Damodaran to give critical perspective of ESG

Never one to mince words, Aswath Damodaran (New York University Stern School of Business) called it “the most overhyped, oversold concept in the history of business.” That was back in 2020, and he was talking about environmental, social, and governance (ESG) factors. After mulling it over for a year, he reaffirmed his position and added a few more choice words, saying, “It’s become a gravy train for all the people who make money on ESG.” Fast-forward two years later to today: Has he changed his tune? Find out at the ASA Spring Fair Value Conference in New York City on May 4 where he will do a session, ESG and Valuation—A Critical Perspective. The full agenda for the conference is available if you click here. Don’t miss it!

Court do-over to figure passive appreciation for divorce

In an Ohio divorce case, the trial court made an award to the wife based on the full fair market value of the husband’s business. But the business was started prior to the marriage, and, in Ohio, only the active appreciation of a business during the marriage is marital property. Any passive appreciation goes to the business owner. The husband appealed, and the appellate court remanded the case back to the trial court. The experts for each side will have to value the business as of the date of marriage and also as of the date of divorce. The increase in value then must be broken down into active and passive components, recognizing the contribution of each to the business.

The case is Fordeley v. Fordeley, 2023-Ohio-261; 2023 Ohio App. LEXIS 240; 2023 WL 1097726, and a case analysis and full court opinion are on the BVLaw platform.

Passive calculator: Dr. Ashok Abbott (West Virginia University) has developed an online application that produces a passive appreciation factor on a national level for businesses in the retail sector. Just choose the type of retail business and enter the beginning and end dates for the valuation. The application is live and available for testing purposes if you click here. The application embodies Dr. Abbott’s methodology from his peer-reviewed paper (click here). Feedback is welcome!

New edition of BVR’s guide to economic damages is available

The Comprehensive Guide to Economic Damages, already the profession’s leading guide of its type, is now even more wide-ranging in its new 7th edition, which has just been released. Existing chapters were revised as needed, and new chapters were added, including:

•    Chapter 29, “Lost Profits Analysis in Cannabis Establishments” (Ryan Cram and Ron Seigneur);

•     Chapter 30, “Economic Damages in Cryptocurrency” (Nicholas Oldack); and

•  Chapter 35, “Commercial Success” (Richard F. Bero and Shane A. Brunner).

This new edition, edited by Jimmy Pappas, Bill Scally, and Steve Veenema, features 50 chapters drawing on the expertise of nearly 70 financial experts and attorneys. It is available now in the BVR bookstore if you click here. For those of you who have the BVResearch Pro platform, the book is included at no extra charge and is automatically added to your library.

Stout updates its restricted stock study companion guide

The 2022 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). The study is updated quarterly and contains over 770 screened transactions with up to 60 data fields. The database includes the Stout Calculator, which makes it easy to use Stout’s methodology and determine a DLOM driven by the financial characteristics of your subject company, as well as the volatility of the market. This is the preferred analysis as opposed to a simple listing of all the studies and their average discounts and then estimating a DLOM from these benchmark averages. To download the new “Stout Restricted Stock Study Companion Guide,” which is free to everyone, click here.

Free e-book: home care medical director compensatio

Based on national market data from several independent third-party surveys, the median hourly rate for home care and hospice medical direction ranges from $115 to $150, according to a free e-book from Buckhead FMV. The resource, Compensation Philosophies as Compliance Tools for Contracted Medical Directors, includes tips on implementing compensation philosophies as compliance tools, compensation philosophy examples, advice for selecting compensation benchmarks, and instructions for converting annual compensation data into hourly rates

Global BV News

CFA Institute issues Kroll’s global cost of capital 2022 summary edition

The CFA Institute Research Foundation has put out the “Valuation Handbook—International Guide to Cost of Capital 2022 Summary Edition” from Kroll. This 179-page work provides interpretive analyses and insights through June 30, 2022, and is an abridged version of the research and data that are available through the Kroll Cost of Capital Navigator. The publication examines the important difference in risk characteristics of investing in various countries and has the following seven chapters:

• “International Cost of Capital Overview”;
• “Strengths and Weaknesses of Commonly Used Models”;
• “International Equity Risk Premia”;
• “Country Yield Spread Model”;
• “Relative Volatility Model”;
• “Erb-Harvey-Viskanta Country Credit Rating Mode”; and
• “Firm Size and the Cost of Equity Capital in Europe.”

The publication is free of charge, and you can download it if you click here.

BV movers . . .

Reilly examines key Tax Court case on reasonable comp (A big lesson for BV experts - IACVS

Nationally known valuation expert Robert Reilly (Willamette Management Associates) has done a comprehensive 17-page article on the Hood case—a Tax Court case with some important and practical guidance on determining reasonable compensation. While the case involved a federal tax matter, the guidance may also be helpful in other contexts, Reilly notes. The case involved a private company, Clary Hood Inc. (CHI), a C corporation in the construction industry. The outcome was “generally favorable” to the IRS, with the company paying back taxes and penalties for taking tax deductions for an unreasonable amount of compensation.

Multifactor approach: Of particular importance, Reilly points out, is the court’s thorough analysis of “the multifactor approach” to assessing the reasonableness of executive compensation. This approach takes into consideration certain factors, such as the employee’s qualifications; the nature, extent, and scope of the employee’s work; the size and complexities of the business; and others. The court’s assessment of these factors was largely in favor of the company, except that it noted that the company never declared or paid a cash dividend even though it was profitable, an indication that some of the compensation paid was a disguised dividend.

Other jurisdictions use an “independent investor” test, which essentially asks whether an inactive, independent investor in the company would receive a reasonable return taking into account the compensation that was actually paid.

Experts stumble: Also important in this case, Reilly says, is the guidance it gives to experts who testify in reasonable comp matters. That’s where things really went wrong for the company, which presented two experts to testify as to how CHI’s compensation compared to similar companies. The first expert was not that familiar with the contents of the report that he co-wrote with a colleague (who was not called to testify). The court said that “perhaps most egregious” was the comparison of CHI, a private regional specialty construction firm, to the multinational conglomerate Caterpillar Inc., with “little attempt” at adjusting for the obvious and stark differences between the two. Also, the report focused on the independent investor test, not the multifactor test, which was controlling in that jurisdiction.

The second expert for the company had not written the report to which he was testifying although he reviewed and agreed with it. The court found the report lacked necessary supporting calculations and relied on unsound assumptions. For example, the report used data from much larger companies and discounted the data by 20%, a rate not supported by any empirical data. The court gave this expert’s testimony little or no weight.

On the other hand, the expert for the IRS prevailed, providing “the most credible and complete source of data, analyses, and conclusions in the record regarding what similar companies might be willing to pay” in terms of compensation, the court said. The amounts were significantly higher than the estimates provided in the IRS deficiency notice but were much less than the amounts the company originally deducted on its returns. Plus, the court found the company liable for a substantial understatement accuracy-related penalty for one of the years at issue.

