New push to explore realignment of intangible asset disclosures
Long overdue is a re-examination of the reporting and disclosure framework for intangible assets (IA). Even though IA is a powerful driver of corporate value, only a small fraction of it shows up on balance sheets. And what’s disclosed bears no relation to the total amount of IA because so much of it is internally generated and not required to be disclosed.
Series of papers: “Time to Get Tangible About Intangible Assets” is the first paper in a three-part series from the International Valuation Standards Council. The paper’s subtitle reveals its goal: “The case for realigning reporting standards with modern value creation.” Like a predecessor IVSC series on goodwill, the paper is well thought out and written by Kevin Prall (BDO), IVSC business valuation technical director, with contributions from the IVSC Business Valuation Board. The second paper in the series will take a deeper dive into the issue, and the third paper will present an analysis of potential frameworks.
The dollar amount of IA has hit $15 trillion worldwide—but this is just IA that has been disclosed, that is, the IA that has been acquired through third-party transactions—and it’s only a small fraction of the total. During a recent webinar, respondents were asked: “How strong do you think is the quality of global IA disclosure today?” Only 5% of respondents said “strong,” while 35% said “weak,” with the majority (59%) saying “mixed.” The need is definitely there for a fresh look at this issue.
Expelled partner should get FMV—but of what?
An Oregon appellate case deals with compensation for a partner’s 25% interest in a business after he is expelled from the firm. The trial court allowed for discounts for lack of control and marketability from the fair market value of the partner’s 25% interest. But the appellate court noted that the firm’s operating agreement called for compensation at 25% of the FMV of the assets of the business—not the interest in the business. The case was remanded back to the trial court for recalculation, sans discounts.
The case is Dipak Patel v. Siddhi Hospitality, LLC et al, 312 Or. App. 347 (June 16, 2021), and the case digest analysis and full opinion are available on the BVLaw platform.
Damodaran’s strong feelings about ESG
A year ago, Professor Aswath Damodaran (New York University Stern School of Business) called it “the most overhyped, oversold concept in the history of business.” He was talking about environmental, social, and governance (ESG) factors. He got some pushback and felt a “little guilty” of hyperbole, so he kept an open mind about it. Over the past year, he read all of the arguments in favor of it and heard from people who disagree with him. Has Damodaran changed his tune? “I am more convinced than ever that ESG is not just overhyped and oversold, but it’s become a gravy train for all the people who make money on ESG, and none of those people are in the groups that ESG is supposed to help.” In a recent blog post, he argued that the difficulty of determining whether a company or fund was “good” in terms of ESG makes the measure difficult to apply. Plus, he contends that the practical benefits of a strong focus on ESG in terms of metrics such as the cost of capital are “muddled.” You can read his blog post and watch his video on ESG if you click here.
Extra: ESG ratings have issues. Read the article “Warning to Business Valuers Looking to Use New ESG Ratings” in the October issue of Business Valuation Update.
New online tool for valuing fractional interests
This October will see the launch of the Partner Value Expert (PVX), an online application that represents a new approach to valuing fractional interests involving real estate. The developer, Dennis A. Webb (Primus Valuations), gave an explanation of the new application during a recent BVR webinar. Webb is a real estate appraiser as well as a business valuation expert who has specialized in fractional interests for almost 25 years. The application has been in development for six years and is also explained in Webb’s new book, Valuing Fractional Interests in Real Estate 2.0. The approach relies primarily on income methods using public limited partnership and REIT market returns. During the webinar, he presented the updated methodology by examining the methods in use today and understanding how and why they are replaced by or used in the new approach. He also stressed the importance of telling the story behind the valuation that makes sense to the user of your report. A recording is available of the webinar, 2.0: The New Breakthrough in Fractional Interest Valuation.
Extra: You can see PVX for yourself in the Exhibit Hall at the ASA International Appraisers Conference October 24-26 in Las Vegas.
Mercer chimes in on BVR DLOM survey
“Our profession has a long way to go in terms of understanding what DLOMs, or marketability discounts, really are,” concludes Chris Mercer (Mercer Capital) in his analysis of BVR’s 2021 DLOM survey. In his blog post, Mercer takes critical aim at the methods most respondents use for developing a DLOM, saying that the survey’s finding that 90% of respondents use restricted stock studies is “astounding.” The survey also found that 43% use pre-IPO studies, which Mercer says is “even more amazing.” He also comments on the use of the Mandelbaum factors and whether it’s appropriate to take a DLOM on a 100% interest in a private company.
Almost a quarter (22%) of valuation analysts polled in the survey say they use the quantitative marketability discount model (QMDM), a model Mercer developed. QMDM is a shareholder-level DCF model that values interests in a business in the context of an appraisal of the entire enterprise. The model focuses on shareholder-level cash flows, risk, and growth to reflect what a willing buyer would pay for a willing seller’s interest. The model is discussed in detail in the recently released third edition of the book, Business Valuation: An Integrated Theory, which Mercer co-wrote with Travis W. Harms (Mercer Capital).
In his blog, Mercer says that DLOMs are “not some magic thing that appraisers apply based on ‘Kentucky windage.’ They only exist to the extent that there are differences from the base value in terms of expected cash flow, growth and risk.” He also says: “Thanks to BV Resources for conducting the DLOM Survey and for sharing it with the appraisal profession.” The full survey results, including some interesting comments from respondents, is available if you click here.
Today! Valuation and legal experts examine latest cases
BVR legal editor Jim Alerding has hand-picked a number of the most consequential recent valuation and financial litigation court decisions for the next installment of our regular BVLaw Case Update webinars, which will be today. Joining him will be valuation expert James D. Ewart (James D. Ewart LLC) and family law attorney Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP), who was directly involved in two of the cases that will be discussed. To register, click here (no charge to BVR Training Passport holders).
Global BV News
Multiples in China lower than year-end 2020
As of Aug. 31, 2021, earnings multiples (price to LTM earnings) for Chinese companies were lower overall than those at the end of 2020, with an average of 30.8x compared to 40.3x for year-end 2020, according to “China Transactions Insights—Fall 2021” from Duff & Phelps (a Kroll business). Healthcare, technology, consumer discretionary, consumer staples, and real estate sectors showed declines in earnings multiples since December 2020, while multiples for the industrials and materials sectors increased, the report says.
Trailing EBITDA multiples (enterprise value-to-LTM EBITDA multiples) for Chinese companies decreased on average 7% from year-end 2020 to Aug. 31, 2021. Healthcare, technology, consumer discretionary, and consumer staples showed declines in EBITDA multiples, with multiples for the industrials and materials sectors showing improvement through August.The report has much more information and data on industry sector performance, IPO activity, COVID-19 recovery, cross-border investment, and more.