Hitchner rebuts Damodaran’s attacks on cost of capital inputs

Just keep on doing what you’re doing with cost of capital, advises Jim Hitchner (Valuation Products and Services), despite what academics say. During a recent webinar, he responded to some severe criticisms Aswath Damodaran (New York University Stern School of Business) made during a recent BVR webinar about certain inputs to the cost of capital. Damodaran rejects some concepts that most valuation practitioners use, such as the historical ERP, the company-specific risk premium, and the size premium. Other academics have also questioned cost of capital models and inputs practitioners typically use.

The two-hour webinar was very comprehensive and went into great detail on how analysts can support their cost of capital estimates. Hitchner offered his list of best practices, and he conducted some polls of the large audience about the use of certain models and inputs. Yes, there are different opinions about many elements, but it’s a healthy dialogue. And it’s important to understand the framework you are using, whether it’s the Kroll Cost of Capital Navigator, BVR’s Cost of Capital Pro, or Damodaran’s data.

Be reasonable: Getting deep into the weeds of cost of capital can be mind-boggling, so, at the end of the day, you need to see whether your overall rate is reasonable. Hitchner advised that a good check on this is to show where your subject company falls in the spectrum of rates out in the market, starting with the U.S. 30-day T-bill (0.06% in 2021) all the way up to venture capital for first stage/early development (40% to 60%). Hitchner showed this as a listing of rates, but you can also depict it in some other form. We’ve seen it done as a gauge, like the gas gauge in your car, with a needle going from low risk to high risk.

During the BVR webinar, Damodaran had made some remarks about total beta that, when taken out of context, lead you to believe that he rejects that concept also. During the Hitchner webinar, he provided the full remarks made about total beta, a concept Damodaran does not criticize in the same vein as he does some of the other concepts. Damodaran publishes total betas and includes the concept in his teachings and writings.

A recording of the July 21 webinar will be made available on the VPS website. The title is: Cost of Capital Dispute: Damodaran vs. Kroll Cost of Capital Navigator vs. BVResources Cost of Capital Professional. What Is Right and What Is Wrong?

Healthcare whistleblower case regarding FMV can proceed

The CFO of a healthcare provider blew the whistle on his former employer, alleging it overpaid for a surgery center in order to induce it to refer future business. Paying for future referrals is in violation of the federal anti-kickback statutes, which prohibit healthcare providers from exchanging remuneration in return for referrals of federal healthcare program business. The overpayment issue hinges on the acquisition being at fair market value. The CFO had done a “high level” valuation of $8 million to $10 million for the center, but the acquisition price ended up being $25 million. The defendants moved for summary judgment, but it was denied. The court ruled that the CFO’s valuation was enough to create a “triable issue regarding the fair market value of the [center]. Summary judgment is not appropriate on this issue.”

The case is Kuzma v. N. Ariz. Healthcare Corp., 2022 U.S. Dist. LEXIS 106969, and a case analysis and full opinion are available on the BVLaw platform.

Extra: The federal physician self-referral law (the Stark Law) incorporates a similar principle by prohibiting certain physician referrals to entities with which physicians have compensation arrangements. FMV is a key matter in this context also, and the rules recently changed. See the soon-to-be-released Complete Guide to Fair Market Value Under the Stark Regulations.

Divorce spotlight: valuing a family business with complex ownership

When a family business caught up in divorce is not a simple 100% ownership, things can get complicated—from both a valuation and legal perspective. In a short video, family law attorney Kevin Segler (KoonsFuller Family Law) points out that dealing with complicated ownership structures is like peeling back an onion, with each layer revealing more issues for investigation.

Valuation expert Karolina Calhoun (Mercer Capital) notes that it’s important to understand complex entity structures and the flow through of that ownership—as well as the qualitative and quantitative characteristics of that ownership. Other issues to consider include multilayering with discounts, tracing marital versus separate asset ownership, and how related parties in the business impact ownership, valuation, and division of assets.

Calhoun and Segler will co-present a session on this very topic at the 2022 AAML/BVR National Conference, September 18-20, in Las Vegas. To see the full agenda and to register, click here.

Paper investigates patent valuation methods

A new paper investigates the underlying knowledge structure and the evolution of patent valuation methods under two main topics: quantitative and qualitative. The authors (all from Bahçeşehir University in Turkey) searched for peer-reviewed journals that resulted in a review of 129 documents between 1981 and 2021. The paper, “Qualitative and Quantitative Patent Valuation Methods: A Systematic Literature Review,” is in the June 2022 issue of the journal, World Patent Information. An abstract is available if you click here.

DealStats users spark enhancements to the database

BVR's Market Data Team recently surveyed DealStats users, and their suggestions have prompted some enhancements. For example, users indicated that it would be important to know whether the buyer in a transaction financed the cash purchase price through an SBA or bank loan. Now, the DealStats platform includes the following searchable fields:

• “SBA/Bank Loan Included” (whether an SBA or bank loan was included in the transaction);

• “SBA/Bank Loan Amount” (if a loan was included in the transaction, you can now see the exact amount);

• “SBA/Bank Loan % of Amount Down” (exactly how much of the cash paid to the seller was financed through an SBA or bank loan); and

• “Bank Name—If Available” (the name of the bank that provided the SBA loan or other financing).

More enhancements are in the works based on the feedback from users. BVR thanks all of those who participated in the survey.

Global BV News

IVSC launches Asia office in Singapore

The International Valuation Standards Council (IVSC) has selected Singapore as its first base outside Europe to drive its advocacy efforts in the adoption of International Valuation Standards (IVS) in Asia. “The launch of the IVSC Asia office comes at a time when demand for professional valuers is growing rapidly worldwide due to financial reporting and audit requirements; and new drivers of company value are rising such as IA, and Environmental, Governance and Sustainability (ESG) factors,” the IVSC said in a statement.

What’s in the August 2022 issue of Business Valuation Update

Here’s what you’ll see:

• “Conference Recap: ESOP Valuations at a Crossroads” (BVR Editor). A key takeaway at the inaugural ESOP Virtual Conference hosted by the American Society of Appraisers was that we may be at a crossroads with regard to valuations of employee stock ownership plans (ESOPs). Topics covered included ESOP valuation basics, key issues from recent litigation, ESOP stock purchase transactions, and advanced topics (such as control premiums, repurchase obligations, and synthetic equity).

• “Damodaran on How Inflation Plays Out in Company Valuations” (BVR Editor). Professor Aswath Damodaran (New York University Stern School of Business) presents a simple framework for assessing the impacts of inflation on the value of a private company. He also made some explosive remarks about certain inputs to the cost of capital.

• “The 2022 Cannabis Reset: A Redux of 2019?” (Ron Seigneur and Ryan Cram, Seigneur Gustafson LLP). Comments on the impacts to the cannabis industry in the wake of COVID-19 and related economic stimuli and amid inflation, interest rate increases, legislative reforms, and labor and supply-chain disruptions.