Reilly discusses a number of other important issues in the article, which is available if you click here. The case is Clary Hood, Inc. v. Comm’r, T.C. Memo. 2022-15.

Size effect is hibernating, per new paper

The size premium is more significantly related to monetary policy than to firm quality or to business cycle troughs, according to a new paper. The authors conclude that monetary tightening eliminates the size premium and it re-emerges when that policy is eased whether or not one controls for quality. “Furthermore, the quality minus junk (QMJ) factor is insignificant in explaining the size premium in the 21st century,” they write. The paper is “The Resurrected Size Effect Still Sleeps in the (Monetary) Winter,” by Marc William Simpson (University of Toledo) and Axel Grossmann (Georgia Southern University). The paper is a preprint and not yet peer reviewed. To download it, click here.

Tell job candidates a story

The search for BV talent has never been more challenging, so anything that can help land a good candidate is very welcome. In his latest newsletter, John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years, advises interviewers to tell candidates a story about the kind of workplace they have. This is better than simply saying “we’re very entrepreneurial here.” Give an example. Get stories from your employees and use those to illustrate. “Bob was interested in exit planning, so we encouraged him to start a new service line—and he’s now leading that area of our practice.” Have the candidate talk to Bob at some point—and to other employees who can give their personal stories about the workplace. This is much more effective than spouting a bunch of self-serving assertations, notes Borrowman. To read more of his observations, click here

Low-cost alternative for public-company data

BVWirerecently met with Derek Zweig, a valuation practitioner who saw the need for a more affordable source of financial data when doing a guideline public company analysis. In 2021, he founded Value Analytics, a firm that has developed a low-cost platform that provides preprocessed public-company financial statement and equity data, as well as customizable data analysis tools. BVR now offers the Value Analytics Excel Add-In, which provides direct access to financial, equity, and company profile data for all U.S. exchange-traded companies available in the Value Analytics database. The user gets unlimited access to data through the Excel plug-in, which also allows for integration into the user’s proprietary models. Price: $495 per year. For more information, including an Excel template and a template for the guideline public company section of a valuation report, click here.

BVPro adds new guide on valuing fitness clubs

The BVResearch Pro platform adds new content continually to its collection of over 16,000 articles, books, special reports, court case digests, webinar transcripts, and more. Just added is a 146-page guide, What It’s Worth: Valuing Fitness Centers, Health Clubs, and Gyms. The guide includes industry intelligence (from Vertical IQ), key benchmarks from DealStats, and insights and rules of thumb from the Business Reference Guide. Plus, it includes a detailed case study from Gary Trugman based on one of his actual engagements (that ended up in litigation).

If you are not a subscriber to BVPro, you can purchase the guide on an a la carte basis if you click here.

Global BV News

IVSC and WIPO collaborate on IP and intangibles

The International Valuation Standards Council (IVSC) together with the World Intellectual Property Organization (WIPO) has signed a memorandum of understanding (MoU) with the goal of strengthening cooperation and collaboration on issues related to the valuation of intellectual property and other intangible assets. The MoU will facilitate the exchange of information and expertise between the two organizations and will include collaboration in research and development activities, training and capacity building, and the promotion of best practices in the valuation of intellectual property and other intangible assets. “Intellectual property is a rapidly growing asset class, and this MoU will help ensure that valuation professionals have the knowledge and skills they need to provide accurate and reliable valuations of these assets,” said Nick Talbot, IVSC chief executive, in a statement.

Preview of the April issue of Business Valuation Update

Here’s what you’ll see:

• “New Damages Guide Examines Crypto Landscape”(BVR Editor). An understanding of the current issues and developments within the cryptocurrency industry, plus a look at some emerging case law, are crucial for damages experts in this area. This is an excerpt from the upcoming 7th edition of The Comprehensive Guide to Economic Damages.
•  “Feedback Wanted on New Model for Small Firm Risk”(BVR Editor). A variation of the multiattribute utility model (MUM) used along with Monte Carlo simulation forms the basis of a new model for estimating a company-specific risk premium (CSRP) for small, closely held businesses. Excel templates are available from the model’s developer, David Goodman (Jesson, Oslin & Associates), and feedback is welcome.
• “What Would a Hypothetical Willing Seller Do? A Complicated Case—A Confounding Decision in Idaho” (Peter J. Butler). An inside look by one of the experts in a case that “had it all”: a high-tech startup, a recent historical transaction, the personal goodwill-versus-commercial goodwill debate, a covenant not to compete, a lot of money at stake, and the proverbial “battle of the experts.”
• “Adjusting the P&L for a Cannabis Dispensary Valuation”(BVR Editor). A sample valuation report for a cannabis firm reveals an interesting technique to get inside, and otherwise unavailable, information to help adjust the income statement.
•  “A Look Back: Including ESG in Valuation Models”(BVR Editor). Quantifying the impact of environmental, social, and governance (ESG) factors and measuring their effects is not a new phenomenon. Thanks to the BVResearch Pro platform, here are two ways experts have done this before.
• “New Country Risk Data Update Reminds Valuers of Factors to Consider”(BVR Editor). A data update from Aswath Damodaran (New York University Stern School of Business) helps valuation experts explain how they considered each of the risk factors in assessing value for business assets located outside of the U.S.

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,” “ktMINE Royalty Rate Data,” “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 March 2023 issue of Business Valuation Update.

BV movers . . .

People:John-Henry Eversgerd, CFA, ASA,  has launched a new boutique valuation firm, Hewlett & Murray, based in Sydney, Australia; the firm already has a team of six professionals specializing in business valuation, intellectual property valuation, economic loss quantification, and expert witness services; Eversgerd is the former co-leader of FTI Consulting’s Australian valuation practice.

Confounding incongruities’ in recent divorce case

A complex divorce case in Idaho included a number of valuation issues, one of which was the personal vs. enterprise goodwill question. The state’s Supreme Court upheld the lower court’s ruling that a material amount of value of an entity that was formed as a result of a buyout transaction was personal goodwill and thus excluded from the marital estate. The entity was deemed a start-up even though it was the result of the transaction. The husband, who was an owner of the firm that was bought, had a share of this new entity, with which he also had an employment contract and a non-compete agreement.

Far apart: The question became whether this was a case where there was a transaction and therefore there should not be any personal goodwill included. The Supreme Court clearly stated that, under Idaho case law, personal goodwill was not transferrable. “There was a transaction that can determine a value—maybe,” writes BVLaw editor Jim Alerding (Alerding Consulting), in a recent post in BVLaw News. “But the Supreme Court also said that the value of the transaction and the value for divorce purposes were two different dates, with the divorce value being the later date.” The court upheld the existence of personal goodwill and the valuation of the husband’s share at $163,373 versus the $1,147,500 the wife contended. The court also noted that awarding the wife a share of this new entity would fail to sufficiently “disentangle” the former couple.

