If you’ve been following the public pronouncements of Akio Toyoda, the CEO of Toyota Motor, you’ve probably heard him speaking Japanese before the English translation takes over. And you’ve doubtless heard him utter the word ano. A lot. In fact, Mr. Toyoda, says ano so much you might think it’s Japanese for a really common word like “the” or “it.”

In fact, ano means “there” — as in “that Prius over there.” But like many Japanese speakers, Mr. Toyoda uses ano not as a word, but as a filler, a meaningless sound meant to buy time in a sentence. You can tell ano is being used as a filler without knowing another word of Japanese; when the meaning is “there,” as in “that one over there,”  ano is short and choppy. When it’s buying time in a sentence, it’s pronounced anoooo. The longer the o sound, the more time the speaker is buying.

The American equivalents of anooooo are ummm and y’know. We hear them in interviews all the time. The other day on the NPR program “Marketplace,” I heard a business economist use y’know a distressing number of times. To me, y’know is a particularly offensive filler word. Generally, when someone throws in a y’know, I DO know, so they are inadvertently insulting me by asking me if I can follow their line of reasoning.  You know (sorry, couldn’t resist) that y’know is just a nervous time-buying expression when someone deploys it two and three times in a single answer.

Businessmen who are perfectly adept at delivering a report from just a handful of notes on index cards sometimes fall back on repeated y’knows when answering questions.  And y’know is contagious.  If an interviewer peppers his questions with y’knows, then an interview subject is far more likely to use the expressions — and, unhappily, visa versa.

Y’know is an awkward crutch that can undermine a business spokesperson’s authority, so the question for those of us who do presentations and answer media and public questions is how to we banish that particularly annoying English version of anooooo?

First, we have to realize we have the bad habit. During media training sessions, clients often learn they have developed the habit only when I play back a practice interview to critique their performance. The expression has become a reflex; almost like breathing, and speakers are unaware they’re saying y’know.

If you’re not in a media training session, how can you learn if you’re using y’know? The best way to find out is to record a conversation with another person, play it back and see if you have the habit.

If you do find yourself afflicted, I have found that preempting the filler often helps. For example, you can start a response with “You know, the most important thing to realize is….” By using the fully spelled out “you know,” you put yourself on mental notice not to use the filler conjunction y’know.  Using “you know,” that way also sets you up to incorporate the sense of the question in your answer — and repeating the sense of the question is a great time-buying device that often gives you that nanosecond you need to decide what your answer really is.   One you’re on course, you’re less likely to fall back on time-buying gimmicks like y’know.

Incorporating the sense of a question in an answer also makes your answer self-contained — which is especially valuable in media interviews. But the most important piece of advice I can give is to have an agenda ready to deploy in any sort of Q&A session — whether it’s with colleagues, the media or the public.  If you have an agenda, incorporate the sense of the question into your answer and from time to time begin a response with “You know,” you’re unlikely to find yourself resorting to y’know.  Or hmmmmm.  Or, if you happen to be doing an interview in Japanese, anoooooo.

Finally, before any interview, do a practice Q&A with a colleague, family member or friend.  You can even interview yourself in a pinch — although that’s a last resort because you know what questions you’re going to pose to yourself.  Record that session, play it back and critique yourself. If you practice, you’re unlikely to resort to fillers.  “If you, y’know, don’t practice, you’re, y’know, setting yourself up for……” You get the idea.

Financial professionals involved with wealth management need to be aware of the effects of court cases relating to valuation of minority interests in small businesses and related securities. Cases brought to the tax court in recent years have shed some light on the relatively obscure subject of discounted values caused by reduced marketability and control for minority interests. This is an issue that is faced by professional advisors regarding gift and estate taxes, and for financial planning. The cases will be pointed out in this article.

Prior to these cases, appraisers generally treated valuation of such discounts as a relatively minor adjunct to the valuation of the basic (majority) position. Many either used “industry standards” for marketability discounts of, say, 35% without support, or they attempted to support these values with statistics from studies of restricted stock of public companies (which can be sold, usually at a discount, from their unrestricted brethren, and by IPO studies of stock values before and after the Initial Public Offering. The courts have virtually all rejected such valuations in the case of closely held securities, and laid down some principles which, if adhered to in appraisals, should significantly limit the chances of litigation. And, if litigated it should dramatically enhance the chances of winning.