• “ASA Ramps Up Efforts to Attract and Retain Young BV Pros” (BVR Editor). Ray Moran (FON Valuation Services), marketing director with the iiBV, interviews Johnnie White, CEO of the American Society of Appraisers, who outlined the ASA’s efforts in dealing with the ripple effects of the great resignation in the valuation profession.

• “Probing Questions Valuers Will Face About Their Guideline Transaction Analysis” (BVR Editor). Here are the questions a trier of fact (or other reviewer) will ask the analyst about his or her guideline transactions method. A worksheet judges use to compare the work of two opposing experts is included.

• “Key Lesson to Be Learned From Valuing a Strip Club” (BVR Editor). A strip club may bare all, but not when it comes to every bit of information an analyst needs to do a valuation. The trick is knowing the right questions to ask to discover these hidden factors that may impact value, and that goes for other types of businesses as well.

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.

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

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

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

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

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

Estate attorney sued over alleged undervaluation

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

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

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

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

Valuing Nightclubs, Bars, and Adult Cabarets

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

SME transaction values rise to 4.5x for 1Q2022

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

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

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

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

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

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

Global BV News

CBV Institute membership grew 4% in 2021

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

Recording available of MAPPI webinar on IP valuation

• No discounts in New Jersey shareholder buyout case

  New Jersey is one of several states that allow discounts for lack of control and marketability in fair value situations if it is proven that the discounts are fair and equitable, but, in a recent case, the trial court disallowed the discounts—and an appellate court agreed.

  Not wrongful: The case is a shareholder dissent matter involving a New Jersey partnership that owns a shopping mall. The defendants argued that the discounts should be allowed based on the premise that the dissenting partners’ dissociation was wrongful (and damages were owed to the partnership), so the discounts are fair and equitable. But the trial court did not find that the dissociation was wrongful, and the appellate court came to the same conclusion. Therefore, there was no justification to apply either discount.

  There are other issues in the case, which is Robertson v. Hyde Park, 2022 N.J. Super. Unpub. LEXIS 848, and a case analysis and full opinion are available on the BVLaw platform.

  Extra: Tune in today, July 13, for the BVLaw Case Update webinar—attorney Drew Soshnick and valuation experts Jim Alerding (BVLaw editor) and Jim Ewart will give their insights on some of the most consequential recent valuation and financial litigation decisions.

  Takeaways from the ASA’s first ESOP conference

  The American Society of Appraisers hosted the inaugural ESOP Virtual Conference on June 21, and here are some notable bits of information we learned:

• There is proposed legislation designed (among other things) to hold the DOL “to the fire” and finalize proposed regulations the valuation community has been waiting for—since 1988(!);
• The landmark Bowers case could represent a turning point for ESOP valuations (see the last issue for more details);
• While DOL litigation may have leveled off (although some do not have that perception), class action litigation by private plaintiffs has increased;
• The No. 1 issue raised in ESOP litigation is the concern over projections;
• Many ESOP transaction trustees now avoid valuations with control premium adjustments, but they also want to see some representative discount/haircut in the valuation to recognize the lack of full and unfettered control; and
• ·         An ESOP stock purchase transaction typically requires five to six months to execute (less time if third-party debt is not needed).

• A full recap with more details is in the August issue of Business Valuation Update.

  Feedback wanted on ‘social value’

  The Social Value Working Group at the International Valuation Standards Council has released its second paper in a series that examines whether “social value” can be a basis of value, the difference between social value and the social component of ESG, and whether the existing valuation principle of highest and best use can apply to social assets and social value. The group is also seeking feedback from valuers by posing a number of questions:

• Do you think that the definition for highest and best use within a social value context needs to be expanded or reframed, and, if so, how would you revise the existing definition?
• Should governments and charities be maintaining a social value balance sheet in addition to their traditional balance sheets?
• Do you consider that the current discussions on ESG adequately addresses social value concepts in both a for-profit and not-for-profit world? If not, what would give this discussion more prominence and stimulus?
• With the information that is presently available, is it possible in most situations to quantify and measure social value accurately? If yes, how, and, if not, what is missing?

You can take the survey if you click here.

Is the IRS Job Aid on reasonable comp still relevant?

Released in 2014, the “Reasonable Compensation Job Aid for IRS Valuation Professionals” is an internal IRS document designed to help review compensation reported on federal tax returns. Reasonable comp remains on the audit radar at the IRS, and, when it litigates cases on this issue, it usually wins. But is the document out of date?

Still good: In a blog post, former IRS manager Michael Gregory (Michael Gregory Consulting LLC) says: “Personally, I would encourage anyone working the issue to download both the IRS Reasonable Compensation Job Aid and the associated Appendix. Together they provide real insight into the issue and how the IRS approaches the issue.” Gregory, now in private practice, worked on the job aid while he was with the agency. In the blog, he also discusses other IRS papers on reasonable comp as well as some procedural issues that arise when the IRS conducts an examination.

The job aid is available as a free download from BVR (login required).

Global BV News

2022 market risk premium and risk-free rate indications from Pablo Fernandez

The results of Professor Pablo Fernandez’s latest survey of the market risk premium (MRP) and risk-free rate (RF) used in 95 countries in 2022 has been released. Many business valuers refer to this longstanding survey in their cost of capital analyses. For example, based on UK-only responses, Fernandez found a market risk premium of 6.1% (a median of 6.0%). As is typical, these rates are marginally higher than the averages for the US (at 5.6% and 5.5%, respectively). Also, not surprisingly, countries such as Ukraine, Argentina, and Venezuela lead all nations, with rates between 28% and 35%. The paper also contains the links to all previous surveys, 2008 to 2021. Fernandez is a professor of finance at the IESE Business School.

Valuation opportunities in the MENA region

ESOP valuations may be at a turning point

At last week’s inaugural ESOP Virtual Conference hosted by the American Society of Appraisers, the landmark Bowers case was discussed, which could represent a turning point for ESOP valuations.

Here’s the story: For over a decade, the Department of Labor has had a very aggressive enforcement stance and had not lost a major ESOP case on a valuation issue. But its winning streak ended with the Bowers case, which involved many key valuation issues that came up in prior cases as well. As in those cases, the DOL alleged that the ESOP paid more than fair market value for stock of the sponsor company. Valuation experts have long maintained that the DOL has been playing by its own valuation rules—rules that are not consistent with accepted valuation standards. But the DOL had a long track record of success using its own rules. In a stunning rebuke, the district court ruled against the DOL, stressing that the agency failed to follow standard valuation practices.

