What young BVers need from veteran practitioners

An interesting session—the first we’ve seen anywhere—was a panel of young valuation experts giving their perspectives on the profession. The session was at last week’s Business Valuation & Financial Litigation Super Conference hosted by NACVA.

Soft skills needed: How to communicate with clients effectively is one thing the panel members all agreed they need more help with from their veteran colleagues. 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. This will go a long way toward developing young talent, the panel noted.

Bob Lewis (Visionary Group) moderated the panel of up-and-comers: Ashley DeCress (Marcum), Kevin Foyteck (ABIP), Mary Fernandez (Bodine Perry), and Dalton Hopper (BMSS). The panel made some other interesting comments, and there will be a full recap of this session in the October issue of Business Valuation Update.

2022 Pepperdine report on private cost of capital released

A preview of the “2022 Private Capital Markets Report” was presented at the NACVA’s Business Valuation & Financial Litigation Super Conference last week. The report is the result of a project at the Pepperdine University Graziadio Business School that conducts an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers.

At the conference, Dr. Craig Everett, the project’s director, discussed the report and handed out the full 2022 report to attendees.

Latest ranges: Bank loans have the lowest average expected returns (a median return of 4.0% to 6.0% depending on loan size) while capital obtained from angels has the highest expected returns (ranging from a median of 33% for later-stage financing to 43% for seed money). The full report contains details on each type of funding and at various levels. The “money shot” is a grid chart showing the ranges of returns the various respondents expect at various levels.

The 2022 annual report is available for purchase if you click here.

Divorce Highlight: Hitchner’s wrath continues regarding Damodaran’s attacks

Speaking at the NACVA’s Business Valuation & Financial Litigation Super Conference last week, Jim Hitchner (Valuation Products and Services) continued his strong rebuttal of some severe criticisms Aswath Damodaran (New York University Stern School of Business) made during a recent BVR webinar about certain inputs to the cost of capital (see prior coverage here). “He’s attacking our profession,” Hitchner noted, and he will continue to vent his anger at the upcoming AAML/BVR Divorce Conference in Las Vegas (September 18-20), so the fireworks will continue! Hitchner will co-present two sessions: How to Attack and Defend the Databases Valuation Analysts Use and Ethical Quandaries: An Interactive Session. The AAML is the American Academy of Matrimonial Lawyers. Conference attendance is expected to be half experts and half attorneys. To see the full agenda and to register, click here. Up to 20 CPE/CLE credits are available.

Reminder: Please take a short survey on financial benchmarking data

Our thanks to those of you who took our very short survey (four questions) on the sources valuation analysts use for financial benchmarking data. If you haven’t taken the survey, it will just take a few minutes and we would greatly appreciate it. All responses are anonymous and confidential. You can take the survey if you click here. Thank you!

Global BV News

Sustainable value is the focus at the IVAS-IVSC conference October 6-7

The leading business valuation conference in Asia Pacific has been the IVAS-IVSC Business Valuation Conference, and the next one will be October 6-7. The focus will be on new strategies to safeguard sustainability, such as environment, social, and governance (ESG) factors. The Institute of Valuers and Appraisers, Singapore (IVAS) organizes the event in partnership with the International Valuation Standards Council (IVSC). Sponsors and supporting partners include the Big Four and valuation professional organizations including RICS, AICPA, and the CBV Institute. For more information and to register, click here. Early bird pricing is available until Septem

• Financial advisor’s book of business is not a marital asset

  In a Tennessee divorce case, an appellate court affirmed the judgment of the trial court that the husband’s book of business as a financial advisor for UBS is not a marital asset. The husband argued that that he did not own his book of business and that he had to provide future services to benefit from it. He did not engage a valuation expert nor present any value in court. The wife noted that the husband talked with another firm about joining it, which was evidence that the book of business had value. She engaged an expert who testified regarding two intangible assets: (1) any potential recruitment bonus the husband might receive from a new firm; and (2) the unvested retirement benefit he will receive if he retires from UBS or from another firm. The appellate court noted that the trial court did not abuse its discretion to accept or reject the testimony of a witness and it had a factual basis supported by the evidence. The opinion of the trial court that the book of business is not a marital asset is affirmed.

