technology 

becomes integrated into websites of all 

kinds. If you need help learning those 

skills, ask any teenager. VE 

David M. Freedman 

Senior Editor 

davidf1@nacva.com 


Forensic Accounting Demand Reaches New High 

Accounting Today’s recent survey of the top 100 accounting 

firms—and their plans for increasing their business— 

dramatically illustrates this niche opportunity: 77% 

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aspects of the accounting profession: auditing, tax, valuation, 

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Here Are the Skill Sets You’ll Acquire 

• Training in the “Top 30” specific tools and techniques to use in forensic accounting and related assignments such as Full-and-False 

Inclusion, Genogram, Entity(ies) Charts, Timeline Analysis, Link Analysis, Item Listing, (Modified) Net Worth Method, Source and 

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FOUNDATIONAL INTERPERSONAL DATA COLLECTION AND ANALYSIS TRIAL 

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Confidential 

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Laboratory 

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Post- 

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Purpose of Stage Tasks to be Performed Potential Issues 

• Obtain validating data 

• Obtain refuting data 

References 

• Internet research, e.g. Best websites 

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• Combine first-hand knowledge (e.g. Interviews and 

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L E T T E R S T O T H E E D I T O R 

Greed Blamed 

for Economic Crisis 

We encourage readers to express 

opinions, share insights, ask questions, 

raise objections, and challenge the 

information that we publish in The 

Value Examiner. The advancement of 

the valuation profession depends on 

your ideas and innovations. 

I 

just read your editorial on greed 

(“Greed Takes the Blame,” The 

Value Examiner, September/ 

October 2009, page 5), and here 

is my take on it. Adam Smith’s invisible 

hand works when competition is high, 

and providers of goods and services 

must provide quality and fair pricing 

in order to compete and thrive. This, 

of course, reflects the economically 

and financially simpler time in which 

Smith lived. 

The greed-related part of our recent 

economic problems is due in large part 

to a lack of transparency, in that the 

investing marketplace was not properly 

aware of the risks being taken—it was 

the morphing of behemoth organizations 

(“too big to fail”) and snake-oil salesmen. 

This, coupled with inadequate 

regulation that would have helped 

protect and inform the public, allowed 

greed to run unchecked. Greed is OK, 

but unchecked greed is not. Such 

examples are all over our economic 

history, such as with railroads in the 

mid-1800s, for example. 

Russell T. Glazer, 

MBA, CPA/ABV, CVA 

Woodbury, New York 

The greed-related part of our recent economic 

problems is due in large part to a lack of 

transparency, in that the investing marketplace 

was not properly aware of the risks being taken… 

Editor’s note: We also received the 

following letter from a reader who wishes 

to remain anonymous because the subject 

is “too politically charged.” 

I read your editorial about greed and 

couldn’t agree with you more. If you 

have not already checked it out, I 

would recommend Meltdown, by 

Thomas E. Woods Jr., a long-standing 

follower of the Austrian School of 

economics. The book gives a solid 

account of the financial collapse of 

the past couple of years. 

In Meltdown (Regnery Press, 2009), 

Woods offers a free-market, smallgovernment 

view, blaming the U.S. Federal 

Reserve System for the worldwide financial 

crisis of 2008–09. He argues that the only 

way to rebuild our economy is by returning 

to the “fundamentals of capitalism” and 

letting the free market work. 

For balance, try The Keynes Solution: 

The Path to Global Economic Prosperity, 

by Paul Davidson (Palgrave Macmillan, 

2009). Keynes advocated for an 

interventionist government role in the 

market economy, in cooperation with 

private initiative, to mitigate the adverse 

effects of recessions, depressions, and 

booms—a view that influenced FDR’s 

new deal policies. VE 



V A L U A T I O N 

The Capex Adjustment 

by John F. Coffey, MAS, CPA/ABV, CVA, CFF, PFS 

I 

was recently hired by one of the 

spouses to prepare a valuation for 

purposes of divorce. The other 

spouse also hired an experienced 

CVA. Both valuators selected the 

capitalization of after-tax cash flows 

method. I assumed we would come to 

similar conclusions, given the same set 

of facts. When the reports were issued, 

however, my valuation was nearly 

double that of the other. 

When I drilled down in the two 

reports, I found that one of the largest 

differences was the assumption of 

necessary future capital expenditures 

(capex). The case went to trial, and the 

capex adjustment was hotly debated. 

In preparing for trial, I searched at great 

length for literature on normalizing capex. 

I found that little had been published on 

the topic, and I spent considerable time 

generating trial exhibits to explain the 

concept for the court. This article is the 

fruit of those efforts. 

In applying the capitalization of 

earnings method, valuators are typically 

taught to normalize the last five years 

of historical financial statements. The 

intent is to determine the company’s 

expected future cash flows into 

perpetuity. As part of the normalization 

process, it is necessary to estimate cash 

flows required to continue funding 

capex. After all, this cash is not available 

to shareholders. 

A proper normalization of capex will 

happen in two steps. 1 First, depreciation 

is added back to net income, because 

depreciation is an expense that does not 

use cash. Second, capex is subtracted 

from net income, because capex is a 

use of cash that does not affect income 

until the assets are depreciated. 

As an illustration, let’s start with a 

simple example based on the facts in 

Table 1, below. 

The two-step process to normalize 

capex is illustrated in Exhibit A. 

In this example, capex (Step 2) was 

determined by reference to historical 

book depreciation (Step 1). But will 

historical book depreciation always 

equal estimated future capex Stated 

differently, is historical depreciation 

always an appropriate proxy for capex 

This was the issue to be debated at my 

recent trial. 

Which came first, the chicken or 

the egg I cannot answer that age-old 

question, but I can tell you that capital 

expenditures always come before 

depreciation. A company cannot 

expense depreciation on an asset it has 

not acquired. Thus, future depreciation 

into perpetuity can only come from 

future capex. It is an error to capitalize 

cash flows into perpetuity where 

depreciation exceeds capex, because 

that is impossible. 2 

With that in mind, it is important 

to understand that depreciation should 

be adjusted to capex. To do the reverse 

TABLE 1 

Five-year average pretax net income $1,500,000 

Five-year average book depr/amort $1,000,000 

Federal income tax rate 30% 

State income tax rate 5% 

EXHIBIT A 

Pretax Net Income $1,500,000 

State Income Tax $(75,000) 

Income Before Federal Tax $1,425,000 

Federal Income Tax $(427,500) 

Subtotal $997,500 

Step 1: Add Depr/Amort $1,000,000 

Step 2: Subtract Capex ($1,000,000) 

Cash Flow to be Capitalized $997,500 

10 

1 James R. Hitchner, Financial Valuation Applications and Models, 2 nd Edition, Wiley & Sons, New Jersey, 2006, pg. 1288. 

2 Ibid., pg. 118. 


The Value Examiner


will distort the capitalized cash flow and 

ultimately distort the value conclusion. 

Into perpetuity, depreciation expense will 

equal the cash needed to purchase capital 

assets, absent growth and inflation. The 

goal is to first determine the level of 

ongoing capex required to sustain the 

existing level of cash flows, and then 

adjust depreciation accordingly. 

Furthermore, is it proper to presume 

that the historical assemblage of assets 

is required to produce the same level of 

cash flows into perpetuity Five years is 

clearly not perpetuity, and most valuators 

have encountered circumstances where 

book depreciation exceeds capital 

expenditures over a five-year period. 

The following are a few examples of how 

this can happen: 

• Accelerated depreciation methods 

(e.g., the IRC Section 179 election) 

• Failure to consider salvage values 

• Depreciation on a building 

(or other long-lived asset) 

• Purchased goodwill 

(or other in-tangibles) 

• Discontinued operations 

• Non-operating assets 

Therefore, before accepting historical 

depreciation as a proxy for estimated future 

capital expenditures, it is imperative 

for the valuator to understand the company’s 

future capex needs. Some factors 

that can influence future 

capex include the EXHIBIT B 

company’s business 

plan and depreciation 

policy, the nature 

of the industry, and 

technology advances. 

can impact future capex. For example, 

adding or discontinuing a product line 

will likely precede fixed asset additions 

and/or disposals. Certain assets may not 

be replaced, and new assets not yet existing 

at the company may be required. Accordingly, 

the valuator should understand 

the company’s business plan because the 

historical assemblage of assets is not always 

indicative of future capex needs. 

DEPRECIATION POLICY 

The depreciation policy must be 

reviewed when assessing future capex 

needs. Circumstances that may require 

adjustment include: 

• Assets are not depreciated over 

estimated useful lives. 

• Salvage values have not been 

considered. 

• Obsolete and/or nonoperating assets 

have been depreciated. 

NATURE OF INDUSTRY 

Some industries are capitalintensive 

(i.e., more capital resources 

are consumed as opposed to labor in 

the production of goods). Automobile 

manufacturing, chemical, and oil 

refinery are some examples. When the 

subject company operates in a capitalintensive 

industry, greater emphasis 

should be placed on forecasted capex. In 

addition, it is important to understand 

the nature of the industry, as replacement 

needs can vary. For example, utility 

companies are generally characterized 

as having high initial capex and low 

asset turnover. In contrast, software 

research and development companies 

tend to have lower initial capex and 

higher asset turnover. 

TECHNOLOGY ADVANCES 

Innovations in technology often 

impact the future capital requirements 

of a particular industry. New technology 

can create the need to retool immediately 

and can even render an entire industry 

obsolete. For example, the digital age 

has dramatically changed both the 

film processing and analog television 

industries. Equipment prices are also 

influenced by new technology. Hightech 

medical equipment prices generally 

increase with improved technology, for 

example, while the cost of better cell 

phones and computers has dropped. 

Continuing with our example, a 

detailed review of the fixed assets 

revealed the following information: 

• Over the last five years, the company 

purchased and immediately expensed 

$50,000 of equipment in year 

1 and $20,000 of equipment in year 

4. Both pieces of equipment have an 

estimated useful life of 10 years with no 

salvage value. As shown in Exhibit B, 

Year 1 2 3 4 5 Totals 

Purchase 1 $50,000 $50,000 

Purchase 2 $20,000 $20,000 

Total Cash Flow $50,000 $20,000 $70,000 

BUSINESS 

PLAN 

Changes in the 

company’s underlying 

business model 

Historical Depreciation $50,000 $20,000 $70,000 

Estimated Life Depreciation $5,000 $5,000 $5,000 $7,000 $7,000 $29,000 

Excess Depreciation $45,000 $(5,000) $(5,000) $13,000 $(7,000) $41,000 



depreciation per books was $70,000 

over the five-year historical period, 

but the useful life depreciation was 

only $29,000. The average excess 

depreciation on this equipment over 

the last five years was $8,200 per year 

($41,000 ÷ 5 years). 