“The result here was not unusual from the standpoint of divorce litigation,” Alerding writes. “Such litigation was often filled with confounding incongruities. This appeared to be one of those cases.”

Stay tuned: One of the valuation experts in the case gives an inside look in the April issue of Business Valuation Update.

The case is Lamm v. Preston, 2023 Ida. LEXIS 4 and a case analysis and full court opinion are on the BVLaw platform.

Dietrich reveals his trade secrets of healthcare valuations

Recently retired, nationally known healthcare valuation expert Mark Dietrich is devoting his time to passing on what he learned over his 45 years in the healthcare arena. Dietrich is putting the finishing touches to his new Engagement Guide to Understanding and Valuing Medical Practice Specialties, which will soon be released by BVR.

Zeroes in: The guide will have chapters devoted to dermatology, gastroenterology, internal medicine, OB/GYN, ophthalmology, orthopaedic surgery, pediatric, urology, and more. This guide will not go over valuation basics--other books already do that. Instead, it will zero in on the type of valuation analysis necessary for specific types of medical practices. Importantly, each chapter includes a comprehensive calculation of reasonable compensation for one or more providers using an RVU (relative value units) calculator. This methodology eliminates the debunked technique of using compensation surveys.

Each chapter is highlighted by “Author’s Insights,” “Research Tips,” and “Report Tips” drawn from actual engagements. There is also a special chapter on how to conduct the management interview, complete with detailed explanations for each interview item.

The guide will be available shortly from BVR. For those subscribers to the BVResearch Pro platform, the guide will automatically be added to your library.

Judicial appraisal needs reform per new paper

A recent paper addresses the problem of the “wide discretion” judges have in fashioning appraisal awards to dissenting shareholders based on opinions of valuation experts that are miles apart. “Judicial appraisal should not be a remedy for dissenting shareholders when a market exit or equivalent protection is otherwise available,” the authors write. Shareholders of publicly held companies often have an exit—they can sell easily. But shareholders of most closely held firms cannot do this. So, the authors explore “reinventing” the shareholders’ appraisal remedy. “While such reform would be costly to valuation litigation professionals, their loss would be more than offset by the benefit of such reforms to shareholders involved in future corporate transactions,” the authors say.

The paper is “The Exit Theory of Judicial Appraisal” and the authors are William J. Carney and Keith Sharfman, The paper appears in the Fordham Journal of Corporate & Financial Law.

Web-based valuation platform gets financing boost

Valutico, an all-in-one web-based valuation platform, closed its first financing round with outside investors that, along with existing investors, totals in the mid 7-figures, the company announced. It received investments from venture capital firms PUSH Ventures and AWS Gründerfonds. Also participating in the round is banking firm Erste Group, based in Vienna, which will partner with Valutico to deploy the platform through its organization.

This platform is not a simple calculator. A short video shows how it handles a private company valuation—performing a qualitative analysis, automatically selecting market comps, pulling suggested transactions, estimating cost of capital, and creating reports. The platform also does public company valuations. Future upgrades include impairment testing and integrating ESG factors into a valuation.

ASA discount: Members of the American Society of Appraisers can get a 15% subscription discount to Valutico, the organization just announced. ASA members get the discount when subscribing for 12 months plus an additional discount for multi-year subscriptions.

Valutico, launched in 2017, has a team of 60 employees based in Vienna with subsidiaries in the US and UK. The company says it currently has around 600 clients in over 85 countries.

Reminder: Take a survey on tax return data extraction

Is the historical financial information you get from client tax returns in usable form? Do you have to extract it by hand? Do you use an automated solution? BVR sees this as an area of some potential need, so if you haven’t already done so, please take a very short survey about how you collect and process these data. All responses are confidential, but we’ll announce the overall results in a future issue. Take the survey by clicking here. Thank you!

Still open: 2023 Pepperdine private cost of capital survey

At press time, the Pepperdine University annual survey of expected rates of return with respect to private companies is still open. If you haven’t yet taken it, input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is here. The survey results are used to produce annual Private Capital Markets Report (reports from prior years are available if you click here). The price for the annual report is normally $125, but it’s free if you fill out the survey—plus you’ll get it a week early.

Users inspire update to the Stout DLOM calculator

Estimating a discount for lack of marketability (DLOM) has just become more robust with a new update to the Stout DLOM calculator. Based on feedback from users, the tool now shows the quintile low/median/high values so that you have a better frame of reference for your subject company. Now, you will see if your subject company is on the low end, high end, or somewhere in between in terms of Size Characteristics, the Balance Sheet Risk Characteristics, Profitability Characteristics, and Market Risk Characteristics. The calculator is included with the Stout Restricted Stock Study^TM which is the most widely used database of its kind for providing empirical support for a DLOM.

Global BV News

Updated study of European capital markets released

The 11th edition of the “ValueTrust European Capital Market Study” provides an analysis of cost of capital parameters, returns (implied and historical) and trading multiples. The analysis focuses on the European capital market (in form of the STOXX Europe 600) and has been subdivided into ten sector indices by industry. Historical data have been compiled from Dec. 31, 2016, and Dec. 31, 2022.

SEC climate proposal is key topic during KPMG panel

At the recent Global Financial Reporting and Valuation Conference, a panel of KPMG leaders shared their knowledge and insights on the evolving landscape regarding environmental, social, and governance (ESG) factors. During this session, audience members were particularly interested in how the SEC climate proposal can impact private companies.

The panel discussed the proposed financial statement footnote and the complexities involved in measuring and recognizing climate-related risks (and opportunities) within the financial statements. Comment letters the SEC has received to date were also discussed. Some respondents have urged expanding safe-harbor provisions for certain forward-looking and third-party information used for Scope 3 GHG (greenhouse gas) reporting. The speakers urged finance and accounting leaders to monitor how the SEC responds in order to track the likely provisions of the final rule.

The proposal is part of new sustainability-related regulations that are emerging both domestically and internationally that are creating “seismic shifts” in corporate reporting for U.S. companies. These changes will significantly affect everything from financial reporting to tax compliance, to valuations during M&A deals.

A replay of the ESG session has just been posted and can be found if you click here. Also, KPMG has an ESG webpage that can alert you to various ESG insights, information, and events.

Extra: A recent academic paper finds that companies with higher ESG scores have a lower cost of capital.

Damages experts caught up in Irish bar fight

In a New York case, majority owners of an Irish soccer bar used the proceeds of a lease buyout to relocate the bar—and cut out the minority owners at the same time. The majority owners started a new corporation to operate the new bar. The minority owners said they knew nothing about all this and sued, claiming the majority owners misappropriated a “corporate opportunity.” Under the corporate opportunity doctrine, a fiduciary cannot “divert or exploit for his own benefit an opportunity that is an asset of his principal.” But, if the minority owners had known of the new venture and did not object, they would not be entitled to reap any benefits from the new bar. However, the court found that the majority owners deceived the minority owners, keeping them in the dark about the new bar, so they are indeed liable for the lost value of the opportunity, plus punitive damages. (By the way, the bar at issue is Smithfield Hall, located at 138 W. 25th St. in New York City.)