The case is “very good news” for the valuation profession, speakers at the ASA conference said, and it is “very helpful” to the ESOP community as well. The case could change the course of litigation, and it also may open the door for the DOL to finalize (at long last) regulations regarding ESOP valuations that were proposed back in 1988 (yes, 1988). Instead of finalizing the regs, the DOL has been “legislating through litigation” and through a series of settlements (process agreements) between the agency and ESOP trustees. Some of the more recent settlements have not been favorable to the DOL, speakers said, so they have not been made public.

The case is Walsh v. Bowers, 2021 U.S. Dist. LEXIS 177184 (Sept. 17, 2021), and a case analysis and the full opinion are available on the BVLaw platform.

Extra: The testifying valuation experts in the Bowers case discussed details in an article that appeared in Business Valuation Update.

Appeals court affirms modified liquidation value in shareholder dispute

In a Michigan shareholder deadlock case, a special master recommended that a sale of shares from one shareholder to the other would yield more value than if the company were dissolved. The special master used a “modified liquidation value,” which was close to the middle between the liquidation value and the fair market value of the shares. The valuation did not account for cash advance receivables, the value of noncompetition agreements, or a going-concern value. It also did not consider certain expenses that would have been incurred if the company were dissolved. The plaintiffs challenged the valuation, but the appeals court affirmed it, finding no clear error on the part of the trial court. Plus, the parties showed an initial willingness to sell their stock for the amount the valuation indicated.

The case is Pitsch v. Pitsch Holding Co., 2022 Mich. App. LEXIS 2730; 2022 WL 1508774, and a case analysis and full opinion are available on the BVLaw platform.

Butler comments on Damodaran’s ‘dynamite’ remarks regarding COE

Last weeks’ issue covered some very choice words (some of which we can’t print here) Aswath Damodaran (New York University Stern School of Business) made about various inputs some analysts use to determine the cost of equity (COE). His remarks triggered some comments from Peter J. Butler (Valtrend), who is the co-developer of the Butler Pinkerton Calculator, which offers empirical data for total cost of equity (TCOE) and company-specific risk premiums (CSRP).

“I listened to Professor Damodaran’s excellent presentation the other week titled, ‘In Search of a Steady State: Inflation, Interest Rates, and Value; The (Inflation) Genie Escapes the Bottle!’ And yes, as BVR indicates, the professor threw some dynamite on how some (but not all) appraisers develop a cost of equity for their privately held company, such as the use of:

• “A ‘normalized’ risk-free rate—whatever that is;

• “A stagnant and backward-looking historical risk premium; and

• “The alleged and dubious size premium, which he calls fiction.”

Butler continues: “He also offered some choice words over the use of the company-specific risk premium (CSRP). For what it’s worth, I have never used a CSRP either (although I have previously been lazy and called what I am actually capturing—an unsystematic risk premium—a CSRP to match, generally speaking, the BV community’s faulty nomenclature).”

“For what it’s worth, I have never added a completely qualitative CSRP to my cost of equity—to make my valuations ‘make sense,’” he says. “I have never had a subject company that is just so unique—so company-specific—that no other company in the world has the same (or at least very similar) risk profile. Rather, I have added an unsystematic risk premium in many (but not all) of my valuations for the last 15-plus years to adjust for the less-than-perfect diversification of hypothetical willing buyers and willing sellers in the private marketplace. How do I do this? ‘Simply’ with the use of total beta, which explicitly captures total risk and, therefore, implicitly captures unsystematic (and systematic) risk. Thus, there is no need to build up the rate and potentially and easily double count risk.”

Butler concludes: “If appraisers use beta in their development of the cost of equity, which I believe we all do in one form or another, it is time to start getting the full benefit of publicly traded stock returns. The only way to do that is to also use total beta.”

Extra: A full recap of Damodaran’s remarks on how to assess inflation’s impact on company valuation will be in the August issue of Business Valuation Update.

The DCF is ‘untestable,’ per new paper

The discounted cash flow method works fine for bonds but not for businesses, projects, or stocks because it is untestable, claims a new paper. “While bonds can be viewed as examples of DCF pricing, this depends on their prices often being observable and their ‘expected’ cash flows typically being bounded above by their promised cash flows,” writes the paper’s author, J.B. Heaton (One Hat Research LLC). “For capital projects, businesses, and common stocks, there is simply no way to determine whether a DCF valuation is a good representation of the causal mechanisms behind market values.” The paper, “The DCF Valuation Methodology Is Untestable,” seems to relate price to value, which valuation analysts know are two different concepts.

Date change for webinar on new Stark FMV regs

Part 1 of a two-part BVR webinar series on the new Stark FMV regs, originally scheduled for June 28, will be held on July 26. The webinar, The New Stark FMV Is a Game-Changer: Foundational Concepts and Valuation Methodology, will be conducted by Timothy R. Smith (TS Healthcare Consulting), who will provide a critical and in-depth assessment of the new definitions of fair market value under the regulations for the federal physician self-referral law commonly known as the Stark Law. Smith is the author/editor of a new book, The Complete Guide to Fair Market Value Under the Stark Regulations, which will be available soon from BVR.

Global BV News

CBV Institute’s new board reflects commitment to diversity

Almost half of the 2022-23 board of directors of the CBV Institute are female, but the organization “will not stop here,” said Dr. Christine Sawchuk, the group’s president and CEO.

“Our efforts to achieve even broader diversity will remain an ongoing focus of our governance efforts.” The full slate of new board members can be found if you click here. The new board chair is Patrick Coady, a partner at KPMG (Ottawa, ON), who praised past board chair, Anish Chopra. “I know I speak for the entire board when I say Anish’s dedication to the Institute, along with his commitment to governance excellence and the Institute’s strategic direction, is greatly appreciated. It is safe to say he left his mark.” The CBV Institute is Canada’s valuation professional organization (VPO) and standard-setter.

IVSC annual meeting in Fort Lauderdale, Fla., September 14-16

• Damodaran tosses some dynamite during BVR webinar

  Historical equity risk premium? “I don’t like a backward-looking and stagnant premium.” A “normalized” risk-free rate? “Don’t use it.” The size premium? “Fiction!” Company-specific risk premium? “[expletive deleted]!!” Never one to mince words, Aswath Damodaran (New York University Stern School of Business) aired his strong views in response to questions from the audience during a recent BVR webinar. His opinions are always thought-provoking, and he gave some solid advice on valuing companies amid inflation.

  Inflation and valuation: The webinar title was “In Search of a Steady State: Inflation, Interest Rates, and Value; The (Inflation) Genie Escapes the Bottle!” He’s done a number of lectures on this, but we asked him to focus on the practical aspects of how valuation experts should assess the impacts of inflation when valuing a private company. Damodaran pointed out that there are disparate effects of inflation, and the value of some companies will be unaffected, others will be negatively affected (to varying degrees), and a few may actually benefit from inflation.