• The company purchased a building 

eight years ago for $2,500,000. The 

building is expected to last for 40 years 

with a salvage value of $1,000,000. It is 

being depreciated on the books over 25 

years on a straight-line basis without 

regard to salvage value. For each of 

the last five years, the annual book 

depreciation was $100,000 per year 

($2,500 ÷ 25 years), and the useful life 

depreciation was $37,500 ([$2,500,000 

– 1,000,000] ÷ 40 years). The excess 

depreciation expense in each of the 

last five years was therefore $62,500. 

• The company commenced operations 

10 years ago under an asset purchase 

where goodwill of $750,000 was 

acquired. Amortization has been 

taken over 15 years on a straight-line 

basis. Amortization for each of the 

last five years was $50,000 per year 

($750,000 ÷ 15 years). The company is 

not expected to make such a purchase 

in future years. 

• In year 3, the company discontinued a 

product line. A portion of the related 

equipment was sold in the same year. 

The average impact on historical 

depreciation for the last five years 

from this equipment was $16,000 

per year. 

• Some of the assets in the discontinued 

product line were obsolete and could 

not be sold. However, the company 

continued to record depreciation 

expense of $4,800 in each of the last 

five years. 

• All other fixed assets are used in 

production of cash flow, will be replaced 

when exhausted, and have been 

depreciated over estimated useful lives. 

Salvage values have been considered. 

Thus, historical depreciation is 

representative of future depreciation 

for these remaining assets. 

The valuator can now estimate future 

capex needs as outlined in Exhibit C. 

Based on this new information, the 

two-step process for normalizing capex 

is illustrated in Exhibit D. 

Cash flow in Exhibit D exceeds cash 

flow in Exhibit A by the after-tax capex 

adjustment. In this example, a failure to 

understand the fixed asset detail would 

result in understating the worth of this 

company by overstating capex. 

GROWTH AND INFLATION 

Until now, we have not considered 

the impact of growth and inflation. 

Absent growth and inflation, it is 

reasonable to assume that depreciation 

will equal capex into perpetuity, because 

current depreciation is based on past 

capex. However, when the company 

is growing and subject to inflation, it 

is natural to assume that future capex 

will outpace past capex (i.e., current 

depreciation). There are varying 

opinions as to whether this difference 

is material to the conclusion of value. 

According to James R. Hitchner, 

“Many valuation analysts will normalize 

depreciation and capital expenditures by 

making them equal. This equalization 

process is a simplifying assumption, 

EXHIBIT C 

Historical Depr/Amort $1,000,000 

Expensed Equipment $(8,200) 

Excess Building Depreciation $(62,500) 

Goodwill Amortization $(50,000) 

Discontinued Operations $(16,000) 

Non-operating Assets ($4,800) 

Capex Adjustment $(141,500) 

Estimated Future Capex $858,500 

EXHIBIT D 

Pretax Net Income $1,500,000 

Capex Adjustment $141,500 

Adjusted Pretax Net Income $1,641,500) 

State Income Tax $(82,075) 

Income Before Federal Tax $1,559,425 

Federal Income Tax $(467,828) 

Subtotal $1,091,597 

Step 1: Add Depr/Amort (Adjusted) $858,500 

Step 2: Subtract Capex $858,500 

Cash Flow to be Capitalized $1,091,597 

12 


The Value Examiner


since capital expenditures will slightly 

exceed depreciation due to inflationary 

pressure in a stable business. However, 

this simplification usually, but not always, 

has a nominal effect on the value.” 3 

In contrast, Gilbert E. Matthews 

advocates computing capex in excess 

of depreciation based on asset life, 

depreciation method, and assumed rate 

of growth. In a 2002 article appearing 

in Shannon Pratt’s Business Valuation 

Update, Matthews illustrates how capex 

exceeds depreciation by 15.5 percent 

based on a 10-year, straight-line, 3 percent 

growth rate assumption. Matthews 

states, “Many valuation reports overstate 

depreciation in growth models, and 

thus, overestimate free cash flow.” 4 He 

[ 

PRESENTATION 

attributes this material error to nonrecognition 

of the impact of growth and 

inflation on capex. 

FUTURE CAPEX REQUIREMENTS 

To properly normalize capex, it is 

critical for the valuator to first make 

an appropriate determination of future 

capex requirements. This includes an 

understanding of the business plan, 

depreciation policy, nature of the 

industry, and impact of technology. 

Depreciation is then adjusted based on 

projected capex. Finally, the valuator 

should determine whether to increase 

capex to account for the impact of 

growth and inflation. 

Next time you are faced with this 

issue, your client will be grateful when 

you clearly explain the appropriate way 

to compute the capex adjustment. VE 

John F. Coffey, MAS, 

CPA/ABV, PFS, CVA, 

CFF, is the principal at 

Coffey & Associates, PC 

(www.coffeypc.com). 

Specializing in litigation 

support for divorce 

proceedings, he has been 

retained as an expert and has testified 

at trial or depositions in valuation cases 

in Illinois. 

3 Ibid., pg. 1288. 

4 Gilbert E. Matthews, “Capex = Depreciation is Unrealistic Assumption for Most Terminal Values,” Shannon Pratt’s Business Valuation Update, March 200, pg. 3. 

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V A L U A T I O N 

Size Matters: 

How to Apply Size Premium Metrics When 

Size-Based Category Breakpoints Overlap 

by Michael W. Barad 

have been involved with the Ibbotson 

yearbooks in a variety of capacities 

since 2000, and one constant is that 

I continue to get asked for guidance 

on how to use the size premium published 

in the Ibbotson SBBI Valuation Yearbook. 

Morningstar publishes a comprehensive 

range of cost of capital statistics for use in 

the buildup method and capital asset pricing 

model (CAPM), so that valuators can 

use their own expertise in choosing the 

right measures of risk premia, date ranges, 

and other adjustments to their model. That 

said, a little guidance never hurt, right 

For all of you who have been spending 

long nights toiling over the decision 

to choose micro-cap, 10th decile, 10a, 

or 10b size premia, this article is for you 

(that, and some sleep). I would also like 

to address the folks who have shut down 

their capacity to choose between a menu 

of overlapping data options, preferring 

to be told by publishers like Morningstar 

exactly how they should be constructing 

their valuation models. The profession of 

business valuation is both art and science. 

Accumulated expertise is what balances 

the art and science. Ayn Rand said man’s 

most important attribute is “his reasoning 

mind.” This article is about applying 

our reasoning minds in constructing our 

valuation models. 

The application of different size premia 

is widely debated and often contested in 

litigation. I will outline a process for helping 

valuation professionals choose between 

overlapping size premium categories. 

SIZE PREMIA 

I think Morningstar (and previously 

Ibbotson Associates) has been clear that 

our beta-adjusted size premia are intended 

for use in either the buildup or CAPM 

models. The beta-adjusted size premium 

calculation is our purest methodology 

for isolating firm return that is solely due 

to size. In other words, we are measuring 

the return that is attributable to firm 

size which cannot be explained by other 

systematic factors. This is far superior to 

the simple “small stock premium,” which 

simply measures the excess return of small 

stocks over large stocks. 1 

Morningstar believes that our size 

premium methodology is an elegant extension 

of the CAPM because it allows 

us to treat other risk factors that would 

influence a firm’s cost of equity in other 

parts of the model without concern for 

double-counting them. Another such 

risk factor is industry risk, which can be 

addressed for a buildup method in the 

form of a published industry premium 

from Morningstar or in an artful application 

by the practitioner. For a CAPM, 

the industry risk can be addressed in one 

of the following ways: 

1. Use a peer group/industry Beta from 

Morningstar Cost of Capital Yearbook, 

ValuSource, and Value Line. 

2. Combine individual company Betas 

from any number of sources (including 

Bloomberg, S&P Compustat, Value 

Line, Morningstar.com, and Yahoo! 

Finance). 

3. Manually combine peer firm returns 

into a blended index that is regressed 

against a market benchmark. 

While we are only addressing size adjustments 

in this article, a proper cost of 

capital estimate requires as much attention 

on the equity risk premium, riskless 

rate, industry adjustment, and companyspecific 

factors. Whether we are talking 

about size premium or other component 

parts to the cost of capital, the metrics 

that are the cleanest to apply are ones 

that measure only what they are intended 

to, and pose as little risk of double-counting 

other factors as possible. 

OVERLAPPING CATEGORIES 

The meat and potatoes of this article 

is a discussion of how to use the various 

1 See the Ibbotson SBBI Valuation Yearbook for a complete analysis and comparison (http://corporate.morningstar.com/ib/asp/subject.aspxxmlfile=1415.xml). 



TABLE 1: SIZE PREMIUM CHOICES FOR SMALL FIRM VALUATION 

Decile Market Cap of Smallest Market Cap of Largest Size Premium 

(size category) Company (in millions) Company (in millions) (return in excess of CAPM) 

Micro-Cap, 9–10 $1.575 $453.254 3.74% 

10 $1.575 $218.533 5.81% 

10a $136.599 $218.533 4.11% 

10b $1.575 $136.500 9.53% 

size premium metrics that Morningstar 

provides when size-based category 

breakpoints overlap. For example, we 

have the choices for a small firm valuation 

shown in Table 1. 

What to do with all those choices If 

I have a small firm with an estimated equity 

value of $120 million, I could choose 

among the micro-cap, 10th decile, or 

10b category for my size premium. The 

range of size premium for this one firm 

would be between 3.74 and 9.53 percent. 

This range would have a tremendous effect 

on the firm’s enterprise value. 

There are two decision paths I see 

folks take when making this choice. The 

dark and scary path is where practitioners 

choose the size premium that achieves 

the self-serving goal of influencing the 

enterprise value in the direction most 

desired. In many cases this leads them to 

choose the highest size premium number 

(9.53 percent in the data above), 

because this will lead to the lowest enterprise 

value for tax purposes, marital 

dissolution, acquisition valuation, etc. 

The path of enlightenment, on the other 

hand, is when practitioners choose the 

size premium that is most statistically 

relevant for their application. 

PATH OF ENLIGHTENMENT 

There are two primary factors in determining 

which size premium to use. 

First, identify how close to a size category 

boundary your subject company 

falls. Second, determine how confident 

you are in your estimate of equity value. 

With this information, you can make the 

right choice. That’s all there is to it. 