Our thanks to attorney Peter Mahler (Farrell Fritz) who alerted us to this case—check out his firm’s blog, “New York Business Divorce,” which offers valuable insights on cases of owner disputes at closely held businesses.

The case is O’Mahony v. Whiston, 2023 NY Slip Op 30482(U), Feb. 15, 2023, Supreme Court, New York County, and a case analysis and full court opinion will appear soon on the BVLaw platform.

Bickering BV thought leaders: What to think?

How often do we hear well-known, veteran valuation experts “vehemently” disagreeing with each other over various issues? Here are some examples:

•  “Use a normalized risk-free rate.” “No, use the spot rate.”
•  “Yes, there’s a size effect.” “The size effect is fiction.”
•  “Use the historical ERP.” “No, the implied ERP is better.”
• “Restricted stock studies are a good proxy for DLOM.” “Those studies are useless.”

The list of debatable topics goes on and on. Yes, healthy debate is good, but what is the average practitioner supposed to think when even the top people in the profession can’t agree? This was a discussion point during a recent AICPA podcast on marketability discounts. Especially for practitioners just starting out, who do you listen to when they disagree strongly about how to do something? While you may go with the view of the expert who you feel is more credible, you need to evolve your thinking, the speakers said. The bottom line is to go with an approach that you are comfortable with and that you feel is more supportable given the particular situation. Practitioners invite trouble if they are resistant to change because thinking on valuation issues continues to evolve.

The podcast was hosted by David Consigli, who was joined by speakers Brian McIntyre (Withum) and Natalya Abdrasilova (BDM). There are other recent podcasts in the series with different hosts and speakers, including discussions about ESG, personal and enterprise goodwill, human capital, and more.

How do you extract tax return data?

BVR is always on the lookout for new offerings that will help practitioners. One area where we see some potential need is in extracting historical financial data from client tax returns. Do you do it by hand? Do you use an automated solution? Please take a very short survey about how you collect and process these data. All responses are confidential, but we’ll announce the overall results in a future issue. Take the survey by clicking here. Thank you in advance for participating!

Agenda set for NYSSCPA BV conference May 15

BVWire is starting to see plans coming together for this year’s conferences. The three major events (from the AICPA, ASA, and NACVA) are all later in the year, but some good events are blooming in the spring. One that we never miss is the annual New York State Society of CPAs’ Business Valuation and Litigation Services Conference, and registration is now open for this year’s event, which will be May 15 on-site in New York City and also online. Topics include a fair value measurement update, statutory fair value and the applicability of a DLOM, valuation issues in matrimonial litigation, litigation finance, cryptocurrency and NFT matters, the latest on private equity M&A, ESG human capital disclosures, and more. Speakers include Chris Mercer, Mark Zyla, Adam John Wolff, and more. Early bird pricing ends April 24. See you there!

Extra: One of the hallmarks of the Business Valuation Update newsletter is its coverage of BV conferences both large and small. If you’re not a subscriber, you can see last year’s conference coverage all in one chapter of the Business Valuation Update Yearbook, 2023 edition. (Note: You already have this edition if you are a subscriber to the BVResearch Pro platform.)

Global BV News

IVS exposure draft will address ESG

This April, the International Valuation Standards Council (IVSC) will publish an exposure draft outlining proposed updates to the International Valuation Standards (IVS). The draft will seek feedback on changes including new standards on “data and inputs” and explicit references to environmental, social, and governance (ESG) within the valuation process. The public comment period will last 12 weeks, during which time the IVSC will organize a series of webinars and roundtables to present details of the exposure draft. An updated version of IVS is expected to be published in 2024. For more information on the project, click here.

Damodaran examines impact of inflation on profitability

In his fifth data update for 2023, Professor Aswath Damodaran (New York University Stern School of Business) focuses on trends in company profitability in 2022, including the impacts of inflation. His analysis includes measures across global regions and industries.

Sector performance:Inflation can increase profits for some firms and lower them for others. Sectors with the highest operating margins include energy (reflecting higher oil prices), a few technology groups (software and semiconductors) and, interestingly, tobacco (a declining, but high-profit business). On the downside, those sectors with the lowest operating margins include four industry groups from the retail space (not surprising, given this sector’s history of low operating margins), the young online software sector, and two industries in “long-term trouble,” namely, airlines and hotel/gaming.

Excess returns:Cost of capital in the U.S. saw its greatest increase last year, from 5.6% at the beginning of 2022 to 9.63% at the start of 2023. In terms of returns, almost 70% of all listed companies across the globe earned returns that were lower than their costs of equity or capital. U.S. companies have the highest percentage of companies that earn more than the cost of capital but still fall short of 50%, his analysis shows. There are clear differences among industry sectors in terms of returns in excess of the cost of capital. Time for companies to revisit hurdle rates, Damodaran advises, and they should figure out how to make money instead of going for “growth, growth, and more growth.”

The post is also helpful in that Damodaran goes into some basics that are sometimes easy to forget. He worries about “insulting” some in the audience, but it’s always a good idea to keep an eye on fundamentals.

Extra: Damodaran’s framework for assessing the impacts of inflation on the value of a private company can be found in an article in Business Valuation Update.

In a damages case, one expert survives Daubert, another does not

In an ongoing damages case in Delaware, the plaintiff had a Daubert motion to exclude the opinions of the defendant’s rebuttal expert. But the court denied the motion, finding that the expert did not impermissibly exceed the scope of a rebuttal expert, her opinion was reliable, and she did not make a credibility determination of the plaintiff (i.e., an accusation that the plaintiff was untruthful). The defendant also filed a Daubert motion to exclude the opinions of the plaintiff’s expert, and it was granted in part. The court found that a portion of the expert’s report was unreliable as it was ipse dixit (an assertion made but not proved). Also, some of his opinions violated the law of the case, and he relied on the rejected “value creation” theory of damages.

The case is LCT Capital, LLC v. NGL Energy Partners LP, 2022 Del. Super. LEXIS 1448, and a case analysis and full court opinion are available on the BVLaw platform.

SaaS valuation multiples see dramatic decrease

While the software-as-a-service (SaaS) industry is poised for significant growth, revenue multiples are projected at a three-year low, averaging a prepandemic level of about 5.5%, according to a report from FirstPageSage. During the third quarter of 2021, valuations hit a record high of 9.8x, and the projections represent “such a dramatic decrease [that] is both a comment on the economic impact of global events (e.g., inflation or Russian invasion of Ukraine) as well as the volatile nature of SaaS and the tech sector as a whole.” The report provides SaaS valuation multiples for ranges of EBITDA, revenue, and seller’s discretionary earnings (SDE) and for various business types. The report points out that, while most companies often rely on EBITDA, the “vast growth potential and large sunk investments in growth for SaaS companies often means that SDE or revenue-based valuations are more valuable within this industry.”

