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  • 17-11-2021 18:58 | Lisa Guo (Administrator)
    • Working group comments on new global BV glossary

      A video has been posted that includes members of the working group that developed the International Valuation Glossary—Business Valuation, a revised version of a prior glossary published in 2001. This was a collaborative effort that began in May 2019 and involved several valuation professional organizations (VPOs) as well as other stakeholders. You can access a copy of the new glossary if you click here.

      Key point: “We do not intend the glossary to be authoritative—rather a helpful tool and a precursor to a harmonization of terms,” says Lucas Parris (ASA, USA) in the video. Steve Choi (RICS, USA) adds: “If any term in this glossary conflicts with a published governmental, judicial, or accounting authority, precedence should be given to the use and interpretation of terms as they appear in applicable published authoritative guidance, given the purpose of the valuation.”

      The prior glossary needed an update because new terms have gained traction and become more popular in the market and in practice, particularly with the introduction of fair value in IFRS and US GAAP and the increasing importance of intangible asset valuation.

      Living document: It will certainly not be another 20 years before this new glossary gets updated. “The working group expects to revisit the glossary periodically and update it as needed, bringing in input from additional organizations beyond those listed in the glossary to promote ever wider use of the document,” says Alexander Aronsohn (IVSC, UK).

      The other members of the working group are Catalina Miranda (chair; CBV Institute, Canada); Jeffrey Tarbell (ASA, USA); Muath Alkhalaf (TAQEEM, Saudi Arabia); and Omar Mohammad Zaman (TAQEEM, Saudi Arabia).

      NOTE:  IACVS participates in this process through examination and response to Exposure Drafts issued by IVSC

      Dietrich updates landmark research on physician compensation

      The December issue of Business Valuation Update includes an article by Mark Dietrich that updates his important research on the geographic distribution of physicians in the United States. It includes an updated comparison of the actual physician marketplace to MGMA’s Provider Compensation data report 2020 based on 2019 data. Dietrich has long maintained that the use of compensation surveys to determine the fair market value of physician compensation is seriously flawed. The article also incorporates key commentary from CMS about the use of surveys for Stark fair market value. Finally, there is a discussion of the pitfalls of survey usage for transaction valuation and marital property litigation involving physician practices.

      Letter sent to Congress regarding valuation discounts

      The American Society of Appraisers and over 100 other business groups and organizations sent a letter to Rep. Neal (D-Mass.) and Rep. Wyden (D-Ore.) urging exclusion of any tax proposals that would impact family businesses and farms, such as eliminating discounts for lack of control or marketability. Proposals such as taxing unrealized gains, halving the estate tax exemption, limits to grantor trusts, and changes to valuation discounts are not in the current framework of the Build Back Better Act—for now, the ASA points out.

      Extra: Will Frazier (Weaver) has an article on the resiliency of valuation discounts for family limited partnerships despite ongoing efforts to eliminate them.

      Article examines brand values, ratios, and multiples

      There has been a dramatic shift in the importance of brands in M&A transactions, with the value of customer relations overtaking the brand-value-to-enterprise-value ratio, reveals a new article. Between 2003 and 2020, the share of brand value dropped by half while customer value almost doubled. The article, by Christof Binder, managing partner of Trademark Comparables AG, covers the importance of brands in corporate M&A and provides a comprehensive list of the 50 most expensive brands and brand portfolios ever acquired, including their values, ratios, and multiples. The article also discusses general trends in importance and appreciation of brands versus customer relations in M&A and country-by-country differences.

      Another interesting point: The perception that brands have a very long life has changed. The average useful life assumed in the valuation of brands has decreased over time, from more than 40 years to less than 20 years today, says Binder.

      To access the article, which appeared in the World Trademark Review (WTR) magazine, click here.

      More jabs at the proposed billionaire tax

      Although it could give a lot of work to appraisers, the proposed billionaire tax is an example of “really bad tax law,” says the dean of valuation, Aswath Damodaran (New York University Stern School of Business). An article in The Wall Street Journal also rips into the proposal, making some of the same points Damodaran did, but also notes that it would accelerate the shrinkage of the U.S. public capital markets. The proposal’s tax on unrealized gains would discourage entrepreneurs from taking their companies public, the article says. For now, the proposal has been eliminated from the latest version of the spending bill, but the current version has a provision that would impose a 5% surtax on those earning more than $10 million a year, with an additional 3% on income of more than $25 million.

      Reminder: Preorder Trugman’s sixth edition

      Understanding Business Valuation by Gary Trugman (Trugman Valuation) has been the go-to book for real-world examples on how to apply valuation theory and complex topics. Praised for its easy-to-understand style, the book draws on the author’s long and practical experience. A revised, sixth edition is available for preorder for an early 2022 release, which will also include an access link to bonus materials—everything from court cases to checklists to sample valuation reports. To preorder, click here.

      Note: If you are a subscriber to BVResearch Pro or BVR’s Digital Library, the book will be included with your subscription, so there is no need for you to preorder.

      ASA fair value virtual conference December 1

      The American Society of Appraisers will hold its 2021 ASA Fair Value Virtual Conference on December 1 from 1:00 p.m. to 5:10 p.m. ET. Conference chair Ray Rath (Globalview Advisors) has put together an impressive program of topics and speakers: stock-based compensation (Amanda Miller, EY); SPACs (Harris Antoniades, Stout); discount rates for ASC 842 debt valuations (Vincent Covrig, Crowe LLP); an IVSC Update (Mark Zyla, Zyla Valuation Advisors LLC); and an update from the company-specific risk premium task force (Roger Grabowski, Duff & Phelps). There will also be a FASB update. This is a virtual event with up to four hours of CPE credit.

      Global BV News

      Most finance execs think global BV standards are in conflict

      Almost three-quarters (72%) of finance executives around the world believe there are material inconsistencies and/or contradictions between the various business valuation standards currently in use globally. This is according to a new study on the importance of business valuation standards to finance executives. The final sample consists of 196 participants from 32 different countries across all continents. One of the conclusions in the study is that ideally one independent standard-setter should issue standards that are applicable and accepted across the world. The study is explained in an article published in Bewertungs Praktiker, which you can access here.

      We point out that the article does not mention the detailed comparison that has been made of the global valuation standards that concludes that they do not conflict with each other. There are two interrelated charts, one on the different sets of U.S. business valuation standards and the other on the various international standards.

      The study was led by three academics, all of whom are members of the International Valuation Standards Council’s Europe Board: Dr. Marc Broekema, assistant professor at the Department of Business Studies, Leiden Law School of the Leiden University; Dr. Olesya Perepechko, lecturer at the Great St. Petersburg Polytechnic University; and Professor Klaus Rabel, a professor of business valuation at the University of Graz.

      Preview of the December 2021 issue of Business Valuation Update

      Here’s what you’ll see:

    •  Valuers Converge (in Person!) at the ASA International Conference” (BVR Editor). This is a recap of some sessions covering small promissory notes, shareholder disputes, sports businesses, valuing defensive patents, IRS news, competing appraisals, and more. Over 600 valuation experts from all disciplines came together for the American Society of Appraisers’ International Conference in Las Vegas, October 24-26. This was a hybrid event, and many of the attendees were on-site.
    •  An Inside Look at the Landmark ESOP Valuation Case” (BVR Editor). For over a decade, the Department of Labor has not lost a major ESOP case on a valuation issue, but its winning streak ended with Walsh v. Bowers. The case involves many key valuation issues, and Ken Pia (Marcum LLP) and Ian Rusk (Rusk O’Brien Gido + Partners LLC), expert witnesses for the defense, give their insights.
    •  Items of Interest Gleaned From the ASA Conference Networking Ops” (BVR Editor). BV firm staffing troubles, Shannon Pratt’s video remarks about his new book, a new app for fractional interests, a heightened interest in businesses with a real estate component, and help needed in developing a new module for the Cost of Capital Navigator are just some of the things we learned outside the regular sessions at the ASA conference—in and around the exhibit hall and during the many networking breaks.
    • Letter to the Editor: A New Development in Personal Goodwill” (R. James Alerding, CPA/ABV). This article presents remarks and comments from BVR’s legal editor on a previous article that discussed Florida’s proposed legislation to clarify the value of goodwill in the marital interest of closely held businesses.
    •  How to Explain Personal Goodwill to a Trier of Fact for a Divorce Valuation” (Gary Trugman, CPA/ABV, MCBA, ASA, MVS). This is an excerpt from the author’s upcoming sixth edition of Understanding Business Valuation, which will be available from BVR in early 2022.
    •  Physician Distribution, Mobility, Fair Market Value, and Compensation Surveys: An Update” (Mark O. Dietrich, CPA/ABV). This article updates the author’s peer-reviewed research on the geographic distribution of physicians in the United States, including some key commentary from CMS about the use of surveys for Stark fair market value.