  He advised experts to go “back to fundamentals” and examine six basic variables when determining how sensitive your subject company is to inflation. One variable is “pricing power,” which is the ability of companies to pass inflation on to customers. Of course, the more power a company has that enables it to pass price increases on to customers, the more protected it would be from inflation. The other variables are cost structure (margins), investment efficiency, cost of equity, cost of debt, and what he terms “failure risk,” which is a separate variable not reflected in cash flows nor the discount rate.

  A full recap of the webinar will be in the August issue of Business Valuation Update.

  FASB hits ‘pause’ on goodwill project

  The big news at the 2022 ASA NY Fair Value Conference last week was that the FASB has dropped its project on goodwill, but it could be revisited in the future. “The goodwill project has been removed from the active agenda,” Joy Sy, a supervising project manager at the FASB, told conference attendees. That means it will not be seeking any more stakeholder feedback on the matter but will monitor developments on this matter, including a project on goodwill disclosures at the International Accounting Standards Board.

  For the past four years, the FASB considered whether annual goodwill impairment tests should be done away with for public companies in favor of a new model that would include amortization. For the most part, the valuation community believed that, from a user perspective, the benefits of the transparency and information the current impairment model provides outweigh the costs. The cost-benefit issue was one of the factors that triggered the FASB to take on the project in the first place. Also, the CFA Institute (CFAI) expressed serious concerns about the possible reversion back to amortization.

  May be back: But the FASB will not simply “throw it out,” said Richard Jones, FASB chair, during its June 15 meeting that decided the project’s fate. “To the extent that it becomes relevant in a future period, it is certainly something we can look at,” he said. During the meeting, FASB board members said they did not think the current impairment-only model is a good reflection of goodwill and they believe it needs improvement. This time around, there just wasn’t enough of a case made for the change, which would have been significant. But the project will not disappear, and “we may be able to bring it back again one day,” said Jones.

  Also, there’s an ongoing intangibles project at the FASB that remains “active,” said Tanya Paul, a post-doctoral fellow at the FASB who gave an update on that project at the ASA conference. Under that project, potential improvements are being considered for items including accounting and disclosure of intangibles, including software costs, internally developed intangibles, and research and development.

  We’ll have more takeaways from the ASA Fair Value Conference in next week’s BVWire.

  Bankruptcy court “Knocks Out” transfers from ‘personal piggy bank’

  In a bankruptcy case in Illinois, the three tests for insolvency came into play when a dispute arose as to whether transfers the debtor company made totaling $1.72 million were fraudulent. The key issue in matters of fraudulent transfers is whether the debtor was solvent when it made the transfer (or would remain solvent as a result of the transfer). The three solvency tests (under Section 548 of the Bankruptcy Code) are: (1) the balance sheet test (do assets exceed liabilities?); (2) the cash flow test (can the company pay off debts as they come due?); and (3) the capital adequacy test (does the company have enough capital to operate?). If the debtor fails any one of the tests, it is an indication of a fraudulent transfer.

  In this case, while the debtor passed the balance sheet test, it failed the other tests, the court found. Also, the court concluded that the company “received no value in exchange” for the transfers, noting that they were made not to satisfy company debts, but rather for the benefit of the controlling shareholder, who used the company as his “personal piggy bank.” Therefore, the transfers are fraudulent and must be refunded to the bankruptcy estate.

  The case is Stone v. Citizens Equity First Credit Union (In re Int’l Supply Co.), 2022 Bankr. LEXIS 865; 2022 WL 962296, and a case analysis and full opinion are available on the BVLaw platform.

  Submitted for your approval: the BV Zone

  The Business Valuation Zone is a new free customizable service that sifts through articles, research studies, and thought-leadership blogs from hundreds of leading business valuation sources. You can get a daily and/or weekly newsletter as well as information on webinars, e-books, and white papers. The service is produced by the American Society of Appraisers and Aggregage. You can check it out and sign up if you click here.

  Global BV News

  Recordings available of free webinar series from the IVSC

  Kroll has been sponsoring a series of webinars presented by the International Valuation Standards Council (IVSC) that started June 2 and runs through June 27. Recordings are available for the past programs if you click here. The next program will be on June 27, The Evolution of ESG in Valuation. Past webinars in the series covered topics including the global economic outlook, the impact of inflation on valuation and the cost of capital, and the growing influence of digital assets in the investment world. Speakers include IVSC chair and former UK Chancellor of the Exchequer, Alistair Darling; Kroll chief economist and Financial Times columnist, Megan Greene; IMF Global Markets chief and former IOSCO deputy chair, Ranjit Singh; Corporate Reporting Users’ Forum (CRUF) chair, Jeremy Stuber; PwC global asset and wealth management leader, Olwyn Alexander; UCLA emeritus professor of finance, Bradford Cornell; and many others.

  Preview of the July 2022 issue of Business Valuation Update

  Here’s what you’ll see:

• “An Actual Brand Valuation Report a Court Rejected as ‘Speculative’” (BVR Editor). Text (redacted) of a valuation report for the brand name of a local hotel and resort used in a dissenting shareholder case. Can you spot why the court rejected the valuation as being too speculative?
• “Highlights From the 2022 NYSSCPA BVLS Conference” (BVR Editor). Money laundering, earnouts, valuing debt, and SPAC enforcement are a few of the topics presented at the Business Valuation and Litigation Services (BVLS) conference hosted by the New York State Society of CPAs. Here are some key takeaways.
• “How Judges Compare Competing DCF Analyses” (BVR Editor). Two valuation experts are far apart in their opinion of value using the income approach. What does the judge focus on when comparing the two analyses?
•  “Appraisers Have the Highest Exclusion Rate Under Daubert, Per PwC Study” (BVR Editor). A look at the latest study from PwC that analyzes challenges to financial expert witnesses (appraisers, accountants, economists, and others) under the Daubert standards from 2000 to 2020. Also, some classic advice on how to survive a Daubert challenge.
• “Misusing the Market Prices of High-Vote Shares When Estimating a Discount for Lack of Voting Rights” (Gilbert E. Matthews, CFA). When analysts estimate a valuation discount for the lack of voting rights in the stock of a private company, they typically look to the public market. Many studies have compared the market prices of publicly traded high-vote shares with the market prices of publicly traded low-vote shares. Unfortunately, when the inputs into these studies are examined, the emperor has no clothes.
• “Why Analysts Should Consider the Asset Approach for Going Concerns” (BVR Editor). Weston Kirk and Robert Reilly, who are both with Willamette Management, urge analysts not to reject the asset approach for going concerns automatically. And they stress (multiple times) that the asset approach is not the same as the cost approach.

