Opening Comments
Welcome to ourSpring 2010 issue of Valuation/Litigation Insights. Through this publication, our hope is to bring our friends in the business community original, internally prepared perspectives that are brief, meaningful and useful. With each article we identify our intended audience, allowing you to focus on what is relevant for your practice or organization. Please let us know if there are any topics you would like to see addressed in future issues.

Whos in Control
Lack of Control Discounts for Majority Ownership Interests
[This article is intended for estate planning advisors]

Once, the earth was not only flat, it was the center of the universe. That perception has changed. Every once in awhile, someone comes along and questions that which has always been taken as gospel. I recently read a study* by Dr. Gene Trevino, a PhD. who is also an Accredited Senior Appraiser (ASA), which questions one of the tenants of the business valuation gospel: lack control discounts are not applicable for greater than 50% ownership interests.

Dr. Trevino sums up his hypothesis that investors pay higher premiums for relatively higher levels of ownership by stating "the concept of control is not an all or none proposition. There is no percentage of ownership other than 100% that confers all the prerogatives of control upon an owner." To test his hypothesis, Dr. Trevino utilizes industry accepted Mergerstat Control Premium studies. He breaks the studies into three control level categories, which are 50% to 66%, 67% to 79%, and 80% to 100%. These categories were based on statutory and other considerations noted in his analysis and the 80% and higher category was understandably noted be closest to absolute control.

The results of his study were intriguing, if not compelling. Median premiums paid in the 142 transactions in the 50% to 66% range were 24.52%. Median premiums paid in the 104 transactions in the 67% to 79% range were almost the same at 23.76%. Median premiums paid in the 97 transactions in the 80% to 100% range were 34.23%, which was significantly higher than the previous two groups and was a difference supported by statistical validity. Interestingly, the median premium for 80% to 99% transactions was 33.28%, which approximated the median of 34.43% for 100% transactions.

Dr. Trevino notes the implications of his findings are that not all controlling interests are created equal and those less than 80% may warrant a discount for lack of control. While to our knowledge his findings have yet to be subjected to critical peer review or the scrutiny of the courts, Dr. Trevinos studies are an interesting challenge to conventionally accepted wisdom. We will continue to monitor this challenge.

*Gene A. Trevino, PhD., ASA and David P. Martin, "Do Controlling Interests Warrant a Lack of Control Discount," Business Valuation Review, Fall 2009.

Who You Gonna Call
Preventing Fraud in the Workplace
[This article is intended managers and advisors]

Every responsible organization has insurance. Buildings are insured. Equipment is insured. The lives of key management and the health of employees insured. The concept is easy to understand: pay comparatively low dollars to offset the risk of future catastrophic losses. Unfortunately, few organizations utilize one of the lease expensive forms of "insurance"one which is likely to benefit them. That "insurance" is the use of a fraud hotline.

Lets look at a few facts:

46% of frauds are found through a tip. This detection method far outpaces any other.*

Many people who are aware of fraud are more likely to speak up if they have a way to do so anonymously. When they do speak up, they often do so outside of traditional business hours.

Fraud victims who have fraud hotlines have median losses of $100,000. Those without hotlines have median losses of $250,000.*

* ACFE Report to the Nation on Occupational Fraud and Abuse.

When 46% of frauds are found through a tip, and since many people are hesitant about speaking up, organizations should do all they can to create and encourage open channels of communication, especially anonymous channels. Establishing a fraud hotline, educating employees about it and distributing visual reminders about the hotline via wallet cards, posters and e-mails facilitates the communications critical to detecting fraud. So what is the cost benefit Typically, establishing a hotline includes a nominal one-time set up fee and a nominal annual fee. The annual fee varies based off of the size of an entity but an annual fee of about $2,000 is common for many organizations. Now lets do a little math. If the average organization with a hotline suffers $150,000 less than one without a hotline and the annual fee for the hotline is $2,000, if we play the averages the hotline will pay for itself for 75 years the first time it catches fraudand we will never know what the tone set by having the hotline prevented.

I know times are tough. I know organizations are not looking for new expenses. I know people often do not like changethey like their cheese right where it is, thank you very much. I also know that many employees are facing financial pressures unlike any they have faced in their lives which opens the door to considering unethical behavior. And I know that managers have a responsibility to protect the goodwill and value of their organizations. Additionally, I am familiar with the phrase "pound foolish and penny wise." Some things in life just make sense. A fraud hotline is one of those things.

Hear Ray Speak
Upcoming Presentations

Columbus: Ohio Bar Associations "Advanced Topics in Family Law Program," June 11, 2010. Ray will be discussing forensic accounting for divorce cases.
RSVP www.ohiobar.org

Cleveland: International Tire Exhibition & Conference (A Crain Communications Inc. Event), September 2010. Ray will be discussing corporate fraud. RSVP www.itec-tireshow.com/index.html

Disclaimer: These articles are intended for our friends in the legal, banking and professional services community and merely reflect our observations. These articles should not be construed as legal counsel. Contact an attorney whenever legal advice is needed.

www.bcgcompany.com

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