    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.
  • 10-11-2021 22:05 | Lisa Guo (Administrator)

    Final version of global BV glossary released

    The International Valuation Glossary—Business Valuation has been completed, and a final version has been released. You can access it if you click here (free registration required). A working group made up of members of the American Society of Appraisers (ASA), Royal Institute of Chartered Surveyors (RICS), Saudi Authority for Accredited Valuers (TAQEEM), Canadian Institute of Chartered Business Valuators (CBV Institute), and the International Valuation Standards Council (IVSC) developed this new version, which is intended to replace the glossary last published in 2001.

    Not authoritative: Is the new glossary an authoritative document? The working group does not intend the new glossary to be authoritative. The ASA, RICS, TAQEEM, and the CBV Institute will adopt and publish the new glossary as a practice aid/guidance to their members. The IVSC is supportive of the new glossary, but the International Valuation Standards (IVS) define only terms used within IVS. The working group encourages other organizations to use and reference the glossary in any way they see fit.

    The process of developing the new glossary was a challenging one and was designed to build consensus. Subject matter experts were consulted, as were other organizations, such as IACVS,  the National Association of Certified Valuation Analysts (NACVA) and The Appraisal Foundation. A draft version was issued in December 2020, and public comments were solicited. All comments received were given thorough consideration by the working group and addressed in the final version as appropriate.

    Stay tuned for more news on the glossary, including some comments from members of the working group.

    Will the landmark ESOP valuation case open the door?

    During an amazing webinar with the testifying experts in the recent Walsh v Bowers ESOP case, a question came in from the audience: “Do you think this case will open the door for the Department of Labor and the valuation profession to work together to develop guidance around ESOP valuations?” The hope is that it will, say Ken Pia (Marcum LLP) and Ian Rusk (Rusk O’Brien Gido + Partners LLC), who testified for the defense and gave webinar attendees an inside look at the valuation issues in the case.

    The idea of the valuation profession working with regulators has worked in other areas of valuation. For example, the Appraisal Issues Task Force is a voluntary group of valuation professionals who work with the FASB and the SEC to evaluate proposals and recommend methodology, assumptions, and approaches in the area of fair value for financial reporting. A similar mechanism could be set up between ESOP valuation professionals and the DOL. Pia and Rusk say the profession would welcome that kind of collaborative effort.

    A recording of the webinar with Pia and Rusk is available if you click here (free to holders of BVR’s Training Passport when available).

    Appellate court KOs unaccrued interest on dissipated assets

    In a divorce case, an appellate court vacated the order of the trial court that erroneously charged the husband with over $4 million in unaccrued interest on marital assets that the husband fraudulently dissipated from the marital estate. This altered the equitable distribution, so the case was further remanded to the trial court to issue a new order in accordance with the appellate court’s opinion.

    Both the husband and wife were accountants, but the wife left her job in 1990 to “tend to the children.” The husband purchased and operated various real estate entities during the marriage, and he created trusts for the parties’ children that ended up being valued at over $9 million. The wife claimed she did not know of the trusts until after the couple separated. She claimed that the transfers to the trust were fraudulent transfers, and the value of the trusts should be charged against the husband in the parties’ equitable distribution scheme. The husband claimed that he had told the wife of these trusts. The trial court deemed the husband’s transfers of assets to the trusts for the children to be fraudulent and void and thus chargeable against the husband in the equitable distribution. The court also charged the husband with $4 million of unaccrued interest, but the appellate court vacated this.

    The case is Mohen v. Mohen, 2021 Pa. Super. Unpub. LEXIS 2560; 2021 WL 4281296 (Sept. 21, 2021). A case digest analysis and full court opinion are available on the BVLaw platform.

    FASB updates Topic 805 on business combinations regarding deferred revenues

    The Financial Accounting Standards Board (FASB) announced an update to its business combinations standard (Topic 805) aimed at clarifying how to apply requirements under its revenue recognition rule. The update requires companies to apply the new revenue recognition standard, ASC 606 (Revenue From Contracts With Customers), which will result in companies recognizing contract assets and contract liabilities at amounts consistent with those the acquiree recorded immediately before the acquisition date. This is expected to result in the acquirer recognizing more revenue in its post-acquisition financial statements related to acquired deferred revenue. Prior to this update, fair value measurement commonly resulted in a reduction, or “haircut,” to the amount of deferred revenue that was previously recognized in the acquiree’s financial statements prior to the acquisition.

    The update applies to all entities that enter a business combination within the scope of Subtopic 805-10 (Business Combinations—Overall). The amendments are effective for public companies for fiscal years beginning after Dec. 15, 2022, including interim periods within those fiscal years, and for all other entities beginning after Dec. 15, 2023, including interim periods within those fiscal years. Early adoption is permitted.

    PCAOB 2020 inspection reports released

    The Public Company Accounting Oversight Board (PCAOB) has issued its 2020 annual inspection reports for the largest U.S. audit firms, including each of the Big Four, BDO, and Grant Thornton. The inspections look at a wide variety of audit issues, including fair value measurements. The majority of the annually inspected audit firms had fewer findings in 2020 compared to 2019 inspections. In audit firms that are inspected every three years, “some improvements were noted, although deficiencies continue to remain high,” according to a PCAOB staff update on the 2020 inspections.

    New edition of a guide on valuing FLPs

    BVR is happy to announce that the Comprehensive Guide for the Valuation of Family Limited Partnerships and LLCs is the newest addition to its bookstore. This is the 6th edition of this book, and it includes all new updates since the last edition was released in 2018. This new edition has five new case study valuation examples, an updated study on market pricing of liquidating noncontrolling real estate interests, using the best empirical data in a valuation, and more. The book’s authors are Bruce A. Johnson, James R. Park, and Spencer Jefferies, and Partnership Profiles Inc. publishes the book.

    Global BV News

    TAQEEM launches study on the value of camels

    The Saudi Authority for Accredited Valuers (TAQEEM) has signed a memorandum of understanding with the Camel Club to develop standards and criteria for evaluating the market value of camels, according to a news release. Under the agreement, the Camel Club will contract with a consulting firm to prepare a market study for the camel sector in all regions of Saudi Arabia. TAQEEM will develop a professional guide for evaluating camels as biological assets and the intangible assets they include, such as goodwill
  • 03-11-2021 22:03 | Lisa Guo (Administrator)

    ASA conference hits the jackpot in Vegas

    About 600 attendees converged—both on-site and virtually—for the American Society of Appraisers’ International Conference in Las Vegas October 24-26. It was great seeing many people at a live event after all these many months so there was a lot of catching up to do! Here are just a few items of interest—just the tip of the iceberg—from the sessions and the many networking opportunities (full coverage will be in the December issue of Business Valuation Update):

