What’s the ‘Barbie buzz’ worth?

Having a product prominently displayed in a hit movie has value—but how much? In his pre-IPO valuation of footwear company Birkenstock, Professor Aswath Damodaran (New York University Stern School of Business) examined the firm’s intangibles, one of which was the “Barbie buzz”: having a pink version of the company’s sandals appear in the big blockbuster movie, which “hyper charged the demand for the company’s footwear.”

Revenue bump: All buzzes fade “but not before they create a revenue bump and perhaps even increase the customer base for the long term,” Damodaran writes. He estimates that it will push up the revenue growth rate from 15% to 25% over the next year before reverting to a compounded growth rate of 15% a year in the following four years.

The other main intangibles he valued were the brand name (which has the biggest effect on value), a celebrity customer base, and good management. You can read his full valuation if you click here.

Active depreciation charged to business owner in divorce

In a South Carolina divorce case, the business owner (husband) appealed the family court’s decision on the valuation of the family business. The valuation was done on the date of filing of the marital litigation, but the value apparently dropped during the litigation. The family court found that any change in value was attributable to the actions of the husband.

High bar: The appellate court noted that it will affirm “unless the appellant satisfies his burden of showing the preponderance of the evidence is against the family court’s findings.” The burden was not satisfied, so the appellate court affirmed the family court’s decision on the matter regarding the change in value. Other matters affirmed included accounting for personal goodwill and the court’s selection of a value within the range of evidence presented.

The case is Clampitt v. Clampitt, 2023 S.C. App. Unpub. LEXIS 381, and a case analysis and full court opinion will be on the BVLaw platform.

The No. 1 valuation issue that triggers an IRS audit

Discounts continue to be the No. 1 red flag that triggers an IRS audit, according to former IRS manager Michael Gregory (Michael Gregory Consulting LLC), speaking at the recent American Society of Appraisers (ASA) International Appraisers Conference in New Orleans. Gregory worked for the IRS for almost 30 years on valuation matters and continues to interact with the agency (he has over 70 contacts there). He is now in private practice, and he helps clients who have IRS disputes regarding business valuation issues as well as other matters.

Explain it: Make sure you have a clear and complete explanation that supports your discount estimates, whether they be for marketability or control, Gregory advises. We point out that we have heard the same remarks directly from IRS officials.

In addition to valuation issues, Gregory also specializes in mediation and conflict resolution, and he told the audience that his website offers some free e-books (click here).

Regulatory uncertainty regarding ESOP valuation is a major problem

The regulatory uncertainty around valuations for employee stock ownership plans (ESOPs) is a significant burden that creates undue risk and can “hamper employee-owned businesses,” says Alex Brill, a senior research fellow at the American Enterprise Institute, in a new paper. He’s referring to long-awaited rules on the fair market value of company shares to be bought by an ESOP—a key to the setup and ongoing operations of these vehicles. Without final rules, the DOL has resorted to regulating through litigation, winning many cases alleging that the ESOPs overvalued (and thus overpaid for) the stock of the sponsoring companies. Valuation experts say the DOL uses rules that are not consistent with accepted valuation standards.

New-law mandate: The paper points out that, while Congress recently directed the DOL to establish guidance on ESOP fair market valuation, the new legislation (contained in the SECURE 2.0 Act of 2022) does not provide a deadline for issuing the guidance. “It is critical that DOL issue guidance for ESOP valuation promptly through a formal notice-and-comment rulemaking that permits stakeholders to offer feedback on a proposed regulation,” Brill concludes.

You can read Brill’s paper if you click here.

We point out that, although there is no official deadline, a DOL official stated that regs will be issued by year-end, according to a blog post from the National Center for Employee Ownership (NCEO). Once the proposed regulations are issued, there will be a two-to-three-month public comment period before they are finalized.

Will the AICPA FVS conference be the biggest of the year?

It was the biggest business valuation conference of 2022, and this year’s version should also draw a huge crowd. The AICPA & CIMA Forensic and Valuation Services Conference will be three days, November 6-8, in Las Vegas live and online. There are almost 60 sessions on everything from emerging issues (artificial intelligence, cryptocurrency, and ESG) to specialized topics (portfolio valuations, complex structures, trade names, and cannabis firms) to perennial favorites (expert testimony, reasonable comp, goodwill impairments, and cost of capital). The AICPA also allows virtual attendees to pick and choose some sessions using a “select 7” option so you can focus on specific topics that match your needs. For more details on the conference, click here.

Global BV News

Cross-border M&A examined in new CBV Insights

For several reasons, the prevalence of cross-border transactions involving Canadian companies is expected to expand over the next several years. In the latest edition of CBV Insights, Stephanie Lau, CFA, CBV, advises Canadian sellers on a few strategies they can employ when engaging with a foreign buyer—and why they should not base their exit timing solely on the strength of the loonie (the Canadian one-dollar coin), the report says. To read the report, click here.

IVSC signs MOU with French accountants

During the recent annual general meeting of the International Valuation Standards Council (IVSC), a memorandum of understanding (MoU) was signed to commemorate the IVSC’s partnership with the two leading accountancy professional bodies in France, the CNCC and CNOEC. “This significant event underscores the importance of collaboration and the IVS within the French valuation community,” the IVSC said in a statement.

Extra: The “IVSC Annual Report” for 2022-2023 is now available (click here to view).

Hitchner busts more BV myths

Does the fair market value standard assume a financial buyer, without synergistic benefits? “This is not true and is indeed a myth,” writes Jim Hitchner (Financial Valuation Advisors) in his September/October issue of Hardball With Hitchner. And his answer would be the same for a subject noncontrolling interest versus a controlling interest. In backing up his position, he examines the definitions of fair market value, investment value, and the key word “hypothetical.” Under certain circumstances, he notes, fair market value can apply to valuations involving both financial and strategic buyers and sellers, as well as a controlling or minority interest. He cautions analysts not to “mix strategic purchases with financial standalone transactions when preparing a transaction method.”

He also tackles another myth: that the levels of value the BV profession uses are a settled and static issue. “This is patently false,” he writes. He goes through the 30-year evolution of the levels of value chart from its first three-level version to the current four-level version (another control level of value was added). Some unsettled issues remain, he notes, such as the existence of empirical data for quantifying marketability discounts on controlling interests and the use of control premium studies. Hitchner advises analysts to make sure they are using the most current chart that reflects the latest views on levels of value.

Earlier this year, Hitchner busted two other BV myths: one that claims that the IRS only accepts USPAP standards for federal tax-related valuations and the other that you cannot rely on restricted stock studies for estimating a marketability discount for federal tax valuations (click here for our coverage).

Hardball With Hitchner is a monthly publication. For subscription information, click here.

