Hitchner responds to Damodaran’s criticisms of cost of capital inputs

BVWire will attend a webinar tomorrow (July 21) by Jim Hitchner (Valuation Products and Services) who will respond to some severe criticisms Aswath Damodaran (New York University Stern School of Business) made during a recent BVR webinar. The professor had some choice words for certain inputs to the cost of capital, namely the size effect, company-specific risk premium, and some others (see our coverage here).

Wrong impression: Damodaran also made some remarks about total beta, which, when taken out of context, lead you to believe that he rejects that concept also. Damodaran publishes updated total betas on his website, and he includes them in his teachings and writings. He has remarked that some analysts use total beta in ways never intended, but he did not put it in the same boat with the concepts he strongly criticized.

We hope this point will be cleared up during tomorrow’s webinar (click here to register)—we’ll be listening!

Extra: A free recording of the Damodaran webinar that triggered all the fuss is available if you click here (it also focuses on how to assess the impacts of inflation in private-company valuations).

Estate attorney sued over alleged undervaluation

The matriarch of a family business in Hawaii had four children, two of which were involved in the business. During her lifetime, she gifted her shares in the business to these two children and the IRS accepted the valuation that was done by her attorney who, it appears, had no training or credentials in business valuation. In her will, she provided for equalization payments to the other two children to make up for shares she gave to the others. The equalization payment was based on the valuation of the shares at the time they were gifted.

Too low: When the matriarch died, one of the beneficiary children who was earmarked for an equalization payment under the will claimed the attorney undervalued the gifted shares, thus making the equalization payment less than it should be. She asked the attorney (who was named the personal representative of the estate) to get a corrected valuation, but he denied her request. A special administrator the probate court appointed concluded that the appraisal was not up to applicable valuation standards, so it was unreliable. The beneficiary sued the attorney for malpractice, and the attorney moved for summary judgment, contending that he owed the beneficiary no duty of care as a nonclient.

The district court denied the motion for summary judgment, finding that there was at least a genuine issue of material fact as to whether the attorney owed the beneficiary a duty of care. By implication, this case contains valuation issues regarding potential conflict of interest, compliance with standards, and the valuation competency of the attorney who prepared the appraisals.

The case is Sullivan v. Loden, 2022 U.S. Dist. LEXIS 81293; 2022 WL 1409567, and a case analysis and full opinion are available on the BVLaw platform.

Valuing Nightclubs, Bars, and Adult Cabarets

That’s the title of the latest installment in BVR’s What It’s Worth series of industry-specific valuation guides. This one goes behind the glitz and into the unseen world of discos, saloons, and strip clubs, some of which operate right on the edge of the law. Not only will you see industry intelligence, benchmark financial data, and economic value drivers, but four valuation practitioners share their insights into issues you will not see in any other kind of business. The 198-page What It’s Worth: Valuing Nightclubs, Bars, and Adult Cabarets is one you don’t want to miss. (Note: Subscribers of the BVResearch Pro platform already have this guide in their library—along with all the other What It’s Worth titles.)

SME transaction values rise to 4.5x for 1Q2022

EBITDA multiples are at 4.5x for the first quarter of 2022, which is up from the 3.9x rate in the fourth quarter of 2021, according to the latest issue of the DealStats Value Index (DVI). The DVI calculates valuation multiples and profit margins from closely held companies each quarter, as shown in the chart below, which also highlights the median selling price/EBITDA with the trailing three-quarter average over a five-year period.

The 2Q 2022 DVI highlights the trend in the EBITDA multiple since 2015 and reports lower multiples than those available from private equity or investment banking sources, so they are far more reflective of fair market value calculations than synergistic or financial sector pricing. Download the current issue of DVI to see all of the new trends in private-company transactions.

Preorders open for unique guide to FMV under the new Stark regs

No other work can compare to a new guide to the new definitions of fair market value (FMV) under the recently updated regulations for the federal physician self-referral law—the Stark law.

In addition to an analysis of how the “game-changing” updated regulations impact accepted valuation principles and practices used to determine Stark FMV, the guide provides the actual text of the public comments the Center for Medicare & Medicaid Services (CMS) responded to in the preamble commentary to the final Stark regulations. This unique feature makes it easy for practitioners and attorneys to understand the full extent of all issues brought to CMS in response to the agency’s proposed regulations on FMV.

At almost 400 pages, The Complete Guide to Fair Market Value Under the Stark Regulations is edited and co-written by Timothy Smith (TS Healthcare Consulting), who had a front-row seat during the development of the updated regs. To preorder the guide, click here (the print version will be released in late August, and the PDF will be released in early August).

Global BV News

CBV Institute membership grew 4% in 2021

The Chartered Business Valuators Institute (CBV Institute) is Canada’s valuation professional organization (VPO) and standard-setter. During 2021, its membership grew 4%, to 2,215 members, according to its latest year in review. In addition, it has 1,197 students enrolled in educational programs. CBV Institute members have the Chartered Business Valuator (CBV) designation. In terms of age, 41% of CBVs are under 40 years of age.

Recording available of MAPPI webinar on IP valuation