    • Johnnie White, the ASA’s CEO, has great things planned for the organization, including new headquarters, a new website, a systems overhaul, and a new PR campaign to raise awareness;
    • Activity on the Vegas Strip has bounced back in strong form—which was confirmed by a session Ray Moran (FON Valuation Services) moderated covering M&A and valuation issues in the gaming industry;
    • During the preconference sessions, Ray Rath debuted a new advanced course on the valuation of intangible assets, BV303—Valuation of Intangible Assets and Special Topics, which is a combination of two prior courses;
    • BV recruiter John Borrowman (Borrowman Baker) told us some alarming news: From May 2021 to October 2021, 63 professionals have left the business valuation, forensics, and litigation services profession;
    • Duff & Phelps would like some feedback on its development of a company-level beta module for its Cost of Capital Navigator;
    • A sports team’s current win-loss record doesn’t always have an impact on value, according to Drew Dorweiler (IJW & Co.);
    • The traditional relief from royalty method for valuing patents has serious shortcomings, one being that it doesn’t capture the value of a defensive patent portfolio, says Brian Dies (Hoffman Alvary & Co. LLC);
    • Closed-end fund data and expanded economic data are now available on the Tagnifi platform of guideline public-company data (it was a platinum sponsor of the conference); and
    • In their session, Ron Seigneur (Seigneur Gustafson LLP) and Nicholas Parseghian (Marcum LLP) said the pandemic has had some very positive effects on the cannabis industry—and much of it will stick going forward (Seigneur is a co-author of the Cannabis Industry Accounting and Appraisal Guide).

    Kudos to the ASA and its conference staff for an amazing event! Next year’s conference will be in Fort Lauderdale, Fla. See you there!

    Valuation experts spar over fraudulent transfer matter

    In the bankruptcy court, two valuation experts squared off in a case where the trustee argued that a cash transfer by the debtor was a constructively fraudulent transfer under the bankruptcy code. The expert for the trustee was not able to show that the debtor was insolvent at the date of the transfer or became insolvent as a result of the transfer. The expert did not perform a balance sheet insolvency test but noted that, while total assets were about $20 million greater than liabilities, the bulk of the assets consisted of goodwill and was likely significantly overstated. The defendant’s expert did perform a balance sheet test and opined that the company was solvent at the date of the transaction. He valued the business as a going concern, which includes goodwill, and he offered credible evidence that the goodwill represented the results of a competitive market transaction.

    The case is Yaquinto v. Thompson St. Capital Partners (In re Stone Panels, Inc.), 2021 Bankr. LEXIS 2635; 2021 WL 4436166 (Sept. 27, 2021). A case digest and full court opinion are available on the BVLaw platform.

    Audax PE invests in Stout

    Audax Private Equity has agreed to make an investment in Stout, a firm that provides advisory services in corporate finance, valuation, financial disputes, and investigations. The transaction is expected to close in the fourth quarter of 2021, according to an announcement. This is a continuation of the recent push by PE firms into accounting and valuation firms. Last month, Citizens Financial Group Inc. acquired Willamette Management Associates, a leading valuation consulting and forensic analysis firm.

    Valuation experts are familiar with the Stout Restricted Stock Study and DLOM Calculator for quantifying a discount for lack of marketability (DLOM). In a recent BVR survey, nine out of 10 respondents say they use restricted stock studies for DLOM, with the Stout study being the front-runner (75% say they use the Stout study).

    Damodaran on proposed billionaire tax

    “A boon for appraisers and accountants,” but it is one of the worst tax proposals ever, says Aswath Damodaran (New York University Stern School of Business), in an appearance on CNBC. He’s referring to the Democratic proposal to tax the unrealized capital gains of people with either $1 billion or more in assets or three consecutive years of income of at least $100 million. Under current law, such assets are subject to tax only when they’re sold. The proposal meets all of Damodaran’s requirements for “really bad tax law,” namely that it targets very few people (and those who can fight back), it is tied to a volatile measure (capital gains), it is very difficult to compute (unrealized gains), and it may possibly cannibalize taxes already being collected from other sources. Plus, some billionaires would escape the tax if, say, the billion dollars they have does not grow—so it singles out successful entrepreneurs. “It’s almost perverse,” says Damodaran. There are better alternatives, he says, such as eliminating the free step-up in basis for inherited assets and raising rates.

    Update on the pandemic’s impact on the gaming industry

    While at the ASA International Conference in Las Vegas, we reached out to industry research provider Vertical IQ to give us an update on the impact of the pandemic on the gaming industry. They tell us that experts say that the increasing number of organizations requiring proof of vaccination to enter Nevada entertainment venues will put pressure on casinos to do the same. Experts say that Las Vegas Raiders games at Allegiant Stadium could provide a blueprint for how events will function. The team has contracted with tech company Clear for use of its Health Pass app to verify vaccination status. The team’s rule is succinct: no vaccination, no entry. Clear’s digital Health Pass requires the user to scan a state-issued ID or passport and upload pictures of his or her face and CDC vaccination card. The health pass, which is a QR code, expires after 12 to 24 hours. To access it again, the user provides a new photo that is matched to the original using facial recognition technology. The user must also answer a short health-screening questionnaire.

    The Vertical IQ platform is geared to business valuation experts and provides details of industry trends, financial metrics, operations, risks, and financial challenges inherent in more than 500 industries. Learn more about the platform during a free webinar on November 18—click here to register.

    Global BV News

    Latest issue of OIV Journal available

    The spring 2021 issue of the journal of the Organismo Italiano di Valutazione (OIV), the valuation standards-setter in Italy, contains the following articles:

    ·  “Cross-Border DCF Valuation in a Nutshell” (Andreas Schueler);

    ·  “Level 3 Reporting Quality: Trend Analysis of Derivative Instruments’ Restatements” (Joel M. DiCicco, Richard S. Gendler, Uliana Filatova, and Teodora Minkova); and

    “Business Valuation and Fundamental Analysis” (Mauro Bini)

    To download the journal, click here

  • 27-10-2021 22:02 | Lisa Guo (Administrator)

    COVID-19 and BV: Hitchner gives an update

    In the opening session of the Virginia Society of CPAs’ Forensic and Valuation Services Virtual Conference, James Hitchner (Valuation Products and Services) gave a current perspective about the many challenges the pandemic has presented for business valuations.

    Hitchner hasn’t changed his opinion about the “magic date” of Feb. 24, 2020, in terms of when the pandemic was known or knowable. “Dates matter” he said, but there is no single date that everyone can use for determining when the virus was known or knowable—it depends on the facts and circumstances of your subject company. For example, a company with all local customers and suppliers would be in a different situation than, say, a company that depends on a supply chain in another part of the world. That’s why it’s important to consider timelines in your analysis. Hitchner’s timeline (that he generously makes available to everyone) is a very helpful tool that includes significant events, including the pandemic’s effect on the U.S. stock market.

    Some of his other observations include:

    • If a pre-COVID-19 valuation does not serve the purpose, consider using a “hypothetical situation” to do two valuations as of the same date (one with COVID-19 and one without)—this complies with SSVS and USPAP;
    • Company-specific risk became the “great equalizer” in his valuations during the pandemic—the extra risk is reflected there (otherwise the discount rate would be lower than before the pandemic, given standard data inputs);
    • He has never spent so much time on economic and industry research (he relied heavily on McKinsey’s free information); and
    • He has “changed his mind” about the work of Aswath Damodaran (New York University Stern School of Business), such as his implied ERP—he currently doesn’t use Damodaran’s data but is reconsidering it.

    CFAs support annual testing for goodwill impairment

    Global standard-setters, such as the Financial Accounting Standards Board (FASB) in the U.S., are revisiting the issue of annual impairment testing versus amortization of goodwill. During a recent webinar, Sandra Peters, head of financial reporting at the CFA Institute, previewed a forthcoming survey of institute members that found broad support for regular testing of goodwill for impairment and skepticism about amortization. She agreed with the majority of the members: “Amortization over a straight-line period tells you nothing. Impairment … says that something you acquired didn’t turn out, and users of financial statements should ask more questions.”

    Peters added that, in practice, many investors perform their own impairment analysis with much less information than the companies have, suggesting it is valuable to them and may not be as onerous and costly as proponents of amortization suggest. Finally, Peters noted that international standard-setters appear to be moving away from the idea of amortizing goodwill, so a U.S. move that embraces the approach would create headaches for users of financial statements.

