• 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

• Six things to know from the NJCPA BV conference

  While we enjoy attending the major valuation conferences, we also look forward to attending local state CPA society conferences that focus on valuation. They represent “hidden gems” that offer excellent speakers and interesting topics. And, since the pandemic triggered more usage of streaming technology, these local events are now beamed all over the world. Such an event was the recent Forensic and Valuation Services Conference hosted by the New Jersey Society of Certified Public Accountants (NJCPA). Hosted by Roy Kvalo, director of litigation and valuation services at The Curchin Group (Red Bank, N.J.), the event was excellent—and here is some of what we picked up:

• The easiest way to get sued for malpractice is by filing a collection lawsuit against a client—they will countersue and find an expert to say you fouled up;
• More calculation reports are showing up in divorce courts—one side does it, so the other side follows suit, and the judges understand the need to save money;
• If the IRS audits your valuation, check the agency’s math—one expert finds math errors 30% to 40% of the time, which can be used against them;
• Using Excel and its regression add-on for lost profits analysis should be fine for court (the tools are widely used and accepted), but it’s how you use them that counts;
• DeFi is the new source of crypto theft on the market—in 2021, it accounted for 76% of all thefts; and
• Getting a lot of subpoenas to produce documents and bringing in your liability insurer does not raise your malpractice premium—your insurer is happy to handle them.

• We’ll have detailed coverage in a future issue of Business Valuation Update.

  Tennessee moonshine formula caught up in business divorce

  A partner in a Tennessee distillery making flavored moonshine felt the other two partners improperly disaffiliated him. He had not contributed to the partnership financially, but he provided his expertise and formulas for the mountain dew. He claimed the other partners stole the formulas, so he wanted to be paid for them as well as for his time and effort.

  DLOM but no DLOC: The court found that the partnership owned the formulas, but the ousted partner was entitled to his one-third share of the business as of the date he left, which was December 2015. His expert’s valuation used information from 2017 and then discounted it back to 2015 to get a value of $258,000. The defendants’ expert used information known as of December 2015 and then applied discounts for lack of marketability and control to come up with a value of $23,000 for the plaintiff’s share. The court sided with the defendants’ expert. On appeal, the court noted that state statute prohibits a discount for lack of control, so the defendants’ expert modified her valuation for a final value of $35,000.

  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.

  Another call to discard CAPM

  “Unfortunately—and I write this with a heavy heart—the CAPM is not just imperfect; it is so badly wrong that it is best ignored,” writes Ivo Welch (UCLA Anderson Graduate School of Management) in an article “The Cost of Capital: If Not the CAPM, Then What?” (click here for a download).

  Why is CAPM still so prominent? Why is it still taught and used in practice so much? Welch’s comments are similar to those of Pablo Fernandez (University of Navarra), another well-respected academic in his paper “CAPM: An Absurd Model.” He found that academics still teach CAPM because it takes up a lot of class hours and there’s nothing to replace it. Welch agrees, saying it’s “we academics who committed the original sin” and became so “enamored” by the model that they “simply ignored the evidence.” CAPM “provides one basic prediction: high-beta stocks should outperform low-beta stocks on average, because high-beta stocks are riskier. Unfortunately, the data say the opposite,” Welch writes. He does offer some recommendations as to how analysts and investors can do better than CAPM.

  Willamette focuses on wealth transfer valuation

  Estate and gift tax planning and valuation issues are the focus of the Autumn 2022 Insights from Willamette Management Associates. Some examples of the articles are:

• “Disguised Dividends and Shareholder/Employee Compensation” (Eliza Jones and Lisa H. Tran);
• “Valuation of Promissory Notes for Transfer Tax Purposes” (Timothy C. Ladd);
• “Valuation Considerations for Preferred Equity Interests” (Ben R. Duffy and Aiden B. Gonen); and
• “Noncompete Agreement Taxation and Valuation Considerations in Corporate Acquisitions” (Robert F. Reilly).

The editor for this issue is Weston C. Kirk. The issue is available if you click here.