New Deal Alert feature in DealStats

In response to user feedback, DealStats has added a Deal Alert feature that allows you to receive notifications when new transactions are added to DealStats, based on your specific saved search parameters. And you can specify how—and how often—you want to be notified of new transactions. You can see new deals when you log in, or you can be notified via email, or both. And you can specify the frequency: daily, weekly, or monthly—it’s your choice (you can modify your selections at any time). You can add a Deal Alert to your saved searches as well as to a new search. There is a video tutorial that shows how the new Deal Alert feature works. If you have any questions about it, please feel free to contact info@bvresources.com or 1-503-479-8200.

Dental practices take top spot in industry research on Vertical IQ

For 2022, the most popular industry profile on the Vertical IQ industry research platform was dental practices, based on number of user visits. Vertical IQ can’t quantify the reasons for the high level of interest, but it’s interesting to speculate. Did more dentists retire and sell their practices? Were more dental practices caught up in a divorce and needed valuing? These same questions can be asked about the rest of the top 10 most-visited industry profiles: full-service restaurants, HVAC and plumbing contractors, physician practices, law firms, trucking companies, lessors of residential buildings, residential brokers and property managers, management consulting services, and auto repair shops. These industries are just a small fraction of the platform’s profiles that cover more than 570 distinct industries, representing more than 97% of the U.S. economy.

Global BV News

First-ever Innovation Valuation Summit in Korea March 21-22

“Valuation of new assets, what’s the future?” is the theme for the premier Innovative Valuation Summit. Sessions will cover big data, cryptocurrency, NFTs, the metaverse, startups, intellectual property, artificial intelligence, ESG, and more. The event will be live on-site at the UST Auditorium in Daejeon, Korea March 20-21 and will also be livestreamed. The language will be Korean with simultaneous English translation. The conference brochure and agenda are available if you click here. A registration form is available if you click here. The event offers 16 CPD credits and is sponsored by the International Association of Certified Valuation Specialists (IACVS), Korea Valuation Association (KVA), and Korea Institute of Science and Technology Information (KiSti). If you have any questions, please e-mail info1@iacvs.org

Next-gen BVers warn about too much technology

Veteran valuation experts have raised red flags about relying too much on technology and automation. This advice is directed particularly to young BV practitioners who have grown up surrounded by automation. But their young colleagues are well aware of this issue and share their concerns.

Watch out:Young up-and-coming BV experts on a recent panel feel that technology will not totally replace the human element in the valuation process. They say there is “so much judgment” involved that technology cannot handle the entire process. There was even the comment that too much automation makes someone a “little nervous,” feeling that experts may lose some understanding of the underlying concepts. But one panel member points out that automated tools could actually enhance understanding by freeing up analysts’ time typically spent on number crunching so they could spend that time learning about what’s behind all the crunching.

If this panel is any indication of young practitioners as a whole, there’s no worry that professional judgment will take a back seat to computer models.

The panel also talked about how and why they chose valuation as a profession, what they need from their firms in order to develop, and other matters. Full coverage of the session is in the March 2023 issue of Business Valuation Update.

Panel members were Dalton Hopper (BMSS Advisors & CPAs), Amy Shaw (Soukup, Bush & Associates), and Nick Contey (DiGabriele, McNulty, Campanella & Co.). The moderator was Bob Lewis, president of the Visionary Group. The session was conducted at the December 2022 NACVA Business Valuation & Financial Litigation Super Conference.

Wife who foregoes expert can’t complain about the outcome

A marital dissolution case in Illinois is another instance of a party not offering a competing valuation and then appealing the outcome—to no avail. The husband engaged a business valuation expert to appraise an entity that held two real estate properties. The expert testified that, while he was a business valuation expert, he often valued equity in real estate partnerships, for which he relied on appraisals or other estimates of value. In this case, for one property, he relied on a broker opinion of value and a market analysis from a relevant expert. For the other property, which was newly built, he based the value on the construction costs. The wife did not engage a valuation expert to appraise the properties. The trial court accepted the valuation done by the husband’s expert and the wife appealed. But the appellate court upheld the trial court’s decision, noting that there was “sufficient foundation” for the expert’s determination of value. Plus, the court pointed out (citing a prior case), “where a party does not offer evidence of an asset’s value, the party cannot complain as to the disposition of that asset by the court.”

The case is In re Trapp, 2022 IL App (3d) 210291-U; 2022 Ill. App. Unpub. LEXIS 1914, and a case analysis and full court opinion are available on the BVLaw platform.

New case on damages in the metaverse

An artist is liable for trademark infringement after creating and selling a series of non-fungible tokens (NFTs) that depict fur-covered purses resembling the iconic Hermès Birkin bag. The series of NFTs were called “MetaBirkens” and were sold on the blockchain. They initially sold for about $450 each, but the NFTs from the artist’s limited collection were bought for as much as $46,000 just two weeks later, according to a report in Tatler. The jury reached a verdict of liability for trademark infringement, trademark dilution, and unlawful cybersquatting on the MetaBirkins.com domain name. They awarded Hermès the $110,000 of profits from the artist’s sale of the NFTs and $23,000 in damages for cybersquatting, according to a report in Lexology. The case is: Hermes Int’l v. Rothschild, No. 22-CV-384 (JSR), 2023 WL 1458126, at *1 (S.D.N.Y. Feb. 2, 2023).

BIZCOMPS now has over 15,000 transactions

A new infographic shows that BIZCOMPS, the database of sales transactions involving small “Main Street” private companies, now includes over 15,165 deals. The infographic also points out that the database covers transactions for over 500 industries and the transactions include 21 data fields. Search tip: When using BIZCOMPS, we recommend searching for transactions not only by SIC code, but also by business description. This will allow you to gather a more comprehensive selection of transactions because SIC codes are occasionally outdated or inaccurate.

BVR to webcast Energy Valuation Conference May 11

For the fifth year, BVR is pleased to partner with the Houston Chapter of the American Society of Appraisers (ASA) to present a live webcast of the Energy Valuation Conference on May 11. The conference will feature presentations from nationally recognized speakers who are profession leaders, covering a range of important topics in the industry. Details are forthcoming, but in the meantime, mark your calendars!

Global BV News

CBV Institute launches ED&I working group

The CBV Institute, Canada’s valuation professional organization (VPO) and standard setter will roll out a series of equity, diversity, and inclusion (ED&I) initiatives targeting the business valuation profession. The goals include (but are not limited to) increasing the number of women and other underrepresented groups to the profession. Recently, it founded an ED&I Working Group made up of CBV volunteers and industry experts that has a mandate to provide the VPO with input and advice on issues of ED&I with respect to the CBV profession, and the business valuation profession at large. To learn more, click here.