    The webinar, What’s New in Goodwill, featured a panel discussion with Peters along with VRC co-CEO PJ Patel and Calcbench CEO Pranav Ghai. You can access a replay if you click here.

    Trugman talks about his new book at the ASA confab

    If you visited the BVR booth at the American Society of Appraisers International Conference in Las Vegas, you would have had the chance to chat with Gary Trugman (Trugman Valuation), who was taking a break from working on the new, sixth edition of his book Understanding Business Valuation. He explained that the entire book is being revised, but some of the notable revisions include an expanded section on personal goodwill. Also, he will add much more material on report writing that will include tips on how to write good rebuttal reports. The new edition will be published by BVR and will also include a special access link to court cases from the BVLaw platform as well as a companion website with supplemental and bonus materials that will be revised regularly.

    At the BVR booth, preorders were taken for the book, which will have an early 2022 release (you can preorder if you click here).

    Extra: At the conference, Trugman received the highest honor the ASA bestows—he is now a member of the ASA College of Fellows (FASA).

    Business owners have many misconceptions about value

    Many private-business owners overestimate the value of their business, says an article on Axial by Al Danto,Business Valuation Misconceptions.” This is a particular problem when the owner wants to sell. The sellers, of course, want the highest valuation possible when they sell, but their misconceptions about value makes a successful sale less likely. For example, business owners think that other companies in their industry with similar sales and revenue averages will have the same valuation. Of course, valuers know this is simply not true! The averages can be the same, but what about trends? A company with downward trends will have a different value than one with upward trends. Knowing how a buyer values a business and what drives a valuation up or down is, therefore, critical for an owner to understand. The article gives a good summary of how buyers evaluate acquisition targets.

    Latest issue of the ASA BVReview now in BVRPro

    The BVResearch Pro platform contains the full archive of BVReview (going back to 1982!), the business valuation journal of the American Society of Appraisers. The latest issue (Summer 2021) has been added to the platform, and it has these articles:

    • “A Current View of the Restricted Stock Studies and Restricted Stock Discounts” (Z. Christopher Mercer, Mercer Capital). Restricted stock studies can be helpful for marketability discount determinations, but too many valuation analysts continue to rely on simplistic comparisons with averages of restricted stock discounts from dated studies.
    •  “When Averaging Multiples, the Arithmetic Mean Is Inferior to the Harmonic Mean” (Gilbert E. Matthews, Sutter Securities). A multiple is an inverted ratio with price in the numerator. The harmonic mean is a statistically sound method for averaging inverted ratios. It should be used as a measure of central tendency for multiples, along with the median.
    • “Attrition Analysis, Midperiod Convention, and Customer Retirement Forecasts” (Richard K. Ellsworth). Valuation practitioners that develop an attrition analysis founded on a midperiod retirement convention should not then apply an end-of-period convention when forecasting customer retirements.
    • “Business Valuation: An Integrated Theory.” This is a review by William H. Frazier of the recently published third edition of Business Valuation: An Integrated Theory (BVIT) by Z. Christopher Mercer and Travis W. Harms.

    If you are not a subscriber to the BVResearch Pro platform, you can do a stand-alone subscription to the ASA’s BVReview if you click here.

    Global BV News

    Most large firms suffer major impact from illicit activity

    Kroll’s Global Fraud and Risk Report reveals that 57% of respondents at companies with a turnover of more than $15 billion reported a very significant impact of illicit activity, such as fraud, corruption, and money laundering, on their organization, with a further quarter (25%) describing the impact as somewhat significant. This trend continued for firms with an annual revenue of between $10 million and $15 billion, with 48% of respondents saying their organization had been very significantly impacted and 44% reporting the impact was somewhat significant.
  • 20-10-2021 22:01 | Lisa Guo (Administrator)

    Can’t answer a question with a simple yes or no in court?

    It is always very interesting to hear what judges have to say about giving expert testimony. At the recent New Jersey CPA Society’s Business Valuation and Litigation Services Conference, retired judge Charles M. Rand, who presided in New Jersey Superior Court, was asked a question: What should the expert do if he or she cannot answer yes or no to a question from opposing counsel? Some judges have said that the witness can turn to the judge and ask to expand on their answer. Some judges may not welcome that, so Judge Rand offers an alternative strategy. The witness should respond, “I can’t answer yes or no to that question.” If the opposing counsel keeps pushing you, then you simply have to give an answer. But the attorney on your side should, on redirect, ask you to explain why you couldn’t answer yes or no.

    Full coverage of all of the sessions at the conference will be in the November issue of Business Valuation Update.

    Justifying hockey-stick projections

    Valuation experts frequently receive from management what may appear to be an unrealistic forecast that starts off modestly but shoots up in future years as if by magic. These hockey-stick projections may be perfectly valid, but it’s up to the analyst to scrutinize them. If the valuation ends up in litigation, the analyst will surely be questioned about them.

    In a blog post, Chris Mercer (Mercer Capital) recalls having a hockey-stick projection from a bank that currently had low earnings. It appeared that the bank could not possibly achieve that level of performance found in the bank’s own current capital plan for the next five years, which had been prepared for regulatory review in the normal course of business. Mercer was accused of unrealistically relying on the bank’s capital plan.

    In response, Mercer referred the attorney to an exhibit in the valuation report that compared the previous five years’ performance with the earnings and returns of the capital plan. “There, it was clear that the projected returns (on assets and equity) were within the levels achieved by the bank in the previous few years, and below the current level of the bank’s peer group,” Mercer writes. “Value today is a function of expectations for future performance—and the expectations used were in line with past performance, management’s stated plans, management’s business plan, and the performance of similar banks.”

    This situation illustrates the importance of professional skepticism, especially when reviewing management’s prospective financial information (PFI). Common procedures include, but are not limited to, a comparison of prior forecasts to actual results, comparison of PFI to industry expectations, checking the PFI against other internally prepared financial information for consistency, a comparison of entity PFI to historical trends, an understanding of who prepared the PFI and how often it is prepared, and math and logic checks.

    D&P/Kroll updates multiples in healthcare services

    The S&P Healthcare Services Index declined by 0.6% in August, compared to the S&P 500 Index, which increased 2.9% over the same period, according to the August 2021 “Healthcare Services Sector Update” from Duff & Phelps, a Kroll Business. The best performing sectors were healthcare staffing (up 15.5%), specialty managed care (up 10.7%), and healthcare information technology (up 9.5%). The poorest performing sectors were behavioral health (down 18%), consumer-directed health/wellness (down 12.9%), and providers—other (down 11.1%). The current average LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 3.63x and 15.2x, respectively.

    Preview of the November 2021 issue of Business Valuation Update

    Here’s what you’ll see:

    • ‘Survey Says’ for FMV of Physician Compensation Is on Its Last Legs” (BVR Editor). The use of compensation surveys to determine the fair market value of physician compensation is seriously flawed, a position well-known expert Mark Dietrich has long maintained. Plus, recent government regulations confirm his position, and he offers an alternate methodology.
    • Statistical Methodologies for Analyzing Active and Passive Appreciation” (BVR Editor). A rundown of the existing quantitative models that have been developed that separates the active and passive appreciation of a closely held business involved in a marital dissolution case. The models seek to statistically identify market forces that reasonably cause changes in the value of assets.
    • Benchmark Data on Contract-Based Intangible Assets and Remaining Useful Lives” (BVR Editor). Many contract-based relationships represent identifiable intangible assets that require valuation apart from goodwill. The data here are from the third edition of Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations, which includes data from almost 16,000 purchase price allocations.