CFOs ignoring cyber risk despite huge losses

A Kroll report finds that 82% of the executives in its survey said their companies suffered a loss of 5% or more in their valuations following their largest cyber security incident in the previous 18 months. At the same time, 87% of CFOs are either very or extremely confident in their organization’s cyberattack response, the report says. This is at odds with the level of visibility CFOs have into cyber risk issues, given only four out of 10 surveyed have regular briefings with their cyber teams. The report, “Cyber Risk and CFOs: Over-Confidence Is Costly,” is available if you click here.

• Some surprising takeaways from the VSCPA BV conference

  The Virginia State Society of CPAs held its 22nd annual Forensic and Valuation Conference. Harold Martin (Keiter) chaired the two-day conference and acknowledged the help of a task force in putting the event together. The sessions and speakers were top-notch, and some of the takeaways from the first day’s sessions may surprise you.

• There is “a ton” of BV work out there (“we’re turning business away”), but the trouble is finding talent—there’s a big shortage of qualified people, so firms need to ramp up recruiting;
• In BV, you can “never be wrong” because different (and opposing) approaches can be supported—the key is what is “right for you”;
• The “dirtiest little secret” in BV is that there is no real due diligence done on client-provided projections;
• Small businesses will often have unreported income, but it may be too costly to uncover it, so consider a high-level lifestyle analysis;
• The main sources of economic data (Mercer, BVR, Tagnify, and KeyValueData) all have “great information,” but they all need more endnotes and citations (and watch out for questions from opposing counsel on whether you have verified the data);
• Eyes are on the Trump legal case regarding manipulation of asset valuations—practitioners want to know who valued the FLPs at issue;
• There’s a certain amount of truth to the idea that, if enough people do something wrong, it becomes “generally accepted”;
• Some courts will not like or understand your DCF analysis, so just convert it to a CCF using a “blended” growth rate (conceptually, the DCF and CCF should result in the same value); and
• There’s a potential opportunity for valuation experts to specialize in reasonable compensation outside of business valuation (e.g., for tax cases).

There will be in-depth coverage in a future issue of Business Valuation Update.

Hitchner on citing BV books and cases

It’s fine to cite authoritative texts in your report—but court cases are another story, advises Jim Hitchner (Financial Valuation Advisors). He spoke at last week’s Forensic and Valuation Services Conference hosted by the New Jersey Society of Certified Public Accountants (NJCPA).

Big three: Hitchner pointed to the three main texts in the BV profession: Valuing a Business (by the late Shannon Pratt), Gary Trugman’s Understanding Business Valuation, and his own Financial Valuation Applications and Models. He has cited all of these resources in his reports when appropriate, pointing out that the Pratt book has just come out with its new sixth edition (done by a group of contributors). The Trugman book is “very different in style and tone” and is “full of good stuff,” he noted. Hitchner also said he is working on the fifth edition of his book, which is scheduled to come out in the first quarter of 2023. All of these books are available from BVR.

Cases: As for court cases, they should not be cited, he advised, but there are exceptions. If the attorney advises that the jurisdiction has an important case that is used as precedent for a certain valuation approach or methodology, citing that case may be appropriate. And, of course, the Mandelbaum case is fine to cite in your DLOM section.

The NJCPA conference, hosted by Roy Kvalo, director of litigation and valuation services at The Churchin Group (Red Bank, N.J.), was excellent, and we’ll have more coverage in future weeks.

Divorce courts getting flexible on valuation dates

One of the interesting points made at the recent AAML/BVR National Divorce Conference was that judges in marital dissolution cases now tend to want more current valuations, particularly when subsequent events may have impacted value. Of course, this can happen as a result of the pandemic. A trial could have started at the outset of the pandemic and then postponed. By the time the trial starts up again, the business could have been materially impacted, rendering the valuations too outdated in the eyes of the trier of fact. Therefore, some of them are abandoning the valuation dates set by precedent and asking for more current valuations.

If you missed the BVR/AAML conference, BVR will be offering recordings of all the sessions. We’ll let you know when they are available.

