Contribute to the BV profession in 2023

During 2022, we saw many examples of BV practitioners giving back to the profession—from volunteering on a board to speaking at a conference to writing an article. The valuation professional organizations—the ASA, AICPA, IACVS and NACVA—are always in need of practitioners to help with education, guidance, or standards matters. The Appraisal Foundation often has opportunities to volunteer on boards and committees, and, on the global front, so does the International Valuation Standards Council (IVSC). In addition to helping the profession, the more you volunteer, write, teach, or speak, the more you learn about your profession. What’s more, you can be on the cutting edge of new guidance that your committee or work group is developing. So, if you haven’t yet contributed to the profession, think about doing so in 2023!

Lack of quantifiable damages dooms IP complaint

In a California case concerning intellectual property (IP), the defendant asked the court to dismiss the plaintiff’s complaint alleging violations of the state’s Unfair Competition Law (UCL) and asking for damages. To seek relief under the UCL, the plaintiff must show that there must be an “injury in fact and [that the plaintiff] has lost money or property as a result of the unfair competition,” the court wrote. “Although ‘the issue here is only the threshold matter of standing … [and] a specific measure of the amount of [the alleged] loss is not required,’ some detail as to the general value of the alleged injury is still necessary to allege damages under a UCL claim.” The plaintiff had not done this, and, therefore, the motion to dismiss was granted.

This case “should point out to attorneys and BV professionals alike that, even at the preliminary level, it is important that there be some clarity on at a minimum a range of damages or demonstration of a process that will determine that there are indeed damages,” writes BVLaw editor Jim Alerding (Alerding Consulting) in a case digest. “I have been involved in cases where the attorneys have come to me after the filing of a complaint and asked me to tell them whether there are quantifiable damages. In at least one case, there were not, and the complaint was withdrawn.”

The case is Zamfir v CasperLabs, LLC, 2022 U.S. Dist. LEXIS 194566; 2022 WL 14915618, and a case analysis and full court opinion are available on the BVLaw platform.

Recession tops Kroll’s 10 trends to watch in 2023

The new year “promises to be a tougher ride for most businesses, investors and consumers globally, but there is always opportunity in volatility,” according to the Kroll Institute in its latest report, “10 Trends to Watch Heading Into 2023.” These trends are:

• Developed markets in recession. (Countercyclical businesses should see increased deal flow.)
• Emerging markets: buoying global growth. (But there are risks to the outlook for China.)
• Emerging markets face a sovereign debt crisis. (Could embroil some middle- and particularly low-income countries.)
• Volatile financial markets and market dislocations. (Earnings pressure will likely persist into much of 2023, particularly for companies more vulnerable to interest rate rises or recession.)
• Developing global trade tensions. (Between the U.S. and China, and maybe between the U.S. and Europe.)
• Russia war on Ukraine persists. (Possible escalation scenarios cannot be ruled out for 2023.)
• “Old” and “tropical” infectious disease outbreaks. (The virus lingers, and others may emerge.)
• Growth of ESG regulation, transparency, and scrutiny. (This should improve measurement issues and reduce greenwashing.)
• Heightened regulatory environment. (The SEC will focus on imposing new rules in such areas as cybersecurity, certain private fund practices, SPACs, and more.)
• Increased cyber and social media risks. (But this will give a boost to the cybersecurity industry.)

“Rarely has the world faced this many interconnected crises but we expect that the outlook in 2024 will be less volatile, with most of the developed world coming out of a shallow recession, inflation abating, and the green transition having made significant progress, particularly in Europe,” the report says. For more on the Kroll Institute, click here.

Private-company EBITDA multiples rebounded in 3Q2022

After dropping to their lowest levels in recent years, EBITDA multiples rose to a median

of 3.7x in the third quarter of 2022, up from 2.8x in the second quarter (see graph below), according to the latest issue of the DealStats Value Index (DVI). In the period analyzed, EBITDA multiples across all industries were highest in the third quarter of 2018, at 5.0x, but then decreased until they bottomed out in the first half of 2022.

The 30-page DealStats Value Index is a quarterly publication exclusively for DealStats subscribers. It provides trend information on valuation multiples and profit margins for transactions in DealStats, including multiples and margins by industry sector, interquartile range by sector and year, multiples and margins for private vs. public, and much more. If you are a subscriber to DealStats, you can download the current issue to see all the latest transaction trends if you click here.

Data on preowned medical equipment prices

The “BuckheadFMV January 2023 Benchmark Report on Pre-Owned Medical Equipment Prices” is now available. Based on data BFMV staff collected for the 36 months preceding publication, the report provides price benchmarks for over 800 different models of preowned medical equipment. Benchmarks are sorted by category, manufacturer/brand, and model, and are reported at the 25th, 50th, 75th, and 90th percentiles, along with an average price reported for each item. The report is currently scheduled to be published in January and July of each year. Click here for more information.

 

Global BV News

IVSC will propose changes to IVS

Court sets fair value of 50% interest in realty firm

In Connecticut, a real estate firm had a shareholder agreement that allowed for an independent appraisal if one of the owners wanted out. The shareholders had a falling out and could not agree on a value, so, under the adage “four appraisers are better than one,” each side engaged a real estate appraiser and business valuation expert to do the valuation. Although state statute says the standard of value is fair value with no discounts, the defendant’s expert argued for both a discount for lack of control and discount for lack of marketability, citing extraordinary circumstances. But the court disagreed and did not allow either discount. Both appraisers used a net asset approach, which the court adjusted by adding other assets to the value of the real property and deducting liabilities.

The case is Buccieri v. New Hope Realty, Inc., 2022 Conn. Super. LEXIS 2230, and a case analysis and full court opinion are available on the BVLaw platform.

Two AICPA fair value guides being revised

At last week’s ASA Fair Value Virtual Conference, several sessions focused on some revised versions of guidance from the AICPA. A working draft of the accounting and valuation guide, Business Combinations, is still open for public comments, which are due Jan. 15, 2023. The document (available if you click here) explains how to submit comments. In their session, Gary Roland (Kroll) and Mark Edwards (Grant Thornton) noted that the final guide is expected to be published in the fall of 2023.

The other revised guidance in the works is an update to the AICPA guide, Valuation of Privately Held Equity Securities Issued as Compensation (aka the Cheap Stock Guide), that was released in 2013. That guide was an update from the original version from 2004. So why update it again? One of the co-chairs of the task force working on the revision, Amanda Miller (EY), noted that the main motivator for the update was that there was a substantial increase in secondary transactions since the last version of the guide. This created a concern that companies may not be placing adequate weight on these external common stock transactions, which may lead to valuations being significantly lower than the price of transactions actually taking place. Another reason for the update, she remarked, was to clarify concepts that were included in the 2019 guide, Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds and Other Investment Companies (PE/VC Guide), that Miller also worked on.