Not following yet Let’s take it a step 

further. In the example above, where we 

have a firm estimated at $120 million of 

equity, this is close to the top breakpoint 

of the 10b category, toward the middle 

of the 10th decile, and toward the bottom 

of the micro-cap. There are always 

going to be more companies included in 

the micro-cap than in the 10th decile, 

and more companies in the 10th decile 

than in the 10b category. More companies 

are usually better, since that means 

more statistical significance in the data. 

However, once we get to a large enough 

number of companies, more data doesn’t 

necessarily add much significance. The 

10th decile was as small as 49 companies, 

back in March of 1926. This is still 

# of Companies 

2,500 

2,000 

1,500 

1,000 

500 

significant. While Morningstar doesn’t 

publish the split between historical 

number of companies in 10a and 10b, 

it is fair to say that it is approximately 

half of what it was back in the 1920s 

(since our breakpoint definition comes 

from the Center for Research in Security 

Prices at the University of Chicago’s 

Graduate School of Business, which 

would have used only NYSE stocks to 

split back in the 1920s). 

Are 25 companies too few I might 

be concerned if we were only using data 

from the 1920s, but after that it really 

picks up and we add a tremendous 

amount of firm data to even the smallest 

breakpoint we publish. 2 

Since the number of companies in the 

data set is not a determining factor, we 

should pick the most “conservative” category 

that has the most “relevance” for 

GRAPH 1: SIZE PREMIA CATEGORIZATION 

10b 

10 

10a 

Micro-Cap 

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 

Market Value of Equity ($mil) 

9 

16 

2 See Table 7–8 of the 2009 Ibbotson SBBI Valuation Yearbook. 


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our subject firm. In this case, it is clearly 

the 10th decile. We need to balance the 

confidence that our subject firm actually 

falls within a particular size category 

with the need to tailor that size grouping 

as tightly as possible to make the peers 

relevant to our analysis. The micro-cap 

category is too broad for this case, since 

our $120 million subject firm would fall 

in the lower range of the category; and 

the 10b is too narrow, since our subject 

company would barely squeeze in 

under the top breakpoint before sliding 

into 10a. We can say with confidence 

that the 10th decile puts our $120 million 

company among the most peers of 

similar size. 

Graph 1 (page 16) shows each size premium 

category. The peak of each premium 

is the number of companies in the category, 

and the range spreads down from the 

peak to the x-axis where the outer limits 

are the market value breakpoints for the 

category. For example, 10b (the smallest 

category) has 1,182 companies ranging 

from approximately $2 to $136 million 

in market value. This is a conceptual illustration 

that shows how practitioners 

can think about assigning a size category 

to their subject company. In our $120 

million example, it is clear that we can 

squeeze into the upper end of 10b (along 

the x-axis), but decile 10 is much more relevant 

because its midpoint between upper 

and lower bounds hovers around the low 

$100 million range. Focusing as close to 

the center of the size grouping as possible 

suggests that your subject company falls 

nicely within the range of peers that make 

up its size premium estimate. 

Now let’s examine the issue of confidence 

in our estimate of equity value. 

Where did that $120 million estimate 

come from, anyway Some practitioners 

make their initial estimate of equity value 

based on fundamentals, past transactions, 

or market comparables. The truth is that 

equity value is what we are trying to solve 

for, not what we start with. In the example 

above, let’s say we started with a price/earnings 

ratio of 20 from the subject company’s 

peer group (from the Morningstar Cost of 

Capital Yearbook) and combined that with 

the subject company’s $6 million in earnings, 

to arrive at a $120 million estimate of 

“price,” or equity value: 

Price subject company/$6 million = 20 

Price = 20 x $6 million 

Price = $120 million 

That’s great, but it is only one measure, 

and it is based on public companies, 

which my hypothetical subject company 

is not. Therefore, I am not that confident 

in my $120 million estimate, and 

I shouldn’t contend that my estimate is 

precise when I apply it to the size premium 

breakpoints. In other words, my firm 

could just as easily be worth $140 million 

as it is $120 million, which would bump 

it out of the 10b size category into 10a. 

This is a big reason why the 10th decile is 

the best category, and how “confidence” 

in bucketing plays a role in choosing the 

appropriate size premium. 

Of course we shouldn’t just use one 

approximation of equity value to bucket 

into a size category. The more comparables 

and fundamentals you can use, the 

better. Then you should have a scattering 

of equity estimates. Let’s say we followed 

this exercise and found that our estimates 

for a firm’s equity value were $60 million, 

$120 million, and $180 million. The average 

is $120 million, but as you can see 

once again, the 10th decile, which ranges 

from around $2 million to $218 million, 

is still the best choice to provide relevant 

peer companies of similar size. 

DEFINITIONS OF SIZE 

All of this suggests the question: Is 

“price” (or market capitalization) the 

best measure of size for determining size 

premium Ask yourself this: How big is 

a company If I told you that a firm had 

net income of $15 million, would that inform 

you as to its size What if I told you 

that a firm had 25 employees, is that clear 

enough Net income doesn’t help because 

companies of all sizes produce a wide range 

of income. A firm like Yahoo has a market 

cap of more than $23 billion, yet it had net 

income of only $15 million. When Citigroup 

or Time Warner have negative net 

income, they shouldn’t then be classified as 

small companies. The advertising agency 

Bark Group has only 25 employees, but its 

market capitalization of equity is over $21 

billion. There may be statistical relationships 

between a wide range of factors and 

firm size, but market capitalization is still 

the most relevant. 

Even with market capitalization representing 

the most relevant measure of 

size, we still must acknowledge the bias 

introduced in first having to estimate 

size in order to establish a size premium 

category, ultimately resulting in a 

firm value that defines “size.” The logic 

is circular. For those of you interested 

in factors other than market capitalization, 

the Duff & Phelps Risk Premium 

Report (D&P Report) provides 

seven alternative measures of size. The 

D&P Report also provides regression 

statistics for people who choose to 

extrapolate the findings to companies 

significantly smaller than the smallest 

size grouping presented. 

THE IMPACT OF DISTRESS 

To date, the D&P Report has been the 

primary source for size-based risk premium 

data that segregates financially distressed 

companies into a separate bucket, leaving 

only healthy companies in the standard 

results. It may not surprise you that high 

financial risk companies represented over 

25 percent of the data set in recent years of 

18 


The Value Examiner


the D&P Report (though this number was 

historically much lower). 

Morningstar has spent a good part 

of 2009 evaluating predictive ability 

to measure financial distress, and we 

found that standard measures can be 

improved. In the October 2009 issue 

of Business Valuation Update, Warren 

Miller and James Harrington’s article 

“A Timely New Study on Bankruptcy 

Prediction Models from Morningstar” 

compares the Altman Z-Score to a newer 

model called Distance-to-Default. 

The results showed that the Distanceto-Default 

model outperformed the Z- 

Score, providing us a better predictive 

measure of default. 

While the D&P Report is based on the 

Z-Score for segregating high financial risk 

companies from the data, the Morningstar 

yearbooks have never separated the distressed 

firms from the healthy ones. The 

main reason why Morningstar has not separated 

the financially distressed companies 

from the rest is that we were looking for a 

better predictor of financial distress than 

Z-Score provided. We found this in the 

Distance-to-Default model. We then asked 

the Center for Research in Security Prices 

to apply the Distance-to-Default methodology 

to historical data going back to the 

1960s so we could evaluate whether there 

was merit in segmenting the distressed 

firms from the healthy ones. Healthy and 

distressed portfolios were created across all 

standard Morningstar size categories. The 

results showed that the distressed portfolios 

underperformed the healthy portfolios 

across all size categories. We then applied 

this data to create beta-adjusted size premia, 

resulting in lower size premia for the 

distressed firms. This would lead to higher 

firm values for distressed companies when 

this data is applied to a discounted cash 

flow model. 

Since we found that distressed firms 

have historically performed poorly, and 

investors were not compensated with extra 

return for the extra risk they took on, 

we are uncomfortable applying this data 

to a forward-looking cost of capital model 

at this time. 

Why doesn’t Morningstar pull out the 

financially distressed firms from our cost 

of capital data Traditional default prediction 

models like Z-Score don’t work 

as well as newer models like Distanceto-Default, 

and when we do apply newer 

models to the historical data, we find the 

results contradict the risk-return tradeoff. 

D&P segregates high financial risk companies 

from their data because they believe, 

as many would expect, that highly 

leveraged, financially distressed firms 

have higher returns than their counterparts. 

In the analysis we performed with 

the invaluable assistance from the Center 

for Research in Security Prices, we 

have found the opposite to be the case. 

As Miller and Harrington concluded in 

their 2009 article: 

When valuing a business as a going 

concern, a firm is assumed to continue 

operations into the indefinite 

future. Does this mean that you need 

to remove distressed companies from 

public company risk premiums when 

applying the latter to the valuation of 

healthy, going concern private entities 

It does not. Although the firm 

is presumed to be a going concern, 

predictive ability is never 100 percent. 

Applying risk premium data based on 

a portfolio of primarily healthy companies 

with a small slice of potentially 

distressed companies acknowledges 

the less-than-100 percent chance that 

a subject firm will be perfectly healthy 

for the indefinite future. 

FINER CATEGORIES 

The relationship between firm size 

and return continues to be an area that 

receives a good deal of attention. For practitioners 

who value very small companies 

and might feel that size premia categorization 

is easy, Morningstar is about to stir 

the pot again. New analysis of the smallest 

companies now allows us to dissect the 

size premium into further categories (cutting 

10a and 10b each in half), providing 

even more choices for the seasoned valuation 

professional. 

Firms like Morningstar, Duff & Phelps, 

and others publish a wealth of data on cost 

of capital so that practitioners have the resources 

to find their own solutions based 

on their knowledge and experience. We 

could simplify what is presented and give 

only one option for each scenario you might 

encounter, but that assumes that business 

valuation is a pure science. There is still a 

place for interpretation of information in 

this field. Data providers hope to provide 

business valuation practitioners with the 

data and tools needed to form intelligent 

cost of capital estimates. In this article I 

offered guidance in regard to the use of 

overlapping size premium categories. Having 

choices is something to value, not fear. 

Enjoy your freedom. VE 

Michael W. Barad is 

the vice president and 

business manager for 

Morningstar’s Financial 

Communications 

Business, which is part 

of Morningstar’s Investment 

Research Division 

(www.morningstar.com). He has written 

and spoken on such topics as asset 

allocation, returns-based style analysis, 

mean-variance optimization, MVO inputs 

generation, growth and value investing, 

commercial real estate investing, the 

cost of capital, equity risk premium, size 

premium, and other topics in the fields of 

finance and economics. 