Moran adds to videos aimed at attracting young BV practitioners

Ray Moran (FON Valuation Services), the marketing director of the International Institute of Business Valuers (iiBV), continues to add to his series of interesting videos designed to spark interest in younger individuals and university students about a career in valuation. In a recent video, he interviews Mei Mahila about her career path from finance student in Albania to BV practitioner. Her corporate finance professor got her interested in valuation, and she entered the Valuation Olympiad, a competition in London sponsored by Global Banking Training. She’s now a manager with Deloitte and offers some valuable advice to the profession on how to attract young people to careers in valuation. One way is to reach out to students and show them personal stories such as hers to demonstrate what can be achieved in the profession. Also, stress the fact that people from all types and levels of educational backgrounds—not just finance and accounting—can be very successful in valuation, such as people with engineering, science, or math backgrounds. The iiBV’s YouTube channel is at youtube.com/channel/UC6CmU7fWmRk0OzF__mmuKOA.

RMA is the financial benchmarking data of choice, per BVR survey

Over three-quarters (78%) of valuation experts say they use RMA for financial benchmarking data, according to a recent survey by BVR. Coming in second is Bizminer, cited by 28% of respondents (see below). Just over 50 practitioners responded to this survey.

RMA	78%
Bizminer	28%
Integra (Microbilt)	8%
Internally developed data	4%
Other	24%

The “Other” category includes a number of resources, most of which just a single respondent cited, including IBISWorld, Cap IQ, S&P Global Intelligence, Business Reference Guide, Vertical IQ, and trade association data. Also, the majority (80%) only use one resource, and most of the respondents say they use these data weekly.

In a 2018 BVR survey (which had 160 respondents), IBISWorld was No. 1 (cited by 57%) and RMA was second (at 47%). We have heard that IBISWorld has had some reliability issues, so that may partly explain the drop in its use.

Global BV News

IVAS-IVSC conference this week: October 6-7

• Another big win for ESOP valuations vs. the DOL

  Valuation experts have long maintained that the Department of Labor (DOL) has been playing by its own valuation rules in its aggressive enforcement of ESOPs—rules that are not consistent with accepted valuation standards. But a court has rejected the valuations the DOL did in a case alleging that an ESOP overvalued (and thus overpaid for) the stock of its sponsoring company. The case involved an ESOP set up in 2004 by TPP, an architectural firm in Atlanta. The DOL had a long winning streak in these cases, but that ended last year with the Bowers case, which was a major win for the ESOP community. With this new case, the tide continues to turn against the DOL.

  Issue of control: The initial draft valuation done for the trustee included a 23% minority discount, but that was eliminated in the final valuation report when it was agreed that a number of “control mechanisms” were to be put in place. The DOL’s position has been that a minority discount must be applied unless the ESOP has “total and unfettered” control of the sponsoring company. In this case, the ESOP owned 51% of the sponsoring company’s stock, but a number of the other control mechanisms were never put in place. Therefore, the DOL expert’s valuation was prepared on an “as is” basis (so a minority discount was baked into the valuation)—plus he deducted an extra 10% for certain factors. But the court rejected the DOL’s valuation in favor of valuations done by an expert from Stout, who testified on behalf of the defendants.

  The case is Walsh v. Robert N. Preston, et al., Case 1:14-CV-04122-ELR, U.S. Dist. Court, Northern District of Georgia, Atlanta Division, Filed 09/20/2022.

  Stay tuned: This is a long case with other valuation issues (including the use of forecasts and company-specific risk), so watch for further commentary. Also, a full case digest and analysis as well as the court opinion will be available soon on the BVLaw platform.

  Extra: In separate news, the ESOP Association has petitioned the DOL to (finally) “provide clear regulation and guidance as Congress directed.” The valuation community has been waiting (four decades) for the DOL to finalize regulations that were proposed way back in 1988.