More AI woes add to caution 

Artificial intelligence is a much-talked-about topic around the business valuation conference circuit, and most of it is cautionary. One story going around is the one about the attorney who wrote a brief using AI, which cited cases that didn’t exist. In the news recently is a case of another attorney whose client is suing him for making a faulty closing argument that was written with help from a generative AI program. The case involves rapper Prakazrel “Pras” Michel, who was found guilty back in April on a number of charges, including conspiracy.

The American Bar Association does not yet have any guidelines on the use of AI in the legal profession, according to the article from Associated Press, though a new task force is studying the issue. AI usage at law firms is in its early stages, but 50% of lawyers expect to use it within the next year. The rapper’s trial is said to be the first time that generative AI was used in a federal trial. Click here to read the article.

What to do: If you plan on using anything that AI generated, check it first! You may also want to consider developing an internal policy that addresses matters such as some specifics as to how AI should be used, confidentiality of client information, and—as noted above—a careful review of the outputs.

Testimony of damages expert excluded due to no basis

In a Pennsylvania breach of contract case, the plaintiff’s damages expert was to testify as to lost profits. Opposing counsel filed a Daubert motion, claiming the expert’s pricing calculations (a key component to the lost profits analysis) could not be based on anything in the record.

In—for now: The court allowed the expert to testify, and it would be admissible at trial as “long as there is a basis for those assumptions in the record.” After the expert’s testimony but before the jury’s verdict was entered, the opposing side moved that the testimony be struck because the expert’s assumptions “had no factual basis in the trial evidence.” The court did not rule on the motion until after the trial. The jury found the defendant liable for the breach of contract and awarded $25 million in compensatory damages.

After entering the judgment, the court granted the motion excluding the expert’s testimony and asking for a new trial on damages only. The expert’s testimony was not based on the trial record. Specifically, without the expert’s testimony as to pricing calculation, the jury could not have reached the damages award it did reach, of $25 million. The plaintiff filed a motion for reconsideration, but it was denied.

The case is Paramount Fin. Commc’ns, Inc. v. Broadridge Inv’r Commc’n Sols., Inc., 2023 U.S. Dist. LEXIS 154020; 2023 WL 5635772, and a case analysis and full court opinion are on the BVLaw platform.

Any impact to multiples from Section 174 changes? Not in this industry

The tax code’s Section 174 requires research and experimentation (R&E) expenses to be capitalized and written off over time. This is a change the 2017 Tax Cuts and Jobs Act made that became effective starting with calendar year 2022. Capitalization versus expensing is not simply an accounting optic—it can trigger unplanned tax liabilities that could impact cash flow. Efforts are underway to eliminate this change in the tax law. In the meantime, has the change had an impact on valuations in the marketplace? Not for architectural and engineering (A/E) firms, according to industry experts Rusk O’Brien Gido + Partners. “Regarding the marketplace for A/E firms, we have yet to observe any material impact on valuation multiples of publicly traded firms or in private market transactions (mergers acquisitions) from this change in the tax code,” they wrote in a recent article. “This is likely due to remaining uncertainty over whether or not the tax code may be amended and the ability of many firms to mitigate the impact through various tax strategies.”

They advise appraisers to take this tax law change into account—especially for the technology, healthcare, manufacturing, and engineering industries. Many firms have already paid unexpectedly large tax bills, they point out, meaning a reduction in cash balances (or increased debt) could reduce equity value.

Extra: Rusk O’Brien Gido + Partners publishes a regular study of current trends in the transacted values of architecture, engineering, and environmental consulting firms. To order the latest version, click here.

BVR ASA booth buzz: Art of Valuation book sparks interest

At BVR’s exhibit hall booth at the 2023 American Society of Appraisers International Conference in New Orleans, one of the items that generated a lot of attention was a new book, The Art of Valuation. BVR does not offer the book, but we featured it at our booth because it’s an important work that deserves attention. The book is a wonderful collection of essays by top veteran experts from overlapping valuation disciplines who tell stories that go beyond the technical issues and get into the heart of appraisal. In essence, the stories inspire practitioners to always strive to improve their thinking about valuation to elevate their own work and the profession as a whole. The book is available from The Appraisal Foundation, and you can click here to order it.

AICPA lets you cherry-pick some FVS conference sessions

Almost 60 sessions are offered at the upcoming AICPA & CIMA Forensic and Valuation Services Conference November 6-8 in Las Vegas live and online. But not everybody needs to attend the entire slate of sessions, so the AICPA allows virtual attendees to pick and choose some sessions using a “select 7” option. This allows you to focus on specific topics that match your needs. With this option, you can choose any seven sessions from the main conference agenda. You will receive access, agenda creation, and material download instructions a few days before the conference starts. What’s more, you can adjust your agenda at any time. For more details, click here.

Global BV News

Check out the V20 conference October 27-29

Designed as the first truly global business valuation event, the V20 (Valuation 20) Conference will be held October 27-29 in New Delhi, India. Click here for the full agenda and details on how to register.

The Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC) co-host the event, which coincides with the annual G20 finance meeting in India The AaRVF is a Registered Valuers Organization the government of India recognizes. Many valuation groups have signed on as participating organizations. BVR is the media partner for the event.

The V20 Summit has several objectives, including raising awareness about the importance of valuation in the global economy and facilitating dialogue and the exchange of ideas among valuation professionals, policymakers, and other stakeholders. Another goal is identifying opportunities and strategies for leveraging valuation to achieve sustainable economic growth and development and advocating for policies and initiatives that support the development of the valuation profession and promote its role in driving economic and social progress.

Damodaran values Birkenstock’s intangibles

He doesn’t care for its sandals, but Professor Aswath Damodaran (New York University Stern School of Business) has taken a great interest in valuing the intangibles of footwear company Birkenstock. Ahead of its recent IPO, Damodaran did a valuation of the company and examined what he views as the firm’s four main intangibles: brand name, strength of the management team, a celebrity customer base, and the Barbie Buzz (pink sandals appeared in the big blockbuster movie).

‘IT’ man: Damodaran hasn’t done much teaching or writing on valuing intangibles, so it’s interesting to see his thought process, which he grounds in his overall “IT” proposition, that is, for “it” to have an effect on value, it must have an impact to either cash flows, risk, or growth. He uses this proposition to assess everything from inflation to ESG. For example, he concludes that Birkenstock’s brand name has the biggest effect on value, resulting in an annual operating margin of 23% to 25% over the next five years. Without the brand name, he believes the operating margin would be 14.74%, which is the average for the entire apparel/footwear sector.

You can read his full valuation if you click here.

Postscript: Since its IPO debut, the stock has lost its footing, falling below what Damodaran considered to be the price at which he would be a buyer—although he still won’t buy its sandals.