Proposed USPAP Changes Focus on Bias

 

The Fourth Exposure Draft of proposed changes to USPAP is now available for review and comment (click here to access the draft). The proposed changes are to the ethics rule and would emphasize the prohibition against unethical and illegal discrimination or bias when developing an opinion of value. The changes are mostly directed to real estate appraisers, but they apply to all appraisers. The Appraisal Standards Board is now accepting all public comments until Feb. 3, 2023. To submit a comment, click here, and the ASB will review your feedback. Appraisal Standards Board chair Michelle Czekalski Bradley and vice president of appraisal issues Lisa Desmarais will host a webinar to discuss this exposure draft on Jan. 12, 2023, at 1:00 p.m. ET. Register here to attend the webinar.

Growth rates for software firms underestimated, says research paper

Both management and market analysts “systematically underestimate the annual growth rates of software companies,” according to researchers who examined these types of firms. Software firms are growing at 13.9% annually, and this growth is being underestimated by over a third. The paper also examines the importance of software to the economy and investigates whether market participants are adequately appreciating the dramatic technological shift that software is supporting and disrupting in the global economy (they’re not). The paper is: “The Value of Software,” by Collin Dursteler, Roberto Gomez Cram, and Alastair Lawrence, all from the London Business School.

Urge to merge? Look beyond the numbers

For some BV firms to grow, it’s a matter of acquire or be acquired. A deal may come along that looks good on paper, but you need to go beyond the numbers before you actually take the leap.

Recent example: Two large accounting firms recently called off their planned merger due to a “cultural mismatch,” according to Inside Public Accounting. The firms, Elliott Davis and Whitley Penn, had announced plans to merge this past June.

While this deal didn’t work out, it does illustrate the importance of cultural fit and of exploring opportunities for growth. Take the recent acquisition of Vantage Point Advisors, a boutique valuation and advisory firm with 30 professionals, by Stout, the global investment bank and advisory firm with 900 professionals. Stout’s private equity partner, Audax, which made an investment in Stout in late 2021, provided advice on how to build the firm’s valuation practice, which included an acquisition strategy. One of the important considerations in the acquisition was how the cultures of the two organizations would align.

What are the other attributes of the buyer and seller that make them attracted to each other? The January 2023 issue of Business Valuation Update has an article that includes interviews with some of the professionals at Stout and Vantage Point who made the deal happen.

Court’s value of law firm interest KO’d on appeal

No operating agreement and no buy-sell agreement can trigger dragged-out fighting when a member or owner leaves the firm. Such is the case with a law firm (an LLC) in Maryland, where one of the firm’s five members withdrew and the haggling started over the value of his 26.5% interest. Two years after withdrawing in 2017, the member sued the firm for his share—and the battle continues.

Court goofs: The trial court rejected the value the firm’s valuation expert put forth and did its own figuring. The member withdrew on Jan. 9, 2017, and, absent an operating agreement, the court looked to the state’s “bare bones” LLC statute, interpreting it as meaning that the member was entitled to his share of the firm’s profits through the end of 2017. The firm’s profit for 2017 was $319,594, so 26.5% of that was $84,692. The decision was appealed.

The appellate court ruled that the trial court misinterpreted the LLC statute and should not have considered the firm’s profits after the date of the member’s withdrawal. The case now goes back to the trial court to determine the member’s “fair value of assets, profits, losses, and distributions to which he was entitled on January 9, 2017.”

The case is Furrer v. Siegel & Rouhana, LLC, 2022 Md. App. LEXIS 745; 2022 WL 9834101, and the full court opinion and a case analysis are available on the BVLaw platform.

Restaurants and inflation: what’s the breaking point?

Restaurants have been raising prices more aggressively in recent months to offset rising food and labor costs, according to an update from the Vertical IQ industry research platform. Full-service restaurant prices rose 9% year over year in August 2022, according to the most recent federal data, while limited-service prices rose 7.2%, Restaurant Business reported.

Point of no return: But there comes a “breaking point” at which restaurant traffic plunges when price increases get too aggressive, concludes a study by the consulting firm Revenue Management Solutions (RMS). “When price increases went beyond 10% to 13%, traffic started to severely decline, negating some or all of the net sales benefits,” Scott Foxworth, director of consulting services at RMS, says. His firm analyzed in-store price increases in the second quarter for 25,000 locations to find the consumer breaking point. The consultancy also found that 45% of consumers said they are eating out less and that a rising percentage of consumers say they are ordering less expensive items or choosing less expensive restaurants.

Vertical IQ provides regular industry updates such as that cover 97% of the U.S. economy and Canada. The platform recently added role-based “Prep Sheets” to help prepare for a management interview or site visit. For information on the platform, click here.

New edition of Moro Visconti’s book on digital intangibles is out

The second edition of The Valuation of Digital Intangibles by Roberto Moro Visconti includes updates that address the metaverse, cloud storage, multisided digital platforms, ESG compliance, and more. The author is professor of corporate finance at the Catholic University of the Sacred Heart in Milan and is the owner of the Moro Visconti firm (chartered accountants). Moro Visconti has nearly 70 research papers on SSRN such as these recent titles: “From Physical Reality to the Internet and the Metaverse: A Multilayer Network Valuation,” “The Valuation of E-Health and Telemedicine Startups,” and “Digital Art Valuation.” These papers can be found at the Social Science Research Network. Click on the paper title to download the entire document.

Global BV News

Industry multiples down in Europe

EV/EBITDA multiples have generally decreased in Europe over the third quarter of 2022, according to the fourth edition of Kroll’s “Industry Multiples in Europe” quarterly report. The sector with the largest decrease in the third quarter of 2022 was information technology (2.5x decrease), heavily impacted by software companies. The report also notes that eurozone growth is expected to be 3.1% in 2022, reflecting a stronger-than-expected second quarter in most eurozone economies, led by growth in tourism-dependent economies. The full report is available if you click here.

Preview of the January 2023 issue of Business Valuation Update

Here’s what you’ll see:

• “BV Year in Review 2022: Ongoing Challenges” (BVR Editor). What did you miss in 2022? Catch up on the highlights in the business valuation profession through over 70 articles and hundreds of news items this newsletter covered in 2022.
• “An Inside Look at the Stout Acquisition of Vantage Point” (BVR Editor). Hear from the architects of this acquisition what makes a business valuation firm an attractive acquisition target—and what attributes of the buyer make it a good fit for the target.
• ·         “BVLaw Review: The Top Valuation Cases of 2022” (BVR Editor). Here is our pick of the most noteworthy valuation cases that emerged over the past year. They include state and federal court decisions covering many areas of law that enhanced our understanding of valuation issues as they arose in a litigation setting.
• ·         “How to Use the Latest DLOM Study for the Johnson/Park Empirical Method” (BVR Editor). An example of how to apply the Johnson/Park empirical method, which is based on the fundamental concept of risk and reward. The annual study serves as a basis to determine how much of an increase in the rate of return is required to compensate investors for the lack of marketability of a subject interest.
• “Recap of the Biggest BV Event of 2022—the AICPA FVS Conference” (BVR Editor). The AICPA’s plans for its forensics and valuation section, incredible frauds, an opportunity in bankruptcy, tips for determining goodwill, and the future of BV are discussed in this recap article—the first of several that will cover this biggest conference of the year.
• “BVR Survey Reveals Career Obstacles of Young BV Practitioners” (BVR Editor). What do today’s young BV practitioners see as holding them back in their careers? Managers need to know this or risk losing good people. Here are some valuable insights from a first-ever survey BVR and the BV recruiting firm Borrowman Baker conducted with the cooperation and support of the American Society of Appraisers (ASA).