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

Husband shuns BV expert, loses case

In a Pennsylvania divorce case involving a restaurant, neither the husband nor the wife submitted formal business appraisals. But the wife had an accounting degree and had worked as an auditor, so she herself did a valuation using the “gross sales method,” and she prevailed in the trial court. On appeal, the husband argued that she was not competent to testify as to the valuation and that the method she used was not appropriate. But the appellate court disagreed, finding she was competent and that prior experts had used the gross sales method, so it was appropriate.

The case is Snyder v. Snyder, 2022 Pa. Super. LEXIS 175; 2022 PA Super 72, and a case analysis and full opinion are available on the BVLaw platform.

Comment on COE data sources survey

In last week’s issue, we reported on a survey of the data sources analysts use to estimate the cost of equity (COE) (click here to see the news item). It triggered some comments from Peter J. Butler (Valtrend), who is the co-developer of the Butler Pinkerton Calculator, which offers empirical data for total cost of equity (TCOE) and company-specific risk premiums (CSRP).

“I am glad to see ‘Damodaran’s data and analyses’ used [cited by survey respondents] at 14% (mean) and 14% (median),” Butler says. “Presumably, his industrywide total beta (TB) calculations are included in the category, along with his calculations of the implied equity risk premium (ERP). I am one of the 14% who look at both his TB calculations and ERP, in addition to (no surprise) the Butler Pinkerton Calculator (BPC). Presumably, since the BPC has had subscribers since 2007, its respondents were captured in the ‘Other or none of the above’ category, at 8% (mean) and 7% (median).”

Butler continues: “For the last 15 years, I have successfully (and easily) used the BPC (with no successful challenges—Daubert or otherwise) for individual guidelines while knowing the pertinent industry TBs (from Damodaran calculations). After all, we call it ‘company-specific risk’ for a reason. Thus, I ‘know’ the industry from Damodaran, and I ‘know’ the best publicly traded ‘guidelines’ to assist with my subject company’s cost of equity. While selection of the overall COE is still qualitative in nature with the BPC, I do not feel like I am ‘flying blind’/completely guessing as to the company-specific risk or total cost of equity for my subject company as I would if I solely relied upon the other data sources, which capture publicly traded stock returns.”

He concludes: “In summary, if you are going to use beta, which everyone does in one form or another, it only makes sense to use TB, too, and get the full benefit of publicly traded stock returns to assist with the valuation of your privately held company.”

Long-term inflation estimates rise, per Kroll infographic

Long-term inflation expectations for the U.S. and Germany, a key starting point to evaluate the long-term growth rate used in the terminal year of DCF analyses, are significantly higher when compared to June 2020, at the height of the COVID-19 crisis, according to a newly updated infographic from Kroll. For the U.S., inflation estimates over the long-term rose from 2.0% in June 2020 to 2.6% in May 2022. For Germany, long-term inflation expectations have surged from 1.6% in June 2020 to 2.6% in May 2022. The “Cost of Capital in the Current Environment” infographic tracks the impact of COVID-19 on some of the financial market and economic indicators used to support the Kroll (Duff & Phelps) recommended U.S. equity risk premium (currently 5.5%) and accompanying normalized risk-free rate (currently 3.0%).

Human capital and valuation explored in new paper

Everyone knows the phrase “our people are our most valuable asset,” but just how does human capital generate value for organizations? And what are the attributes of such value creation? How is this analyzed by investors and measured by valuers? Part 2 in a series of perspectives papers on intangibles from the International Valuation Standards Council (IVSC) explores the concept of human capital. To download the paper, click here.

ASA announces keynote for its annual conference

The state of the current—and future—economy is more important than ever for valuations, so the American Society of Appraisers has lined up a top-notch keynote for its 2022 ASA International Conference, September 10-12 in Tampa, Fla., and virtually. The speaker will be Dr. LaVaughn Henry, former senior economist for the Council of Economic Advisers in the Executive Office of the President (the White House), and the senior regional officer and vice president for the Federal Reserve Branch in Cincinnati. He will discuss key economic drivers and analysis of external factors impacting global markets, particularly as they relate to the valuation profession. Of course, the rest of the conference is just as compelling, with 65 educational sessions across six discipline tracks. See you there!

CPA firms continue to have trouble finding staff

Historically, “finding qualified staff” has been a leading concern of all CPA firms other than sole proprietors, and that held true to a large degree this year, according to the “2022 PCPS CPA Firm Top Issues Survey” unveiled during the recent AICPA ENGAGE Conference in Las Vegas. It’s the No. 1 concern for all firms with over 10 professionals. For smaller firms, challenges with working with the IRS is their top concern. The survey was conducted online from April 19 to May 23 and had 752 respondents, representing a mix of practice types and firm sizes, from sole practitioners to large firms with 21 professionals or more.

Global BV News

New edition released of Business Analysis and Valuation: IFRS

Cengage has released the 6th edition of Business Analysis and Valuation: IFRS Edition in the educational market. The book uses international cases to illustrate the interpretation and use of IFRS-based financial statements and financial data in various valuation tasks. A fully updated companion website is also available with PowerPoint slides, an instructor’s manual, additional questions, solutions, example spreadsheets, and weblinks. The authors are Krishna G. Palepu (Harvard University), Paul M. Healy (Harvard University), and Erik Peek (Erasmus University).

CBV Institute launches LinkedIn page for students

The Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO), has just launched a CBV Program of Studies LinkedIn showcase page. The page focuses solely on current and prospective students and provides them with the information they require to develop an “exciting career in the growing world of business valuation.”

Morrison cautions appraisers regarding automation

Blind reliance on automated tools for business valuation is a danger, says past ASA international president Bob Morrison, FASA, who spoke on a recent webinar on the future of the valuation profession. While he agrees that the profession should embrace AI and other technologies, professional judgment must not take a back seat to computer models, he cautions. The other major issues he sees the profession facing are diversity, equity, and inclusion (DEI) and the “silver tsunami,” meaning the aging of the profession and the need to attract new young professionals. Morrison, who is also on the board of trustees of The Appraisal Foundation, made his comments during the International Webinar: The Future of the World’s Valuation Profession on June 3, organized by the FIABCI World Council of Experts.

Hitchner surveys COE data sources of choice

The Kroll (formerly Duff & Phelps) Navigator has been the consistent clear choice for cost of equity (COE) data by valuation analysts, according to ongoing surveys by Jim Hitchner (Valuation Products and Services). He’s been doing a number of surveys over the years, and the COE survey has been done periodically since 2019, which has shown consistent results for all of the data providers (see below).

                                                                   Mean                        Median

                                                                 Average                     Average

Kroll (Duff & Phelps) Navigator              88%                            88%

BVR Cost of Capital Pro                          22%                            21%

Damodaran’s data and analyses           14%                            14%

Pepperdine survey data                          11%                            10%

Other or none of the above                       8%                              7%

The results of more surveys are in the June 2022 issue of Hardball With Hitchner.