No do-over for valuation of business hit by COVID-19

In a Wisconsin marital dissolution case, COVID-19 negatively impacted the husband’s hair salon business, which had to shut down for a while. This happened two months after the couple’s divorce was granted. In Wisconsin, assets are normally valued as of the date of divorce, but the court may deviate from the general rule due to special circumstances. The husband argued that the COVID-19 pandemic presented special circumstances for using an alternative date. The circuit court disagreed, saying, “There has to be some finality for all the parties in this.” The husband appealed, but the appellate court agreed that the circuit court’s reliance on finality was rational, noting that the divorce had been pending for two and a half years.

The case is In re Marriage of Gill, 2023 Wisc. App. LEXIS 917, and a case analysis and full court opinion are on the BVLaw platform.

BV-real estate gap regarding property rights can skew valuation

At BVR’s exhibit hall booth at the 2023 American Society of Appraisers International Conference in New Orleans, we had a conversation with Barry Cunningham (Property Tax Research LLC) about potential pitfalls when valuing real estate-centric entities (RECEs). A RECE is a business that owns its own real estate (e.g., a hotel, nursing home, golf course, etc.).

Cunningham feels that business appraisers need a better understanding of how real estate appraisers think about property rights, which can lead to understating or overstating intangible assets in these types of entities. The distinction between the terms “fee simple” and “leased fee estates” is important in understanding the potential for misstating intangible value. Also, above- and below-market rents need to be considered. Cunningham explains this in a recent article he wrote, “Property Rights and the Real Estate Appraiser,” which is in the Spring 2023 issue of the ASA’s Business Valuation Review. He intends the article to be a primer to foster more in-depth discussion within the appraisal community.

The article is available if you click here (free to subscribers of the BVResearch Pro platform, which has the full archive of Business Valuation Review).

New edition of Hitchner book in the wings

The fifth edition of Financial Valuation: Applications and Models will be out by the end of this year or early 2024, announced author Jim Hitchner (Financial Valuation Advisors Inc.) at the recent two-day Forensic and Valuation Conference hosted by the Virginia State Society of CPAs. This is a must-have book that is on the shelf of all top valuation experts. The book includes contributions from many nationally recognized names in the valuation industry with specialties in accounting, forensics, business valuation, and financial analysis. We especially like the practical “ValTips” scattered throughout the book.

Full agenda available for AICPA FVS Conference November 6-8

The full agenda for the AICPA & CIMA Forensic & Valuation Services Conference taking place November 6-8 in Las Vegas is now available. Click here to see the almost 60 sessions being offered on everything from emerging issues (artificial intelligence, cryptocurrency, and ESG) to specialized topics (portfolio valuations, complex structures, trade names, and cannabis firms) to perennial favorites (expert testimony, reasonable comp, goodwill impairments, and cost of capital). This agenda has something for everyone, and you can attend on-site or online.

Global BV News

Patel ‘intrigued’ by the V20, slated to speak

“Very intrigued,” responded PJ Patel (Valuation Research Corp.) about his reaction when he first heard of the V20 Valuation Summit to be held October 27-29 in New Delhi. During an interview with Ray Moran (FON Valuation Services Group), one interesting element Patel noted is that the summit coincides with the annual G20 finance meeting in India. Organizers planned the event that way, and future V20 events will follow suit (next year will be Brazil). Patel will be a panelist at the summit and so will several of his colleagues and associates, including Chris Mellen (VRC, U.S.); Peter Ott (Peter Ott & Assoc., Canada); and Rajeev Shah (RBSA Advisors, India). These are just a few of the panelists and speakers slated for the event. You can watch the full video interview if you click here. For more on the conference, click here.

BVIUK Summit October 26

BVR CEO David Foster will moderate the second round of the BVIUK’s Expert Debate, where some of the best BV experts in the world discuss the most topical issues in the industry, including inflation, startup valuations, expert testimony, bias, and subjectivity. Speakers include Carla Nunes, Josh Shilts, Andrew Strickland, Graham Antrobus, Hafiz Imtiaz, Mike Blake, Theresa Zeidler, Sandra Mossios, Nene Glenn Gianfala, Roger Loh, Jim Alerding, Dennis Webb, and others. For more information and to register, click here.

What’s in the November issue of Business Valuation Update

Here’s what you’ll see:

• “New Research Finds That Industries Have Different Growth Rates” (BVR Editor). An update to ongoing research by Roger Grabowski (Kroll) and Dr. Ashok Abbott (West Virginia University) supports the use of different long-term growth rates for different industries and the use of the three-stage DCF.

• “Key Points From the VSCPA Forensic and Valuation Conference” (BVR Editor). An economic update, a new IRS crackdown, goodwill, reasonable comp, healthcare insights, expert testimony, and options are among the topics recapped from the annual two-day Forensic and Valuation Conference hosted by the Virginia State Society of CPAs.

• “Hitchner Updates the Risk/Return Spectrum for Cost of Capital” (BVR Editor). A good visual to use for checking the reasonableness of your cost of capital estimate is the spectrum of rates in the market. Jim Hitchner (Financial Valuation Advisors Inc.) has done an update to this spectrum, which can be used in valuation reports and in court.

• “CPT® Codes Drive Compensation, Business Valuation, and Regulatory Compliance in Healthcare” (Mark O. Dietrich, CPA). “Know them or practice at your peril,” says the author, who maintains that you cannot understand Stark Law requirements without understanding the CPT® codes for the particular medical specialty you are engaged to value.

• “The CEIV Is Gone But the MPF Will Endure—Here’s an Example” (BVR Editor). The Certified in Entity and Intangible Valuations (CEIV) credential has been discontinued, but the Mandatory Performance Framework (MPF) will continue to be used. In fact, a revision is expected to make it more streamlined. Here are its guidelines for documenting management projections, which are worthy of repurposing.

• “Student Business Valuation Challenge May Be Resurrected” (BVR Editor). At the 2023 ASA International Conference in New Orleans, there were some preliminary discussions about bringing back the Business Valuation Challenge, a competition for college students.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “Stout Restricted Stock Study and DLOM Calculator” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the November 2023 issue of Business Valuation Update.

Lack of BV credential triggers a Daubert challenge

In a bankruptcy case in South Carolina, the defendants moved to exclude evidence of an expert, which included his exhibits and valuation report. Citing no education nor certification on business valuation nor membership in any BV organizations, the defendants asserted the expert was not qualified to give an expert opinion on business valuation under Rule 702 (the federal rule of evidence regarding expert witnesses).

The expert had been a CPA since 1985, and his license was in good standing. He also had a B.S. in accounting and was a member of the AICPA. His CV, which was provided to the defendants, “provides information regarding his educational history, professional experience (including over 400 business valuations), professional designation as a CPA, and presentations.”

Not excluded: “Courts have … agreed that any gaps in an expert’s knowledge generally go to the weight of the witness’s testimony, not its admissibility,” the court wrote. Based on evidence from the expert’s various disclosures about his background, the court determined that he was qualified as an expert witness by his skill, knowledge, experience, training, and/or education.