L I T I G A T I O N C O N S U L T I N G 

Court Corner 

John Stockdale, Jr., Esq., Schafer and Weiner, PLLC 

BANKRUPTCY ACTIONS 

In In re Advanced Modular Power 

Systems, 2009 WL 2960615 (Bankr. 

S.D. Tex. Sept. 16, 2009), the U.S. Bankruptcy 

Court for the Southern District 

of Texas awarded a Chapter 7 trustee 

damages for fraudulent transfer and 

conversion of estate assets, where the 

controlling shareholder opened an 

identical business using a similar name 

and the debtor’s intangible property 

prior to the petition date. The controlling 

shareholder further destroyed the 

debtor’s financial records. The court rejected 

the trustee’s, a CPA, assessment 

of damages at gross profits of the identical 

business less its cost of goods sold. 

Rather, the court assessed damages as 

gross profit of the identical business 

less certain expenses including salary, 

repairs, rents, taxes and licenses, interest, 

depreciation, and 50 percent of 

miscellaneous expenses as reported on 

its tax returns. 

In In re American Home Mortgage 

Holdings, Inc., 2009 WL 2855888 

(Bankr. D. Del. Sept. 8, 2009), the U.S. 

Bankruptcy Court for the District of 

Delaware determined that the phrase 

“commercially reasonable determinants 

of value” as used in 11 U.S.C. Sec. 

562 was ambiguous. It defined the term 

to mean “any commercially reasonable 

valuation methodology may be used as 

evidence of the damages under a repurchase 

agreement after its rejection, 

termination, or acceleration.” The court 

then adopted the debtor’s expert’s discounted 

cash flow valuation of the loan 

portfolio that was the subject of the 

repurchase agreement at issue, even 

though the actual market for the loan 

portfolio was dysfunctional. 

In In re SMTC Manufacturing of 

Texas, 2009 WL 2940161 (Bankr. W.D. 

Tex. Sept. 11, 2009), the U.S. Bankruptcy 

Court for the Western District 

of Texas determined that, for state law 

fraudulent transfer purposes, where 

the assets of a business are secured by 

a blanket lien and the loan supporting 

the lien is guaranteed by affiliated business, 

the value of that lien should be 

discounted to account for the chance 

that the debtor may not be required to 

fulfill that loan. In addition, the court 

concluded that the right of contribution 

from co-guarantors of that debt 

should be considered in valuing the 

amount of the debt. 

SHAREHOLDER APPRAISAL ACTIONS 

In McDaniel v. 162 Columbia Heights 

Housing Corporation, 2009 WL 3131173 

(N.Y. Sup. Sept. 29, 2009), the Supreme 

Court of Kings County, NY, determined 

the appropriate calculation of fair value 

of a cooperative housing corporation 

to avoid dissolution under the Business 

Corporation Act was the value of the 

business as a going concern, considering 

the current use (rather than its highest 

and best use) of the real property, 

subject to the long-term obligations to 

the remaining shareholder-tenants. The 

court relied on a comparable recent sale 

of an apartment in the corporation’s 

building to determine the value of the 

corporation and then offset a valuation 

decrement occasioned by this litigation 

against the rise real property values in 

the area. 

In Schimke v Liquid Dustlayer, Inc., 

2009 WL 3049723 (Mich. App. Sept. 

24, 2009), the Michigan Court of Appeals 

affirmed a lower court’s award 

of fair value for oppressive and willfully 

unfair conduct under Michigan’s 

business corporation act. The court 

acknowledged that standard in Michigan 

does not require a discount for minority 

interest in the calculation of fair 

value, and affirmed the decision not to 

apply a discount. 

In Gignilliat v Gignilliat, Savitz & 

Bettis, LLP, 2009 WL 3246789 (S.C. 

Oct. 12, 2009), the Supreme Court of 

South Carolina reversed a lower court 

that found a lawyer’s surviving spouse 

failed to state a claim for the right of 

publicity where the lawyer’s former law 

firm continued to use his name after his 

demise without compensation to his 

estate. The lower court concluded that 

the name was tied to the professional’s 

personal goodwill and therefore had 

no value apart from him. The Supreme 

Court disagreed and found that while 

the lawyer’s name continued to have 

value, such value was limited to the le- 

20 


The Value Examiner


gal field and there were at least nominal 

damages for the continued use of the 

lawyer’s name. Moreover, the Supreme 

Court commented that under the facts 

of this case, damages beyond nominal 

damages for infringement of this 

right would be more difficult to prove 

than personal goodwill. Nevertheless, 

the court found that the law firm had 

a complete defense to this claim in the 

lawyer’s pre-death consent to continue 

using his name in connection with the 

law practice. 

LOST PROFITS 

In Southwest Stainless, LP v. Sappington, 

et al., 2009 WL 2989149 (10th 

Cir. Sept. 21, 2009), the U.S. Court of 

Appeals for the Tenth Circuit affirmed 

a district court’s award of damages 

in this breach of non-compete case. 

The district court held that salesmen 

subject to a non-compete agreement 

limited by territory were not liable for 

general lost profits measured by the 

all defendants’ sales in the territory, 

but were liable for the loss of several 

specific contracts entered into by the 

salesmen with the plaintiff ’s former 

clients. The appellate court agreed 

that the plaintiff failed to establish a 

sufficient causal nexus between general 

loss profits and the actions of the 

salesmen. It further affirmed the calculation 

of loss profits from the specific 

contracts based testimony regarding 

the plaintiff’s profit margin. 

In Gullwing International Motors, 

Ltd. v. Ostermeier, 2009 WL 2961939 

(Cal. App. 2. Dist. Sept. 17, 2009), the 

California Court of Appeals, Second 

District, affirmed the lower court’s 

decision denying the defendant’s challenge 

to a jury’s lost profits award 

based on the new business rule in this 

breach of fiduciary duty and fraud action. 

The appellate court found that the 

new business rule did not apply where 

the business had been in existence for 

at least six years, had a strategic business 

plan, and expert testimony was introduced 

regarding its operations and 

profits. Therefore, the court affirmed 

the jury’s $17 million jury award for 

defendant’s misconduct. 

DIVORCE VALUATIONS 

In Lee v Lee, 2009 WL 3155054 

(Ohio App. 5 Dist Sept. 30, 2009), the 

Ohio Court of Appeals for the Fifth District 

affirmed the lower court’s determination 

that the value of a restaurant 

was equal to the value of the company’s 

equipment. In reaching this determination, 

the trial court adopted the parties’ 

stipulated value of the company’s equipment, 

acknowledged that the company’s 

liquor license had value of an unknown 

amount, and that the business had debt 

well over $150,000. Additionally, the appellate 

court affirmed the trial court’s 

decision to give an expert CPA’s valuation 

of the business little weight where 

the expert was retained three weeks 

before trial, the expert’s report was delivered 

to opposing counsel on the day 

of trial, and the expert was not provided 

sufficient information to accurately value 

the business. 

In Bass v Bass, 2009 WL 3174467 

(N.C. App. Oct. 6, 2009), the North 

Carolina Court of Appeals reversed and 

remanded the trial court’s finding that 

the increase in the value of a business 

between the date of separation and the 

date of trial was marital property. The 

court focused on the husband-shareholder’s 

efforts at the company after the 

date of separation. It noted that the husband 

was a high-level executive at the 

company, responsible for approximately 

350 people. Therefore, the court found 

that at least some of the increase in value 

was separate property because it was the 

result of his post-separation efforts. 

In Hamilton v Hamilton, 2009 WL 

3209183 (Wis. App. Oct. 8, 2009), the 

Wisconsin Court of Appeals affirmed 

the lower court’s valuation of the parties’ 

jewelry business at $1. The husband 

presented expert testimony from a CPA 

that the business had a negative value of 

$80,000. The wife presented expert testimony 

from her CPA who opined that 

the business had a positive value, but 

lacked sufficient information to provide 

specific dollar value. The appellate court 

affirmed because the transcript from 

the valuation hearing was not included 

in the record on appeal. As a result, the 

only evidence of value in the appellate 

record indicated that the business had 

a negative value. 

In Haynes v Haynes, 2009 WL 

3219301 (Ohio App. 8 Dist. Oct. 8, 

2009), the Ohio Court of Appeals for the 

Eighth District affirmed the trial court’s 

valuation of an Ohio licensing bureau 

office operated by the wife. The wife’s 

expert, a business broker, concluded 

that the business had a value of $83,444 

based on a net asset value, because the 

business is operated at the discretion of 

the State of Ohio and is not transferable. 

The husband’s expert, a CVA, valued 

the business at substantially more 

using an excess earnings method. The 

court adopted the wife’s valuation, giving 

weight to the impediments to transferability. 

The appellate court affirmed, 

finding that the trial court did not abuse 

its discretion when it valued the business 

using the wife’s expert’s appraisal. 

However, the court did reverse the equitable 

distribution award because it 

was unable to determine whether the 

business’s bank balance, which was sep- 



arately distributed by the lower court, 

was included in the business’s value. 

ESTATE AND GIFT TAX VALUATIONS 

In Estate of Malkin v. CIR, T.C. 

Memo. 2009-212 (U.S. Tax Ct. Sept. 

16, 2009), the U.S. Tax Court concluded 

that IRC Sec. 2036 should be applied 

to recapture the value of publicly trade 

stock transferred to two FLPs during 

decedent’s life. The court found that 

there was an implied agreement allowing 

the decedent to retain the enjoyment 

of the transferred assets where 

the FLPs permitted the decedent to use 

the transferred stock as collateral for his 

personal loans. In addition, the court 

found that there was not a legitimate 

non-tax reason for the contribution of 

the stock to the FLPs that would permit 

the transaction to be shielded from IRC 

Sec. 2036 under the bona fide sale exception. 

The Tax Court also considered 

issues relating to indirect gifting of LLC 

interests to the FLPs. 

In Estate of Farnam v. CIR, 2009 

WL 3209442 (8th Cir. Oct. 8, 2009), a 

divided U.S. Court of Appeals for the 

Eighth Circuit affirmed the Tax Court’s 

decision and held that “interest in an 

entity” as used to determine eligibility 

for a “qualified family-owned business 

interest” (QFOBI) deduction under IRC 

Sec. 2057(a) did not include a creditor’s 

interests in the business. Rather, it concluded 

that the QFOBI deduction was 

only available to equity interests in a 

family-owned business. 

In Estate of Murphy v. CIR, 2009 WL 

3366099 (W.D. Ark. Oct. 2, 2009), the U.S. 