    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
    • BVLaw Case Update: The latest court cases that involve business valuation issues.
    To stay current on business valuation, check out the November 2021 issue of Business Valuation Update
  • 13-10-2021 22:00 | Lisa Guo (Administrator)

    Trugman’s sixth edition now available for preorder

    The new, sixth edition of Gary Trugman’s Understanding Business Valuation is now available for preorder for an early 2022 release. The entire book is being revised, but Trugman tells BVWire that some of the notable revisions include an expanded section on personal goodwill. Also, he will add much more material on report writing that will include tips on how to write good rebuttal reports. Trugman has conducted workshops on report writing and rebuttals, so this new material will be a very welcome addition. The new edition will also include a special access link to court cases from the BVLaw platform as well as a companion website with supplemental and bonus materials.

    Calculation of value at center of Arizona court battle

    A court in Arizona rejected the use of a calculation report, but an appellate court ruled it was wrong to do that and sent the case back to the lower court. The trial court excluded the evidence of a business valuation expert because he had submitted a calculation of value report and was then asked to testify to it. The expert self-admitted that he would not testify to a calculation of value and had explained in his engagement letter that, if he had to testify, a valuation engagement would be required. Despite the exclusion by the trial court and the self-admission of the inadequacy of a calculation of value for testimony purposes, the appellate court nevertheless ruled that a calculation of value is not unacceptable per se. The case has been remanded in part to determine whether the calculation of value met the requirements of Arizona Rule 702 for allowable evidence.

    The case is Larchick v. Pollock, 2021 Ariz. App. Unpub. LEXIS 895; 2021 WL 3929954. The full court opinion and a case analysis are available on the BVLaw platform.

    Clint Eastwood awarded $6.1 million in right of publicity case

    In a default judgment, actor Clint Eastwood has been awarded $6.1 million from a company that falsely claimed Eastwood had endorsed its CBD products. The lawsuit claimed that the defendants created fake news articles and manipulated search results to make it appear that Eastwood had endorsed their products. This case points up the intriguing valuation issue known as the “right of publicity.” This is a form of intellectual property that covers an individual’s likeness, including his or her name, image, signature, voice, and so on. As the Eastwood case shows, there could be a great deal of value when it comes to a celebrity.

    How to do it:A veritable road map on how to value the right of publicity can be found in the recent case of the Michael Jackson estate. Experts for the estate presented a fascinating look at how the name-likeness valuation was done during a BVR webinar. The webinar panel consisted of Jay E. Fishman (Financial Research Associates) and celebrity licensing expert Mark Roesler (CMG Worldwide), whom the estate engaged to value the name and likeness. Also on the panel was music industry financial advisor David Dunn (Shot Tower Capital), who advised on other valuation issues.

    Feedback wanted on Abbott model for active/passive appreciation

    For several years, Professor Ashok Abbott (West Virginia University) has been developing a methodology for separating active from passive appreciation of business assets in a divorce context (see our first coverage here). During a recent BVR webinar, Dr. Abbott brought us up-to-date on his methodology, which is an analytical framework based upon econometric modeling.

    Dr. Abbott also has a recent peer-reviewed paper out that explains his methodology (including a detailed example), which is available if you click here. During the BVR webinar, he encouraged the audience to read the paper and provide feedback to him (his contact information is in the paper).

    Expert predicts continued PE push into accounting

    Recently, EisnerAmper became the first top 20 accounting firm involved in a private equity deal. “I would make a bold prediction here that in the next month, there will be a second top 20 firm to go the way of private equity,” says Allan D. Koltin, in an interview in the Journal of Accountancy. Koltin is CEO of Koltin Consulting Group and has served as an adviser and broker on many of the biggest M&A deals in the accounting space. “But I wouldn’t stop there,” he continues. “I think we could wake up a year from today and there could be no less than three, maybe even as many as four, of the top 20 CPA firms owned by private equity.” Koltin also remarked 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.

    Gearing up for the ASA conference October 24-26 in Las Vegas

    BVR will be attending—in person—the 2021 ASA International Conference at Planet Hollywood in Las Vegas, October 24-26. You can find us at our booth in the exhibit hall (unless we are attending some of the great presentations), so please stop by and say hello. This will be a hybrid event featuring live in-person sessions combined with a simultaneous virtual online option for remote attendees. The conference brings together appraisers of all disciplines, and the agenda features the latest trends presented by top thought leaders in the profession. To see the at-a-glance schedule, click here.

    Expand your practice with value growth advisory services

    A natural extension for a valuation practice is advising business owners on ways to maximize firm value. A training and credentialing program is available for valuation professionals who want to offer this service. The Certified Value Growth Advisor (CVGA) program is a five-day course that focuses on the fundamental best practices that drive value of any business. You will also learn how to build on those drivers to develop a short-term tactical plan and long-term strategic plan for the client’s business. This course is designed to help your clients increase company value by two to three times over a two-to-five-year period. The next CVGA program is scheduled for November 8-12 and will be in a virtual environment. For more details, click here.

    Global BV News

    Full agenda for IVSC Virtual AGM October 21-28

    This year’s annual general meeting (AGM) of the International Valuation Standards Council (IVSC) will be held as a virtual program from October 21 to October 28. There will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. The full agenda is now available, and you can see it if you click here. Some parts of the overall program are restricted to IVSC sponsor/member organizations or their representatives, but other aspects are open to anyone with an interest in valuation and the work of the IVSC.
  • 06-10-2021 21:59 | Lisa Guo (Administrator)

    BV book alert: Two important titles are in the works

    Two books that all valuers should have on their shelves will soon have new editions!

    Understanding Business Valuation, by Gary Trugman (Trugman Valuation), will come out with its new (sixth) edition in early 2022. Acclaimed for its easy-to-understand explanations of complex topics, the book draws on the author’s long and practical experience to present real-world examples on how to apply valuation theory. The new edition will also include an access link to court cases from the BVLaw platform as well as a companion website with ancillary materials designed to keep you up-to-date on key matters.

    Valuing a Business, by Shannon Pratt, will also come out with its new sixth edition, scheduled for a March 2022 release. The book, first published in 1981, is being published with underwriting sponsored by the American Society of Appraisers Educational Foundation. Pratt is now retired, but the ASA has assembled a group of contributors to bring the book up-to-date and maintain Pratt’s legacy for the valuation profession.

    Stay tuned for more details on these two volumes as they develop.

    Record attendance at VSCPA conference

    Again this year, BVR was pleased to sponsor the two-day Virginia Society of CPAs Forensic and Valuation Services Virtual Conference, which saw record attendance, reports Harold Martin (Keiter), who served as chair of the conference planning task force. Excellent speakers presented a lot of great information, and here are a few interesting bits of information we picked up:

    • Pre-COVID-19 valuations may not be useful, so consider using a “hypothetical situation” to do two valuations as of the same date (one with impacts of COVID-19 and one without)—this complies with SSVS and USPAP;
    • Several speakers remarked that business at their practices dipped during 2020, but it’s rebounded in 2021—and then some (“we’re slammed,” “our best year in decades,” “a lot of estate and gift work”);
    • A case to watch: A court in Arizona KO’d the use of a calculation report, but the appellate court ruled it was wrong to do that and sent the case back to the lower court (the case, Larchick v. Pollock, is in BVLaw);
    • Developing the proper statistical model for lost profits analysis hinges on understanding the drivers of—and trends in—firm performance;
    • Tax proposals in Washington seek to eliminate valuation discounts for family limited partnerships and personal holding companies, but it’s a narrower provision than the 2017 proposed Sec. 2704 regs that targeted estate valuation discounts for minority interests;
    • When doing forensics, you need a definite methodology (e.g., the IRS uses financial status audit techniques (FSAT));
    • The biggest problem with determining reasonable compensation is dealing with owners with two hats—as an owner and also as an employee/executive—where there is a commingling of compensation and profit; and
    • An FBI agent spoke on cybersecurity and noted that each of the 56 FBI field offices have a least one cyber squad investigating ransomware and other cyber crimes.