  Great turnout for the AAML/BVR National Divorce Conference

  The AAML/BVR National Divorce Conference harkened back to prepandemic times as family law attorneys and valuation experts met in person in Las Vegas September 18-20. The AAML is the American Academy of Matrimonial Lawyers. There were hundreds of attendees on-site, a dozen exhibitors, networking dinners, and some excellent sessions co-presented by attorneys and valuation experts. Here are some quick takeaways:

• Companies have three years to file for the Employee Retention Tax Credit—this could potentially be a tax asset hidden by the business owner spouse;
• The first place to look for hidden cryptocurrency is tax records (the first page of the 1040 asks about it);
• Attorneys should help the expert tailor his or her report and testimony to the learning style of the specific judge;
• In divorce courts, comparability using the market approach is very narrowly defined, unlike in tax matters;
• To estimate goodwill in some states, the excess earnings method is the “most used and abused method,” but “works great if done correctly”;
• Judges like to do a side-by-side analysis of opposing experts’ valuations to help make their final decision (for an example, see “How Judges Compare Competing DCF Analyses,” in the July 2022 Business Valuation Update);
• When doing valuations of hedge funds or private equity, examining audited financials is “critical”;
• When testifying, watch your body language—it represents 55% of your total communication; and
• Bring in a specialist if you need help with issues outside your wheelhouse, such as intellectual property, reasonable comp (vocational expert), businesses that own real estate, etc.

Detailed coverage of the conference will be in the November issue of Business Valuation Update.

Take a fresh look at your long-term growth rate, says Grabowski

Do you estimate a long-term growth rate by taking long-term real GDP growth plus expected inflation? If you do, you may want to reconsider, according to recent research by Roger Grabowski (Kroll) and Ashok Abbott (West Virginia University). Grabowski conducted an interesting session at the recent ASA 2022 International Conference in Tampa, Fla., and he says that common approach is wrong. Reason: GDP includes both existing firms and new firms, whose growth is driven by acquisition. GDP growth is being driven by firms such as Amazon and Apple—businesses that did not exist 20 years ago—so you can’t assume your subject company will grow at the rate of GDP, he says. Therefore, the expected long-term growth rate should reflect “organic” growth, so the effect of the acquisitions should be backed out.

Grabowski cites research that estimates real long-term growth in aggregate corporate earnings at 3%, with 2% attributable to new companies. Therefore, the long-term average real earnings for existing businesses (i.e., organic growth) is equal to 1%, or one-third. This means your subject company will, on average, grow at the rate of one-third of real GDP plus inflation.

Comments wanted on AICPA draft of business combinations guide

The AICPA seeks comments on its newly released Draft Accounting and Valuation Guide, Business Combinations. This guide 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 will 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. Comments are due by Jan. 15, 2023 (see the document for how to submit comments). To download the working draft, click here.

Healthcare compensation and productivity data workshop October 4-6

The American Association of Provider Compensation Professionals (AAPCP) is a relatively new nonprofit group whose members advise and lead healthcare organizations on provider compensation, contracting, planning, recruitment, retention, strategy, and valuation. The group is having a three-day Provider Compensation and Productivity Data Workshop October 4-6, which will be virtual. While the event is targeted to teams that manage provider compensation for organizations, it includes topics of interest to healthcare valuation professionals. For details, click here.

Global BV News

EACVA and IVSC launch European BV magazine

AICPA releases draft of business combinations guide

The AICPA seeks comments on its newly released Draft Accounting and Valuation Guide, Business Combinations. This guide 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 will 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. Comments are due by Jan. 15, 2023 (see the document for how to submit comments). To download the working draft, click here.

On-the-ground report from the ASA International Conference

Appraisers from all disciplines met in Tampa, Fla., and online for the ASA 2022 International Conference September 10-12. BVWire was there along with hundreds of attendees on site—somewhat of a return to prepandemic normalcy. At all the sessions we attended, speakers were live and on-site. Here are some big-picture highlights—more detailed coverage of the sessions will be in the November issue of Business Valuation Update.

Three pillars: Johnnie White, ASA’s CEO, welcomed the attendees and outlined the organization’s strategic plan built around three “pillars”: (1) membership; (2) education; and (3) branding. The ASA has been experiencing some challenges with respect to membership levels (partly because of the aging of the profession), so efforts are underway to attract and retain members better, particularly younger members. Also, educational content is being increased with the addition of more on-demand learning and specialty conferences (such as the recent inaugural ESOP conference). As for branding, a PR firm has been hired to help elevate the ASA brand in the appraisal profession (brand logos have been sent to all members).