District Court for the Western District 

of Arkansas valued a 95 percent limited 

partnership interest in an FLP holding 

publicly traded securities subject to Rule 

144 as well as cash and real property. The 

FLP was valued using the net asset value 

approach and applying discounts for lack 

of marketability and lack of control. The 

court adopted the estate’s expert’s calculations 

for the Rule 144 blockage discounts. 

This expert considered: 

1. The size of the block 

2. The volatility of the stock 

3. The actual price change under recent 

and preceding market conditions 

4. The current economic outlook for 

the company 

5. The stock price trend and financial 

performance 

6. The company’s earnings trend 

7. Any resale restrictions 

The court also adopted the estate’s 

expert’s discounts for lack of control, 

which for the equity interests were 

based on closed-end fund data. Further, 

the court adopted the estate’s expert’s 

32.5 percent discount for lack of 

marketability, which was based on data 

from the FMV Opinions, MPI, and Silber 

studies. The court also valued a 49 

percent interest in a limited liability 

company that held the general partnership 

interest in the FLP discussed above 

as well as valued four artworks. VE 

Source data was provided by Business Valuation 

Resources, LLC (www.BVResources.com). 

The information provided in this article is for 

informational purposes only, and should not be 

construed as legal advice. If you need legal or 

professional advice, please consult the appropriate 

professional. 

John J. Stockdale, Jr., Esq., is an associate 

attorney at Schafer and Weiner, 

PLLC, a boutique bankruptcy law firm 

in Bloomfield Hills, MI. He addresses 

issues in business and person bankruptcies, 

business sales, shareholder/ 

member disputes, real estate, and collections. 

Stockdale has been reporting 

business valuation and damage computation 

case law for appraisers and 

attorneys since 1996. He is the author 

of BVR’s Guide to Lost Profits Case 

Law, BVR’s Guide to Canadian Valuation 

Cases, and Valuation Case Digest. 

He has also contributed articles to the 

Michigan Tax Lawyer and Business 

Valuation Update. E-mail: jstockdale@ 

schaferandweiner.com. 

22 


The Value Examiner

The Opportunity 

An unprecedented tsunami of baby 

boomer wealth transfer is headed our 

way: over the next 18 months, more than 

1,000,000 privately held businesses will 

change hands. Professional help will be 

needed! 

The middle market generates lucrative 

fees for investment bankers, with deal 

fees ranging from a low of $200K to 

several million dollars. The average M&A 

fee is somewhere around $400,000. 

But there are barriers to entry, including 

the high cost of marketing and technical 

support, a lack of training and experience, 

generating and sustaining deal flow 

while executing current engagements, 

lack of a track record and credibility, and 

the need for technical resources supplied 

by larger investment banks. 

The McLean Group (TMG) has a 

unique program, however, for potential 

investment bankers and deal makers 

that provides training, marketing and 

deal support, national and international 

branding, regulatory compliance support, 

and licensing. 

Catch the Wave 

The TMG Turnkey Program 

The TMG program is designed—in 

short—to put NACVA members in the 

M&A business. (The majority of TMG 

bankers are, in fact, NACVA members.) 

Here, more specifically, is what TMG 

provides NACVA members: 

 

how to market M&A services 

 

person if requested—on deal engagements 

 

bankers 

 

each of its bankers 

 

 

ing direct mail and/or e-mail campaigns, 

seminar speakers, marketing collateral 

such as brochures, business cards, and 

logos, telemarketing programs, and 

e-mail newsletters 

The McLean Group 

This intensive, soup-to-nuts program is cosponsored by the Consultants’ Training Institute (CTI), the Middle Market Investment Banking Association 

(MMIBA), and The McLean Group. With headquarters in Washington, DC and offices in Sacramento, Winnipeg, Boston, Columbus, 

Richmond, Raleigh, and Atlanta, The McLean Group is a Financial Industry Regulatory Authority (FINRA) Registered Broker Dealer and Member 

FINRA/SIPC. Headed up by Chairman and Managing Director Dennis J. Roberts, CPA/ABV, CVA, TMG provides merger and acquisition, 

private institutional equity and debt formation, valuation services (through a separate affiliate), and transaction related consulting services to the 

middle market. TMG maintains a tight international affiliation with a number of other banks, and collectively executed the third largest number of 

M&A transactions in the world last year. 

Step by Step 

Is the challenging mergers and acquisitions discipline right for you Test the waters: TMG, the Middle Market Investment Banking Association 

(MMIBA), and the CTI offer the following courses: 

The five-day Mergers & Acquisitions Workshop that simultaneously addresses both the sales side and the buy side: this intensive training 

program leads to the Certified Merger and Acquisition Professional (CMAP) designation and is designed to put participants on the fast track 

to the M&A world—offered December 7–12 in Atlanta, GA 

TMG’s four-hour training and introduction to The McLean Group Procedures, Resources, and Processes 

Whether you’re thinking of offering M&A advisory services as an adjunct to your existing practice, 

as a stand-alone entity, or if you’re ready to take the plunge into investment banking, The McLean 

Group, MMIBA, and the CTI have the training and support you’ll need to make your mark in the 

high-powered field of middle market mergers and acquisitions. 

For more information on The McLean Group Investment Banker Support Program, including the 

training session referred to above, call (703) 827-0200. For the CTI/MMIBA course, visit the 

Training area of the NACVA website: www.nacva.com. Or call Member Services toll-free: (800) 677-2009. 

7900 Westpark Drive, Suite A 320 

McLean, Virginia 22102 

Tel: (703) 827-0200 

Fax: (703) 827-0175 

Internet: www.mcleanllc.com


F O R E N S I C A C C O U N T I N G 

Fraud is a pervasive problem that can affect any organization. Fraud deterrence is based on the 

premise that improvements to the underlying internal control structure of an organization can 

reduce the opportunity for fraud. These are the stories of fraud and the organizations affected. 

The Fraud Files 

Compiled by James Martin, CMA, CIA, CFFA; 

R. Austin Marks, CPA, CFF, CFE, CFFA, CFD; 

and Todd Michael Jolicoeur, CFFA 

THIRST FOR CASH 

The former CEO of soft drink maker 

Le-Nature’s, Inc., has been charged, 

along with four co-defendants, in a 

29-count indictment that was unsealed 

September 28, 2009. The defendants 

allegedly siphoned approximately $806 

million to the ex-CEO, Gregory Podlucky, 

and his family. According to U.S. 

Attorney Mary Beth Buchanan, this is 

the largest fraud in the history of the 

Western District of Pennsylvania, an 

area that covers 25 counties. Podlucky 

turned over “dramatically false financial 

statements” to various financial institutions 

and suppliers in hopes of obtaining 

loans and leases for what lenders 

and investors believed would be used 

for business operations and equipment. 

The false documents resulted in 

various lenders and investors supplying 

the company with cash, via loans and 

investments, in excess of $700 million. 

This was discovered during a criminal 

investigation that arose when a bankruptcy 

judge determined the company 

directors had likely engaged in fraudulent 

activity. Le-Nature was forced into 

bankruptcy in 2006. Although jewelry 

totaling tens of millions of dollars and 

a model train set with an approximate 

value of $1 million have been recovered, 

Podlucky is being asked to forfeit his 

bank accounts, which are believed to 

be valued at more than $7 million. The 

funds Podlucky spent were mostly used 

for the benefit of himself and his family; 

he is in the process of building a mansion 

near Pittsburgh. The company’s former 

accounting director, as part of her guilty 

plea to bank fraud and other charges, 

has been cooperating with authorities. 

She admitted to doctoring the company 

records under Podlucky’s instruction. 

As part of the deception, the financial 

statements were altered from an actual 

$32 million in revenues for 2005 to an 

inflated $275 million. 

Joe Mandak, “Ex-CEO of Pa. Drinks- 

Maker Charged in $806M Fraud,” AP, 

28 September 2009; available at: 

www.npr.org/templates/story/story. 

phpstoryId=113282085; accessed 16 

October 2009. 

“SHE WAS A TRUSTED EMPLOYEE” 

Amy Colling, former executive director 

of the Community Covenant Church 

day care, has been convicted on charges 

of theft by unlawful taking of more than 

$1,500 from the ministry during 2003 

through 2006. According to the county 

attorney, more than $91,000 was stolen 

in the specified timeframe. Included in 

the amount taken were monies used for 

such purchases as an X-box video game 

system, clothing from Macy’s, a 24-pack 

of Bud Light, and a family membership 

to 24-hour Fitness. Additionally, Colling 

overbilled the church for hours 

her daughters worked while they were 

in school full-time and for repairs her 

husband (an Omaha, NE, police officer) 

made to the church that were not performed, 

according to church members. 

Colling, who had been a kindergarten 

teacher in the Omaha public school system 

(OPS), was on paid administrative 

leave. The OPS terminates employees 

with felony convictions. She faces up to 

20 years behind bars when sentenced in 

December. As argued by Bill McGinn, 

Colling’s attorney, there was little to no 

oversight or restriction on the authorization 

required for purchases. First alerted 

when payroll tax forms did not match, 

the church conducted an internal audit 

that expanded to the hiring of an external 

auditor. Although the church would 

like financial restitution, they have no 

plans of bringing a civil suit. “She was a 

trusted employee, church member, and a 

close friend to the pastor and others. The 

church forgave her a long time ago, but 

there are still consequences,” said Rodney 

Halstead, a church council member. 

The day care facility is still in business 

and has up to 130 children enrolled. 

24 


The Value Examiner


Katie Fretland, “Woman Steals from 

Day Care,” omaha.com, 19 September 

2009; available at www.omaha.com/ 

article/20090919/NEWS01/709199918; 

accessed 21 October 2009. 

DEALERSHIP TAKEN FOR A RIDE 

Christien Atwood-Calverly has 

agreed to admit sufficient facts for a 

finding of guilty in her case just before 

going to trial on three counts of larceny. 

A 13-year employee of Stagg Chevrolet, 

Atwood-Calverly and her children 

were treated like family. The fraud occurred 

between 2000 and 2008. In addition 

to bonuses and commissions 

she paid herself, Atwood-Calverly paid 

herself extra vacation pay. She also gave 

herself discounts on vehicles she purchased 

through the dealership. Atwood- 

Calverly also paid her car note through 

corporate accounts, marked her own 

repair bills paid, and forged signatures 

on a company credit card. After leaving 

the dealership to work closer to home, 

Atwood-Calverly called requesting her 

final two weeks of vacation pay in May 

2008. Acting on this request, the payroll 

company found she had already paid 

herself for an extra 13 weeks of vacation 

pay, totaling slightly over $11,000 during 

the previous two years. Atwood-Calverly 

received a suspended sentence of one 

year in jail, was placed on probation for 

four years, and ordered to repay the 

dealership its fees for the fraud team’s 

investigation. The amounts stolen from 

the company are being covered by the 

company’s insurance carrier. 