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

    Insurer not required to defend valuation firm in ESOP lawsuit

    A valuation firm can no longer force its professional liability insurer to defend a lawsuit challenging the firm’s ESOP valuation because the case’s surviving claim falls under a policy exclusion, a federal court has ruled. While the policy covered valuation services, the policy also featured an exclusion for claims against the insured for securities violations. The insurer’s duty to defend the firm ended when the ESOP participants suing the firm filed an amended complaint that included only one claim for federal securities fraud. The policy featured an exclusion for claims against the insured for securities violations.

    The case is Great Am. Fid. Ins. Co. v. Stout Risius Ross, Inc., 2021 U.S. Dist. LEXIS 158553; 2021 WL 377 (Aug. 23, 2021). A case analysis and the full opinion are available on the BVLaw platform.

    Free model adjusts ROI distortion from missing intangibles

    Intangible assets that are “missing” from corporate balance sheets (see prior coverage) distort performance metrics and generally overstates return on capital. In a new article, the authors suggest adjustments to correct for this distortion—and they provide a free interactive model to illustrate. They demonstrate the model by calculating an intangible asset adjusted return for Amazon. The article and model, from The Footnote Analyst, is available if you click here.

    Newest What It’s Worth guide examines insurance agencies

    What makes insurance agencies and brokerages tick? How are changes in the industry impacting firms? What’s the best valuation approach? Get the answers to these questions and more in the new guide, What It’s Worth: Valuing Insurance Agencies. The report draws upon the best benchmarking data and industry research sources available, summarizes key insights and appraisal factors, and will help guide your professional judgment in determining a conclusion of value that is as reliable as ever. Check out the table of contents if you click here. Note: You already have access to this new guide if you are a subscriber to the BVResearch Pro platform!

    Global BV News

    Want to help develop global standards for valuing financial instruments?

    Here’s a great chance to give back to the valuation profession. The International Valuation Standards Council (IVSC) is looking for someone to help write and lead the international approach to valuing financial instruments. The candidate would have to be able to make a commitment (flexible) of 30% of his or her time per week for nine to 18 months, so the support of the candidate’s firm or organization is important. The role would be to support the lead financial instruments director in efforts to further develop the International Financial Instruments Standards of the IVSC. If you are interested in this opportunity, click here for more details and how to apply.
  • 29-09-2021 21:57 | Lisa Guo (Administrator)

    Major win in ESOP valuation case vs. DOL

    A district court has ruled “decisively” against the Department of Labor (DOL) in an ESOP valuation case, stressing that the DOL failed to follow standard valuation practices. “The decision is one of the most comprehensive rebukes of DOL arguments in valuation cases,” says Corey Rosen, founder and senior staff member of the National Center for Employee Ownership (NCEO), in a blog post.

    The case is Walsh v. Bowers, 2021 U.S. Dist. LEXIS 177184 (Sept. 17, 2021), and it involved the ESOP company Bowers + Kubota (an architecture and engineering firm). The DOL had 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.

    Stay tuned for more coverage of this important case. A copy of the opinion is available on the BVLaw platform, and a case digest analysis will be available soon.

    Value of Coke’s secret formula could end up in Supreme Court

    At last week’s New Jersey CPA Society’s Business Valuation and Litigation Services Conference, Barry Sziklay (Friedman LLP) gave an update on the huge battle between Coca-Cola and the IRS over transfer pricing that involves the trademark and secret formula for the soda giant’s iconic beverage. Coke is facing a more-than-$3 billion tax bill in a dispute over the valuation method used for determining the royalty charged to suppliers that provide the soda concentrate to bottlers.

    Not refreshing: Coca-Cola had been using a “10-50-50” method that the IRS had approved in the wake of the agency’s audit of the company for the years 1987 to 1995. The approval came in the form of a closing agreement executed in 1996 between the company and the IRS. Going forward, the company continued to use that transfer pricing method for 11 years with the approval of the IRS. Then, when the IRS audited the company for its 2007-to-2009 tax years, the agency did an about-face and rejected the “10-50-50” method in favor of the “comparable profits method” for apportioning income between the U.S. parent company and its foreign supply points (i.e., manufacturers who produce Coca-Cola concentrate using The Coca-Cola Co.’s secret formula, which they, in turn, sell to unaffiliated bottlers who turn the concentrate into the soft drink retailers sell worldwide).

    The 10-50-50 method permitted the supply points to retain as profits 10% of their gross sales with the balance of the profit split 50-50 between the parent company and the supply points. The comparable profit method (set forth in U.S. Treasury Reg. Sec. 1.482-5) attempts to determine an arm’s-length apportionment result based on the amount of operating profit an uncontrolled “comparable” company would earn in comparison to the subject company (The Coca-Cola Co. and subsidiaries). In this case, the IRS expert based his analysis on a return-on-assets metric. Result: an approximate more-than-$9 billion increase to the company’s taxable income and a more-than-$3 billion bill for back taxes. The matter went before the Tax Court.

    On Nov. 18, 2020, the Tax Court judge ruled in favor of the IRS. Sziklay told the conference audience that, on June 21, 2021, Coca-Cola filed a “motion for reconsideration,” which includes a separate motion requesting that all Tax Court judges rule on the case, not just the one who rendered the original decision. “Stay tuned,” says Sziklay. “This case could end up before the U.S. Supreme Court.”

    Sziklay points out that this is a very important case because transfer pricing is becoming ever-more important as the world moves toward a global minimum tax regime as the Organization for Economic Co-operation Development has articulated in its July 2021 issuance of OECD/G20 Base Erosion and Profit Shifting Project, “Addressing the tax challenges arising from the digitalisation of the economy.”

    You can find the Tax Court opinion and continuing coverage on BVR’s BVLaw platform. The case is: Coca-Cola Co. v. Comm'r, 155 T.C No. 10 (Nov. 18, 2020). Also join the Gift and Estate Tax Valuation Update with Barry Sziklay on October 19.

    Today! Take a fresh look at the GPC method

    What are the best sources of data for the guideline public-company (GPC) methodology when valuing a closely held interest? How do you narrow down the initial comps? What about adjusting for size and growth differences from the subject business? Get the answers to these questions and more from veteran valuer Rob Schlegel (Houlihan Valuation Advisors). He’s conducting a webinar today, September 29, titled Relying on Guideline Public-Company Data in Appraisals of Closely Held Interests, and you can register if you click here (no charge to holders of BVR’s Training Passport Pro).

    2021 Johnson/Park DLOM study is now available

    The Johnson/Park empirical method to estimate a discount for lack of marketability (DLOM) is one of the most popular methods business appraisers use for this purpose, according to a recent BVR survey. The method highlights the relation of the DLOM to the return on the investment and quantitatively measures the impact of the rate of return as a function of the DLOM. This methodology has been used in several tax court cases including the first family limited partnership (FLP) case to go to trial. The “2021 Discount for Lack of Marketability Study” provides objective rate-of-return measures to implement the Johnson/Park empirical method and includes a thorough explanation and example on how to apply these data.

    Did you ever value a bar or nightclub?

    If so, then BVR wants to hear from you! We are preparing the newest in our What It’s Worth series of special reports, and it’s on bars, nightclubs, and adult entertainment venues. We already have an expert on the adult clubs, but we need some help on bars and nightclubs, i.e., value drivers, risk analysis, unique operational considerations, M&A landscape, a sample valuation report (redacted), etc. If you can help us, please contact the BVWire editor at Thanks!

    Global BV News

    Market risk premium reverts in Germany

    Recent analysis on the German market suggests that the perceived risk of equity investing has dropped back to its precrisis levels, according to Alvarez & Marsal, which does a regular analysis of pricing dynamics in Germany. In terms of pricing levels, forecasted 2021 EV/EBITDA multiples rank significantly above historical levels for certain industries. “In a 10-year comparison, Healthcare, Energy & Materials and Software & IT rank highest among industries, while Retail & Wholesale Trade is priced at a significant discount,” the report says. You can read the full report, “A&M Germany: Valuation Insights,” September 2021, if you click here.
  • 22-09-2021 21:56 | Lisa Guo (Administrator)

    New push to explore realignment of intangible asset disclosures

    Long overdue is a re-examination of the reporting and disclosure framework for intangible assets (IA). Even though IA is a powerful driver of corporate value, only a small fraction of it shows up on balance sheets. And what’s disclosed bears no relation to the total amount of IA because so much of it is internally generated and not required to be disclosed.