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues.

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.

Global BV News

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. 

Valuing a minority interest with no information on the subject company

In a Maryland divorce case, neither valuation expert had any documents or financial information from the husband’s ambulatory surgical center (ASC) in which he owned a small interest. The wife’s expert based his valuation on a recent sale of a controlling interest in the ASC to get an equivalent value for the husband’s remaining share, which amounted to $332,000. The expert for the husband used his Form K-1 and a buy-sell agreement in the operating agreement and came up with a value of $45,000, after revising his opinion along the way. The trial court sided with the wife’s expert, saying his analysis was “more persuasive.” The husband appealed, but the appellate court affirmed the trial court’s ruling, saying that, as long as the court’s decision was “reasonable, logical and explained in detail,” the court was not “clearly erroneous” in choosing the wife’s expert over the husband’s expert.

The case is Goicochea v. Goicochea, 2022 Md. App. LEXIS 729; 2022 WL 5113852, and a case analysis and full opinion can be found on the BVLawplatform.

2022 Johnson/Park DLOM study is now available

The Johnson/Park empirical method to estimate a discount for lack of marketability (DLOM) is one of the most popular methods business appraisers use for this purpose, according to a BVR survey. The method highlights the relation of the DLOM to the return on the investment and quantitatively measures the impact of the rate of return as a function of the DLOM. This methodology has been used in several tax court cases, including the first family limited partnership (FLP) case to go to trial. The “2022 Discount for Lack of Marketability Study” provides objective rate-of-return measures to implement the Johnson/Park empirical method and includes a thorough explanation and example on how to apply these data.

Private firms pay a median $30,000 in board retainers

To support adjustments for reasonable compensation when doing private-company valuations, comparable data are necessary. One source for private-company board member compensation is the “Private Company Board Compensation and Governance Survey,” conducted by Compensation Advisory Partners (CAP) and Family Business and Private Company Director magazines. The new 2022 third edition of the survey contains over 1,200 responses, an increase of about 300 participants from the prior full version of the survey in 2020.

Board retainers are highly correlated with company size, the survey says, ranging from a median of $20,000 at firms with less than $10 million in revenue to $65,000 at firms with greater than $1 billion in revenue. In addition to retainers, other elements of cash compensation for private-company directors are annual travel reimbursements and in-person meeting fees, provided by about half of the respondents.

A summary of the survey is available if you click here. Full results are available only to survey participants.

Global BV News

Results of the first student BV Challenge in Canada

The CBV Institute has announced the winners of its inaugural Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. The competition saw 19 teams test their business valuation skills, and in first place was the team from Haskayne School of Business—University of Calgary (Katherine Borger, Lizelle Jansen Van Vuuren, Emily Chen, and Jerry Qin). In second place was the team from Rotman School of Management—University of Toronto (Andrew Koh and Jesse Wang), and in third place was the UBC Sauder School of Business (Tony Liaw, Ayush Malhorta, and Matthew Stuart). A total of 59 students participated. The top three teams received cash awards, and the members of the first-place team will receive complimentary enrollment to Level 1 in the CBV Program of Studies. “With demand for CBVs at an all-time high, the BV Challenge is an excellent opportunity to introduce undergraduate business students to our rapidly expanding and evolving profession,” said Dr. Christine Sawchuk, president and CEO of the CBV Institute. More details on the competition are available if you click here.

Valuations of German and European banks

The decline in market capitalizations coupled with a positive earnings outlook has led to record levels of the implied cost of equity of 14.8% for European banks and 17.8% for German banks, according to the latest edition of the Alvarez & Marsal’s “Germany Valuation Insights.” The high levels of return on equity have been driven by cost savings and moderate loan losses. Download the full November 2022 report by clicking here.

• Inflation showcased in lead-off session at the AICPA FVS conference

  As this issue rolls off the (virtual) presses, BVWire is attending the AICPA & CIMA Forensic and Valuation Services Conference. The kickoff session of the three-day event, which was presented by Carla Nunes and Jim Harrington, both with Kroll, discussed the cost of capital ramifications of the Russia-Ukraine War and global inflationary pressures.

  Uncertainty and volatility: The raising of interest rates by the major central banks and the war have led to progressively weaker growth forecasts for the U.S. and other economies. “There will be a lot of pressure on earnings over the next couple of years,” said Nunes in a recent video. Revenue growth will depend on the ability to pass on increased costs to customers, but costs may outpace revenue growth and the price increases could weaken demand.

  The increased uncertainty about economic growth and company earnings could result in a variability around expected cash flows, which makes equity risk higher. Recently, Kroll increased its recommended U.S. equity risk premium (ERP) from 5.5% to 6.0% when developing USD-denominated discount rates as of Oct. 18, 2022. This is matched with the higher of a normalized risk-free rate of 3.5% or the spot 20-year U.S. Treasury yield as of the valuation date if it is higher than 3.5%, Kroll said in a recent update.

  Also, increased financing costs raise the cost of debt, so there may be less M&A activity, Nunes remarked, and you could see valuations going down.

  Appellate court rules on valuation of inventory in Sears bankruptcy

  Sears (the Amazon of its day) recently emerged from bankruptcy after four years and thousands of court filings. One of the many issues involved in the bankruptcy was the valuation of inventory.

  Wide disparity: Second-lien holders, entitled to payment only after the debts of first-lien holders have been discharged, argued that the value of the collateral that secured their claims, as measured on the petition date, vastly exceeded what they had been paid and that they were accordingly entitled to priority payment of the difference. At trial, all parties put on evidence as to the value of the assets at the petition date. The differences varied widely. “The differences among these values turned primarily on how the experts calculated the revenue Debtors could expect to earn from selling their inventory.”

  The appeal dealt primarily with this inventory issue and how it should be valued. The Bankruptcy Court, affirmed by the district court, used a net orderly liquidation value (NOLV) to determine the value at the petition date. The appellate court affirmed the judgments of the two lower courts.