No deduction for tax in shareholder buyout

In a North Dakota partnership dissolution case, the defendants argued on appeal that the district court erred in its valuation. They asserted that the district court was required to consider taxes in calculating the plaintiffs’ buyout. The district court found that the agreement in principle called for a valuation without a discount. The accounting firm for the defendants provided an analysis of what would happen if the assets of the partnership were liquidated. However, the district court found this to be speculative because the plaintiffs indicated there was no intention currently to liquidate. The state Supreme Court affirmed the district court’s decision.

The case is Sproule v. Johnson, 2022 ND 51; 2022 N.D. LEXIS 56; 971 N.W.2d 854; 2022 WL 803346, and a case analysis and full opinion are available on the BVLaw platform.

Cannabis lawsuit could be a game changer

A coalition of influential marijuana companies and stakeholders are planning to sue the federal government over alleged unconstitutional policies that affect their operations, according to a report in Marijuana Moment. Two lawsuits will be filed in federal district court. One will challenge the Controlled Substance Act (CSA) and will argue that prior court rulings on the federal government’s authority over intrastate commerce should not apply to marijuana companies. The second lawsuit will focus on the tax law’s Section 208E, which impedes cannabis businesses from deducting federal taxes. Our thanks to Ron Seigneur (Seigneur Gustafson LLP), who alerted us to this news. Seigneur is the co-author of The Cannabis Industry Accounting and Appraisal Guide, and he will co-present a BVR webinar on cannabis valuation in August.

Stout releases guide to ASC 842

Accounting Standard Codification (ASC) 842 is the new lease standard, and Stout has released a guide designed to give practical guidance and key takeaways from their experience with both public- and private-company adoptions. Public business entities have already adopted the new lease guidance. For private companies, the standard is effective for fiscal years beginning after Dec. 15, 2021. One consideration is impairment—leases will show up on the balance sheet and will be subject to impairment consistent with any other long-lived asset. The guide is available if you click here.

Global BV News

EY releases global transfer pricing guide

The EY Worldwide Transfer Pricing Reference Guide 2020-2021 is designed to help identify transfer pricing rules, practices, and approaches. The guide covers 131 jurisdictions and gives an overview of transfer pricing tax laws, regulations, rulings, documentation requirements, transfer pricing returns and related-party disclosures, transfer pricing methods, benchmarking requirements, and much more. There’s also an interactive map where you can just click on a jurisdiction to view the guide chapter for that territory. To download the guide, click here.

BV movers . . .

People: Brittany Dela Rosa, CPA, CA, CBV, has been named a partner at Calgary-based MNP; she is a member of MNP’s Valuations and Litigation Support Services team and prepares business valuations for a variety of purposes, including tax planning, corporate reorganizations, matrimonial and estate proceedings, and shareholder disputes … Rishi Aswani, CFA, has joined Houlihan Lokey in the firm’s Financial and Valuation Advisory (FVA) business in Mumbai as a managing director in the Portfolio Valuation and Fund Advisory Services practice; he joins from Duff & Phelps in Mumbai.

Firms: Calgary-based MNP is adding Jean Luc Quenneville CPA of Laval, Québec, which has a team of five professionals … Toronto, Ontario-based firms Segal LLP and GCSE LLP are joining forces under the new name of Segal GCSE LLP; Segal provides audit, accounting, tax, and advisory services to a wide range of clients, while GCSE offers accounting, tax, and advisory experience and has long been the go-to Canadian firm for the legal industry … New York City-based Marcum LLP is adding LTSP Inc. of Newport Beach, Calif., which provides accounting and advisory services to closely held businesses and high-net-worth individuals; three partners and 19 associates from LTSP will join Marcum in its new Newport Beach office … Kroll has acquired Crisp, a real-time risk intelligence company that protects brands, assets, and people from reputational damage, security threats, and online harm.

• Study says there is ‘clear evidence’ of bias among BV experts

  Researchers say they have found “clear evidence for the existence of … engagement bias” in valuation professionals who were assigned randomly to perform valuation tasks on behalf of a buyer or a seller. The study has been published in the Journal of Behavioral Finance.

  The researchers state that “valuators appear to be affected by their clients’ interests, such that they indicate that a valuation should be adjusted in accordance with their clients’ interests. Specifically, when they represent a buyer and therefore have an incentive to lower the value of the shares, they also indicate the valuation should be adjusted downwards more heavily and also indicate a lower value range for the true value of the company. The opposite is the case when they represented the seller.”

  Also, the study found that experts exhibited a “blind spot” for their own potential bias: “Whereas 58.7% believed the valuator representing the opposing party was biased, only 25.1% believed they themselves were biased.”

  The study’s authors are Marc J. R. Broekema, Niek Strohmaier, Jan A. A. Adriaanse, and Jean-Pierre I. van der Rest (all Leiden University). The paper is “Are Business Valuators Biased? A Psychological Perspective on the Causes of Valuation Disputes.” A full copy is available if you click here.

  IP damages expert Bania testifies in Johnny Depp-Amber Heard trial

  One of BVR’s authors, Douglas Bania, testified that ex-wife Amber Heard’s allegations of abuse damaged Johnny Depp’s image. Bania is an expert in intellectual property (IP) damages and valuation and is one of the founders of Nevium Intellectual Property Consultants.

  Damaged goods: Using some eye-catching charts, Bania showed the jury his analysis of Depp’s Q scores (a measure of familiarity and public appeal) and Google search results. His analysis showed that, before May 2016 (when Heard filed for a restraining order), Depp had largely positive and ordinary search results. But, after that, his search results revealed much more negative news coverage and his Q scores dropped—and it got worse after the op-ed Heard wrote in late 2018. Bottom line: The public perception of Depp has been damaged. You can watch a video of his testimony if you click here (at 46:47).

  His testimony gave an interesting look at the use of internet analytic tools in matters such as these. Bania, along with Brian Buss (also with Nevium), co-wrote two chapters on IP damages in BVR’s Comprehensive Guide to Economic Damages, 6th edition.

  Delaware Chancery rejects partnership valuation in a freeze-out

  In a coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, the court found that AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review, and AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation, awarding more than triple the amount originally paid to partners who were squeezed out.

  The case is In Re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56. This is a long case opinion that involves many issues of interest to valuation professionals. The June 2022 issue of Business Valuation Update will have a case digest as well as commentary by Gil Matthews (Sutter Securities) and BVR legal editor Jim Alerding (Alerding Consulting).

  More business owners deciding to sell, most retiring

  The long anticipated “Silver Tsunami” wave of retiring baby boomers appears to be arriving and is expected to supply the market with a steady stream of available businesses throughout the year, according to a report from BizBuySell. An increasing number of small business owners, many aging and no longer willing to wait on the sidelines, believe now is the time to exit. Of surveyed owners, over 63% say they are over 50 years old and 30% say they are over age 60. More than a third (37%) say they plan to sell within two years. Of owners recently surveyed, the majority (55%) cite retirement as their motivation for selling, while a substantial 31% say their business is doing well and feel they can currently receive a good price. Active for-sale inventory has climbed 10% over the past year, the report says.