There were other issues in this case, where both sides sought to exclude each other’s valuation experts. Both motions were granted in part and denied in part. The case is Vieira v. Think Tank Logistics, LLC (In re Levesque), 2023 Bankr. LEXIS 2113; 653 B.R. 127, and a case analysis and full court opinion are on the BVLaw platform.

Watch out for ‘black box’ compensation apps

During his session on reasonable compensation at the Forensic and Valuation Conference hosted by the Virginia State Society of CPAs, Neil Beaton (Alvarez and Marsal) discussed the various compensation benchmarking surveys and subscription databases. Be careful, he cautioned, because some of these are “black boxes” that use algorithms to generate data that could be challenged (he had a case where that was an issue). ERI was one that was mentioned that does not give the recipe for its “secret sauce.” Therefore, make sure you know what’s underlying the data—and use multiple sources in case one gets disqualified. He also suggested examining proxy statements from public companies for compensation data.

Updates to two closed-end fund reports are available

Closed-end fund (CEF) data are commonly used to derive discounts for lack of control (DLOC) for closely held holding companies invested in marketable securities. Updated versions (to June 2023) of two sources of CEF data, prepared by Bruce A. Johnson and James R. Park (Partnership Profiles), are now available:

1. 2023 Closed-End Fund Report: Fixed Income Securities. Use this report to compare privately held family limited partnerships (FLPs) and LLCs that hold money market funds, certificates of deposit, government bonds, municipal bonds, corporate bonds, or other fixed income investments; and
2. 2023 Closed-End Fund Report: Stocks and Equity Investments. Use this report to compare privately held FLPs that hold common stock, preferred stock, mutual funds, REITs, or other corporate equity investments.

Price: $295 each.

Global BV News

Next edition of IVS expected January 2024

Alexander Aronsohn, technical director at the International Valuation Standards Council (IVSC) told the audience at the 2023 ASA International Conference that there were 116 responses (i.e., comment letters) to the exposure draft for the updates to the International Valuation Standards (IVS). The public comment period ended this past July 28, and an updated version of IVS is expected to be published in January 2024 with an effective date of July 2024. The exposure draft included IVS updates that address various factors, such as ongoing changes in global markets and valuation practices, increasing use of technology and data sources, growing demand for clarity in valuation processes, and the need to address new types of assets and liabilities, including environmental, social, and governance (ESG) factors.

BV firms are thriving, per BVR’s benchmarking insights

The past few years may have been witness to the most demand, the best growth, and the highest profitability the business valuation profession has ever seen, according to the executive summary for the 2023 BVR Benchmarking Survey. All respondents to the survey will soon receive the full executive summary.

Business valuation, forensics, and litigation services (BVFLS) practice management expert Rod Burkert (Burkert Valuation Advisors) helped design the survey and is adding his insights to the final report on the survey. A few more observations:

• About two-thirds of partners and owners saw their 2022 compensation increase over 2021;
• Eighty-four percent of firms increased their billing rates from the prior year;
• The average and median profit margin for all reporting firms was 50%;
• With business surging, it’s not surprising that new client development is no longer the most pressing challenge—quality control is now the top concern; and
• A hidden opportunity may exist in developing an industry niche—very few practitioners claim or rely on that expertise.

This is just scratching the surface in terms of data and metrics collected from the survey, which included responses from almost 200 business valuation firms and practices. Most of the respondents (60%) have business valuation as their primary business, while 23% say public accounting is their main business, with BV as a practice area. In terms of volume of engagements, there was a good mix of small and large practices, with about half of the respondents doing more than 50 engagements this past year and about a third doing one to 20 engagements.

Points to know from the VSCPA conference

The annual two-day Forensic and Valuation Conference hosted by the Virginia State Society of CPAs is one event we never miss. This year, we were happy to see some younger practitioners joining the veteran and well-known speakers in presenting the sessions. Conference chair Harold Martin (Keiter) acted as host and thanked a task force in putting the event together, which was also livestreamed to state CPA societies in New Jersey and Connecticut. Here are a few key points from all of the sessions. There will be a full recap in the November issue of Business Valuation Update.

• A mild recession is still expected in the U.S. for 2024;
• Valuations for estate and gift tax purposes may no longer be low risk due to fallout from an IRS crackdown on easement appraisers;
• Estimating personal goodwill is all about jurisdiction—and having a documented framework of thinking that backs up your opinion;
• Make sure you analyze CPT codes when valuing medical specialty practices—they drive several important aspects of a valuation;
• The stakes can be high for estimating reasonable compensation—is the average appraiser really qualified?
• On the witness stand, “redirect is your friend,” so don’t struggle to say all you need to say during cross-examination;
• Rules of thumb should “absolutely” always be used—but only as a sanity check and because clients will always ask about them; and
• When Monte Carlo is used to analyze financial projections, consider reducing the DCF discount rate due to shifting of risk analysis.

Lone dissenter of medical merger challenges share valuation

In a California case, a physician was a nonexclusive provider to a physician network and was one of 75 shareholders. The network was sold, and the buyer paid $18 million as part of the transaction. The physician agreed the transaction was fair, but he was the only shareholder who did not approve the merger and he had a problem with how the proceeds were doled out.

No remedy: The 75 shareholders would get $50,000 for each share, and the rest of the money would go to the network’s directors, certain officers, and some physicians as “transaction bonuses” using a “confidential formula.” The dissenting physician did not get a transaction bonus and felt the $50,000 was way below the value of his share. But the trial court ruled that, under Section 310, the merger transaction and the bonuses were “just and reasonable” and so was the value that the physician received for his share. An appellate court affirmed the decision.

The case is Ghaly v. Riverside Cmty. Healthplan Med. Grp., 2023 Cal. App. Unpub. LEXIS 4313; 2023 WL 4733006, and a case analysis and full court opinion are on the BVLaw platform.

Free updated guide to the Stout restricted stock study

The 2023 edition of the “Stout Restricted Stock Study Companion Guide” is now available, and it reflects updated tables and graphs that contain new transactions. The study is the most widely used restricted stock transaction database for providing empirical support for a discount for lack of marketability (DLOM), according to the BVR surveys. To download the new guide, which is free to everyone, click here.

AICPA offers free replay of portfolio valuation event

If you missed the live AICPA Portfolio Valuation Forum, a free replay is available if you click here (free account registration needed). This was the first in what will be a recurring event on this topic, and you can sign up to be notified of the next edition. The forum was about an hour and a half in duration, and the speakers were Sumeet Bhatnagar of KPMG, who also acted as moderator; Garrett Pittenger (Apollo Global Management); Michael Weinberg (First Republic Bank/Columbia Business School); Augie Wilkinson (Bessemer Venture Partners); Jennifer Young (BDT & MSD Partners); and Douglas Burrill (PIMCO).

