Young practitioners question traditional discount methodologies

“Outdated studies” and “emerging quantitative methods” are some reasons why young valuation practitioners are questioning the traditional methodologies for estimating discounts for lack of control and marketability (DLOC and DLOM). This was revealed during a Young Valuation Analysts Panel session at NACVA’s recent Business Valuation & Financial Litigation Super Conference. Challenging the status quo is one way the profession can evolve its thinking about methodology and practice.

The issue came up when a question was posed to the panel about the obstacles and challenges that they see in the profession over the next five years. In addition to examining new methods for estimating discounts, the panel mentioned M&A uncertainty amid difficult economic conditions and educating young professionals about the existence of business valuation as a profession. The panel included Todd Kutcher (Reliant Business Valuation), Coleton Benfatti (The Red Maple Group), and Ryan McKeon (Doeren Mayhew), and the moderator was Karen Kaseno (The Kaseno CPA Firm APC).

Current methods: Preliminary results from BVR’s Benchmarking Survey show that the FactSet Mergerstat/BVR Control Premium study is currently the most cited source for determining a DLOC, cited by 50% of respondents. As for DLOM, the traditional methodologies continue to be the most used, notably: restricted stock studies (53% use the Stout study and calculator, 34% use other historical studies); pre-IPO studies (26%); and Mandelbaum factors (66%). Thirty percent of survey respondents cited the use of option price modeling methods, which is up from 20% in the prior survey (2018).

Extra: In a separate session, Dr. Ashok Abbott discussed the Margrabe options approach to DLOM and offered attendees access to a new DLOM calculator he is developing that is in beta testing. You can access it at dev.optionmodeldlom.com. Dr. Abbott would like feedback on the calculator, including suggestions for improvements, additional features desired, and possible extensions. His contact info is on the calculator.

Damages waiver precludes lost profits claim

In an Illinois case, a contract for consulting services for an online platform was terminated and the terminating party was supposed to return the source code to the other party but did not, breaching the contract. The plaintiff (a startup company) sued for lost profits based on what it would have earned had it been able to monetize the platform. A jury awarded the plaintiff $18.3 million in lost profits damages. But the defendant then filed a motion for a judgment as a matter of law, and the court overturned the award.

The contract contained a provision that waived liability for “consequential” (indirect) lost profit damages, as opposed to “direct” damages, which would be recoverable. The difference between direct and consequential damages in breach of contract claims lies in the degree to which the damages are foreseeable and highly probable, the court noted.

Strict interpretation:Illinois precedent is that “damages waivers should be strictly construed against the benefitting party.” In this case, the lost profits damages were deemed consequential and indirect, which the contract precluded. The focus of the contract was for the plaintiff to provide consulting services as an independent contractor, and they were fully paid for those services. There was no “additional link in the causal chain” to connect the damages to the contract. Therefore, direct damages would have been a portion of the value of the source code that was not returned to the plaintiffs. But they did not put a value on that, nor did they seek that value as damages.

Also, Illinois law does not permit recovery of expected profits for a new commercial business. But, since the damages were considered consequential and barred by the contract, there was no need for the court to address that issue.

The case is Endless River Techs. LLC v. Trans Union LLC, 2023 U.S. Dist. LEXIS 725; 2023 WL 24101, and a case analysis and full court opinion will soon be on the BVLaw platform.

Deadline soon for BVR’s benchmarking survey

Our thanks to the over 170 business valuation firms and practices that have responded to the BVR Benchmarking Survey. But the survey will be open through July 31, and we welcome more responses. The direct link to it is bvresources.com/2023bvsurvey. The survey collects information on operations, financial metrics, staffing, compensation, billing practices, marketing, tools and resources used, and more. All responses will be confidential, but we will give survey respondents the opportunity to participate in rankings that identify top-performing practices. Participants will get a free executive summary, a discount on the full study, and some other perks.

Private-sector companies optimistic, per McKinsey survey

Consulting firm McKinsey has some very useful economic and industry reports, research studies, and regular briefings. All of this material is free, and you can sign up for regular alerts on the McKinsey website. Its latest survey on company expectations shows that private-sector respondents report consistently positive views about their companies’ profit, demand, and workforce prospects. The survey has interactive graphs that show results by industry—click here to access it.

Second issue of Willamette’s Perspectives is released

The second issue of a new quarterly digital publication from Willamette Management Associates, Perspectives, has been released, and you can access it if you click here. This publication replaced the firm’s Insights publication. The articles in the second issue (July 2023) are:

· “Understanding the Implications of Cecil v. Commissioner” (Grant Crum);

· “How to Properly Use Asset Transactions in the Guideline Merged and Acquired Company Method” (Tia R. Hutton and Lisa H. Tran); and

·  “Getting the Most Out of Every Engagement” (Timothy J. Meinhart and Marc D. Bello).

Meinhart also served as editor for this issue.

Global BV News

Kroll reports on industry multiples

Two reports from Kroll have insights into trading multiples for various key industries as of March 21, 2023.

The Industry Multiples in Europe quarterly report (click here to download) is now in its sixth edition. One highlight: In terms of EV/EBITDA, multiples have generally remained relatively stable during the first quarter of 2023, with a few industries presenting significant variations. For example, the median EV/EBITDA multiple of semiconductors and semiconductor equipment increased to 15x (from 10x in the fourth quarter of 2022).

The Industry Multiples in Latin America quarterly report is in its fourth edition (click here to download). One highlight: During the first quarter of 2023, while median EV/EBITDA multiples have not changed significantly for many industries, some of them experienced notable decreases. For instance, in the energy sector, the median EV/EBITDA decreased 1.4x in the first quarter of 2023 in relation to the fourth quarter of 2022.

Call for papers for Valuation 20 in India October 27-29

There is a call for researchers, practitioners, policymakers, and industry professionals to contribute their commentaries and research papers on several important themes, including technology, ESG, and more. This is in connection with the V20 (Valuation 20) conference October 27-29 in New Delhi, India, co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). Submissions of abstract papers are due August 18, and, if accepted, the final papers will be due October 1. For details on the call for papers, click here.