Preview of the March 2023 issue of Business Valuation Update

Here’s what you’ll see:

• “A Model for Forecasting a Multiple-Location, Growing Business” (BVR Editor). Veteran valuation expert Gary Trugman (Trugman Valuation) had an engagement that involved a business that operated a franchise with multiple locations—and was required to open a lot more. This article shows in detail how he did the forecasting.

• “More Insights From Young BVers About the Profession” (BVR Editor). The second of two panel discussions with young valuation and forensics experts reveal additional insights on their perspectives on the profession, including what attracted them to the profession and why they stay in it.

• “Simple Idea to Help Business Sellers Get All They Deserve” (BVR Editor). A valuation expert had a client who wanted to sell his company but had an unrealistic idea about price. The expert used DealStats to create a compelling visual that saved the deal from falling apart.

• “Considerations When Adding Litigation Services to a Valuation Practice” (BVR Editor). The 2022 AAML/BVR National Divorce Conference sparked some advice for moving your practice into litigation support services for marital dissolution or any other matters that are headed to court.

• “Valuation Expert Gets Caught Up in a Plagiarism Nightmare” (BVR Editor). A valuation expert in a divorce case was discredited over some material in his report that was copied from outside sources without attribution. With the proliferation of data and research on the web, it is easy to inadvertently use something and then forget to add the attribution.

• “NICE DLOM Method for FLPs Gets Peer Reviewed” (BVR Editor). A paper describing the theory and mechanics of the nonmarketable investment company evaluation (NICE) method for estimating a discount for lack of marketability (DLOM) has been published in the Business Valuation Review, the peer-reviewed journal of the American Society of Appraisers.

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.

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

Inflation appears to have peaked, per Kroll

The latest cost of capital infographic from Kroll says that inflation seems to have topped out toward the end of 2022. Inflation estimates over the long term rose from 2.0% in June 2020 to 2.9% in October 2022 but declined to 2.4% at the end of December 2022. Long-term inflation expectations are a key starting point to evaluate the long-term growth rate used in the terminal year for a DCF analysis.

Cost of capital inputs: The same infographic says that, as of Jan. 17, 2023, Kroll’s recommended U.S. equity risk premium (ERP) is 6.0% and the normalized risk-free rate is the higher of 3.5% or the spot 20-year U.S. Treasury yield as of the valuation date. This guidance is effective when developing USD-denominated discount rates as of June 15, 2022, and thereafter.

IRS hits taxpayer with gross valuation misstatement penalty

Easement cases before the Tax Court can offer some interesting insights and guidance to BV professionals. A recent case involved the valuation of a conservation easement donation for a charitable deduction. The deduction is figured by determining the fair market value of the property before the donation and subtracting the FMV after the donation. In this case, the donation involved an easement on undeveloped real estate. The opposing valuation experts agreed that the highest and best use for the property was as a residential subdivision and development. But the donors’ valuation expert came up with a value that was “incredible as a practical matter,” as the court put it. He mischaracterized the zoning according to the court and valued the property as fully developed. He also did not consider a prior transaction involving the property. The IRS expert concluded that the valuation should be based on the property being undeveloped. The two valuations were miles apart.

The court sided with the IRS expert, and, because the donors’ valuation was 200% or more of the correct valuation, they were hit with the 40% gross valuation misstatement penalty. Plus, the court disallowed the deduction because the donors failed to get proper substantiation of the donation—the easement deed alone was not sufficient.

The case is Brooks v. Comm’r, T.C. Memo 2022-122; 2022 Tax Ct. Memo LEXIS 122, and a case analysis and full court opinion are available on the BVLaw platform.

Year-end 2022 data now in the Cost of Capital Professional

Year-end 2022 data, including equity risk premia, CRSP decile size premia, and industry betas/IRPs, are now available in BVR’s Cost of Capital Professional platform. The platform is a simple, transparent, and cost-effective service for estimating the cost of capital and is designed to bring more professional judgment and common sense back into the process, which has become too much of a complex “black box” of applied mathematics. It supports the buildup method and CAPM calculations for any valuation date. It also gives you the flexibility to choose the start year for historical return data based on what segment of history you believe best offers a reasonable basis to make estimates of expected future returns. For a personalized demo of the platform, click here.

Extra: In a head-to-head test, all of the main cost of capital datasets, including Kroll’s Navigator, BVR’s Cost of Capital Professional, and Pepperdine, produced similar cost of equity estimates. See this article in the February 2023 issue of Business Valuation Update.

Report drills down on dental practice financials

PKF O’Connor Davies has released its 2022 edition of “Dental Practices by the Numbers,” which provides key financial benchmarks. This year’s edition contains more statistics and metrics than past reports. Average collection and expense amounts—including staff compensation, services costs, facilities costs, and administrative costs—organized by practice and by individual general dentist are reported. In addition, the report contains an average statement of collections and expenses for specialists, including pediatric dentists, oral surgeons, and periodontists. To download the free report, click here.

Final issue of Willamette’s Insights focuses on best practices

The Winter 2023 issue will be the final one for Insights from Willamette Management Associates. The firm will replace it with a new digital publication, Perspectives, which will be a quarterly. The first issue will be out in April, and you can sign up if you click here. The last issue of Insights is edited by Robert Reilly and has articles on best practices in such areas as S corps, damages, economic obsolescence, fair value measurements, executive compensation, and more. The issue is available if you click here.

Global BV News

IVSC’s Talbot gives his views for 2023

Several key trends are shaping the valuation profession, namely environmental, social, and governance (ESG) factors, technology, and the increasingly global nature of business, says IVSC chief executive Nick Talbot. Also, ongoing uncertainty throughout the world acts as a “double-edged sword,” making the “valuer’s role more complicated but also increases the demand for high quality valuation skills as investors look for additional advice in times of change.” He also identified several challenges for 2023 and beyond, including the growing complexity of the business world and the growing demand for transparency and accountability. “As the global economy continues to evolve, the demand for high-quality valuations will only increase, making it an exciting time to be a valuer,” he says. “Those who are able to adapt to the trends and challenges of the profession will be well-positioned to succeed in the years ahead.”

Bieber sells music rights; what are the value drivers?

Singer Justin Bieber has sold his music rights for around $200 million, according to various reports. One of the main drivers of value in a music catalog has been the emergence of streaming, which has triggered higher cash-flow growth expectations—and has proven to be resilient during COVID-19, according to this report. Also, music royalties are recurring and predictable (similar to what you would see in asset classes such as real estate). What’s more, spending on music has a low correlation to economic activity. A 2021 report by Shot Tower Capital explains that “music assets have generally experienced non-correlated growth throughout various market cycles.” Moreover, consumers continue to spend on music during recessions. In times of economic instability, music provides stable cash flow. Low interest rates also fueled high values, but rising rates have caused a “general cooling-off” of the catalog market, according to Variety.