  The case is ESL Invs., L.P. v. Sears Holdings Corp. Debtor-Appellee (In re Sears Holdings Corp.), 2022 U.S. App. LEXIS 28584, and a case analysis and full opinion can be found on the BVLaw platform.

  New FASB rules on crypto coming in first half of 2023

  Under proposed accounting rules, fungible tokens will be measured at fair value as opposed to the cost (less impairment) model. The rules will be issued for public comment during the first half of 2023, said FASB chair Richard Jones at a recent conference, according to a report. Back in May 2022, the FASB added a project on digital assets to its technical agenda that would provide standards for crypto accounting. It was later announced that nonfungible tokens (NFTs) and certain stablecoins were to be excluded from the forthcoming guidance. Before the proposed guidance is released, the FASB will need to address certain issues, such as where changes in fair value should be presented (in earnings or in other comprehensive income), disclosure requirements, and whether the change in measurement attribute be recognized prospectively or retrospectively.

  AICPA session reiterates request for comments on business combinations guide

  A session at this week’s AICPA FVS conference discussed the recently released Draft Accounting and Valuation Guide, Business Combinations, which provides guidance and illustrations regarding the accounting and valuation considerations for business combination transactions. It addresses many accounting and valuation issues that have emerged over time and is designed to help preparers, auditors, and valuation specialists understand and comply with the requirements of FASB ASC 805, Business Combinations, and FASB ASC 820, Fair Value Measurement. The AICPA is seeking comments, which are due by Jan. 15, 2023 (see the document for how to submit comments). To download the working draft, click here.

  Global BV News

  KPMG releases cost of capital study

  KPMG has published its “Cost of Capital Study 2022” that addresses the impact of high inflation on company valuations. This edition examines the influence of rising inflation rates on business models, corporate developments, and on long-term return expectations (cost of capital) based on sector-specific analyses. To download the study, click here.

  OECD releases final fiscal valuation guidance for crypto-assets

  The Organization for Economic Cooperation and Development (OECD) has published the final Crypto-Asset Reporting Framework (CARF), which provides for the automatic exchange of information between countries on crypto-assets. These are intended as global standards, though the U.S. likely will not adopt them, and it’s left to individual countries to apply them within their own jurisdictions.

  The final CARF provides some guidance on hard-to-value assets. They allow analysts to rely on the second value of new resulting property if the hard-to-value asset is exchanged. In addition, if the relevant crypto-asset service provider does not maintain an applicable reference value, it may rely on, first, the internal accounting book values with respect to the relevant crypto-asset should be used. If a book value is not available, a value provided by third-party companies or websites that aggregate current prices of relevant crypto-assets must be used if the valuation method that third party used is reasonably expected to provide a reliable indicator of value. If neither of the above is available, the most recent valuation of the relevant crypto-asset must be used. If a value can still not be attributed, a reasonable estimate may be applied as a measure of last resort.

  Prior to the release of the final rules, based on responses to the initial March 2022 draft, the OECD revised many provisions including the definition of covered assets, the treatment of decentralized finance (DeFi) platforms, and who would be required to report. The final rules include a new threshold of $US50,000 for retail transaction reporting.

  Preview of the December 2022 issue of Business Valuation Update

  Here’s what you’ll see:

• “Good News in New BVR Survey of Young ASA BV Experts” (BVR Editor). Preliminary results of a first-ever survey designed to gain some insights and perspectives to help the profession better attract and develop the younger generation of BV practitioners. The survey was conducted by BVR and the BV recruiting firm Borrowman Baker with the support of the American Society of Appraisers and was sent to ASA members under 40 years old in the business valuation discipline.
•  “Hot Topics at the 2022 VSCPA Forensic and Valuation Conference” (BVR Editor). It was back to in-person attendance at the 22nd annual Forensic and Valuation Conference hosted by the Virginia State Society of CPAs. Topics included the income approach, effective recruiting, reasonable compensation, guideline transactions, surviving cross-examination, IRS developments, and a “Hardball With Hitchner” session that covered some front-burner issues.
• “Appraisers Continue to Be Excluded Most Under Daubert, Per PwC Study” (BVR Editor). Under Daubert, appraisers were excluded more often in 2021 than any other type of financial expert witness, according to the latest edition of an annual PwC survey. Of the three most common financial experts (economists, accountants, and appraisers), appraisers had a 38% exclusion rate in 2021, followed by accountants (32%) and economists (27%). The article gives more insights into the survey and some ways to avoid a Daubert challenge.
• “New Case Points Up Practice Opportunity in Reasonable Compensation” (BVR Editor). Opposing counsel attacked a valuation expert over his expertise in assessing reasonable compensation—and also criticized the data he used. The expert prevailed in this challenge, which illustrates that valuation experts can take on engagements in tax matters and shareholder disputes involving the fair market value of executive compensation.
• “Pratt’s Document Request Checklist Stands the Test of Time” (BVR Editor). The new sixth edition of Shannon Pratt’s Valuing a Business does not only contain a great deal of valuation concepts, but also includes some very practical advice and tools. One such tool that has endured is a checklist for an initial request for documents. The list has some minor updates, but it is essentially the same as the one Pratt included in prior editions.
• “Recap of the New Jersey CPA Society FVS Conference” (BVR Editor). Some excellent speakers covered litigation tips, malpractice, estate tax audits, statistics for lost profits, cryptocurrency, and divorce matters at the Forensic and Valuation Services Conference hosted by the New Jersey Society of Certified Public Accountants (NJCPA).

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “ktMINE Royalty Rate Data,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the December 2022 issue of Business Valuation Update.

BV movers . . .

People: David Mitchell has been appointed as managing director in the valuations practice of Interpath Advisory, formed two years ago as a management buyout from KPMG; he was previously head of the UK valuations team at BDO and has specific expertise in the specialized area of tax and restructuring valuations … Michael Koch, CVA, has been chosen to lead the valuations practice at Lancaster, Pa.-based RKL LLP; he has experience in valuation, financial modeling/projections, and litigation support and has performed engagements for gifting, estate planning, buying or selling a business, and other analysis and consulting for clients in a wide variety of industries … Rob King, CPA/ABV/CFF, associate director in the Hattiesburg, Miss., office at Postlethwaite & Netterville, was named chairman of the forensic, litigation, and valuation services committee for the Society of Louisiana CPAs.

Firms: Albuquerque, N.M.-based REDW LLC has added Edwards Largay Mihaylo & Co. PLC (ELMCO) of Phoenix, a firm that provides tax compliance, business and tax consulting, and accounting services to a wide range of clients … Los Angeles-based SingerLewak has combined with HBLA Certified Public Accountants of Irvine, Calif., which has 21 employees and provides accounting, audit, tax, estate planning, and bookkeeping services to privately held businesses including professional services firms such as engineering, architectural, law offices, and medical and veterinary practices … Parsippany, N.J.-based Sax LLP is adding Steven R. Press CPA PC of Mamaroneck, N.Y., a firm with a focus on employees and founders of tech and high-growth companies … Carmel, Ind.-based Blue & Co. LLC is adding Lee R. Ford & Associates of Carmel, Ind., which serves clients in the areas of construction, real estate, and privately owned businesses.