    Series of papers: “Time to Get Tangible About Intangible Assets” is the first paper in a three-part series from the International Valuation Standards Council. The paper’s subtitle reveals its goal: “The case for realigning reporting standards with modern value creation.” Like a predecessor IVSC series on goodwill, the paper is well thought out and written by Kevin Prall (BDO), IVSC business valuation technical director, with contributions from the IVSC Business Valuation Board. The second paper in the series will take a deeper dive into the issue, and the third paper will present an analysis of potential frameworks.

    The dollar amount of IA has hit $15 trillion worldwide—but this is just IA that has been disclosed, that is, the IA that has been acquired through third-party transactions—and it’s only a small fraction of the total. During a recent webinar, respondents were asked: “How strong do you think is the quality of global IA disclosure today?” Only 5% of respondents said “strong,” while 35% said “weak,” with the majority (59%) saying “mixed.” The need is definitely there for a fresh look at this issue.

    Expelled partner should get FMV—but of what?

    An Oregon appellate case deals with compensation for a partner’s 25% interest in a business after he is expelled from the firm. The trial court allowed for discounts for lack of control and marketability from the fair market value of the partner’s 25% interest. But the appellate court noted that the firm’s operating agreement called for compensation at 25% of the FMV of the assets of the business—not the interest in the business. The case was remanded back to the trial court for recalculation, sans discounts.

    The case is Dipak Patel v. Siddhi Hospitality, LLC et al, 312 Or. App. 347 (June 16, 2021), and the case digest analysis and full opinion are available on the BVLaw platform.

    Damodaran’s strong feelings about ESG

    A year ago, Professor Aswath Damodaran (New York University Stern School of Business) called it “the most overhyped, oversold concept in the history of business.” He was talking about environmental, social, and governance (ESG) factors. He got some pushback and felt a “little guilty” of hyperbole, so he kept an open mind about it. Over the past year, he read all of the arguments in favor of it and heard from people who disagree with him. Has Damodaran changed his tune? “I am more convinced than ever that ESG is not just overhyped and oversold, but it’s become a gravy train for all the people who make money on ESG, and none of those people are in the groups that ESG is supposed to help.” In a recent blog post, he argued that the difficulty of determining whether a company or fund was “good” in terms of ESG makes the measure difficult to apply. Plus, he contends that the practical benefits of a strong focus on ESG in terms of metrics such as the cost of capital are “muddled.” You can read his blog post and watch his video on ESG if you click here.

    Extra: ESG ratings have issues. Read the article “Warning to Business Valuers Looking to Use New ESG Ratings” in the October issue of Business Valuation Update.

    New online tool for valuing fractional interests

    This October will see the launch of the Partner Value Expert (PVX), an online application that represents a new approach to valuing fractional interests involving real estate. The developer, Dennis A. Webb (Primus Valuations), gave an explanation of the new application during a recent BVR webinar. Webb is a real estate appraiser as well as a business valuation expert who has specialized in fractional interests for almost 25 years. The application has been in development for six years and is also explained in Webb’s new book, Valuing Fractional Interests in Real Estate 2.0. The approach relies primarily on income methods using public limited partnership and REIT market returns. During the webinar, he presented the updated methodology by examining the methods in use today and understanding how and why they are replaced by or used in the new approach. He also stressed the importance of telling the story behind the valuation that makes sense to the user of your report. A recording is available of the webinar, 2.0: The New Breakthrough in Fractional Interest Valuation.

    Extra: You can see PVX for yourself in the Exhibit Hall at the ASA International Appraisers Conference October 24-26 in Las Vegas.

    Mercer chimes in on BVR DLOM survey

    “Our profession has a long way to go in terms of understanding what DLOMs, or marketability discounts, really are,” concludes Chris Mercer (Mercer Capital) in his analysis of BVR’s 2021 DLOM survey. In his blog post, Mercer takes critical aim at the methods most respondents use for developing a DLOM, saying that the survey’s finding that 90% of respondents use restricted stock studies is “astounding.” The survey also found that 43% use pre-IPO studies, which Mercer says is “even more amazing.” He also comments on the use of the Mandelbaum factors and whether it’s appropriate to take a DLOM on a 100% interest in a private company.

    Almost a quarter (22%) of valuation analysts polled in the survey say they use the quantitative marketability discount model (QMDM), a model Mercer developed. QMDM is a shareholder-level DCF model that values interests in a business in the context of an appraisal of the entire enterprise. The model focuses on shareholder-level cash flows, risk, and growth to reflect what a willing buyer would pay for a willing seller’s interest. The model is discussed in detail in the recently released third edition of the book, Business Valuation: An Integrated Theory, which Mercer co-wrote with Travis W. Harms (Mercer Capital).

    In his blog, Mercer says that DLOMs are “not some magic thing that appraisers apply based on ‘Kentucky windage.’ They only exist to the extent that there are differences from the base value in terms of expected cash flow, growth and risk.” He also says: “Thanks to BV Resources for conducting the DLOM Survey and for sharing it with the appraisal profession.” The full survey results, including some interesting comments from respondents, is available if you click here.

    Today! Valuation and legal experts examine latest cases

    BVR legal editor Jim Alerding has hand-picked a number of the most consequential recent valuation and financial litigation court decisions for the next installment of our regular BVLaw Case Update webinars, which will be today. Joining him will be valuation expert James D. Ewart (James D. Ewart LLC) and family law attorney Andrew Z. Soshnick (Faegre Drinker Biddle & Reath LLP), who was directly involved in two of the cases that will be discussed. To register, click here (no charge to BVR Training Passport holders).

    Global BV News

    Multiples in China lower than year-end 2020

    As of Aug. 31, 2021, earnings multiples (price to LTM earnings) for Chinese companies were lower overall than those at the end of 2020, with an average of 30.8x compared to 40.3x for year-end 2020, according to “China Transactions Insights—Fall 2021” from Duff & Phelps (a Kroll business). Healthcare, technology, consumer discretionary, consumer staples, and real estate sectors showed declines in earnings multiples since December 2020, while multiples for the industrials and materials sectors increased, the report says.

    Trailing EBITDA multiples (enterprise value-to-LTM EBITDA multiples) for Chinese companies decreased on average 7% from year-end 2020 to Aug. 31, 2021. Healthcare, technology, consumer discretionary, and consumer staples showed declines in EBITDA multiples, with multiples for the industrials and materials sectors showing improvement through August.

    The report has much more information and data on industry sector performance, IPO activity, COVID-19 recovery, cross-border investment, and more. 
  • 15-09-2021 21:55 | Lisa Guo (Administrator)

    New case to address goodwill impairment dispute

    Goodwill impairment does not appear often in litigation, but a court case in Tennessee will go forward after a judge ruled not to dismiss the plaintiff’s claims. The plaintiffs brought a class action suit on behalf of those who purchased stock in Tivity (the defendants), which acquired Nutrisystem in 2019, and one of the claims involves goodwill impairment.

    Inflated assets:The plaintiffs allege that the defendants impaired goodwill by inflating its assets and carrying a goodwill value that exceeded its implied fair value. They further allege that the defendants knew of multiple triggering events for impairment of goodwill but failed to impair and write down both the goodwill and the Nutrisystem trade name. In their motion to dismiss, the defendants countered that the claim failed to allege a misstatement, but their arguments were “unpersuasive,” so the case will proceed, the court ruled.

    The case is Strougo v. Tivity Health, Inc., 2021 U.S. Dist. LEXIS 141711, __ F.Supp.3d __, 2021 WL 3209567. A case digest analysis and the full opinion are available on the BVLaw platform.