Free webinar series from the IVSC and Kroll

Recordings are now available of the Kroll-sponsored series of webinars presented by the International Valuation Standards Council (IVSC) from June 7 through June 15. The 2023 Valuation Webinar Series presents four panel discussions from leading international experts on topics such as the global economic outlook, ESG, sovereign wealth funds, consistency and transparency issues, and more. To access the recordings, click here.

New Rule 702 crackdown already impacting expert witnesses

Although they don’t officially go into effect until December 1, expert witnesses are already feeling the effects of the changes designed to strengthen Rule 702, which is the federal rule of evidence regarding testifying experts. Last year, we noted that the changes will result in more experts being excluded from testifying, and that is just what is happening—but earlier than we thought.

Early adoption: Courts have already been citing the pending changes when excluding expert testimony, points out a recent article by attorneys at the law firm Faegre Drinker Biddle & Reath. The article mentions several cases in different jurisdictions that have cited the pending changes, including one in which an appellate court reversed the district court’s decision to admit expert evidence.

Courts have a “gatekeeping” function under Daubert or similar standards to disqualify testifying experts who are not competent or who can’t offer helpful evidence. But the courts were not performing their gatekeeping function as rigorously as originally intended. The courts were going more to “weight than admissibility,” that is, just letting the experts testify and then the judge deciding on the weight to give that testimony or deferring that decision to the jury. The Rule 702 amendments “will not change the substance of the law as it was meant to be applied but that many courts have not been applying it correctly,” the article says.

Extra: Appraisers have the highest exclusion rate (38%) among financial experts under Daubert, per the most recent PwC study that examines exclusions.

Court has limited menu for steakhouse valuation

Without enough evidence, a court can only decide on a valuation with what it has to work with. In a Michigan case, two 50% owners of a Ponderosa steakhouse were locked in a battle over the Old West-themed eatery, with both owners engaging in oppressive conduct against the other. They left it up to the court to decide their fate, and it ordered one owner to buy out the other at fair value.

Dying breed: In Michigan, “fair value” can mean anything the court deems appropriate “under the totality of the circumstances.” Naturally, both parties were miles apart in their personal opinions of value. A business valuation was done, but the expert’s report was not entered into evidence nor did the expert testify. The owner being bought out said Ponderosa was a “dying breed” and the real value was in the real estate. An appraisal of the real estate was presented, and the expert testified that she did not include the value of the going concern nor the furniture, fixtures, or equipment. No competing evidence to her appraisal was offered.

With this scant evidence, the court concluded that the restaurant had a “fading popularity” and believed an asset approach was the most appropriate valuation method. It accepted the real estate valuation and made some adjustments, such as for equipment and both parties’ oppressive behavior.

More details can be found in the case, which is Herremans v. Fedo (In re Herremans), 2023 Bankr. LEXIS 1800; 2023 WL 4611429, and a case analysis and full court opinion are on the BVLaw platform.

New app for the Margrabe options approach to DLOM

Dr. Ashok Abbott (West Virginia University) is developing a calculator that uses the Margrabe options approach to estimating a discount for lack of marketability (DLOM). He would like feedback on the calculator, including suggestions for improvements, additional features desired, and possible extensions. You can access the calculator at dev.optionmodeldlom.com. Dr. Abbott’s contact information is on the calculator.

BIZCOMPS being upgraded with new platform

Users of BIZCOMPS will soon see a new look to the database of small private-company transactions. As of September 29, BIZCOMPS will be on a new platform that will provide new search capabilities, user-specific customization, and various export options. In fact, the platform is the same that is now used for DealStats, FactSet/BVR Control Premium Study, Guideline Public Company Comps Tool, and BVR’s Cost of Capital Professional. If you use any of those tools, you’ll already be familiar with the new BIZCOMPS platform, which will add helpful features and enhancements such as saved searches, deal alerts, and more. If not, you can watch a video that gives a preview of the updates if you click here.

VRC named M&A valuation firm of the year

Valuation Research Corp. (VRC) has been named Valuation Firm of the Year in M&A Advisor’s 14th Annual International M&A Awards. An independent judging panel of industry experts evaluated nominations representing over 250 individual companies from across the world. VRC won the award last year and has received the award a total of 11 times. For a full list of winners, click here.

Global BV News

CBV Institute opens registration for Student BV Challenge

The CBV Institute has opened registration for its Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. Student teams will compete with students from other universities in a test of their business valuation skills. Last year’s inaugural event was a “resounding success,” the organization reports, with 19 teams and 57 students from schools across Canada participating. CBV Institute will accept 25 teams into the competition, and a maximum of two teams per university can participate. The deadline to register is October 13, which is expected to fill up quickly, so it recommends that schools register their teams as soon as possible. More details are available if you click here. The actual event will take place virtually November 8-9.

Moran interviews IVSC Asia director Konialidis

The fastest growing part of the world for the valuation profession is the Asia-Pacific region, believes Ray Moran (FON Valuation Services), marketing director at the International Institute of Business Valuers (iiBV). He recently interviewed Nicolas Konialidis, the Asia director at the International Valuation Standards Council (IVSC). He is based in Singapore and noted that about a third of the IVSC’s member organizations are from the Asia-Pacific region. They also discussed the V20 (Valuation 20) Conference to be held October 27-29 in New Delhi. The Assessors and Registered Valuers Foundation (AaRVF) and the IVSC co-host the event. You can watch the video interview if you click here (the video includes links for more information on the conference). BVR is a media partner for the event.

What’s in the October issue of Business Valuation Update

Here’s what you’ll see:

• “Practical Considerations in Normalizing the Risk-Free Rate” (Ronald D. DiMattia). Some valuation firms and practitioners have advocated that the risk-free rate of return (Rf) should be normalized when it is believed to be too low because of Federal Reserve Bank policies. Recent arguments for doing so have been based on technical economic analyses but have ignored practical aspects of normalizing Rf. This article is intended to address those practical considerations.

• “Do Fairness Opinions Adequately Address Fairness to Shareholders?” (Gilbert E. Matthews). This article concludes that opinions that speak to fairness of an acquisition to a SPAC are inadequate when they do not consider the impact on unaffiliated shareholders.

• “Heat Maps for Valuing Venture-Backed vs. Closely Held Firms” (BVR Editor). During a recent BVR webinar, Joe Orlando (Exit Strategies Group) and Eric Sundheim (Mercovus Valuations) presented some heat map charts that illustrate the differences between the due diligence, tools, and approaches to valuing a venture-backed firm versus a closely held company.

• “Valuers Suggest Enhancements to AI-Powered PDF-to-Excel Tool” (BVR Editor). BVR recently partnered with Nambri Technologies to offer Nambri TaxXL, an advanced AI enterprise SaaS software application designed to convert PDF tax returns into Excel spreadsheets. During a recent demonstration webinar, valuation practitioners suggested some enhancements, which triggered some planned updates to allow for the application to handle additional tax forms.