Susan Milton, “Woman Admits 

Stealing from Auto Dealer,” capecod. 

com, 7 October 2009; available 

at www.capecodonline.com/apps/ 

pbcs.dll/articleAID=/20091007/ 

NEWS/910070327/-1/rss02; accessed 

28 October 2009. 

FROM INFORMER TO INMATE 

A computer hacker turned federal 

informer has pled guilty in one of the 

largest identity theft cases in U.S. history. 

Albert Gonzalez entered pleas 

to 19 counts in Massachusetts, which 

included, among other charges, conspiracy, 

computer fraud, and aggravated 

identity theft. He also pled guilty to wire 

fraud in New York. Among the retailers 

whose systems he hacked into are 

TJX, OfficeMax, Boston Market, and 

Barnes & Noble. (In a recent settlement, 

TJX paid $9.7 million to 41 states after 

hackers stole credit card information 

in one of the largest data breaches 

ever: www.securitymanagement.com/ 

news/tjx-settles-data-breach-97-million-005941). 

Prior to sentencing, as part of the 

plea deal, Gonzalez must forfeit bank 

accounts that hold in excess of $2.7 million, 

his Miami condo, BMW automobile, 

a Tiffany ring he gave his girlfriend, 

and Rolex watches he gave to family and 

friends. Sentencing, which is scheduled 

for December 8, 2009, could send Gonzalez 

to jail for up to 25 years (15 to 25 

in Massachusetts and up to 20 in New 

York) instead of the several hundred 

years the charges would have held if 

Gonzalez was convicted of all charges 

faced. The sentences are scheduled to 

run concurrently. 

Denise Lavoie, “Former Informant 

Pleads Guilty,” washingtonpost.com, 

12 September, 2009; available at www. 

washingtonpost.com/wp-dyn/content/ 

article/2009/09/11/AR2009091103773_ 

pf.html; accessed 29 October 2009. 

FRAUD GONE WILD 

“Due to Diamond Jo Casino refusing 

to honor its obligation to provide 

the venue, we are unable to produce the 

event as planned. This matter has been 

referred to legal counsel.” That is what 

ticket holders saw when they logged 

onto the website for the Rock Gone Wild 

concert they were to attend between August 

20 and 23. Diamond Jo Casino is 

being blamed for the demise of the fourday 

rock music festival known as Rock 

Gone Wild, which was in its inaugural 

year. Promoters are charging they lost 

millions over the cancellation. According 

to Ted Sporer, the attorney for Rock 

Gone Wild, LLC, “The cancellation of 

the event was pretty devastating for our 

people.” The event, which was originally 

scheduled to take place at Freedom Park 

in Algona, Iowa, was moved due to space 

concerns and logistics to Diamond Jo 

Casino. The concert event, which was 

to feature over 50 rock bands, expected 

to bring thousands to the area. The 

move was originally approved, but when 

contracts drawn up by the casino’s legal 

division didn’t comply with the original 

agreement, promoters did not accept the 

terms. The casino’s major concern was 

personal and event liability, and stated 

the promoters did not provide ample liability 

insurance. Left in the lurch are 

ticketholders who paid up to $565 plus 

tax for a ticket, money paid out for travel, 

transportation, lodging, etc. Sporer stated, 

“We’re trying to put together a plan 

that will take care of ticketholders.” 

Kristin Buehner, “‘Rock Promoters 

Promise Lawsuit,” globegazette.com, 14 

August 2009; available at www.globegazette.com/articles/2009/08/14/news/ 

local/doc4a84e69c1f088221005976. 

txt#vmix_media_id=7072863; accessed 


ANOTHER FOUL BALL 

For the second year in a row, federal 

agents attended the National Sports 

Collectors Convention, issuing subpoenas 

to sports enthusiasts and collectors 

for various records, including 

auction invoices. In addition to issuing 

the subpoenas, the FBI and USPS 

agents, hoping to gain information 

regarding the sale of counterfeit jerseys, 

fake game-used items, and other 

fraudulent merchandise, interviewed 

different auction house officials, 



memorabilia dealers, and authenticators. 

The subpoena recipients and 

interviewees were among some of 

the largest in the industry, including 

Lelands, SportsCard Guaranty, and 

Hunt Auctions. This process was not 

to identify targets of the probe, but to 

merely collect information that might 

assist the agents in the operation, similar 

to “Operation Foul Ball,” which 

brought down a multi-state forgery 

ring dealing in autographed baseballs 

in the 1990s. They have additionally 

investigated shill bidding and fraud 

by Mastro Auctions (which has since 

folded with several key employees purchasing 

assets and forming Legendary 

Auctions). Also on the agents’ agendas 

was trying to determine whether 

some historic documents were stolen 

from the New York Public Library, as 

alleged. The documents include letters 

to baseball pioneer Henry Wright. 

The appearance of the agents in 2008 

caused a stir at the convention. Dealers 

and collectors who remembered 

the agents from last year seemed at 

ease this year, as the agents, who were 

dressed more like fans than Feds, 

moved from booth to booth. 

Michael O’Keeffe, “Feds Hunt for Fraud 

at National Sports Collectors Convention,” 

nydailynews.com, 1 August 2009; available 

at www.nydailynews.com/sports/ 

baseball/2009/08/02/2009-08-02_feds_ 

hunt.htmlprint=1&page=all; accessed 


FIGHTING INTERNET CRIMES 

A conference funded by the Commonwealth 

Secretariat and supported 

by the Global Prosecutors e-Crime 

Network, the UK’s Crown Prosecution 

Service, and the International Association 

of Prosecutors was recently held in 

Bermuda. Training sessions addressed 

the use of new technologies in crime, 

including Internet, e-mail, and mobile 

phones. The idea that high-tech crimes 

are victimless is a myth that director of 

public prosecutions in Bermuda Rory 

Field is trying to dismiss. “We have just 

had a guilty plea today to a pornography 

case where a girl under the age of 

14 was being used to make a film that 

was being put out on the Internet. That 

can hardly be said to be a victimless 

crime.” The idea of the conference was 

to look deeper into crimes like fraud 

and online scams and see that their 

ancestries are much deeper and can 

be linked to more menacing crimes. 

Field stated, “The monies [used to finance] 

fraud may come from things 

like human trafficking, arms or drug 

trafficking—or the profit may be put 

back into those types of crimes. It may 

even go into terrorist financing.” 

New technology brings new challenges 

to police and prosecutors. At 

the same time, it also brings aid to certain 

aspects of crime investigation and 

resolution. Police and prosecutors from 

15 Caribbean countries attended the 

conference, with training led by experts 

from the UK Crown Prosecution Service 

and the U.S. Department of Justice. 

The focus of the training was providing 

skills in recognizing and collecting evidence, 

improving retention and analysis 

techniques, and evidence presentation 

at trial. In closing, Field remarked, “It is 

important to have international cooperation 

to act in coordinated manner if 

you are going to fight the crime.” 

“Internet Pornography, Hacking and 

Fraud Probed in Caribbean,” thecommonwealth.org, 

9 September 2009; available 

at www.thecommonwealth.org/new 

s/177370/213415/090909hightechcrim 

e.htm; accessed 30 October 2009. 

The information in this article was 

derived from both primary and secondary 

sources, which are cited at the end 

of each item. In cases where the authors 

relied on secondary sources, they do 

not claim that the information was accurately 

reported by those sources. VE 

James Martin, MS, 

CIA, CMA, CFFA, senior 

manager with 

Cendrowski Corporate 

Advisors, LLC (www. 

frauddeterrence.com), 

provides comprehensive 

risk assessments, focusing 

on the evaluation of 

operating effectiveness of business processes 

and the internal control structure. 

R. Austin Marks, 

CPA, CFF, CFE, CFFA, 

CFD, consultant with 

Cendrowski Corporate 

Advisors, LLC, specializes 

in risk assessment, 

internal control 

evaluation, business 

process review, and 

litigation support for partnership 

and divorce proceedings. 

Todd Michael Jolicoeur, 

CFFA, staff tax professional 

and consultant 

with Cendrowski Corporate 

Advisors, LLC, 

works with management 

to identify operational 

and financial issues to 

improve business performance, 

and provides litigation support for 

partnership and divorce proceedings. 

26 


The Value Examiner



Optimize Your Website Content 

How to Drive Traffi c to Your Website through 

Social Media—the Fundamentals 

by David M. Freedman 

You invested time and money 

to develop your website. Now 

you need to help people find it. 

Specifically, you want to help 

your clients, prospects, and referral sources 

find it, and perhaps potential employees, the 

media, and other key audiences as well. 

One of the best ways to help them is 

to put your website URL on your business 

card, hand them the card, look them in the 

eye, and say, “Please visit my website. There 

you’ll find the information you need—and 

call me if you have any questions.” Besides 

your business card, you can distribute 

article reprints and other useful literature, 

or even novelty items like pens and 

calendars, that bear your name and URL. 

Another way to publicize your site is to 

send e-mail to your key audiences to alert 

them that you have a new website, or you 

have posted new or updated information 

that will help them succeed. Your e-mail 

message includes a hyperlink to the page of 

your site that bears this new information. 

Once they’re on that page, they have an 

opportunity to click through to your home 

page, and ultimately your contact info. 

A third way to help key audiences 

find your site is Web optimization. That 

is what this article is about. Optimization 

involves helping audiences find your 

website through search engines and 

social media. 

J-LEVEL CONTENT 

First you must create and post the 

information people need, so you can 

refer them to it. There are at least two 

categories of information, or content, 

that websites provide. One is information 

about you and your firm: the services 

you offer, credentials of the firm’s 

professionals, clients or industries served, 

contact information, success stories, press 

releases, and “about us.” 

The other category is what I call 

journalism-level content. It includes 

articles and white papers published under 

your byline, blogs, newsletters, transcripts 

and podcasts of your speeches, how-to 

information that helps clients succeed, 

and links to other Internet resources. 

In this article I will focus on optimizing 

J-level content. 

Three good examples of sites that offer 

J-level content are: 

• Mercer Capital’s (www.mercercapital. 

com) Knowledge Center, accessed via a 

top-level navigation tab. 

• Michael Goldman Associates (www. 

michaelgoldman.com/articles.htm) 

features published, bylined articles 

in six categories, including fraud 

and valuation. 