    Frazier reviews ‘very important’ book on business valuation

    A very comprehensive review of an important book is in the Summer 2021 issue of the Business Valuation Review™, published by the American Society of Appraisers. Veteran valuation expert William H. Frazier (W.H. Frazier & Co. Inc.) reviews the third edition of Business Valuation: An Integrated Theory, co-written by Z. Christopher Mercer and Travis W. Harms (both with Mercer Capital). The book is designed to demystify modern valuation theory and show how to apply fundamental valuation concepts. It also includes a detailed discussion of the quantitative marketability discount model (QMDM) for estimating a marketability discount. The book is a “very important contribution” to the business appraisal body of knowledge, writes Frazier. “I highly recommend my fellow business appraisers get a copy of this book and read it thoroughly—especially the parts you initially disagree with,” he concludes. “It will test and challenge your own theory. I know in my own experience, it has caused me to change the way I think about things—well, some of them anyway.” You can read the full review if you click here.

    Extra: Did you know that you can find the full archive of past issues of Business Valuation Review™ on the BVResearch Pro platform? They go all the way back to 1982!

    Jim Alerding joins BVR as legal editor

    BVR is extremely pleased to announce that veteran valuation expert Jim Alerding, CPA/ABV (Alerding Consulting LLC), has joined us as legal editor. Jim will draw on his extensive appraisal and litigation experience to review and analyze all new business valuation-related court cases to be included in BVR’s BVLaw platform. He will also offer his perspective and commentary on the cases and other litigation-related matters. Jim worked closely with BVR’s former legal editor, Sylvia Golden, Esq., who passed away recently. Together, they did a regular webinar on BV-related court cases, and Jim will continue that tradition (the next BVLaw Case Update webinar is scheduled for September 22).

    A highly respected valuation expert, author, and teacher, Jim has performed over 1,000 valuations and has testified over 400 times during his long career. In his current practice, he consults with business valuation professionals on a wide range of appraisal and litigation projects. Jim is a former member of the AICPA’s Business Valuation Committee and is the co-author of VS 100, which is the AICPA’s Statement on Standards for Valuation Services. He is in the AICPA’s Business Valuation Hall of Fame, and he is on the Editorial Advisory Board of BVR’s Business Valuation Update. He is a co-author of Financial Valuation: Applications and Models and has written or co-written four other books on business valuation-related topics.

    BVR is very fortunate to have Jim with us, and we look forward to sharing his unique insights with readers.

    Specialty pharmacies resilient amid COVID-19

    The pandemic had less of an impact on specialty pharmacies than other types of entities, say speakers on a recent BVR webinar. What is a specialty pharmacy? There’s no standard definition, but it’s generally a pharmacy that dispenses specialty drugs, as opposed to a retail pharmacy that typically does not. Jarrod Barraza, a senior manager in the Healthcare Valuation Service Line at Horne LLP, was in the middle of valuing a pharmacy when COVID-19 struck. The pharmacy simply expanded its hours and started curbside pickup with relatively little impact to the business. Barraza also deals with dental practices, and he saw a sharp contrast. You can actually pinpoint the day that dentists’ cash flows stopped coming in—and then starting up again when restrictions were lifted and people started coming in again. People could forego certain dental visits, such as annual checkups, but that was not the case with specialty pharmacies.

    Barraza co-presented the webinar, Valuation of Specialty Pharmacies—Practical Considerations, with Mike Gerling, president of Veros Health, who deals with mergers and acquisitions of specialty pharmacies.

    New course on intangibles debuts at the October ASA conference

    A new advanced course on the valuation of intangible assets will make its debut at the ASA International Appraisers Conference in Las Vegas. BV303—Valuation of Intangible Assets and Special Topics will take place October 21-24, prior to the main conference, which runs from October 24 to October 26. Students attending the class also receive a discount to the conference. The course instructor will be its developer, Ray Rath (Globalview Advisors).

    There are a number of other preconference education sessions to choose from, including the four-day BV201 (Introduction to Business Valuation, Market Approach), BV203 (Introduction to Business Valuation, Asset Approach, Discounts and Premiums), and AR204 (Appraisal Review and Management Application) classes.

    Two state CPA societies host BV events his month

    Some state CPA societies organize business valuation conferences, and two of them are coming up later this month. Both events will be online only, and BVWire is looking forward to attending!

    New Jersey: First up is this year’s Business Valuation and Litigation Services Conference, hosted by the New Jersey Society of CPAs, which will be a live webcast on September 21. The fine program includes sessions on cannabis, estate and gift, federal taxation, physician compensation, and a panel with a retired judge about expert witness testimony. To register, click here.

    Virginia: The Virginia Society of CPAs (VSCPA) will hold this year’s two-day Forensic and Valuation Conference September 29-30. The agenda includes topics related to COVID-19, using statistics for lost profits, recent federal tax developments, goodwill, financial forensics tools, reasonable comp, and more. For more information and to register, click here.

    Free webinar reveals what’s new in goodwill

    The amount of goodwill on corporate balance sheets is at the highest level since 2017—and it’s growing. The possible change in the standards for accounting for goodwill has significant unintended consequences. This—and more—will be discussed on September 23 during a free webinar hosted by the CFA Institute, Calcbench, and Valuation Research Corp. The speakers will be from these three organizations, and they will be, respectively, Sandra Peters, Pranav Gai, and PJ Patel. To register, click here.

    Global BV News

    Initial agenda for IVSC Virtual AGM October 21-28

    This year’s annual general meeting (AGM) of the International Valuation Standards Council (IVSC) will be held as a virtual program from October 21 to October 28. There will be panel sessions, public board meetings, meetings of the Advisory Forum, and the formal AGM. There will be more items added to the agenda, and you can see it if you click here. Some parts of the overall program are restricted to IVSC sponsor/member organizations or their representatives, but other aspects are open to anyone with an interest in valuation and the work of the IVSC.

    Preview of the October 2021 issue of Business Valuation Update

    Here’s what you’ll see:

    • Florida’s Proposed Change to Goodwill Could Set a Precedent” (Richard West, Esq.; Bruce Parisi, ASA, ARM; and Thomas Gillmore, CPA/ABV/CFF, CFE). The Family Law Section of the Florida Bar is proposing legislation to clarify the value of goodwill in the marital interest of closely held businesses. The authors envision that this proposed legislation could set a precedent for future family law matters throughout the United States.
    • Good News: Key Research on Private Cost of Capital Is Back” (BVR Editor). On the brink of ending its long run, the Private Capital Markets Project from Pepperdine University has secured funding to continue its ongoing survey of expected rates of return of providers in the private capital market.
    •  Updated Data Help Appraisers With RULs of Intangible Assets” (BVR Editor). To estimate the expected remaining useful life (RUL) of an intangible asset, it can be helpful to see how other appraisers have assigned RULs to similar assets in the subject industry. Data on 18 identifiable intangible types (also broken down by industry) culled from almost 16,000 purchase price allocations (PPAs) have been assembled into the third edition of Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations.
    •  Warning to Business Valuers Looking to Use New ESG Ratings” (BVR Editor). A hot topic today is environmental, social, and governance (ESG) factors and how to reflect the impact of these factors in business valuations and financial reporting. Data are starting to emerge to help quantify the impact of ESG—but analysts need to be careful in using these data.
    • Premium Gap Closes Between Strategic and Financial Acquisitions” (BVR Editor). The difference between the premium strategic buyers pay for acquisitions versus what financial buyers pay has decreased, according to recent data in the Factset MergerStat/BVR Control Premium Study.
    • COVID-19 Cloud Has Silver Lining in the Cannabis Sector” (BVR Editor). A good example of the varying effects of COVID-19 on different industries can be found in the cannabis sector. Of course, the pandemic has had devastating effects overall, but something interesting happened in this sector that allowed it to weather the storm fairly well, according to valuation experts close to the industry.

    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.
    To stay current on business valuation, check out the October 2021 issue of Business Valuation Update

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