• “New Book Offers Template for Assessing ESG Impact on Firm Value” (BVR Editor). Based on some case studies, a new book includes a template that summarizes steps in assessing whether ESG factors are material enough to integrate into a valuation. The book is Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuation, edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters.

• “Valuation Matters Highlighted in the Estate of Cecil” (Rajesh Khairajani and Kinjal Shah). A discussion and the valuation implications of several issues in this case: tax affecting an S corporation, applying an asset approach to value a going-concern business, reliance on a single comparable company, and discounts applied to arrive at per-share value.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.

To stay current on business valuation, check out the October 2023 issue of Business Valuation Update.

Firms with better ESG ratings yield somewhat higher returns, per Kroll study

Companies with better environmental, social, and governance (ESG) ratings generally outperformed those with lower ratings over the 2013-to-2021 period, according to Kroll’s new ESG and Global Investor Returns Study.

Fifty percent premium:Globally, “ESG leaders” earned an average annual return of 12.9%, compared to an average 8.6% annual return “laggard” companies earned؅—about a 50% premium in terms of relative performance by top-rated ESG companies, the study says. This holds true for the U.S., where the “ESG leaders” earned an average annual return of 20.3%, compared to a 13.9% average annual return earned by “laggard” companies.

The study analyzes the relationship between a company’s total stock returns (dividends plus capital appreciation) and its MSCI ESG ratings over the 2013-to-2021 period. The study examines over 13,000 publicly traded companies across a variety of geographies and industries and their ESG ratings to determine the correlation of ESG ratings to company performance. For more information and to download the study, click here.

Internal billings trigger M&A damages; GPCM prevails

A case in Delaware Chancery Court shows that the court will not award damages from an M&A transaction gone bad when the calculations are based on speculative lost synergies.

GAAP gap: NetApp Inc. sued the sellers of the company it acquired, Cloud Jumper, a private software firm, for breach of contract and fraud in connection with the sale. The court held that the defendant breached multiple representations in the merger agreement, including that the financial statements were GAAP-compliant and represented bona fide transactions. But the seller included internal billings in company revenue and projections that it did not disclose to the buyer, who relied on those numbers when valuing the firm for purchase.

The court awarded expectation damages but did not accept the plaintiff buyer’s calculation, which used a DCF and projected as well as synergistic cash flows. The court accepted the seller’s estimate of damages, which was the purchase price minus the valuation using the guideline public company method (GPCM).

There are much more details in the case, which is NetApp, Inc. v. Cinelli, 2023 Del. Ch. LEXIS 220; 2023 WL 4925910, and a case analysis and full court opinion are on the BVLaw platform.

New book of essays by prominent valuation experts

Top experts from overlapping valuation disciplines tell their stories that capture a flavor of the romance, intrigue, art—and heart—of business appraisal in a new book, The Art of Valuation.

The book starts with a history of the profession and then reveals the nuances, tips, tactics, and ways of thinking about business appraisal that can help elevate your work from good to great. Practitioners are encouraged to look beyond the technical issues and mechanics of analyses and spreadsheet modeling to the “essence of the big-picture thinking that produces a powerful, effective, credible work product.”

The book, edited by Sarah von Helfenstein (Value Analytics & Design LLC), is a magnificent tribute to the valuation profession! It is available from The Appraisal Foundation, and you can click here to order it.

Extra: Several contributors to the book (including the book’s editor) will be presenting sessions at the upcoming 2023 ASA International Conference in New Orleans October 1-3. Click here for details on the conference.

BVResearch Pro adds to its archive of the ASA’s BV Review

Among many other resources, the BVResearch Pro platform contains the full archive of the Business Valuation Review going back to 1982. This is the business valuation journal of the American Society of Appraisers. The Spring 2023 issue has been added to the platform, and it includes these articles:

• “Business Valuation Cases in Brief”(Erin D. Hollis, ASA CDBV);
• “Property Rights and the Real Estate Appraiser” (Barry J. Cunningham, Ph.D., ASA, MAI AI-GRS); and

•  “Implied Control Premiums Through Delaware Appraisal Decisions” (Joseph Thompson, ASA, CFA and Paul Skluzak).

If you are not a subscriber to the BVResearch Pro platform, you can do a stand-alone subscription to the ASA’s BVReview if you click here.

ISBA appraisal review workshop November 9-10

The International Society of Business Appraisers (ISBA) is offering a two-day workshop for its Business Certified Appraiser in Review (BCA-R) credential. The workshop will be November 9-10 in Fort Lauderdale, Fla. Certified business appraisers with two full years’ experience or more in developing and reporting on the valuation of businesses or the equivalent are eligible to qualify for the BCA-R. For additional requirements and information on the workshop, click here.

Extra: Shawn Hyde (Canyon Valuations) recently gave an interesting BVR webinar on appraisal review. To access a recording, click here (free to BVR Training Passport holders).

Global BV News

IVSC annual meeting in Paris October 9-11

The International Valuation Standards Council (IVSC) will hold its annual general meeting (AGM) at the Maison de la Chimie, Paris from October 9 to October 11. There will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. Some parts of the overall program are restricted to IVSC board members and sponsor/member organizations, but other sessions and all networking events are open to anyone with an interest in valuation and the work of the IVSC. You can check out the agenda and register if you click here.

DOL ESOP valuation regs coming by year-end

The Department of Labor (DOL) will issue long-awaited guidance on ESOP valuations by the end of this year, according to a blog post from the National Center for Employee Ownership (NCEO). Once the proposed regulations are issued, there will be a two-to-three-month public comment period before they are finalized.

Tide is turning: The regulation will clearly define “adequate consideration” under Section 408(e) of the Employee Retirement Income Security Act of 1974 (ERISA). It has been four decades since such regulations were proposed but never finalized. Valuation experts have long maintained that the DOL has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. After a long winning streak, the courts rejected the DOL’s valuations in several recent and important cases, alleging that the ESOPs overvalued (and thus overpaid for) the stock of the sponsoring companies.

“Valuation regulations will have a profound impact on the creation and ongoing viability of ESOPs,” says Corey Rosen, NCEO founder and senior staff member, in the post. “The community must engage with the regulatory process to ensure they adequately accommodate the needs of ESOPs and ESOP participants, so the regulations do not discourage ESOPs.”

Valuation expert’s credibility takes several hits

In a New York fair value case, one of the 50% owners filed for dissolution and the other owner elected to buy him out. The valuation expert for the owner who would remain with the business relied solely on tax returns to base his valuation—even though his client controlled the books and records. The expert testified that he did not independently verify the financial information his client gave him. The court wrote: “It is troubling that an expert would purport to render a serious opinion on the Company’s value based only on its tax returns, knowing his client could easily have given him a more complete set of records.”