Economy: The Fed “will not back off” and will keep raising rates until it sees “serious progress,” said keynote speaker LaVaughn M. Henry, former White House economic advisor and senior regional officer and vice president for the Federal Reserve Branch in Cincinnati. There will be slowing growth over the next six months but not necessarily a recession. Henry noted that Bank of America backed off on its prior forecasts of a recession this year, now saying “maybe” next year. (Note: Henry’s remarks were made before last week’s market plunge.)

Shannon Pratt Award: The recipient of the inaugural Shannon Pratt Award is Roger Grabowski (Kroll). Jay Fishman (Financial Research Associates) and Ken Pia (Marcum) presented him with the award. Recently, Grabowski spearheaded the effort to publish the sixth edition of Pratt’s Valuing a Business.

‘ESG Ratings: A Compass Without Direction’

That’s the title of a new paper out of the Stanford Graduate School of Business that examines the concerns over the reliability of the various ratings schemes for environmental, social, and governance (ESG) factors. ESG has become a “new” hot topic (although much of it has been around for years) in the investment world, and it, of course, has implications for valuation. But the various ratings that have emerged are (still) not ready for prime time. “We find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments,” the authors write.

The paper is available if you click here. The authors are David F. Larcker (Stanford University), Lukasz Pomorski (AQR Capital Management), Brian Tayan (Stanford University), and Edward M. Watts (Yale School of Management).

Extra: The IVSC has a perspective paper, “ESG and Business Valuation,” that represents an early step toward developing a systematic approach to the incorporation of ESG into business valuation practice and standards. To access the IVSC paper, click here.

A ‘field guide’ to BV just released

Based on all of the questions business owners have asked them over the years, appraisers Casey Karlsen and Seth Webber of BerryDunn have put together a helpful book, A Field Guide to Business Valuation. Written in an easy-to-understand style, the book uses a case study example that winds through the entire book to clearly illustrate the valuation concepts discussed clearly. This book is designed for owners and leaders of private businesses, but it will also help valuers give clear answers to questions from their clients that they are sure to get. To see the Table of Contents and Introduction, click here. A PDF version is available now, and the print version will ship by the end of September.

Reminder: Survey of young ASA BV practitioners

The American Society of Appraisers, together with Business Valuation Resources (BVR) and the recruiting firm Borrowman Baker, is conducting a survey of 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. If you are an ASA member under 40 in the BV discipline, you should have received a link to the survey. If you have not, send a note to info@bvresources.com and we will send you a link. Responses are strictly confidential and anonymous and will contribute to the continued advancement of the profession. The survey will be open until September 30. Thank you in advance for participating!

Global BV News

Student BV Challenge launched in Canada

The CBV Institute has launched its inaugural Business Valuation Challenge, a national case competition for undergraduate students from top business schools across Canada. Student teams will compete with students from other universities in a test of their business valuation skills. A case study has been developed by a team of Chartered Business Valuators (CBVs) and refined for a university audience. All participants will have the opportunity to attend a training session to learn the basics of business valuation that can be applied to the case study. The registration period is from September 13 to October 14, and the competition dates will be November 17-18. More details are available if you click here.

• Nath comments on Hitchner v. Damodaran

  The author of a number of seminal articles on control premiums, minority interest valuation issues, and cost of capital, Eric Nath (Eric Nath & Associates) comments on a recent article in Business Valuation Update. The article covered a webinar Jim Hitchner (Valuation Products and Services) presented in which he challenged the views of Aswath Damodaran (New York University Stern School of Business) concerning the cost of capital.