• First-ever survey of young BVers gives rare insights

  Preliminary results of a new survey confirm that most BV practitioners were not made aware of the profession in their early years. About two-thirds of respondents say they were not made aware of the profession in college, in either graduate or undergraduate studies. Until now, we’ve heard anecdotally that many young practitioners discover BV by accident, and this new survey backs that up.

  The survey, conducted by BVR and the BV recruiting firm Borrowman Baker, was launched with the cooperation and support of the American Society of Appraisers (ASA). Respondents are ASA members under the age of 40 whose primary discipline is business valuation. The goal is to gain some insights and perspectives to help the profession better attract and develop the younger generation of practitioners.

  Reach out. Once students hear about BV, it could change the course of their career plans. “I planned to go into audit, but I met someone who was a CPA and did valuation work,” one respondent said. “Hearing what valuation was made me pursue it instead of accounting work.” For its part, the ASA is urging its members to visit their alma maters and talk about the profession to students. This idea works. “I took a business valuation elective in business school and a partner at a BV/FLS shop did a guest lecture. That is how I learned about the BV profession.” This respondent now has several years of BV experience under his belt.

  We know a number of firms that maintain a presence at local colleges and have success recruiting from those schools. But, clearly, more firms and valuation groups need to ramp up their efforts to increase awareness.

  Other insights. Much can be learned from the young generation of BV practitioners. Other survey questions asked about such things as the quality of training they received, why they left their last firm, and whether they still see themselves doing valuation work five years from now.

  BVR will post as a free download the full survey results once they have been compiled. In the meantime, more detailed results will be in the December issue of Business Valuation Update.

  Most firms can’t forecast impacts of ESG

  A new global survey highlights the difficulty in quantifying the financial impacts of environmental, social, and governance (ESG) factors. Over half the firms surveyed (54%) say they are unable to estimate the financial impacts of any ESG factors in their forecasting. Of the rest, 42% say they could partially estimate the impacts and 4% said they could fully estimate it. At this point, most firms don’t believe ESG has a very material impact on firm value, but the reason for this could be the difficulty in quantifying it.

  The International Valuation Standards Council (IVSC) conducted the ESG survey, and the majority of responses came from firms based in Europe (67%). Other responses came from firms located in Asia (17%), North America (11%), and Africa (6%). Respondents were a mix of small and medium-sized firms and multinational organizations. The full results are available if you click here.

  Extra: A new research paper from the CFA Institute proposes a performance evaluation and attribution framework for ESG investment strategies.

  Competition keeps cost of capital platform prices down, experts believe

  That’s the feeling of a panel of veteran valuation experts who presented at the recent Forensic and Valuation Conference hosted by the Virginia State Society of CPAs. One commenter felt that you’d be paying “double or triple” the current price if users had only one choice. For a long time, the only game in town was from Duff & Phelps (now Kroll), first with its Valuation Handbook series and then with its online Navigator, launched in early 2018. Feeling that the profession needed a simpler, less expensive alternative, BVR came out with its Cost of Capital Professional later that same year. When they go head-to-head, both platforms produce results that are not that different. A 2019 article in Business Valuation Update reported on the head-to-head demo. More recently, an article in the October 2022 issue of Hardball With Hitchner confirmed that the two platforms still produce similar results.

  Survey reveals use of Excel add-ins for the GPCM

  As part of BVR’s ongoing surveys related to data resources and methodologies, we recently ran a short survey on the use of Excel add-ins for the guideline public company method (GPCM). The survey generated about 50 respondents, and here’s what we found:

• Almost half (45%) of the respondents use the GPC method in 50% of their valuations or more.
• Only 15% said they never use the GPC method.
• Of those who use the GPC method, 71% use an Excel add-in.
• The most commonly used add-in was from Cap IQ, followed closely by Tagnifi.
• Of those who use an add-in, 44% use it exclusively (no other resource besides the add-in). Of the 56% that use another resource in addition to the add-in, it was primarily EDGAR (SEC) for fundamentals and Yahoo Finance for stock prices—presumably to verify data from the add-in.
• Of those currently not using an add-in, 100% said they would be interested in using one.

• Our thanks to those of you who responded, and we’ll continue these surveys in the future.

  Sessions we’re eyeing for next week’s AICPA FVS conference

  BVWire will be at the AICPA & CIMA Forensic and Valuation Services Conference November 14-16, which will be live from the Wynn Las Vegas and Encore. There’s a lot to choose from in the almost 60 sessions on the agenda, but we’ve checked off a few so far that we plan to attend:

• Cost of Capital Ramifications of the Russia-Ukraine War and Global Inflationary Pressures; Carla Nunes (Kroll) and James Harrington (Kroll);
• Personal vs. Enterprise Goodwill: How the Analysis Lies Within the Facts; Audra Moncur (Wipfli) and Karolina Calhoun (Mercer Capital);
• Forensic and Valuation Experts in a Shareholder Dispute: How Two Experts Look at the Same Data Differently; Brett Axelrod (Fox Rothschild) and Hubert Klein (Eisner Advisory Group);
• Complex Business Asset Tracing—Separate or Marital PLUS Active or Passive; Stefanie Jedra (Marcum) and Josh Shilts (Shilts CPA);
• When Valuation Experts Disagree (Panel); Harold Martin (Keiter), Bethany Hearn (CLA), Karolina Calhoun (Mercer Capital), and James Hitchner (Financial Valuation Advisors);
• Moving on-Chain: Unwinding the Complexity of Crypto; Eric Forni (DLA Piper), Peter Altman (Akin Gump Strauss Hauer & Feld), and Kevin Madura (AlixPartners);
• Valuation Hot Topics; Lisa Cribben (Wipfli), Stacy Collins (Financial Research Associates), Chris Mercer (Mercer Capital), and James Hitchner (Financial Valuation Advisors);
• Business Combination Guide (recently released draft); Adam Smith (PwC), Mark Edwards (Grant Thornton), Gary Roland (Kroll), and Frederik Bort (KPMG);
• The Forensic: How the CIA, a Brilliant Attorney and a Young CPA Brought Down Howard Hughes; Paul Regan (Hemming Morse, CPAs); and
• Marketability Discount—Why Are There Such Varying Opinions?; Brian McIntyre (Withum Smith Brown) and Natalya Abdrasilova (Boyle, Deveny, & Meyer).

The conference will also be streamed online, and there’s a “select 7” option that allows you to focus on specific topics to match your needs. The event offers 12 to 20 CPE credits, and the agenda has something for everyone. You can get more details and see the full agenda on the conference site if you click here. Watch for our coverage in future issues!

