Court affirms calculation report in divorce case

A calculation of value is not the “gold standard,” but it is not unacceptable, an Arizona appellate court ruled in a divorce case.

No challenge: The husband and wife were owners of a law firm and the wife’s valuation expert used information she provided as well as an analysis of comparable businesses. The husband refused to provide any financial information to the expert in a timely manner. During the trial, the husband’s attorney did not challenge the methodologies and conclusion of the valuation expert. What’s more, the husband did not offer an opposing valuation. The trial court accepted the wife’s expert’s valuation, and the husband appealed, arguing that the expert’s opinion was deficient because it was a calculation of value report rather than “an opinion of value report.”

The appellate court noted that the fact-finder need not discount an expert’s opinion just because he did not consider every process and procedure that would be included had he conducted a more complete valuation. Plus, the husband’s counsel had ample opportunity to challenge the valuation and offer a competing opinion, but he did not.

The case is Mikalacki v. Rubezic, 2022 Ariz. App. Unpub. LEXIS 836; 2022 WL 10219850, and the full court opinion and a case analysis are available on the BVLaw platform.

Investment banks’ COE estimates are higher for management buyouts

Researchers have examined investment bank incentives in M&A by analyzing management buyouts, as these deals are “particularly rife in conflicts of interest,” they say in a recent paper. The banks “use significantly higher COE [cost of equity] values in management buyout deals, which potentially underestimates target value to make the proposed bid more attractive for target shareholder approval,” the paper says. They also found that investment banks do not look to CAPM or the Fama-French models to estimate COE but use several proxies for risk, including industry effects, beta, size, and illiquidity as well as past returns, financial distress, and volatility. The paper is “The Cost of Equity: Evidence From Investment Banking Valuations,” by Gregory W. Eaton (Oklahoma State University), Feng Guo, Tingting Liu, and Danni Tu (Iowa State University), and is available if you click here.

Young practitioners to air views at next week’s NACVA conference

One of the sessions we’re looking forward to at the NACVA “super” conference next week is a panel of young practitioners who will share their perspectives on the profession. At NACVA’s spring conference, we covered a similar session (with different panel members). One interesting remark that the panel made was that they tend to question the status quo (which is a good thing) and they need senior firm members to explain to them why things are done the way they’re done. This goes not only for firm procedures, but for valuation approaches and methods as well. This should not be taken as being confrontational, but rather because of just sometimes being in the dark. Management should welcome these questions because they will help get buy-in from the younger generation. But, also, these questions may trigger some second thoughts about why some methods have perpetuated—possibly because it’s the way everyone else has always done it.

The conference will be Dec. 14-16 in-person from two locations: Park City, Utah, and Fort Lauderdale, Fla. You can find more information and how to register if you click here.

GDP up in 3Q22, reports BVR’s EOU

The U.S. economy—as indicated by gross domestic product—increased at an annual rate of 2.6% in the third quarter of 2022 after declining at a rate of 0.6% in the second quarter, according to the latest quarterly issue of Economic Outlook Update (EOU), published by Business Valuation Resources (BVR). The 55-page report also has consensus forecasts for real GDP and inflation, which form the basis for long-term growth rates used in business valuations. The report is a compilation of research from leading authoritative resources, which you can use in your valuation reports as long as you give proper attribution. To learn more, visit bvresources.com/eou.

Firm nimbleness as a measure of risk

Investors perceive firms with higher levels of inflexibility, such as not being able to scale operations or adapt to changes in profitability, as being riskier and have a higher implied cost of equity, researchers conclude in a new paper. This research confirms what some would say is common sense, that a firm with a better ability to adjust to market conditions will fare better than one that cannot. Examining a large sample of manufacturing firms over the period 1989 to 2018, the researchers’ conclusions are consistent with prior similar research. They also found that the impact of firm inflexibility on cost of equity capital is greater for small firms. The paper is “Firm Inflexibility and the Implied Cost of Equity,” by Sadok El Ghoul (University of Alberta), Zhengwei Fu (University of South Carolina), Omrane Guedhami (University of South Carolina), and Samir Saadi (University of Ottawa), is available if you click here.

Preorder deal on the 2023 Business Reference Guide

The 2023 print edition of the Business Reference Guide (BRG) by Tom West is now available for preorder at a 20% savings if you click here (valid through December 31). Now in its 33rd year, it contains the latest industry-related information including “rules of thumb,” pricing tips, benchmarking information with comparison data, industry resources, and general industry data on nearly 600 types of businesses. There is also an online version with a fully searchable database, and it includes the print version of the guide.

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Industry multiples down in Latin America

In terms of EV/EBITDA, multiples in Latin America have generally decreased over the first three quarters of 2022 due to a pessimistic outlook and deteriorating market conditions, according to the second edition of Kroll’s “Industry Multiples in Latin America” (LATAM) quarterly report. However, in the third quarter of 2022, many industries present higher EV/EBITDA multiples when compared to the multiples in the second-quarter 2022 report. The full report, available if you click here, contains a detailed overview of EV/revenues, EV/EBITDA, P/E and P/B multiples of publicly traded companies in Latin America covering nonfinancial industries and market capitalization/revenues, P/TBV, and P/E and P/B multiples covering financial industries for which such data are available.