Husband shuns BV expert, loses case
In a Pennsylvania divorce case involving a restaurant, neither the husband nor the wife submitted formal business appraisals. But the wife had an accounting degree and had worked as an auditor, so she herself did a valuation using the “gross sales method,” and she prevailed in the trial court. On appeal, the husband argued that she was not competent to testify as to the valuation and that the method she used was not appropriate. But the appellate court disagreed, finding she was competent and that prior experts had used the gross sales method, so it was appropriate.
The case is Snyder v. Snyder, 2022 Pa. Super. LEXIS 175; 2022 PA Super 72, and a case analysis and full opinion are available on the BVLaw platform.
Comment on COE data sources survey
In last week’s issue, we reported on a survey of the data sources analysts use to estimate the cost of equity (COE) (click here to see the news item). It triggered some comments from Peter J. Butler (Valtrend), who is the co-developer of the Butler Pinkerton Calculator, which offers empirical data for total cost of equity (TCOE) and company-specific risk premiums (CSRP).
“I am glad to see ‘Damodaran’s data and analyses’ used [cited by survey respondents] at 14% (mean) and 14% (median),” Butler says. “Presumably, his industrywide total beta (TB) calculations are included in the category, along with his calculations of the implied equity risk premium (ERP). I am one of the 14% who look at both his TB calculations and ERP, in addition to (no surprise) the Butler Pinkerton Calculator (BPC). Presumably, since the BPC has had subscribers since 2007, its respondents were captured in the ‘Other or none of the above’ category, at 8% (mean) and 7% (median).”
Butler continues: “For the last 15 years, I have successfully (and easily) used the BPC (with no successful challenges—Daubert or otherwise) for individual guidelines while knowing the pertinent industry TBs (from Damodaran calculations). After all, we call it ‘company-specific risk’ for a reason. Thus, I ‘know’ the industry from Damodaran, and I ‘know’ the best publicly traded ‘guidelines’ to assist with my subject company’s cost of equity. While selection of the overall COE is still qualitative in nature with the BPC, I do not feel like I am ‘flying blind’/completely guessing as to the company-specific risk or total cost of equity for my subject company as I would if I solely relied upon the other data sources, which capture publicly traded stock returns.”
He concludes: “In summary, if you are going to use beta, which everyone does in one form or another, it only makes sense to use TB, too, and get the full benefit of publicly traded stock returns to assist with the valuation of your privately held company.”
Long-term inflation estimates rise, per Kroll infographic
Long-term inflation expectations for the U.S. and Germany, a key starting point to evaluate the long-term growth rate used in the terminal year of DCF analyses, are significantly higher when compared to June 2020, at the height of the COVID-19 crisis, according to a newly updated infographic from Kroll. For the U.S., inflation estimates over the long-term rose from 2.0% in June 2020 to 2.6% in May 2022. For Germany, long-term inflation expectations have surged from 1.6% in June 2020 to 2.6% in May 2022. The “Cost of Capital in the Current Environment” infographic tracks the impact of COVID-19 on some of the financial market and economic indicators used to support the Kroll (Duff & Phelps) recommended U.S. equity risk premium (currently 5.5%) and accompanying normalized risk-free rate (currently 3.0%).
Human capital and valuation explored in new paper
Everyone knows the phrase “our people are our most valuable asset,” but just how does human capital generate value for organizations? And what are the attributes of such value creation? How is this analyzed by investors and measured by valuers? Part 2 in a series of perspectives papers on intangibles from the International Valuation Standards Council (IVSC) explores the concept of human capital. To download the paper, click here.
ASA announces keynote for its annual conference
The state of the current—and future—economy is more important than ever for valuations, so the American Society of Appraisers has lined up a top-notch keynote for its 2022 ASA International Conference, September 10-12 in Tampa, Fla., and virtually. The speaker will be Dr. LaVaughn Henry, former senior economist for the Council of Economic Advisers in the Executive Office of the President (the White House), and the senior regional officer and vice president for the Federal Reserve Branch in Cincinnati. He will discuss key economic drivers and analysis of external factors impacting global markets, particularly as they relate to the valuation profession. Of course, the rest of the conference is just as compelling, with 65 educational sessions across six discipline tracks. See you there!
CPA firms continue to have trouble finding staff
Historically, “finding qualified staff” has been a leading concern of all CPA firms other than sole proprietors, and that held true to a large degree this year, according to the “2022 PCPS CPA Firm Top Issues Survey” unveiled during the recent AICPA ENGAGE Conference in Las Vegas. It’s the No. 1 concern for all firms with over 10 professionals. For smaller firms, challenges with working with the IRS is their top concern. The survey was conducted online from April 19 to May 23 and had 752 respondents, representing a mix of practice types and firm sizes, from sole practitioners to large firms with 21 professionals or more.
Global BV News
New edition released of Business Analysis and Valuation: IFRS
Cengage has released the 6th edition of Business Analysis and Valuation: IFRS Edition in the educational market. The book uses international cases to illustrate the interpretation and use of IFRS-based financial statements and financial data in various valuation tasks. A fully updated companion website is also available with PowerPoint slides, an instructor’s manual, additional questions, solutions, example spreadsheets, and weblinks. The authors are Krishna G. Palepu (Harvard University), Paul M. Healy (Harvard University), and Erik Peek (Erasmus University).
CBV Institute launches LinkedIn page for studentsThe Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO), has just launched a CBV Program of Studies LinkedIn showcase page. The page focuses solely on current and prospective students and provides them with the information they require to develop an “exciting career in the growing world of business valuation.”