Global BV News

Industry multiples in Europe decrease in 2Q22

Inflation, volatility trigger increase in ERP, per Kroll

Kroll has increased its recommended U.S. equity risk premium (ERP) from 5.5% to 6.0% when developing USD-denominated discount rates as of Oct. 18, 2022. This is matched with the higher of a normalized risk-free rate of 3.5% or the spot 20-year U.S. Treasury yield as of the valuation date if it is higher than 3.5%, Kroll says.

Big picture: “Starting in mid-January, as inflation continued to surprise with increasingly higher-than-expected readings reaching levels not seen in 30 to 40 years in some countries, global equity markets became more volatile,” says the firm in a recent update. “Investors have tried to ascertain the magnitude and speed at which central banks will raise interest rates, leading to a potential decrease in the value of companies in various industries due to an increase in discount rates.”

In the same update, Kroll issued its recommendations for Canada, the eurozone (from a German investor perspective), and the United Kingdom.

Court uses old transaction to value a dental practice

In a North Carolina divorce case, the wife’s stake in a dental practice was valued based on what she paid for it two years before she and her husband separated in 2015 (the valuation date). She had purchased a 50% share of a father-son practice from the father, who continued to work at the practice and was paid as an associate. She paid $1.2 million, which was based on an appraisal that included $1 million of goodwill. At the date of separation, she was still carrying the $1 million of goodwill on the books. The elder dentist was still working at the practice, which had a long history and excellent reputation in the community.

No experts retained: At trial, neither the husband nor wife offered up a current valuation of the practice, so the court examined the price paid for the wife’s stake two years before, concluding that it was an arm’s-length transaction. The court also investigated what happened to the practice in those intervening two years. It noted that the balance sheet still carried the $1 million of goodwill and that the elder dentist who had sold out was still working at the practice. “Persons looking at the practice would not see any change that might impact the goodwill,” the court wrote. Therefore, the court valued the business at essentially what was on the balance sheet (the $1.2 million purchase price less some small accounting adjustments).

The wife appealed, but the appellate court affirmed the trial court’s decision, noting that, although the valuation approach was “rudimentary,” it was “sufficiently reliable” considering both parties chose not to retain experts to prove otherwise.

The case is Logue v. Logue, 2022-NCCOA-625; 2022 N.C. App. LEXIS 644; 2022 WL 4350119, and a case analysis and full opinion can be found on the BVLaw platform.

Appraisers have highest exclusion rate under Daubert, per PwC study

Under Daubert, appraisers were excluded more often in 2021 than any other type of financial expert witness, according to the PwC survey, “Daubert Challenges to Financial Experts (2000-2021).” Of the three most common financial experts (economists, accountants, and appraisers), appraisers had a 38% exclusion rate in 2021, followed by accountants (32%) and economists (27%). Over the 22 years of the study, appraisers have the highest exclusion rate (44%) of the three. The exclusion rate includes full and partial exclusions.

The annual study analyzes challenges to financial expert witnesses (appraisers, accountants, economists, and others) under the Daubert standards from 2000 to 2021. These are the years following the U.S. Supreme Court’s Kumho Tire decision, which expanded Daubert’s reach to financial expert witnesses. For the full report, click here.

Customer relations is the top intangible, per Markables study

Customer relations is the most important of all intangible assets, accounting for 25% of enterprise value, according to a new study from MARKABLES. Next in line are software and technology, at 18% of enterprise value each, and last comes trademarks, at 8%. “Looking at the development during the last 15 years, customer relations showed the highest growth, while trademarks suffered badly, from a once leading position to last place,” says the study. The analysis was compiled from the MARKABLES database of almost 40,000 intangible assets acquired and valued globally in mergers between 2005 and 2021. The analysis reveals size, composition, and value drivers of different intangible assets.

AICPA FVS conference offers a ‘select 7’ option

Almost 60 sessions are offered at the upcoming AICPA & CIMA Forensic and Valuation Services Conference November 14-16 in Las Vegas live and online. For those virtual attendees who want to pick and choose some sessions, a “select 7” option is available so you can focus on specific topics that match your needs. With this option, you can choose any seven sessions from the main conference agenda. You will receive access, agenda creation, and material download instructions a few days before the conference starts. What’s more, you can adjust your agenda at any time. Check it out! For more details, click here.

Global BV News

New CBV Insight on damages published

The IRS to BV experts: We want you!

No, not for an audit. The agency is looking to hire experienced business appraisers for 14 open positions across the U.S., Gary Smith, IRS lead financial analyst, tells BVWire. The IRS uses the title financial analyst for its business valuation specialists. The salary range is from $94,373 to $150,703 per year, according to the job posting, which you can see if you click here.

Other side: “As can be expected, the position involves reviewing (and sometimes challenging) valuations of operating entities, holding entities, or intangible assets, prepared in a fair market value/tax context,” Smith says. Some travel may be required, and the positions are “telework eligible” after the probationary first year, which allows the analyst to work remotely approximately four days a week. Federal benefits including a pension and a “great” work-life balance, “along with the peace of mind that comes from knowing that you’re working for the right side of the table!” he quipped. Bet you didn’t know the IRS had a sense of humor!

For all of the details, including job description, experience requirements, locations offered, how to apply, and more, just click here. The job posting should answer all your questions, but if you have any other questions for Mr. Smith, you can email him at Gary.A.Smith2@irs.gov.

How long will high inflation last?

The U.S. economy will be returning to a more normal level of inflation by late 2023 and heading into 2024, according to published research presented during a recent BVR webinar conducted by William Harris (Trugman Valuations). In the short term, valuation analysts should examine their subject company’s industry to assess the impacts of inflation because not all industries have been impacted the same, Harris pointed out. At his firm, he has seen some companies struggling with supply-chain issues and rising input costs, while other companies have been able to pass through these costs successfully to end users. Therefore, a thorough understanding of how the current economic environment impacts the subject company is essential, he stresses.

Methodology: Because of the current economic picture and the events that have impacted the last few years of historical financials, the capitalized cash flow (CCF) model has given way to the discounted cash flow (DCF) model, Harris notes. He also advises that, with the market approach, an understanding about how the current inflationary environment impacts guideline public company multiples and transaction multiples is also essential. Historically, high levels of inflation have driven down publicly traded and M&A multiples and have eroded corporate earnings. Stock prices have tended to be lower as investors have increased their required rate of return expectations. With respect to the M&A market, deal volume has historically declined in high inflationary environments and multiples have tended to be lower. This is largely due to the increased financing costs since the Federal Reserve tends to fight inflation by raising interest rates, which makes financing transactions more expensive.

Harris wrote two articles in the October issue of Business Valuation Update explaining the valuation impacts of high inflation, which also includes a case study of an income forecast that takes high inflation into account.