  Conference season is here!

  Two upcoming conferences of note (click the links for more information and to register):

• Tomorrow, Thursday, May 12, is the Houston ASA Energy Valuation Conference: A BVR Live Webcast, a full-day event—the 12th year for this event—presenting leading-edge valuation techniques applicable to all sectors of the energy industry (nine CPE credits available); and
• On Monday, May 16, the annual New York State Society of CPAs’ Business Valuation and Litigation Services Conference will be webcast. This full-day conference will feature many topics including an update on BV-related court cases, tax litigation involving valuation issues, SPAC warrant valuations, debt valuation, control premiums, exit planning, and more (eight CPE credits available).

Global BV News

Valuing early-stage firms: full-day seminar from Malaysia

• TAF issues exposure draft regarding conclusion of value vs. value calculations

  In the first in a series of valuation briefs, The Appraisal Foundation (TAF) has published an exposure draft, “Understanding the Differences: Conclusion of Value v. Value Calculations.” TAF’s Business Valuation Resource Panel wrote the draft. A copy of the exposure draft is available if you click here.

  Feedback wanted: Comments on the exposure draft are due by May 26. To submit a comment, TAF has a special form that is available if you click here. The comment submission form notes that all written comments will be published for public viewing, exactly as submitted, on TAF’s website, but names may be redacted upon request.

  If you have questions or need assistance, please contact Jalin Debeuneure at jalin@appraisalfoundation.org.

  Experts in, lay witnesses out in damages case

  In a Michigan case, there were a number of motions to exclude expert witnesses in a damages case that involved employee poaching in the automotive industry. The motions were granted with respect to lay witnesses but denied (or partially granted) with respect to damages experts, as follows:

• The defendants’ motion to exclude the plaintiff’s industry expert was denied (the expert had over 40 years of experience in the industry and would testify as to industry customs and practices);
• The plaintiff’s motion (in limine) to preclude the defendant from presenting expert testimony from lay witnesses was granted (they were employees of the defendant);
• The defendants’ motion to exclude testimony of the plaintiff’s owner as an expert was granted (he can testify as to his own personal experiences but not as to industry customs and practices);
• The defendants’ motion to exclude the plaintiff’s damages expert was denied (he was not a CPA or had business valuation credentials, but he was a JD/MBA who had testified in a number of damages cases); and
• The plaintiff’s Daubert motion to exclude specific expert testimony from the defendant’s expert was granted in part (he was an ASA and CVA who would be a rebuttal expert to the plaintiff’s damages expert).

• The case is Auto Konnect, LLC. v BMW of North America, LLC, 2022 U.S. Dist. LEXIS 42345, and a case analysis and full opinion are available on the BVLaw platform.

  Extra: There are proposed changes to strengthen Rule 702, which is the federal rule of evidence regarding testifying experts. See the April 2022 issue of Business Valuation Update for details.

  Twitter’s brand value soared prior to Musk’s bid

  The brand value of Twitter increased by 85% to US$5.7 billion this year, even before the takeover attempt by Elon Musk, according to an analysis by Brand Finance. This “provides strong underlying support for Musk’s apparent investment thesis that significant improvements to revenue are possible,” the report says. Other findings in the report include:

• Google retains the title of world’s most valuable media brand, at US$263 billion;
• Chinese social media giant WeChat is the strongest media brand in the world, with an elite AAA+ brand rating;
• TikTok/Douyin is the highest new entrant in the Media 50 2022 ranking, valued at US$59 billion; and
• Technology brands constitute 66% of the total brand value in the ranking.

The full Media 50 2022 report is available if you click here.

Extra: Professor Aswath Damodaran (New York University Stern School of Business) gives his analysis of Musk’s bid for Twitter in a blog post.

Becoming an industry expert—from the ground up

Some valuation analysts become expert in certain industries by chance—they get some engagements in a particular sector and learn along the way. Others, such as Bryce Erickson (Mercer Capital), do it from the ground up and in a very deliberate way. Erickson has been involved in hundreds of valuations and related engagements since 1988 and has developed a specialty in the energy sector. He publishes research related to the oil and gas industry and is a regular contributor to Mercer Capital’s blog Energy Valuation Insights and the energy sector of Forbes.com. During a recent webinar, he recounted that, early in his career, he was with a merchant bank, making unsecured loans to oil and gas companies. He started to take continuing education courses on oil and gas at a local university. He also listened to earnings calls by public companies to learn the jargon. He spent hundreds of hours reading. With a good base of knowledge, he started to take engagements, and his learning continued. You may make some mistakes and “take your lumps,” but you’ll be in a much better place with a solid understanding of the industry.

Extra: Speaking of the energy sector, plan to attend the 2022 Houston ASA Energy Valuation Conference: A BVR Live Webcast, a full-day event on May 12. This is the 12th year for this event, and it will present leading-edge valuation techniques applicable to all sectors of the energy industry.

Free model helps take DCF a step further

In an article “Analytical Insights From DCF Value Analysis,” the authors include a free model business valuers can use to take their “DCF calculation a step further and analyze the resulting value into four components.” Their four components of value each represent the value contribution from different periods, and they are: (1) current operating value; (2) short-term growth value; (3) medium-term investment value; and (4) long-term franchise value. The objective of the authors (from The Footnotes Analyst) is to show that “there is more to DCF than simply an explicit forecast and a terminal value and that, by analyzing value in this alternative way, additional insights can be obtained.” The authors include an explanation of the model and the underlying math in “Interactive Model: Target Enterprise Value Multiples.”

New trends help eateries build business

Virtual restaurants—commercial kitchens that operate through delivery services and do not have a physical dine-in space—are increasing due to the coronavirus pandemic, reports the Vertical IQ industry research platform in a recent “Coronavirus Update” for the restaurant industry. These operations may be extensions of existing brick-and-mortar restaurants or startups using rented kitchen space. The need to replace lost revenue combined with a greater emphasis on carryout and delivery is driving growth. Industry experts say that full-service operators that were already experimenting with off-premises options before the pandemic were best positioned to capitalize on the model.

Extra: A spin on this concept is the “ghost franchise,” such as MrBeast Burger, that has no physical locations—it contracts with local restaurants to make its burgers and fries, which are 100% delivery only (using third-party delivery apps).