• The Grant Thornton website (www. 

grantthornton.com) features the Grant 

Thornton Thinking center, accessed 

through a top-level navigation tab, which 

offers newsletters, podcasts, white papers, 

reports, and other J-level content. 

By the way, I found many financial 

advisory firms’ websites that provide long, 

chronological lists of their bylined articles, 

white papers, and PowerPoint presentations. 

To help visitors find the information they 

need, the lists should instead (or in addition) 

be organized by subject category, rather 

than date of publication. 

SEARCH ENGINES 

AND SOCIAL MEDIA 

The broad objective of Web optimization 

is to generate traffic to your website content. 

It involves two activities: search engine optimization 

and social media optimization. 

The narrow objective of search engine optimization 

(SEO) is to get your article ranked 

high in search engine results so that people 

find it quickly when they search for information 

on the topic. SEO is something you do 

once when you post an article to your website; 

it is not necessarily an ongoing process, 

although you might have occasion to tweak 

your SEO strategy. Social media optimization 

(SMO), on the other hand, is an ongoing 

process over weeks or months after new 

content is published on your website. The 

narrow objective of SMO is to spread the 

word “virally” through various online communities 

that your article has been posted, 

tell how it can help people who read it (its 

benefits), and provide a hyperlink to it. 

SEARCH ENGINE OPTIMIZATION 

Each page of your website, including 

your bylined articles, should be optimized 

for search engine ranking. Search engines 



rank J-level content primarily on the basis 

of (a) its relevance to the search terms, 

(b) its popularity in terms of visitor traffic 

and inbound links, (c) relevant outbound 

links, (d) the amount and depth of related 

information featured elsewhere on your site, 

(e) how often and how recently the content 

has been updated, and (f) the metatags 

(hidden HTML code that contains the 

article’s title, description, and keywords) 

on the page, among other criteria. 

Search engines love content that 

is narrowly focused. For example, a 

CPA friend of mine wrote an article on 

generation-skipping tax strategies for 

estate planners, got it published in a local 

weekly newspaper, and then posted it on 

his website (acknowledging the original 

publisher as an indication that the article 

was credible enough to get published). 

He updated the article whenever the 

tax law changed. The title of the article 

included the phrase “generation-skipping 

tax stratregies.” He wrote descriptive 

metatags that included the phrase “estate 

planning.” And that was the extent of 

his SEO efforts. The article was very 

well written and practical, so it pulled 

in some traffic and a few inbound links. 

His website featured dozens of other 

articles that had been published, a few 

of which mentioned generation-skipping 

strategies. A couple years ago, before he 

retired, if you searched “generation skipping 

tax strategies” on Google, his article was 

ranked number one—it appeared at the 

very top of the first page of search results. 

If you searched for “Chicago accountant 

estate tax,” or any other broad term, no page 

of his website would be ranked anywhere 

near the first dozen pages of search results. 

The lesson: a narrower focus generally 

improves ranking. 

SEO is very important for companies 

that conduct business primarily online, 

such as e-commerce, commercial portals, 

and subscription-based news media and 

research sites. For those companies, SEO 

requires an understanding of search bots, 

ranking algorithms, key-word density, and 

other complexities. But for advisers and 

consultants whose business is primarily 

people-to-people, SEO should be a lot 

simpler—hiring an SEO consultant would 

probably be overkill. 

One hard and fast rule for optimizing 

J-level content: Write for your target 

readers, not for search engines. Readers 

must appreciate your content, and 

thereby consider you credible, or else 

optimization fails. 

SOCIAL MEDIA 

Internet technology developed mostly 

after the 2000 tech bubble made it not 

just possible, but easy and cheap (often 

free), for non-tech users to contribute 

(or “generate”) content to various kinds 

of websites. Blogging sites, for example, 

let you post, comment, and discuss with 

other bloggers and commenters. Social 

networks let members post profiles and all 

manner of personal and business-oriented 

content. Anyone can write and edit entries 

for Wikipedia, or post book reviews on 

Amazon.com. Wikis and forums let groups 

collaborate on content creation. You can 

upload your photos to Flickr and your short 

videos to YouTube. You can rate, share, 

recommend, tag, and socially bookmark 

the content that others create. 

In the early days of the World Wide 

Web, content flowed mainly one way: 

from websites to users. Now content flows 

every which way and back again—it’s a 

conversation. Around the middle of this 

decade, the new Internet became known 

variously as the user-generated web, the 

social web, and Web 2.0. 

Mainstream news and entertainment 

media have become increasingly social 

in the past few years. CNN’s iReport and 

Fox’s UReport led the way, letting “citizen 

journalists” post news stories on their 

sites, and of course allowed other users to 

comment, rate, share, etc. 

As of mid-2008, more people depend 

on the Internet for news and entertainment 

than on any other medium, according 

to comScore. From a public relations 

standpoint, it’s no longer a question of 

whether your clients, prospects, referral 

sources, colleagues, employees, and 

job applicants are engaging with social 

media. It’s a question of how you find 

them, appeal to them, and engage them 

via social media—whether they are at a 

desk, on the road, walking the dog, or 

almost anywhere else. 

SOCIAL MEDIA OPTIMIZATION 

SMO is a set of methods for attracting 

visitors to website content by promoting 

and publicizing it through social media. 

SMO is a subset of social media marketing, 

which is promoting and publicizing all 

kinds of products and services, not just 

Web content, through social media. 1 

There are two kinds of SMO methods: 

• Social media features that you “plug into” 

your website content, including RSS 

feeds, commenting fields (a function of 

WordPress and other CMS 2 software); 

and tools for sharing (ShareThis), rating 

(Digg), social bookmarking (Delicious), 

and polling (ConstantContact and 

ZapSurvey). 

• Promotional activities in social media, 

including writing a blog, commenting on 

other blogs and news sites, participating 

in discussion groups, and posting status 

updates on social networking profiles. 

Except for the cost of hosting your 

website, you can find plug-ins and services 

that let you do all those promotional activities 

free of charge. But don’t be fooled by the 

word “free.” Occasionally I hear someone 

say that SMO is extremely cost-effective 

because it’s free, in the same way that I’ve 

heard it said that public relations is better 

than advertising because it’s free. Not really. 

Effective SMO, like effective PR, requires 

time (which is, of course, money) and 

media relations skills that you don’t acquire 

overnight. There are two components to 

cost-effectiveness: cost and effectiveness. 

Just because a technique is low-cost (or even 

1 This definition appears in the Wikipedia entry for “social media optimization” (http://en.wikipedia.org/wiki/Social_media_optimization). I don’t think I am 

infringing on Wikipedia’s copyright, as I am the original author of this definition. 

28 

2 Content management systems (CMS) let you build dynamic websites (typically based on PHP programming language and SQL database) with a dashboard 

or “back end” that non-technical authors can use to design and build pages, and create and update content. 


The Value Examiner


no-cost) doesn’t guarantee that it’s effective; 

first you need to learn the skills and spend 

the time required to make it effective. 

SMO METHODS 

There are many ways to use social 

media to spread the word virally about 

your article. You probably won’t have time 

to exploit all of them, so select a few that 

you feel most comfortable with, among 

the following: 

• Join a professional network like 

LinkedIn or Plaxo, or a social network 

like Facebook (if that’s where many of 

your clients, prospects, and referral 

sources hang out). Post a status update 

about your new content, providing a 

hyperlink to that page of your website. 

Post a status update every time you 

update content too. 

• Join discussion groups in which your 

key audiences participate. Follow the 

discussions, and when you have some 

ideas or information to contribute, join in. 

Mention your website content, with a link 

to it, if it adds value to the discussion— 

not in an overtly promotional manner. 3 

(LinkedIn and Facebook have tens of 

thousands of niche discussion groups 

and sub-groups. If you can’t find one in 

your practice or industry area, you can 

start one.) 

• Participate in LinkedIn’s “Answers” 

feature. Any member can post a businessrelated 

question, and other members who 

work in a related field may answer the 

question publicly. Your answer may refer 

to, and link to, your own website content. 

The original question asker may select 

one of the answers as a “Best Answer,” 

which wins acclaim for the person who 

posted that answer. 

• Read blogs in your industry, field, or 

practice niche, and post a comment (in 

response to the original blog entry or to 

another comment) whenever you have 

some constructive ideas or criticism, or 

to correct a factual mistake. Mention 

your content (with hyperlink) if it helps 

to illuminate the subject. 

• If you write your own blog, post a 

summary of any new content that 

you add to your website. Link to your 

content whenever you post a blog entry 

on a related topic. 

• Write or edit entries on Wikipedia, 

quoting from and citing your content 

if it is relevant. 

If your content requires updating from 

time to time, do so assiduously—do not 

ever let it become obsolete or inaccurate, 

or you’ll shoot your credibility. Add a 

note under the title that shows the date 

on which the article was updated. If the 

update is substantial, optimize it again. 

Always, always, proofread your posts, 

comments, status updates, and answers 

before you press “send” or “upload.” Keep 

your comments discreet—assume they 

will be read by clients, colleagues, partners, 

judges, and your parents. In some cases you 

are allowed to edit or clarify a comment 

after you send it, but not always. And in 

many cases, your comments are fixed 

forever—you can never take them back, 

and they will appear if someone searches 

your name. 

TRACKING AND ANALYTICS 

To some extent you can measure the 

response from social media participation, 

using both human and electronic tracking 

systems and analytics. As in traditional marketing, 

ask clients, prospects, and other inquirers 

what prompted them to contact you, 

and how they found your website. Electronic 

tracking and analytics may have an aura of 

accuracy and certainty, but still leave a lot of 

room for interpretation. It’s difficult to measure 

the improvement in name recognition 

and reputation that do not get measured by 

clicks, page visits, and responses. 

But to the extent that you can analyze 

response to your SEO and SMO efforts, 

adjust your strategies (and topics for 

future content) accordingly. 

Anyone with strong writing and PR skills 

can do Web optimization effectively. If you 

do not have those skills on staff, you can hire 

a freelance journalist, editor, ghostwriter, 

media relations consultant, or PR 

professional. One final tip: not all journalists 

have expertise in optimization, and not all 

media PR pros are good journalism-level 

writers. So if you need help, be sure you hire 

an individual or firm with that broad range 

of expertise. VE 

Social Media Engagement 

Must Be Authentic 

Your comments and contributions to 

online discussions should be authentic 

and sincere. Don’t pretend to be someone 

you’re not. 

A few years ago, Whole Foods and Wal- 

Mart were pilloried in the blogosphere and 

business press for publishing disingenuous 

content online. 