Koltin’s eye-opening remarks at the NACVA conference

Allan Koltin (Koltin Consulting Group) has served as an adviser and broker on many of the biggest M&A deals in the accounting space. During his keynote address at a recent NACVA conference, he made some observations that some may find surprising, including a prediction that private equity will soon own more than half of the top 20 accounting firms. While much of what he said related to CPA firms, BV firms are facing similar issues. As for the M&A frenzy, part of the reason for it is the recognition that acquisitions are needed for larger firms to be able to grow at a reasonable rate (you can only bill out so many hours). He also noted that once PE firms acquire a large accounting firm as an “anchor tenant,” they will seek out smaller firms with between $15 million and $100 million in revenue for potential M&A deals. He made several other observations:

• Offshoring is a model whose “time has come” because many practitioners have become so busy that they can’t devote enough time to managing their firms.
• The “war for talent” is “tremendous” and will continue for the next five to 10 years. The number of accounting grads is down and so is the number of CPA exams being taken.
• Staff costs have ballooned to 40% to 50% of overall firm costs (it used to be one-third each for overhead, staff/workforce, and partners’ profit).
• Reliance on compliance work is changing and is shifting more to higher value-added and more profitable areas of advisory services.

Koltin also noted that the aging of the profession is creating a need for succession planning, including some creative alternatives to traditional strategies.

Extra: The next NACVA “super” conference will be December 14-16 in-person from two locations: Park City, Utah, and Fort Lauderdale, Fla. A virtual option is also available, and sessions can be ordered á la carte. Click here for details.

Prevailing expert comments on ‘moonshine’ case

In an earlier issue, we reported on an appellate court case involving the valuation of an owner’s one-third share in a Tennessee moonshine distillery (click here for the prior coverage). The court opinion said that the expert whose valuation the court accepted offered a modified report that eliminated the discount for lack of control (DLOC). But the expert who prevailed, Renee Harwell (Harwell Valuation Advisors), tells us: “Actually, the valuation wasn’t modified. My valuation report showed the lack of control and lack of marketability adjustments, as the entity was an LLC that filed as a sole proprietorship that represented itself as a partnership, so it was unknown what law to apply. The appellate court went with partnership.”

Harwell continues: “Why the appellate court remanded when they could have simply removed the lack of control adjustment is unknown. However, upon remand the same valuation report was used, and the adjustments pointed out to the court, which then declared the value at $35,000 without the DLOC.”

The case is Boesch v. Holeman (II), 2022 Tenn. App. LEXIS 335, and a case analysis and the full opinion can be found on the BVLaw platform.

Goodwill impairments YTD 2022 are up, per Kroll analysis

Risky financial markets and an uncertain economic environment add up to increased goodwill impairments. So far in 2022, the amount and frequency of goodwill impairments recorded by U.S.-based companies have increased. An analysis by Kroll finds that, compared to 2021, the top 10 impairments recognized thus far are triple the size of the top 10 for overall 2021 (see below). The data were compiled on Aug. 15, 2022.

Kroll notes that the spotlight is now on goodwill impairment assessment because many companies have annual goodwill impairment testing dates that fall in the second half of the year. What’s more, “significant changes in the economic environment increase the likelihood of having to perform a quantitative goodwill impairment test (rather than a qualitative assessment),” the firm says. You can read more of Kroll’s analysis if you click here.

BVWire to cover the AICPA FVS conference November 14-16

BVWire is looking forward to the AICPA & CIMA Forensic and Valuation Services Conference November 14-16, which will be live from the Wynn Las Vegas and Encore. It will also be streamed online, and there’s a “select 7” option that allows you to focus on specific topics to match your needs. The event offers 12 to 20 CPE credits, and the agenda has something for everyone. One session we are sure to attend will discuss the AICPA’s draft of its new accounting and valuation guide for business combinations. You can get more details and see the full agenda on the conference site if you click here. Watch for our coverage in future issues!

Reminder: Please take a survey on Excel add-ins for the GPCM

As part of BVR’s ongoing surveys related to data resources and methodologies, we’re exploring the use of Excel add-ins for the guideline public company method (GPCM). Are Excel add-ins prevalent? Which add-ins are used? What other data resources are used for the GPCM? Please take a very short two-minute survey, and we’ll present the results here in a future issue. Learn what your peers are doing! To go directly to the survey, click here. If you already took the survey, thank you!

Global BV News

IVSC issues new paper on brand value

The International Valuation Standards Council (IVSC) has released the third in a series of perspective papers on intangible assets. Parts 1 and 2 of the series examine the “Case for Realigning Reporting Standards With Modern Value Creation” and took a deep dive into human capital value creation and measurement. Part 3 takes a deeper dive into brands and reputation value creation by:

·   Examining how brands generate value for organizations and the attributes of such value creation;

·   Analyzing how investors assess the enterprise value creation attributable to brands; and

·   Discussing the value measurement techniques and assumptions used to estimate the value of brands.

To download the new paper, click here.

• Dealing with stubborn inflation in your valuations

  With the CPI numbers coming in higher than expected, valuation experts will continue to grapple with how to assess the impact of inflation on their subject companies. During a BVR webinar on this very topic, Aswath Damodaran (New York University Stern School of Business) noted that, “even if you don’t consider inflation directly, it is still affecting your margins and your growth. You have to dig through the layers of your businesses to see how the impact plays out.”

  Margin impacts: Margins (current and target) depend on the company’s cost structure. If the company has high gross margins, the cost inputs are low and (if those inputs are not commodities) inflation might not affect the margins. For example, a software company has high margins that can be 40% or 45% steady state for a simple reason: The extra unit of software it sells costs nothing to make. But, if gross margins are low, typically many cost inputs are needed to produce a product or service. For example, an air carrier has many cost inputs that are commodity inputs (such as oil), so its margins will actually get squeezed if there is high and unexpected inflation. “Operating margins capture the profitability of your business model,” Damodaran observes.

  Growth/investment efficiency: When inflation becomes high and unstable, individuals and companies do not like to invest long term because it will take longer to recoup that investment. As inflation gets higher and more unstable, long-term investment tends to drop off. Unexpectedly high inflation will hurt a manufacturing company a lot more than a service company, which makes much more short-term investments.

  To capture how efficiently a company is delivering growth, Damodaran uses a ratio called sales to invested capital. (Many analysts use return on invested capital, but he thinks that metric is “vastly overrated.”) Sales to invested capital looks at revenues per dollar of invested capital. What does that measure? If you are a more efficient company, you should be able to generate more revenue per dollar of invested capital. Revenue growth margins and sales to invested capital capture the business model for a company. “I challenge you to find me any nonfinancial service company where I cannot capture the business model with those two inputs,” he says.