For some insights into the valuation of a music catalog, David Dunn, managing partner at Shot Tower Capital, discussed the valuation of Michael Jackson’s music catalog during a 2021 BVR webinar.

Ipse dixit nixes some of expert’s opinion

In an economic damages case in Delaware, both sides filed a number of motions to exclude expert testimony, evidence, and arguments. In one instance, the court found that a portion of one expert’s report was unreliable because it was ipse dixit. Under Daubert and Rule 702, testimony based on nothing more than the expert’s “because I say so” (ipse dixit) is destined to be excluded. If an expert makes an assertion, it must be substantiated. In this case, the expert was “not permitted to testify to damages based on Plaintiff’s expectation interests in the agreement it purports to have reached with Defendants.” However, the expert was allowed to testify to the general proposition that the nature and extent of services justified higher compensation.

The case is LCT Capital, LLC v. NGL Energy Partners LP, 2022 Del. Super. LEXIS 1448, and a case analysis and full court opinion are available on the BVLaw platform.

Vertical IQ enhances its industry research platform

Eleven U.S. industry sector profiles have been added to the Vertical IQ industry research platform, including: accommodation and food services; agriculture, forestry, and fishing; educational services; information sector; real estate; and transportation and warehousing. The platform’s sector profiles offer a macro level look at the major segments of the U.S. economy, so they give a wider view. For a narrower view, the platform’s industry profiles cover more than 570 distinct industries, representing more than 97% of the U.S. economy.

More news:Also, the platform now incorporates data from Nexis Newsdesk™, a top provider of news and media content, to increase Vertical IQ subscribers’ access to industry news articles.

For some sample reports, click here.

What BV developments did you miss in 2022?

Now’s your chance to catch up on all things BV with the latest editions of two BVR yearbooks. New ideas on valuation approaches and techniques, takeaways from the leading conferences, key court decisions, and changes in regulations and standards are covered in over 70 articles and hundreds of news items in the Business Valuation Update Yearbook, 2023 edition. A companion guide, the Business Valuation Case Law Yearbook, 2023 edition, represents BVLaw’s analysis of the most noteworthy court decisions of the past year in the areas of business valuation and damages. It also contains the court opinions and a case listing by state/jurisdiction, court, and case name, followed by a short description of the key valuation issue of each case. These yearbooks are compilations of what appeared in the Business Valuation Update newsletter and the BVLaw platform during 2022.

Good news:You already have these two volumes if you are a subscriber to BVResearch Pro or BVR’s Digital Library.

BVResearch Pro adds another issue 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 Summer 2022 issue has been added to the platform, and it includes these articles:

•  “Double Backsolve Remains Unsupported” (Eric Sundheim, ASA; Ben Towne, CPA/ABV; and Jeff Faust, CVA);
•  “The NICE Method Theory and Application” (William H. Frazier, ASA); and
•   “Most States Reject Discounts in Appraisals and Oppression Cases—But There Are Important Exceptions” (Gilbert E. Matthews, MBA, CFA).

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.

Global BV News

2022 was a record year for Swiss M&A, per KPMG

Despite the gloomy economy, the number of mergers and acquisitions with Swiss involvement hit a new record high in 2022, surpassing the numbers of the past 10 years, according to KPMG in its report “Clarity on Mergers & Acquisitions.” The report contains deal statistics from last year, highlights the most noteworthy transactions, and presents latest trends and drivers that are impacting deal activity. It also includes KPMG’s outlook by sector for 2023.

More courts Knock Out DLOM when business won’t be sold

Keep an eye out for courts in more states deciding to eliminate a discount for lack of marketability (DLOM) depending on whether the business will be sold. During a recent webinar that discussed several recent valuation-related cases, the observation was that it appears that more states are applying this factor as an issue. This seems to be a modification of the fair market value standard, i.e., a hypothetical sale is ignored. In one divorce case discussed, Fair v. Fair in Louisiana, the expert applied a discount to the husband’s 100% interest. While there’s no consensus in the valuation profession that a discount should be taken on a 100% interest, there is supporting evidence for the discount, and many experts do apply it or at least consider it. But the court appeared to focus on the fact that the company was not to be sold, so it rejected the DLOM, and an appellate court affirmed. Will this apparent trend become more widespread regardless of jurisdiction? Stay tuned!

BVLaw editor Jim Alerding (Alerding Consulting LLC), veteran valuation expert Jim Ewart (James D. Ewart LLC), and attorney Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP) conducted the webinar, BVLaw Case Update.

High ESG scores lower the cost of capital, study finds

A recent paper says there is significant evidence that companies having a higher environmental, social, and governance (ESG) score have a lower cost of capital. While the “ESG score does not seem to have a significant impact on the cost of equity and the beta,” the paper says, the impact is on the cost of debt because “firms having a high ESG score can significantly obtain more leverage.” Researchers analyzed the relationship between the ESG score and the cost of capital of 600 large, mid- and small capitalization companies across 17 countries of the European region being a component of the EURO STOXX 600 Index. The paper is “The Impact of a Firm’s ESG Score on Its Cost of Capital: Can a High ESG Score Serve as a Substitute for a Weaker Legal Environment?” and the authors are Randy Priem (Financial Services and Markets Authority; Saint-Louis University, Brussels; KU Leuven; United Business Institutes) and Andrea Gabellone (United Business Institutes).

Valuation impacts of the Inflation Reduction Act (USA)

Expect to see increased scrutiny on business valuations for tax purposes as a result of the Inflation Reduction Act of 2022 (IRA). The new law provides additional funding for the Internal Revenue Service to beef up its enforcement efforts. Part of the agency’s new efforts is its search for 14 new business valuation experts to join its ranks. Of course, estate and gift valuations will get caught up in the agency’s widening net, but so will other tax-related valuations, such as stock-based compensation (409A “cheap stock”), valuations for deductions of worthless stock, intangible property valuations for intercompany transactions, and more. Also, the IRA has provisions that will impact certain industries, such as the energy, pharma, and biotech sectors. McKinsey has a nice summary of the IRA and its provisions.

Extra: Chris Campbell(Kroll) will conduct a two-hour webinar on February 2, The Inflation Reduction Act—What Valuation Professionals Need to Know.

Values of tech brands have nosedived, per new study

Shifting consumer demand patterns and inflation have taken their toll on the world’s most valuable brands, particularly in the tech sector. Apple dropped out of the No. 1 ranking after losing $57.6 billion in value, according to “Brand Finance Global 500 2023.” Taking its place at the top of the list is Amazon, despite losing $51 billion in value. Not all brands in the tech sector have plummeted: Instagram is up 42%, and LinkedIn saw a 49% gain in value, which the report attributes to “well-executed strategy to commercialize their services.” Other gains were seen by electric car manufacturers Tesla, which is up 44% (interesting, given Elon Musk’s recent woes), and BYD, up 57%, “as demand grows for electric cars as part of a broader transition to a low carbon economy,” says the report.