Valuation Principles

All appraisals are a defensible opinion of value, prepared by an expert, for an ownership interest. Such an ownership interest is often referred to as a “bundle of rights.” Normally ownership in fee contains the most valuable bundle of rights, and lesser forms such as ownership of a security interest, lease, license, or other such instrument will reduce the bundle of rights – and hence the value. Further, restrictions on marketability or control of such minority interests results in a reduction of value.

If the asset to be valued is a minority interest, and/or if it is subject to restricted marketability, and/or lack of control, appropriate discounts to value must be applied. Over the years, many appraisers have adopted policies that separated the lack of control discount from the lack of liquidity or marketability discount. However, this appears to be a difference without a distinction. All discounts from value appear to be, in the end, evidence of impairments in marketability. The fact that such discounts, even if treated as separate discounts, are multiplicands which are multiplied by each other to derive a final discount figure illustrates this point.

Though the appropriateness of applying such discounts in these situations has been universally accepted by the IRS and the courts, recent court decisions have shown a fair amount of disagreement over the means of quantifying the appropriate discounts. (IRS Revenue Ruling 77-287 deals with marketability discounts for “restricted securities,” but it is silent on “exempted securities,” which make up the vast majority of privately held securities.  Both are defined and described in the Securities Act of 1933.) The cases indicate a complete analysis is required.

To quantify the “marketability discount,” because of a lack of available specific data, some appraisers have been relying on two sources of data from public company transactions;  Initial Public Offering Studies, and Restricted Stock Studies to defend their discount opinion. The “standard” discount often derived from these studies is typically between 30% to 40%. Three cases against the Commissioner in 2003 found that such studies, based upon data from public companies, were not sufficient basis to value  closely held private (exempt and unregistered) ownership. Upon a deeper look the reasons are fairly obvious:

* Initial Public Offering Studies (IPO) show the difference in the price of a stock before the offering and after, and an appraiser may attempt to infer that this is direct evidence to support a marketability discount for an exempt security. This is erroneous for the following reasons:

* Stock values of privately held companies typically are based upon investment value – that is, an investor will be interested in both the current return, and the amortization factor (risk abatement factor) which indicates how long it will take to recover the initial investment. This is necessary because of the high degree of illiquidity of non-public securities.

* The IPO price, on the other hand, reflects a speculative value – that is, the investor is looking mainly towards price appreciation. By its nature once publicly traded, the stock should have high liquidity, so recovery of the investment is not an investment concern. Thus, this study is relevant only to companies anticipating an IPO. Unfortunately, these companies represent less than 1% of the companies extant in the U.S.

* Restricted Stock Studies deal with stocks of public companies that have been temporarily restricted from sale for two years (later for one year) in the public markets (usually by virtue of securities regulations under Rule 144). Nonetheless, there is no prohibition in selling these securities in private transactions where they usually sell at an average of 30% or so less than publicly traded stock. But these are applicable only to publicly traded stocks that have only a temporary restriction from public markets, and not on the general ”permanent” illiquidity problem faced by small privately held companies which would make them far less marketable.

* Control discounts, (or more appropriately control-based marketability discounts) for small privately held companies are magnified in comparison with publicly held companies for a simple reason – in privately held companies the only practicable way to recover the investment is liquidation (sale) of the company. Without control, an investor does not have the right to exercise this option. Thus minority interests in closely held companies are very difficult to sell. In practice, in the past appraisers have often attempted to base discounts for lack of control on control premium studies of public companies. The two are not the same at all.