Plus, the expert concluded that the business had zero value, even though it was a going concern and his client would continue to operate it. “Indeed, that [the owner’s] expert could conclude based on the record evidence that the Company was worth $0 significantly undermines his credibility,” the court wrote. “The notion that the Company is worthless is belied by the significant value [the owner] continues to derive from it.”

In the end, the court relied mostly on the opinion of value from the departing owner’s expert but did make some adjustments, including to the growth rate, the multiple derived from the guideline transaction method, and the potential retirement of the remaining owner (for goodwill). There was no discussion of a discount for lack of marketability (New York does not take a consistent position with respect to this discount in fair value proceedings).

The case is Rosenthal v. Erber, 2023 N.Y. Misc. LEXIS 4035; 2023 NY Slip Op 32750(U), and a case analysis and full court opinion are on the BVLaw platform.

Private-company EBITDA multiples up in 2Q2023

After a downward slide in the fourth quarter of 2022 and the first quarter of 2023, the median selling price-to-EBITDA multiple has jumped to 4.0x in the second quarter of 2023 (see the graph below), according to the latest issue of the DealStats Value Index (DVI). In the period analyzed, EBITDA multiples across all industries were highest in the third quarter of 2018, at 5.0x, but then decreased until they bottomed out in the first half of 2022. Since then, EBITDA multiples have generally been trending upward.

The 30-page DealStats Value Index is a quarterly publication exclusively for DealStats subscribers. It provides trend information on valuation multiples and profit margins for transactions in DealStats, including multiples and margins by industry sector, interquartile range by sector and year, multiples and margins for private vs. public, and much more. If you are a subscriber to DealStats, you can download the current issue to see all the latest transaction trends if you click here.

Global BV News

Worldwide support grows for the V20

The list of organizations that are supporting the V20 Valuation Summit and Conference October 27-29 in New Delhi is impressive—and growing. In a video, Saurabh Gupta, managing director of Assessors and Registered Valuers Foundation (AaRVF), explained that early support came from the International Valuation Standards Council (IVSC). Others followed, including the Insolvency and Bankruptcy Board of India (IBBI), International Institute of Business Valuers (iiBV), IACVS, Royal Institution of Chartered Surveyors, ASA, CBV Institute, and more.

Also, they are inviting other organizations and institutions to participate, including those from Singapore, the EU, Africa, and Asia. Gupta also mentioned support from several ministries within India and the G20 Secretariat. The V20 event coincides with the annual G20 finance meeting in India, and future V20 events will follow suit (next year will be Brazil).

Another case of lopsided valuation experts

A Minnesota divorce case is an example of why judges can get the perception that valuation experts are hired guns. The wife’s expert valued the husband’s interest in an asset management company at $5,067,804, while the husband’s expert came up with $138,418. True, there can be legitimate reasons why two valuation experts come up with widely disparate values for the same entity, so there can be some middle ground. But, in this case, a district court gave the husband’s expert’s opinion “little evidentiary weight” and an appellate court affirmed the decision.

Way off: Among other disparities, the husband’s expert based the valuation on only one year—a year in which no performance fees were paid. The valuation ignored over $14 million in performance fees that were paid over the prior four years. Also, a 2% profit margin was used to compute income that was one-tenth of the operating income from the prior four years. It also did not account for why the husband’s dividend in the year of separation “was more than nine times greater than what he proposed the company was worth.” The husband also argued that he had personal goodwill, but he did not provide any indication of its value.

The case is Tennebaum v. Deshpande, 2023 Minn. App. Unpub. LEXIS 630, and a case analysis and full court opinion are on the BVLaw platform.

Don’t get stung by a bad review of your valuation report

Shawn Hyde (Canyon Valuation) has been reviewing the reports of other valuation experts for years. During a recent BVR webinar, he presented a seven-page review report (disguised, of course) that concluded that the valuation was likely incorrect. Hyde’s review pointed out five major areas in the report where either material errors were made or underlying assumptions may have led to erroneous conclusions. The review was done at the request of an attorney who wanted to know whether a second valuation should be done.

Better timing: A question from the audience: Wouldn’t it be better for the report’s author to have gotten the review before submitting it to his client? An unfavorable review may give the client second thoughts about hiring that expert again. Hyde agreed that doing a review before submitting it would be optimal but pointed out that there often is not enough time to do that. How much time should you allow for a review? It could be just a few days if there’s someone at your practice who can do it. When using an outside reviewer, it depends on the workload of the reviewer, but about two weeks is a good estimate.

A recording of the webinar, Appraisal Review—Read Between the Lines, Too! is available if you click here (free to BVR Training Passport holders).

BV practice marketing budgets hold steady for 2023

Since most business valuation firms and practices are very busy, it’s not a great surprise that marketing budgets for 2023 are about the same as 2022 levels, according to the 2023 BVR Benchmarking Survey. More than half (58%) say the amounts they spend on marketing and practice development activities will not increase from 2022 levels, and another 28% say they will see just a “small increase.” Of the rest, only 10% say they plan a “significant increase” and 4% expect to spend less. Much more information was collected about marketing and many other aspects of operations from almost 200 business valuation firms and practices that responded to the survey. We are analyzing the results, which will be made available as soon as possible.

2023 Stout restricted stock study guide now available

The 2023 edition of the “Stout Restricted Stock Study Companion Guide” is now available, and it reflects updated tables and graphs that contain new transactions. The study is the most widely used restricted stock transaction database for providing empirical support for a discount for lack of marketability (DLOM), according to the BVR surveys. To download the new guide, which is free to everyone, click here.

Panel on trial testimony featured at VSCPA

How to survive expert testimony and cross-examination is one of the most popular topics at the annual two-day Forensic and Valuation Conference held by the Virginia Society of CPAs (VSCPA). This year’s event will be held September 26-27 in Glen Allen and will include a panel on trial testimony moderated by conference chair Harold Martin Jr. (Keiter). The panel members will include nationally known valuation experts Kristopher Boushie (NERA Economic Consulting), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC), Neil Beaton (Alvarez & Marsal Valuation Services LLC), Ron Seigneur (Seigneur Gustafson LLP), and attorney Martin Cunniff. For more details on the conference and to register, click here. This will be an on-site event with the option of attending virtually.

Global BV News

IVAS-IVSC conference October 3-4

The leading business valuation conference in Asia Pacific is the IVAS-IVSC Business Valuation Conference, and the next one will be October 3-4. The conference theme is “The Future of Business Valuation: Embracing Shifts and Innovation.” The agenda includes topics such as environmental, social, and governance (ESG) factors as well as intangible assets, generative AI and its impact on business value, and more. Professor Pablo Fernandez (IESE Business School, University of Navarra) will hold a two-and-a-half-hour master class, and Anton Colella, chief executive of Moore Global and an IVSC trustee, will give the keynote. The event is organized by the Institute of Valuers and Appraisers, Singapore (IVAS) in partnership with the International Valuation Standards Council (IVSC). For more information and to register, click here.