Global BV News

Free webinar series from the IVSC June 2-10

• Hitchner’s advice on which BV glossary to follow

  In his latest issue of Hardball With Hitchner, Jim Hitchner (Financial Valuation Advisors) commends the “fine work” done on the 2021 International Valuation Glossary—Business Valuation. He also points out that six glossaries are now available and/or required to be followed, depending on which valuation professional organizations (VPO) you belong to. Here are his recommendations for three distinct groups with the following designations:

• CPA and/or ABV: The AICPA has not adopted the 2021 glossary, and the 2001 version is still part of SSVS VS Section 100, so these practitioners must follow the 2001 glossary. Hitchner (who is a CPA/ABV) says he will follow the required 2001 version (which is still relevant, he says) but will also follow the 2021 glossary as well, but on a “selective basis,” he writes.
• ASA only: The ASA has adopted the 2021 glossary, so it must be followed (ignore the 2001 version), he believes.
• ·         CPA/ABV, ASA: For those individuals holding both AICPA and ASA credentials, follow both the 2001 and 2021 glossaries, Hitchner advises. He also suggests that you include (in the body of your report or in a footnote) a discussion of which definition, between the two glossaries, you followed and why (or a statement that either definition would apply correctly to your work).

• We also suggest that analysts check with their own professional organizations for guidance.

  In the issue, Hitchner also provides 40 pages of analysis with commentary about the differences between the 2001 and 2021 glossaries. Future issues will address the use of all six sets of glossaries.

  Nothing personal about goodwill in dental practice

  In a South Carolina divorce case, the appellate court reversed the family court on the issue of personal versus enterprise goodwill. In this state, enterprise goodwill is marital property subject to equitable division, but personal goodwill is not (see BVR’s Charting Goodwill map).

  Retiring dentist: In this case, the husband, who was 72 years old, was retiring from dentistry altogether and sold his practice to his son for $569,000 plus $51,113 of accounts receivable. The sale was done after the couple had separated but prior to the equitable division of the marital estate. The sales contract designated $424,140 as goodwill and also included a covenant not to compete. The son changed the name of the practice. The family court included all goodwill related to the value of the husband’s dental practice as personal goodwill and not part of the marital estate.

  The appellate court disagreed, noting that, since the practice was not an “ongoing concern,” the goodwill was enterprise, not personal, and thus should be included as marital property. The court also noted that the husband had previously sold a second practice of his in another location at similar terms (and also including goodwill and a noncompete) and the remaining payments to the husband were treated as marital property.

  Dissenting opinion: There was a dissenting opinion, which pointed out that goodwill in professional dental practices such as the one in this case “has always been classified as personal, non-marital property”—and the prior decisions did not hinge on whether the business was still an ongoing concern at the time of trial.

  The case is Bostick v. Bostick, 2022 S.C. App. LEXIS 33, and a case analysis and full opinion will be available shortly on the BVLaw platform.

  Helping BV staff advance—when ‘up’ is in short supply

  What should you do when staffers want to move up, but it doesn’t look like there’s any “up” to offer? “Think about helping your employees to move forward, instead of up,” advises John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years. “This approach can be the ounce of prevention that helps you reduce turnover.” His suggestions:

• Offer lateral movement, such as assigning a broader range of engagements or getting them involved in a practice management activity such as campus recruiting;
• Enrich their existing job by, for example, dubbing the employee the “go-to” person for a particular engagement or analysis;
• Give the employee a temporary assignment so he or she can examine other options; and
• Realign the employee’s position by, for example, returning him or her to those job duties which, in hindsight, really are more interesting.

In his latest newsletter, Borrowman also explores how to use learning and development to attract and keep the best talent, offers tips for differentiating your practice in a recruiting pitch, and more.

Global BV News

IVS and Spanish standards are broadly aligned

That’s the conclusion of an analysis the International Valuation Standards Council (IVSC) carried out in conjunction with the Asociación Española de Análisis de Valor (AEV). The AEV is the professional association that represents the Spanish Registered Valuation Companies that carry out around 85% of the valuations for regulated purposes in Spain. The analysis focused on the alignment between the International Valuation Standards (IVS) and the Spanish national regulations contained within the ECO Order 805/2003. Even though there are no major contradictions between them, the IVSC and AEV make several recommendations for additions to the ECO Order. They are:

·   Adoption of IVS Core Principles of valuation standard-setting and valuation;

·   Adoption of the definitions contained within the IVS Glossary;

·   Inclusion of a section on compliance with IVS within valuation reports;

·   Inclusion of a Scope of Work or Terms of Engagement as per IVS 101 Scope of Work;

·   Inclusion of minimum report contents as per IVS 103 Reporting; and

·   Inclusion of sensitivity analysis for the determination of values based on unobservable or estimated inputs, as this is particularly helpful during periods of uncertainty such as during the recent coronavirus pandemic.

You can read more details if you click here.

What’s in the May 2022 issue of Business Valuation Update

Here’s what you’ll see:

• “Comments on an Article on Attracting More Practitioners to BV” (BVR Editor). An article in last month’s Business Valuation Update discussed the need to make business valuation a more recognized career path. This article includes some very thoughtful comments by Dr. Michael A. Crain, CPA/ABV, CFA, CFE, an academic and practitioner.

• “How Direct Loan Market Participants Are Handling the Handoff From LIBOR to SOFR” (John Czapla). The transition from the London interbank offered rate (LIBOR) to the secured overnight fund rate (SOFR) will continue to present challenges for private lenders and their operating and valuation teams as long as loan portfolios have a mix of LIBOR- and SOFR-based deals and as long as there are numerical differences between term SOFR and term LIBOR. The author is chairman of Valuation Research Corp. and head of its portfolio securities valuation practice.

• “A Lesson in Healthcare Supply and Demand—and Market Power, Part 2” (Mark O. Dietrich, CPA/ABV). This is Part 2 of a two-part article that follows up on the author’s landmark research on the fair market value of physician compensation. The issue of insurance market structure and the related impact on the negotiating of provider contracts was addressed in Part 1 of this article. Physician distribution and the impact of local payment rates that determine compensation is addressed in Part 2.

• “A Bird’s-Eye View of Major Intangible Asset Benchmarks” (Christof Binder, Ph.D.). An analysis of over 30,000 intangible assets and the types most prevalent in acquisitions, including asset values, royalty rates/profit margins, and useful lives.

• “Breaking Into Bankruptcy Valuations With Little—or No—Experience” (BVR Editor). There are a lot of opportunities for business valuation analysts in the context of financially distressed or bankrupt companies. A veteran expert gives some advice on how to add this area to your practice regardless of your level of direct experience.

• “Using the Valuation Report as a Selling Tool” (Gary Trugman, CPA/ABV, FASA, MVS). A business valuation report is the perfect forum for selling the valuation analyst’s conclusion regarding the value of the valuation subject. This is an excerpt from the new sixth edition of Understanding Business Valuation, which has a companion website that includes a good selection of full sample valuation reports.

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.