BVR-supported research examines small-firm M&A valuations

Using the DealStats database, M&A advisor Ray Johnson (Exit Experts) conducted a study to examine how various financial factors influence acquisition valuations for small businesses. The study was for Johnson’s dissertation for his doctorate degree in business at the University of Florida. Congratulations, Ray!

New ground: The study uses a definition of small business not used in previous studies, namely the Small Business Administration’s size standards. The study was also able to examine the importance of adjusted EBITDA in small-firm valuation. Previously unavailable, data on adjusted EBITDA has been included in the DealStats database since May 2017. The findings also highlight the significance of certain other measures, such as net sales, gross profit margin, and growth. The paper also points to future research that can be done, using this study’s findings as the foundation.

In the paper’s acknowledgments, Johnson says he is “profoundly grateful” to BVR’s Adam Manson, chief data officer, for his support and assistance with the study. This is not the first time BVR has lent its support to scholarly research, and we are always happy to become involved in projects that will be of benefit to the profession. Maybe you have something in mind?

More details of the paper’s findings, as well as some commentary by Johnson, will be in a future issue of Business Valuation Update. Also, once the paper is publicly available, we will let you know.

Adjusting WACC for ESG: ±100 basis points proposed

When assessing environmental, social, and governance (ESG) factors on valuation, unless there is an impact to cash flow, risk, or growth, ESG has no effect on business value. But what if the analyst determines that there is an impact and it can’t be quantified in the numerator of the valuation equation? How much of an adjustment should be made to the subject company’s weighted average cost of capital (WACC)? A new book gives some guidance.

Proposed range: “We propose that the total WACC adjustment should not be adjusted beyond ±100 basis points (bp). Furthermore, the magnitude of the adjustment should be based on the importance of the ESG issue being considered. For example, a meaningful issue might warrant an adjustment of ±50 bp but a minor or distant one, only ±10 bp.” This quote is taken from a chapter written by Frédéric Le Meaux, senior European equity portfolio manager at Amundi, a leading European asset manager, in a new book, Valuation and Sustainability—A Guide to Include Environmental, Social, and Governance Data in Business Valuation. The chapter gives some case study examples of integrating ESG into the valuation process.

The book was edited by Dejan Glavas (ESSCA, School of Management, Boulogne-Billancourt, France), who also wrote several chapters. The book is available if you click here.

Dealing with market efficiency in appraisal hearings

Weary of dueling experts, the Delaware Court of Chancery has shifted its attention more toward using a stock’s market price as the best measure of fair value in statutory appraisal matters. This means that valuation experts who come up with a different value would, therefore, need to prove that the market is not efficient. What methodology can be used to prove—or disprove—market efficiency?

Look to fraud cases: Market efficiency is a key factor in federal securities fraud cases, so the methodology used in those cases can be used for appraisal cases, according to Steven P. Feinstein, Ph.D., CFA. He is an associate professor of finance at Babson College and founder and president of Crowninshield Financial Research and has been engaged in many securities fraud cases.

Feinstein gave a presentation at NACVA’s Business Valuation & Financial Litigation Super Conference in July based on research and a working paper by him and Jaime d’Almeida (d’Almeida Consulting LLC). In addition to giving background and context, he presented a framework for a market efficiency analysis based on factors from several precedential court cases, namely Cammer v. Bloom and Krogman v. Sterritt. In addition to these factors, direct empirical evidence is needed to demonstrate a cause-and-effect relationship between corporate disclosures and stock price movements (Feinstein used a Fisher exact test in his case study examples).

The September issue of Business Valuation Update has details of the framework, several case studies that demonstrate the analysis, and some suggested report language. And we look forward to their upcoming paper to which we will alert readers when it is available.

BV firms rank most effective marketing techniques

The one-on-one meeting with a prospect leads the pack of marketing techniques BV firms and practices find most effective. Twenty-seven percent of those who use this method deem it “very effective,” and another 29% say it’s moderately effective. This is according to the preliminary results of the 2023 BVR Benchmarking Survey. Other methods that rank high on the “very effective” list are cross-marketing to existing clients, public speaking, attending or sponsoring events with prospects, and the firm’s website. Almost 200 business valuation firms and practices responded to the survey, and we are analyzing the results, which will be made available as soon as possible.

Sustainability triggers in private credit valuation

“Sustainability-linked loans—where a loan’s economics are tied to the borrower’s achievements of certain environmental, social or governance key performance indicators—aren’t coming to the loan market. They’re already here,” writes John Czapla (VRC) in an article in Private Debt Investor. The article considers the issues surrounding the widespread use of sustainability-linked loans as pricing and valuation can be complex. Co-author Adrian Lowery, also with VRC, goes on to further discuss market activity in Europe where “the volume of leveraged loans containing an ESG-linked margin ratchet reached three-quarters of the total issuance in the fourth quarter of 2022,” and, in the U.S. market, where issuances were down, it still reached $206 billion in 2022.

Czapla and Lowery say that, as sustainability-linked loans continue to grow in prevalence, private-debt valuation teams will need to refine their approaches to assessing fair value for less liquid SLL loans. To access the article, click here (limited free access).

When pest control company owners want to bug out

What does the financial due diligence process look like for a pest control business? Listen to industry experts Ilka Krieger and Claire Williams, both with Alvarez & Marsal, as they talk about how investors look at a pest control company. They’ve done about 50 deals with these kinds of firms, and they give some interesting insights on “pest practices.” To watch the program, click here.

Global BV News

Video series explains the V20

“Let’s make the most glamorous show of valuation in the world!” exclaims Sandip Kumar Deb about the V20 Valuation Summit and Conference in the first of a series of videos that explain the event. Interviewed by Ray Moran (FON Valuation Services), Sandip noted that the event will be October 27-29 in New Delhi and is co-hosted by the Assessors and Registered Valuers Foundation (AaRVF) and the International Valuation Standards Council (IVSC). Sandip is a member of one of the boards at the IVSC and has his own valuation firm in India. He also noted that the event coincides with the annual G20 finance meeting in India, and future V20 events will follow suit (next year will be Brazil). You can watch the video if you click here (the video includes links for more information on the conference).

Papers due August 31: There is a call for papers on several important themes, including technology, ESG, and more. Selected papers will have an opportunity to be published in peer-reviewed conference proceedings. Submissions of abstract papers are due August 31. For details on the call for papers, click here.