Elder talks about global themes at the V20

Ben Elder, global director of valuation at RICS, discussed the dynamic relationship between valuation and global themes of people, planet, prosperity, and principles during an interview with Ray Moran (FON Valuation Services). These themes are front and center at the V20 Valuation Summit and Conference October 27-29 in New Delhi, and they are challenging to valuers of every discipline, from real estate to intangibles to business entities, Elder remarked.

You can watch the video if you click here (the video includes links for more information on the conference).

Papers due August 31: There is a call for papers on several important themes, including technology, ESG, and more. Selected papers will have an opportunity to be published in peer-reviewed conference proceedings. Submissions of abstract papers are due August 31. For details on the call for papers, click here.

The event is co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). The Royal Institution of Chartered Surveyors (RICS) is one of the participating organizations for the conference. BVR is the event’s international media partner.

BVR-supported research examines small-firm M&A valuations

Using the DealStats database, M&A advisor Ray Johnson (Exit Experts) conducted a study to examine how various financial factors influence acquisition valuations for small businesses. The study was for Johnson’s dissertation for his doctorate degree in business at the University of Florida. Congratulations, Ray!

New ground: The study uses a definition of small business not used in previous studies, namely the Small Business Administration’s size standards. The study was also able to examine the importance of adjusted EBITDA in small-firm valuation. Previously unavailable, data on adjusted EBITDA has been included in the DealStats database since May 2017. The findings also highlight the significance of certain other measures, such as net sales, gross profit margin, and growth. The paper also points to future research that can be done, using this study’s findings as the foundation.

In the paper’s acknowledgments, Johnson says he is “profoundly grateful” to BVR’s Adam Manson, chief data officer, for his support and assistance with the study. This is not the first time BVR has lent its support to scholarly research, and we are always happy to become involved in projects that will be of benefit to the profession. Maybe you have something in mind?

More details of the paper’s findings, as well as some commentary by Johnson, will be in a future issue of Business Valuation Update. Also, once the paper is publicly available, we will let you know.

Adjusting WACC for ESG: ±100 basis points proposed

When assessing environmental, social, and governance (ESG) factors on valuation, unless there is an impact to cash flow, risk, or growth, ESG has no effect on business value. But what if the analyst determines that there is an impact and it can’t be quantified in the numerator of the valuation equation? How much of an adjustment should be made to the subject company’s weighted average cost of capital (WACC)? A new book gives some guidance.

Proposed range: “We propose that the total WACC adjustment should not be adjusted beyond ±100 basis points (bp). Furthermore, the magnitude of the adjustment should be based on the importance of the ESG issue being considered. For example, a meaningful issue might warrant an adjustment of ±50 bp but a minor or distant one, only ±10 bp.” This quote is taken from a chapter written by Frédéric Le Meaux, senior European equity portfolio manager at Amundi, a leading European asset manager, in a new book, Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuation. The chapter gives some case study examples of integrating ESG into the valuation process.

The book was edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters. The book is available if you click here.

Dealing with market efficiency in appraisal hearings

Weary of dueling experts, the Delaware Court of Chancery has shifted its attention more toward using a stock’s market price as the best measure of fair value in statutory appraisal matters. This means that valuation experts who come up with a different value would, therefore, need to prove that the market is not efficient. What methodology can be used to prove—or disprove—market efficiency?

Look to fraud cases: Market efficiency is a key factor in federal securities fraud cases, so the methodology used in those cases can be used for appraisal cases, according to Steven P. Feinstein, Ph.D., CFA. He is an associate professor of finance at Babson College and founder and president of Crowninshield Financial Research and has been engaged in many securities fraud cases.

Feinstein gave a presentation at NACVA’s Business Valuation & Financial Litigation Super Conference in July based on research and a working paper by him and Jaime d’Almeida (d’Almeida Consulting LLC). In addition to giving background and context, he presented a framework for a market efficiency analysis based on factors from several precedential court cases, namely Cammer v. Bloom and Krogman v. Sterritt. In addition to these factors, direct empirical evidence is needed to demonstrate a cause-and-effect relationship between corporate disclosures and stock price movements (Feinstein used a Fisher exact test in his case study examples).

The September issue of Business Valuation Update has details of the framework, several case studies that demonstrate the analysis, and some suggested report language. And we look forward to their upcoming paper to which we will alert readers when it is available.

BV firms rank most effective marketing techniques

The one-on-one meeting with a prospect leads the pack of marketing techniques BV firms and practices find most effective. Twenty-seven percent of those who use this method deem it “very effective,” and another 29% say it’s moderately effective. This is according to the preliminary results of the 2023 BVR Benchmarking Survey. Other methods that rank high on the “very effective” list are cross-marketing to existing clients, public speaking, attending or sponsoring events with prospects, and the firm’s website. Almost 200 business valuation firms and practices responded to the survey, and we are analyzing the results, which will be made available as soon as possible.

Sustainability triggers in private credit valuation

“Sustainability-linked loans—where a loan’s economics are tied to the borrower’s achievements of certain environmental, social or governance key performance indicators—aren’t coming to the loan market. They’re already here,” writes John Czapla (VRC) in an article in Private Debt Investor. The article considers the issues surrounding the widespread use of sustainability-linked loans as pricing and valuation can be complex. Co-author Adrian Lowery, also with VRC, goes on to further discuss market activity in Europe where “the volume of leveraged loans containing an ESG-linked margin ratchet reached three-quarters of the total issuance in the fourth quarter of 2022,” and, in the U.S. market, where issuances were down, it still reached $206 billion in 2022.

Czapla and Lowery say that, as sustainability-linked loans continue to grow in prevalence, private-debt valuation teams will need to refine their approaches to assessing fair value for less liquid SLL loans. To access the article, click here (limited free access).

When pest control company owners want to bug out

What does the financial due diligence process look like for a pest control business? Listen to industry experts Ilka Krieger and Claire Williams, both with Alvarez & Marsal, as they talk about how investors look at a pest control company. They’ve done about 50 deals with these kinds of firms, and they give some interesting insights on “pest practices.” To watch the program, click here.

Global BV News

Video series explains the V20

“Let’s make the most glamorous show of valuation in the world!” exclaims Sandip Kumar Deb about the V20 Valuation Summit and Conference in the first of a series of videos that explain the event. Interviewed by Ray Moran (FON Valuation Services), Sandip noted that the event will be October 27-29 in New Delhi and is co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). Sandip is a member of one of the boards at the IVSC and has his own valuation firm in India. He also noted that the event coincides with the annual G20 finance meeting in India, and future V20 events will follow suit (next year will be Brazil). You can watch the video if you click here (the video includes links for more information on the conference).

Papers due August 31: There is a call for papers on several important themes, including technology, ESG, and more. Selected papers will have an opportunity to be published in peer-reviewed conference proceedings. Submissions of abstract papers are due August 31. For details on the call for papers, click here.