  “Your article ‘Hitchner Rebuts Damodaran’s Attacks on Cost of Capital Inputs’ might perhaps have been titled ‘Hitchner Attempts to Rebut Damodaran.’ My understanding is that probably 35% to 40% of appraisers (never mind academics) agree with Damodaran in whole or in part. Many of us never use historical data at all for ERP, size premiums or much of anything else. See the following article for detailed reasons why: The Big Myth. At this point the Pepperdine Survey is the best source of forward-looking required rates of return. Implied rates of return based on forecasts for some public companies is also a forward-looking approach, but it doesn’t really deal with lack of control or marketability/liquidity that impairs value for minority ownership positions in small private companies. It would be great to see the Pepperdine researchers figure out a way to get into the deeper, darker recesses of minority interests in smaller closely-held businesses, but at least for now the Survey’s venture capital and private equity segments get closer than anything else to what we need.” (signed) Eric Nath, ASA.

  BVR surveys confirm Nath’s belief that over a third of appraisers look to Damodaran for estimating cost of capital. Also, BVR surveys have shown that about 30% of appraisers look to the Pepperdine Survey (the 2022 edition is now available if you click here).

  Expert can’t testify regarding legal and state of mind opinions

  In a case in Delaware Chancery Court concerning breach of fiduciary duty surrounding an acquisition, a well-known expert has had the court partially exclude his testimony. For example, one aspect of the report provided his opinions on facts omitted from the proxy statement. The court noted that this amounted to a legal opinion of materiality, which is an issue for the court, so he was precluded from testifying in that regard. Some other aspects of his report fell into a gray area, but it did not provide a meaningful basis for evaluation and was largely personal thinking and judgment, the court noted. The expert had testified in the high-profile Dell case presided by the same judge, Laster, who wrote: “His opinions on the sale process in this case thus differ from the helpful analysis he offered about the management-led buyout in Dell, which rested not only on his thinking and judgment, but also on a data set of management buyouts he collected.” The court ruled that the expert may not testify on certain subjects of his report.

  The case is In re Columbia Pipeline Group, 2022 Del. Ch. LEXIS 180, and a case analysis and full opinion can be found on the BVLaw platform.

  Survey regarding young ASA BV practitioners

  The American Society of Appraisers, together with Business Valuation Resources (BVR) and the recruiting firm Borrowman Baker, is conducting a survey of 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. If you are an ASA member under 40 in the BV discipline, you should have received a link to the survey. If you have not, send a note to info@bvresources.com and we will send you a link. Responses are strictly confidential and anonymous and will contribute to the continued advancement of the profession. The survey will be open until September 30. Thank you in advance for participating!

  Paper explores IPP investments in the US

  An interesting paper examines the types of intellectual property products (IPP) capital employed by various sectors as measured in the National Income and Product Accounts (NIPAs) by the Bureau of Economic Analysis (BEA). The paper finds (not surprisingly) that investments in hard assets (e.g., plant and equipment) have decreased and have been replaced by investments in IPP. Also, there “still is a lot of heterogeneity in the types” of IP used among sectors, the paper says. For example, software capital is more prevalent in sectors such as information, finance and insurance, or management of companies than in sectors such as professional, scientific, and technical services, which continue to “invest heavily in the relatively more expensive R&D capital, as they had been doing since the 1980s,” the paper says. Consumer services and healthcare continue to be heavily invested in buildings (“expensive nonresidential structures”) but have also “increased their investments in a balanced mix of software and R&D capital but at much more modest levels compared to the rest of the capital-intensive sectors analyzed in this paper.”

  The paper, “Understanding the Uneven Growth of Intellectual Property Products Investment in the U.S.,” is by Dennis Fixler and Eva de Francisco, U.S. Bureau of Economic Analysis, and can be accessed if you click here.

  Global BV News

  European BV conference in Vienna November 3-4

  The 15th annual conference of the European Association of Certified Valuators and Analysts will be held in Vienna on November 3-4. More than 300 attendees are expected to hear from some of the most renowned speakers in the business valuation field while connecting and networking with other valuation professionals. Keynote speeches will be presented by Professor Dr. Dr. h.c. Ulrich Blum on Outright Economic Warfare: Can It Be Contained? and Bradford Cornell, Ph.D., on ESG and valuation. For more information and to register, click here.