The case of Mandelbaum v. Commissioner, T.C.M 1995-255 determined that use of irrelevant data is unacceptable, and sets forth some basic factors which might comprise the discount, but specified that this list was not exclusive, and other factors may (and should) apply as the situation dictates. It basically states that a complete analysis must be done which is relevant to the subject. The factors listed to be evaluated included but were not limited to:

• Private vs. public sales of stock
• Financial statement analysis
• Dividend policy
• Nature of the company, history, position in the industry and economic outlook
• Management
• Amount of control in transferred shares
• Restrictions on transferability of stock
• Company’s redemption policy
• Costs associated with making a public offering

IRS Revenue Ruling 77-287 deals with marketability discounts for “restricted securities”, but it is silent on “exempted securities,” which make up the vast majority of privately held securities. Both are defined and described in the Securities Act of 1933.

Post by: Gerald W. Barney MS, CSBA, CMEA

American ValueMetrics Corp.
www. Americanvaluemetrics.com
info@americanvaluemetrics.com

Back in the early 1980s, when I was producing the “CBS Morning News” (now renamed “The Early Show”) Diane Sawyer, the co-anchor, booked an interview with former President Richard M. Nixon.

This was a considerable time after Mr. Nixon had undergone the grilling by David Frost depicted in the play and movie, “Frost/Nixon,” and through his books, articles and speeches, the former president had recast himself as an elder statesman. Moreover, Ms. Sawyer had been an aide in Nixon’s White House and when he left Washington in disgrace, she was one of a tiny handful of staffers who accompanied him into his temporary exile in San Clemente, CA, where she helped him organize his papers.

So you can understand how the former president, now living on an estate in New Jersey, might expect a benign interview from Ms. Sawyer. What he got was an on-camera third degree that made the Frost interview look like a tea party in Mayfair.

My point is apolitical; it is simply that every reporter, even one you know well,  is capable of doing a tough interview. Perhaps, because he anticipated gentle handling, Mr. Nixon was atypically ill-prepared for the onslaught.

I tell this story to all my media-training clients because I want them to prepare for tough questions, even when they assume the interview occasion is unlikely to prompt them. In fact, I have formulated a law of interviews:  “Anyone unprepared for tough questions will be asked tough questions.”

Here’s a case history:  I was preparing a financial services company for a news conference announcing the California test rollout of a new credit card product. When I asked them what tough questions reporters might ask. The lead spokesperson said, “Oh, we won’t get any tough questions. This product is so great.”

“O.K.,” I said. “Pretend Ralph Nader is coming to the news conference. What will he ask?”

“Well,” said the lead spokesperson, “he’d probably ask where he could sign up for our product.” That brought laughter from his fellow panelists.

Do I  need to tell you what happened at the news conference? The first question was worthy of a criminal prosecutor in its tone, severity, and insight.  The spokespersons just sat at their table with their mouths open. What happened next was the journalistic equivalent of a shark feeding frenzy; the reporters tore them to shreds.

Interestingly, a year later there was a national rollout at a New York news conference and this time the clients drilled extensively, developing persuasive answers to tough questions. They were ready for combat, but this time there was no reportorial onslaught. Perhaps lulled by the huge buffet breakfast the client laid out, the New York and national reporters didn’t ask a single tough question.

But it’s better to prepare for the tough questions and not get them than to be unprepared and and suffer a barrage of them. What’s the best way to do this? Write down your nightmare questions and then formulate answers. But don’t stop there; you want to use those tough questions to transition to your own message points.

The way you do this is my four-step process: Acknowledge, Bridge, Message Point, Shut Up.

What do I mean?

Acknowledge: Here’s the shortest acknowledgement I know of: “No,”

Bridge: Here’s the shortest bridge I know of, “As a matter of fact.”

Message Point: Here you insert your own agenda point.

Shut Up: Don’t go back and reference the original question.

But what if the reporter asks the question again? Well, he’s just opened the door for you to bridge to a second of your agenda points.

Of course none of this works unless you HAVE an agenda. I always recommend coming up with a five point agenda for every interview. Then, come up with tough questions and cut-and-paste agenda points under each tough question. What you now have is a visual road map you’ll drive down if you get any of your nightmare questions.

And if you don’t get the tough questions, you’ll still have an agenda to deploy. The corollary to the law: “Anyone unprepared for tough questions will get them” is “Anyone prepared for tough questions may get them but it won’t matter.”