  BVR is making available free of charge a recording of Damodaran’s 77-minute webinar, In Search of a Steady State: Inflation, Interest Rates, and Value; The (Inflation) Genie Escapes the Bottle! You can access it if you click here (login required).

  Cryptocurrency under the radar

  At the recent AAML/BVR National Divorce Conference, this question was asked: On your client intake forms, do you have any questions about cryptocurrency? Only a very few hands were raised. Questions that need to be asked include: Do you hold any cryptocurrency? Do you believe your spouse holds any? Often, the attorney or analyst will have to ferret out this asset, and the first place to look is tax records, says Dorothy Haraminac (GreenVets). The first page of the Form 1040 asks about it, but that’s just for the current year, so that’s just a starting point. Other forms that could reveal crypto are Form 8938 (foreign assets), Form 8949 (capital gains/losses), Form 8283 (Schedule A, contributions), and Form 1099 Misc (for payments and receipts).

  Another place to look is the public blockchain, she advised. Cryptocurrencies are not completely anonymous, and anybody can access the information on the internet, which is the “authoritative source” for this. Cryptocurrencies are publicly reported on online blockchain ledgers that identify users solely by their cryptocurrency addresses, which look like long strings of numbers and letters. There is no personally identifying information, such as names and locations. Therefore, the question for the client is: What are your addresses?

  Session co-presenter Ed Kainen (Kainen Law Group) asked whether traditional financial records can reveal cryptocurrency. Yes, absolutely, Haraminac responded. Old-fashioned statements from the bank, credit card issuers, and investment advisors can reveal crypto transactions. You also may find something in the client’s employment agreements, she noted. She also advised bringing in a crypto specialist, if necessary, as the techniques for investigation are still evolving.

  Develop your young BV staffs’ interpersonal skills

  How to communicate with clients effectively is one thing young BV professionals say they need more help with from their veteran colleagues. This was one of the interesting takeaways from a panel of young valuation experts giving their perspectives on the profession during a session at the Business Valuation & Financial Litigation Super Conference hosted by NACVA.

  The young generation of valuers are very tech-savvy, but interpersonal skills are a different story. Interacting with clients effectively is an acquired skill that needs to be passed down to the new generation of valuers. This can be done through some explanation, but the best way is to teach by doing—experienced experts should include young colleagues in site visits, client meetings, copy them on correspondence, invite them to a client lunch, or anything else where they can observe how to build rapport. But don’t just have them sit there—preplan some questions for them to ask. These efforts will go a long way toward developing young talent, the panel noted.

  A full article, “Young BV Practitioners Speak Out About the Profession,” is in the October issue of Business Valuation Update.

  Please take a survey on Excel add-ins for the GPCM

  As part of BVR’s ongoing surveys related to data resources and methodologies, we’re exploring the use of Excel add-ins for the guideline public company method (GPCM). Are Excel add-ins prevalent? Which add-ins are used? What other data resources are used for the GPCM? Please take a very short two-minute survey, and we’ll present the results here in a future issue. Learn what your peers are doing! To go directly to the survey, click here. Thank you in advance for participating.

  Another issue of the ASA’s journal added to BVResearch Pro

  Every month, subscribers to the BVResearch Pro platform get access to new articles, books, court cases, webinar transcripts, and more that are added to the almost 20,000 pieces of content. The full archive of the American Society of Appraisers’ Business Valuation Review™ is on the platform, and the Spring 2022 issue has just been added. In this issue, Aziz El-Tahach and his colleagues discuss the benefits of warrants in ESOP transactions. Joe Thompson addresses meme stocks and the risks they pose to business appraisers. Brad Cornell and Richard Gerger revisit the dividend growth model and provide their observations on its use in practice. The issue also includes a review by Gene A. Trevino, Ph.D., of Valuing a Business, 6th edition, and an update to the International Valuation Glossary—Business Valuation. If you’re not a subscriber to the BVResearch Pro platform, the journal is available on a stand-alone basis if you click here.

  Global BV News

  All markets unstable, per KPMG valuation pros

  The Q3 2022 International Valuation Newsletter from KPMG Switzerland includes articles on valuation in times of geopolitical tension, macroeconomic shifts, and microeconomic challenges. “One thing we learned over the last two to three years is that all the shockwaves we have experienced have affected industries and sectors differently,” the authors write. “There is no one-size-fits-all answer to the question of a market-adequate valuation—because there are no stable markets these days.” The issue also includes capital market data, including stock market performance, multiples, risk-free rates, country risk premia, and inflation forecasts. To download the issue, click here.

  Preview of the November 2022 issue of Business Valuation Update

  Here’s what you’ll see:

• “BVR Responds to Hitchner Article on DealStats” (Adam Manson, BVR director of valuation data). This is a response to an article by Jim Hitchner discussing the various transaction databases including BVR’s DealStats. It gives an additional perspective on the private buyer transactions in DealStats
• “Recap of the AAML/BVR National Divorce Conference” (BVR editor). It was a happy marriage of divorce attorneys and financial experts who gathered together for the AAML/BVR National Divorce Conference in Las Vegas. The AAML is the American Academy of Matrimonial Lawyers. Here are some highlights from some of the sessions.
• “New Pepperdine Report Creates Buzz at the NACVA Conference” (BVR editor). One of the more well-attended sessions at the Business Valuation & Financial Litigation Super Conference hosted by the National Association of Certified Valuators and Analysts (NACVA) was a session Dr. Craig R. Everett conducted. He is the project director of the Private Capital Markets Project from Pepperdine University, which does an ongoing survey of expected rates of return of providers in the private capital market.
• “Ang Offers SSBV Members More Evidence of the Lack of a Size Effect” (BVR editor). Clifford Ang (Compass Lexecon), who offered an impassioned plea to a large group from the UK’s Society of Shares and Business Valuers (SSBV), has become one of the leading proponents of eliminating or minimizing the traditional size premia. Ang has written a number of articles on the size effect, and he has a new book, Applied Valuation, due out early next year.
• “Estimating the Extra Risk of Customer Concentration” (BVR editor). Interesting comments were made by Roger Grabowski (Kroll), who conducted a session at the American Society of Appraisers International Conference. He discusses the research in this area and how to examine the customer concentration of guideline public companies.
• “The Two Most Prevalent Methods for Solving the Goodwill Conundrum” (BVR editor). Remarks from a session at the AAML/BVR National Divorce Conference conducted by veteran valuers Jay Fishman (Financial Research Associates) and Ken Pia (Marcum) who were joined by attorney Thomas J. Sasser (Sasser, Cestero & Roy).

The issue also includes:

·  A full section of “BV News and Trends/Global BV News and Trends”;

·  Regular features: “Ask the Experts” and “Tip of the Month”;

· BV data spotlight: “DealStats MVIC/EBITDA Trends,” “Stout Restricted Stock Study and DLOM Calculator,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and