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

  Here’s what you’ll see:

• “Young BV Practitioners Speak Out About the Profession” (BVR Editor). You may be surprised at the comments from a panel of young valuation experts who were asked to give their perspectives on the profession at the recent Business Valuation and Financial Litigation Super Conference hosted by NACVA in Salt Lake City.
• “Valuation Considerations in High Inflationary Environments” (William Harris, ASA, CFA, Trugman Valuation). With inflation at its highest level since the Great Inflation, valuation analysts will have to consider macroeconomic factors that have not been present in the US economy in over 20 years.
• “Accounting for Inflation in the Income Statement Forecast” (William Harris, ASA, CFA, Trugman Valuation). An example from an actual engagement that demonstrates the manner in which inflation can impact a valuation. This is a companion to the above article.
• “Mercer Examines the State of the BV Profession” (BVR Editor). In a keynote address at the Business Valuation and Financial Litigation Super Conference hosted by the National Association of Certified Valuators and Analysts (NACVA), Chris Mercer (Mercer Capital) addressed the aging of the profession, consolidation, how the VPOs are adapting, and what the future might hold for valuation theory.
• “Key Industry Updates for Various Types of Stores and Retailers” (BVR Editor). The economy, high inflation, the Russia-Ukraine war, and the pandemic continue to impact firms in all industries, so it’s important for valuation analysts to keep up with these developments. Here are some recent and very targeted updates for various retail stores from the Vertical IQ industry research platform.

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

Expert’s testimony excluded regarding licensing tattoos to video games

In a copyright infringement case in federal court in Ohio, a tattoo artist sued a video game company for depicting NBA players adorned with his copyrighted tattoos. The defendants argued that their use of the tattoos fell under the “fair use” rules, but the court noted that one of the factors to be considered was the “effect of the use upon the potential market for or value of the copyrighted work.” There were currently no incidences of tattoo artists licensing their designs for video games. The plaintiff brought in an expert from a large global consulting firm who was to testify on various matters, including whether the defendants benefited financially from reproduction of the tattoo designs. The expert was also to testify as to the likelihood of new markets forming, but, in a Daubert challenge, the court ruled that he was outside his area of expertise when he opined about the inevitable potential market for the licensing of tattoos for video games. The court excluded any testimony by the expert in regard to that but allowed his testimony on other matters.

The case is Hayden v. 2k Games, Inc., 2022 U.S. Dist. LEXIS 139184, and a case analysis and full opinion are available on the BVLaw platform.

SME transaction values drop to 2.9x for 2Q2022

EBITDA multiples are at 2.9x for the second quarter of 2022, which is down from the 4.5x rate in the first quarter of 2022, 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.

Car dealer blue-sky values remain at record levels, per Haig report

“Blue sky” values are 6% higher than at the end of 2021, and they are at the same level as they were at the end of the first quarter of 2022, according to the Q2 2022 Haig Report. Blue-sky value represents the intangible value of a car dealership. A blue-sky multiple is applied to normalized earnings, and then the tangible net assets are added in to get the fair market value of the entire enterprise.

Profitable road: Despite bad news in the economy and weak consumer sentiment, auto dealer profits remained high but growth in profits may be leveling off. M&A activity boomed in the first half of 2022, with 3% more dealerships sold compared to the record-setting pace of the first half of 2021. In these current conditions, a new risk has emerged: Car makers see a chance to restructure the relationship between consumers, retailers, and themselves. To stave this off, dealers will need to stress the value they bring to consumers and the car makers, says the report. To download the full report, click here.

Extra: Join Alan Haig and Nate Klebacha from Haig Partners for a BVR webinar, Auto Dealerships Are Running Hot: Key Valuation Metrics Unique to Auto Dealers, on September 14.

Global BV News

Demand for BV experts in Canada is at an all-time high

The awareness of the business valuation profession in Canada has grown, and demand for experts is at an all-time high, says Dr. Christine Sawchuk, the president and CEO of the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter. In an interview with Ray Moran (iiBV), she discussed some growing trends, including the increased complexity of valuation work, more demand for transparency and disclosure, emerging valuation metrics (such as for data and ESG), and the increased use of automated valuation models. She also discussed the many doors that the CBV designation opens for young professionals and university students. You can watch the full interview if you click here.