Reminder: The 2023 Pepperdine private cost of capital survey is now open

Every year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. A BVWire poll found that 40% of respondents use the survey results for estimating small private-company cost of capital. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is here.

The survey results are used to produce annual Private Capital Markets Report (reports from prior years are available if you click here). The price for the annual report is normally $125, but it’s free if you fill out the survey—plus you’ll get it a week early.

Global BV News

IPEV updates PE/VC valuation guidelines

International Private Equity and Venture Capital (IPEV), a trade group that sets valuation practices for private funds, has published the 2022 edition of its guidelines. The update takes developments on international standards into account and also incorporates the last two special issues of guidance from 2020 and 2022 (related to COVID-19 and the Ukraine war) and expands on the concept and impact on valuations on distressed markets.

New chair of the IVSC standards board

Susan DuRoss, executive director, global valuations, at Harvest Investments, has been appointed the new chair of the Standards Review Board (SRB) at the International Valuation Standards Council (IVSC). She will assume the role in March 2023 and takes over from Mark Zyla (Zyla Valuation Advisors), who has led the board since 2017, during which time the IVSC issued two editions of the International Valuation Standards, established and appointed international experts to the three technical standards boards, and formed several important collaborations, among other accomplishments.

Damodaran posts his data update for 2023

At the beginning of each year, Professor Aswath Damodaran (New York University Stern School of Business) generously posts a great amount of data on his website that include risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. He does a series of posts on his blog based on these new data, which contain his thoughts on what the data are best suited for and some caveats for users. His first post explains some of these data and gives the background of his annual analysis.

Implied ERP at 5.94%. For the ERP, Damodaran uses a forward-looking method known as the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP in the U.S. to be 5.94% as of Jan. 1, 2023. His spreadsheet of ERP and country risk premia is available if you click here.

Absent a goodwill analysis, the court does its own

In a Tennessee divorce case involving the husband’s plastic surgery practice, neither valuation expert did an analysis that separated enterprise and personal goodwill. The husband’s expert relied mostly (90%) on the adjusted net asset value (NAV) but also considered the capitalized cash flow value (CCF), giving it a 10% weight, arriving at a value of $110,000. The wife’s expert relied 100% on the CCF and came up with a value of $350,000. Both experts acknowledged that their valuations included goodwill, and the husband argued that the personal goodwill component needed to be backed out and excluded from the marital property. The court, finding that the wife’s expert was “more experienced,” adopted her expert’s valuation and backed out $95,000, coming up with $255,000 as the value of the practice. This value included an amount in excess of the NAV representing some level of enterprise goodwill. The husband appealed, but the appellate court affirmed the trial court’s valuation, noting that it adopted a valuation “within the range of the evidence submitted.” In the end, the court did its own “analysis” of enterprise and personal goodwill.

The case is Chase v. Chase, 2022 Tenn. App. LEXIS 478, and a case analysis and full court opinion are available on the BVLaw platform.

The 2023 Pepperdine private cost of capital survey is now open

Every year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. A BVWire poll found that 40% of respondents use the survey results for estimating small private-company cost of capital. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is pepperdine.qualtrics.com/jfe/form/SV_bycpTq6uVqgg170?region=34582&spl=NB1.

The survey results are used to produce annual Private Capital Markets Report (reports from prior years are available if you click here). The price for the annual report is normally $125, but it’s free if you fill out the survey—plus you’ll get it a week early.

Extra: Using the Pepperdine report produces very similar results for cost of equity as you get from other sources, including Kroll’s Navigator and BVR’s Cost of Capital Professional, according to an article in the February 2023 issue of Business Valuation Update, “COE Estimates From Leading Data Sets Are All ‘Very Close.’”

Accounting standards needed for crypto, urges paper

“We recommend that accounting regulators undertake standard-setting specifically for cryptocurrencies instead of allowing companies to choose which existing standard to apply and how to do so,” says a new paper, “Financial Reporting for Cryptocurrency.” Existing disparate practices by companies studied are causing “inconsistencies or distortions in their balance sheets, income statements, and statements of cash flow reporting.” The study analyzed the financial statements of 40 global companies that have exposure to cryptocurrencies and how they accounted for these assets. The paper appears in the journal Review of Accounting Studies, and the authors are Mei Luo and Shuangchen Yu, who are both at the School of Economics and Management, Tsinghua University, Beijing, China.

DealStats Hall of Fame members for 2022

Thanks to business brokers and other intermediaries who contribute data, DealStats is the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2022 are:

· Ryan Gipple, Berkshire Business Sales & Acquisitions (Chandler, Ariz.);

·    Neal Isaacs, VR Business Brokers (Raleigh, N.C.);

· Stephen Goldberg,Sun Mergers & Acquisitions LLC (Hasbrouck Heights, N.J.);

·       Jason Ward, TrueView Business Advisors (Houston); and

·  Teija Heikkila,National Kennel Sales & Appraisals (Grand Junction, Colo.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Extra: DealStats has some enhancements planned for 2023—stay tuned for details!

Global BV News

CBV Institute issues exposure draft on adopting IVS

The CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, has issued an exposure draft that proposes the adoption and permitted (optional) use of the International Valuation Standards (IVS) as issued by the International Valuation Standards Council (IVSC). IVS would be adopted as an option alongside, rather than replacing, the CBV Institute’s existing standards. Comments are due by March 31, and the details are available if you click here.

What’s in the February 2023 issue of Business Valuation Update

Here’s what you’ll see:

•  “New Research Strengthens Support for the Three-Stage DCF” (BVR Editor). Unpublished research from Roger Grabowski and Ashok Abbott reveals data on firm growth over three stages: startup, stabilizing, and long term.
• “COE Estimates From Leading Data Sets Are All ‘Very Close’” (BVR Editor). Jim Hitchner conducted a hypothetical engagement using Kroll’s Navigator, BVR’s Cost of Capital Professional, the Pepperdine study, and Damodaran’s data to estimate cost of equity (COE).
• “The Walsh v. Preston ESOP Case—Is it a Victory or an Escape?” (Jim Alerding). Commentary from BVR’s legal editor on an important ESOP valuation case.
•  “Tom West’s Legacy to Appraisers: The Business Reference Guide” (BVR Editor). BVR was very saddened to learn of the passing of Tom West, co-founder of the International Business Brokers Association and founder of the Business Brokerage Press. Business valuers have him to thank for the Business Reference Guide, which contains pricing rules of thumb for almost 700 types of businesses.
• “New ‘Court Cases Method’ for DLOM Points Up a Conundrum” (BVR Editor). A new study analyzes court cases to determine a more legally defensible discount for lack of marketability (DLOM). But should business valuers look to court cases for “good” valuations?
• “The Valuation of Special Share Classes in the United Kingdom” (Andrew Strickland). A special analysis of a recent exposure draft concerning shares to employees in the United Kingdom (England and Wales, Scotland, and Northern Ireland).

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