Over a period of a few years ending in 

2006, Whole Foods CEO John Mackey 

wrote messages on financial discussion 

boards (including Yahoo! Finance) in 

which he disguised his identity and praised 

Whole Foods, and sometimes bashed its 

competitors. That may not have violated 

U.S. securities laws (the SEC probed it), but 

it created a serious public relations challenge 

for Whole Foods. 

In 2006, a Business Week article revealed 

that a popular travel blog featuring a couple 

called Laura and Jim, who traveled the 

country by RV and camped in Wal-Mart 

parking lots (with a strong pro-Wal-Mart 

editorial slant), was funded by Wal-Mart 

through its PR firm Edelman. Embarrassing 

at best. 

The lesson: Be authentic in blogs and 

online discussions (oh, and everywhere else). 

Such is the community-intensive nature of 

social media that your attempt to deceive 

may result in a blogstorm of reproach. 

David M. Freedman is the senior editor 

of The Value Examiner. He has worked as 

a financial, legal, and technology journalist 

since 1978. He reviews books about finance 

and economics on his blog, For Your Reading 

Pleasure: www.4yrp.com/finance. 

3 Network members tolerate a moderate amount of promotional messages if you are also contributing valuable information or insights to the discussion. But 

too much self-serving blather will earn you a bad rep very quickly and widely. 




Report Righter shows how to avoid making common report-writing mistakes, and how to correct them 

if you do. A poorly written report distracts the reader from the opinion you want to express, and makes 

your opinion less persuasive. A well written report is easy to read and understand, and leaves the reader 

confident in your opinion. 

Report Righter: 

Use Active Voice to Earn Trust 

by David N. Wood, CPA/ABV, CVA 

We first heard it in our English 

composition classes in 

school. If you take NAC- 

VA’s CTI report writing 

course, you will hear it again: Write your 

reports in predominantly active voice. 

This sentence uses active voice: “I issued 

this report on August 31, 2009.” 

Many consultants and experts are in the 

habit of using passive voice, as if it were not 

polite to be self-referential. Here is the same 

sentence in passive voice: “This report was 

issued on August 31, 2009.” 

The active version of that sentence leaves 

no doubt as to who issued the report (certainly 

a crucial piece of data), and imparts an 

air of confidence and accountability. 

Even if the reader already knows who issued 

the report (because the expert’s name 

is on the cover and first page), the passive 

version still has an air of uncertainty, as 

though the issuer were not proud of his or 

her work. 

I know that breaking the passive-voice 

habit is tough. You may ask, “If most valuation 

analysts write their reports in the passive 

voice, why should I be different” 

I’ll give you some very good reasons why 

using active voice makes your report more 

impressive and persuasive, and I’ll also help 

you break the passive-voice habit. 

CONFIDENCE AND ACCOUNTABILITY 

Your writing style, and particularly your 

use of active and passive voice, affects the 

readers’ interpretation of what you write, 

and ultimately their perception of how 

credible you are. Given the persuasive nature 

of our work, what the reader thinks of 

your credibility is very important. 

In general, active voice tends to be perceived 

by readers as more open, forthcoming, 

accountable, confident, and precise than 

passive voice. You can sum up those traits in 

one word: trust. 

Passive voice is generally perceived by 

readers as more evasive, uncertain, unaccountable, 

awkward, imprecise, and even 

pompous. 

Think about this classic example of passive 

voice, “Mistakes were made.” Do you get 

the impression that the speaker was being 

accountable, confident, and precise Open 

and forthcoming How would your impression 

be different if the speaker had said, “I 

made mistakes” 

There are exceptions, of course—instances 

where using passive voice is the better way 

to express an idea. I’ll get to those later, but 

first I want to give you some excerpts from 

actual valuation reports (with names of the 

parties changed to protect confidentiality), 

and show why changing passive to active 

voice is more persuasive. 

EXAMPLE A 

I plucked the following two sentences 

out of the middle of a paragraph (the passive 

verb is in bold text): 

We also determined an indicated value 

using the Adjusted Net Asset Method, 

but this method is most appropriate for 

holding companies, not operating companies. 

The Guideline Public Company 

and the Merger and Acquisition Methods 

were also investigated. 

The first of those two sentences clearly indicates 

that the valuation analyst who wrote 

the report was the actor, i.e., determined an 

indicated value. The second sentence, however, 

leaves a slight doubt as to who actually 

investigated the two methods. Even if you 

assume the writer did the investigating, it 

doesn’t appear that he or she is eager to take 

credit for it. This is an accountability issue. 

The active (accountable) version would be: 

“We also investigated the…methods.” 

EXAMPLE B 

Similarly, the following sentence gives 

the impression that the valuator might be 

hedging, in case the discount rate is challenged: 

A small discount for lack of marketability 

of 5% was applied to this indicated 

control value to arrive at a $6,412,000 

(rounded), non-marketable value. 

A confident valuator might write, “To 

this indicated control value I applied a 5% 

discount for lack of marketability, and arrived 

at….” 

EXAMPLE C 

I’ll give you one more example of passive 

voice weakening the valuator’s credibility: 

Based on the foregoing, it would seem 

that the Company’s financial performance 

would warrant a reduction in 

the Company’s capitalization rate used 

30 


The Value Examiner


in the capitalization of earnings method 

in valuing the business….Consequently 

there is some skepticism as to how well 

this Company will perform if such an 

economic downturn materializes. 

Those two sentences hedge. Does the analyst 

mean to hedge Is the hedge justified 

If not justified, then the analyst’s passive 

writing style weakened the report and the 

conclusion. If the valuator is not confident 

in his or her judgment, why should a judge 

or jury or even your own client be confident 

in it That paragraph would be much more 

persuasive if it were written: 

Based on the foregoing, the Company’s 

financial performance warrants 

a reduction in…Consequently, I am 

skeptical as to how well this Company 

will perform… 

When you proofread your report and 

spot passive sentences like those, it’s a simple 

matter to change them to active voice. After 

a while, you’ll get in the habit of making 

these changes, and eventually you’ll be writing 

your first drafts in predominantly active 

voice. And guess what: you will not only be 

perceived by readers as more confident, you 

will be more confident. 

RESISTANCE TO ACTIVE VOICE 

I know some valuators will resist making 

this change. At one CTI course on report 

writing, a participant told me he preferred 

writing in passive voice because it was a kind 

of hedge. “I like having that wiggle room,” he 

said. In fact, that wiggle room is often illusory. 

In court you may be pinned down on 

cross-examination and forced to be precise 

and accountable. A good trial attorney will 

look for weakness in your report; passive 

voice signals areas for deeper questioning. 

PASSIVE IS BETTER SOMETIMES 

In some instances, when it’s not important 

to know who the agent of the action was 

(i.e., who did the thing), passive voice may 

convey the information more effectively 

than active. Here are two examples: 

Problems and delays in the expansion 

of the manufacturing facility that was 

completed in January 1999 caused reductions 

in sales and operating profits 

for 1998. 

In that sentence, the analyst is focusing 

on problems and delays, not who completed 

the expansion. So passive voice works here. 

It works also in the following paragraph: 

Washington, Jefferson & Company, 

LLC, has been retained by Alexander 

Hamilton, Executor of the Estate 

of James Madison to estimate the fair 

market value of Monroe-Adams common 

stock. Monroe-Adams is a Limited 

Liability Company located in Concord, 

New Hampshire. A 100% interest is being 

valued as of December 31, 2007. 

The firm being retained is the focus of 

the first sentence in that paragraph. Who 

retained the firm is not as important. If that 

sentence had been written in active voice, 

the executor’s name would have come first, 

and the sense of relative importance would 

have been lost. The second sentence is also 

passive, and I think it’s okay because making 

it active would have required the analyst 

to begin the sentence with “Washington, 

Jefferson & Company is valuing a 100% interest…,” 

which steals the focus away from 

the important data, which is the percent 

being valued. 

CONVERSION QUEST 

So should you try to convert all or most 

of your passive sentences to active Not necessarily. 

Consider converting from passive to 

active if doing so would (a) shift the focus 

to more important information, (b) change 

your tone from hedging to confident, or (c) 

convey that you are accountable 

for your judgment 

or action. 

As long as active voice 

predominates, there is no 

harm in using passive voice 

where it’s appropriate. In 

good literature, passive 

voice is used sometimes to 

vary the sentence structure 

so as not to appear rigid or 

monotonous (as I’ve done 

in this sentence). You could 

apply the same principle 

to report writing—it never 

hurts to make your report 

more pleasant to read. 

READABILITY TOOL 

As I showed in last issue’s 

Report Righter column, Microsoft 

Word 2003 and 2007 have a tool called 

Readability Statistics, which tells you what 

percentage of the sentences in your report 

are passive (see illustration). Word does 

not offer any advice as to what is an acceptable 

percentage—I think 20 to 30 percent 

passive is a good maximum range for 

valuation reports. The tool also alerts you 

while you’re writing the report that you’ve 

just composed a passive sentence. 

DIAGNOSE, FIX, AND IMPROVE 

Writing impressive, persuasive reports 

is a challenge for financial and technical 

experts. But, as with most good writing 

techniques, if you diagnose, fix, and improve 

your writing style every time you 

write something, you will start writing 

impressively and persuasively on your 

first draft. VE 

David N. Wood, CPA/ 

ABV, CVA, is a valuation 

analyst and founder of 

Wood Forensic / Valuation 

Services in Mt. Vernon, IL 

(www.woodvaluation.com). 

He developed and instructs 

an eight-hour NACVA 


course, “Exceptional 

Report Writing Skills and Practice Management 

Tips.” Wood is chairman of the Editorial 

Board of The Value Examiner, and a member 

of NACVA’s Ethics Oversight Board. 


The Value Examiner 

c/o National Association of Certified 

Valuation Analysts (NACVA) 


Salt Lake City, UT 84106-5401 

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U.S. POSTAGE 

PAID 

SALT LAKE CITY, UT 

PERMIT NO. 6563 

Niche training 

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If you’re ready to put your career pedal to the metal, the Consultants’ Training Institute (CTI) can put you on 

the right track. 

The CTI is NACVA’s professional training organization that combines hundreds of years of practitioner experience 

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If you’re ready to step on it, kick our tires for details at www.nacva.com or call for a free 2009 catalog: 

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c/o National Association of 

Certified Valuation Analysts 


Salt Lake City, Utah 84106-5401 

Tel: (801) 486-0600 

Fax: (801) 486-7500 

Internet: www.nacva.com

NOVEMBER/DECEMBER 2009 - NACVA.com

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