  An analysis and full opinion of the case, Hollis v. Hollis, 2022 Tenn. App. LEXIS 250; 2022 WL 2348567, are available on the BVLaw platform.

  Extra: For more on valuing this asset, see “Valuing a Financial Advisor’s Book of Business,” by Howard A. Buchler, J.D., in the December 2019 issue of Business Valuation Update.

  Do fair value audit woes impact M&A…for publicly traded companies?

  A new study suggests that firms avoid obtaining intangibles via acquisition because they don’t want to face scrutiny from the PCAOB over impairment matters. The alternative would be to invest internally in corporate innovation for the intangibles. The paper, “The Effect of PCAOB Inspections on Corporate Innovation: Evidence From Deficiencies About the Valuation of Intangibles,” examines the economic consequences on corporate innovation when PCAOB inspections cite auditors for insufficient procedures in auditing the valuation of intangibles. The study found that audit deficiencies in fair value measurements trigger larger and timelier impairment of intangibles. But this dampens managers’ discretion to delay the recognition of losses. Of course, the timely recognition of impairments is the goal of the regulators, but managers may not want to admit that an acquisition fell short of expectations. But to think that accounting optics would materially alter overall corporate strategies may be a bit of a stretch by the study’s author. A “build or buy” option may not be feasible for certain intangibles, such as intellectual property.

  Divorce Highlight: What’s in a judge’s mind?

  In divorce matters, the most important audience is often the trier of fact, so anytime you can glean insights from them is time well spent. A panel of three judges will take questions from attorneys and testifying experts during a session at the AAML/BVR Divorce Conference—where valuation experts and attorneys will meet over three days at the Venetian in Las Vegas (September 18-20).

  The judges, Alan D. Scheinkman, Kerry R. Bensinger, and Charles J. Hoskin, will provide guidance to attorneys and experts regarding expert testimony, including:

• Supporting expert opinions;
• Excluding expert testimony;
• Analysis of competing expert opinions;
• What is effective and persuasive testimony and cross-examination; and
• Pitfalls—evidence of illegal activities including illegal financial activities (e.g., “perk” or fraud?), spoliation of evidence, etc.

• The AAML is the American Academy of Matrimonial Lawyers. Conference attendance is expected to be half experts and half attorneys. To see the full agenda and to register, click here. Up to 20 CPE/CLE credits are available.

  Mercer’s latest on restricted stock studies

  Chris Mercer (Mercer Capital) has been writing a series of articles designed to provide a complete analysis of the historical restricted stock studies many business appraisers rely on for estimating a discount for lack of marketability (DLOM). Mercer’s latest article addresses an issue that is “rarely mentioned in the context of the studies—the impact of dividends on restricted stock discounts (RSDs).” He concludes that an analyst cannot use restricted stock studies to estimate a DLOM for a dividend-paying company. “Some level of dividends in an investment would mitigate the marketability discount for otherwise similar investments with no dividends,” he writes. “The expectation of larger future dividends relative to smaller future dividends would mitigate the marketability discount for the higher dividend-paying investment. This is just common sense.” To read his full article, click here.

  Please take a short survey on financial benchmarking data

  BVR is conducting a very short survey (four questions) on the sources valuation analysts use for financial benchmarking data. It will just take a few minutes, and we would greatly appreciate it. All responses are anonymous and confidential. You can take the survey if you click here. Thank you in advance!

  Global BV News

  Key consideration for global cost of capital

  During the recent ASA New York Fair Value Conference, Mike N. Moskowitz and Tushar Shah, both with EY, discussed global valuations with an emphasis on the cost of capital. One important point they made concerns geography—that is, even though a company may be headquartered in a certain country, do not assume to use that country as the basis for your cost of capital estimates. You need to look at where the company does its business—where it operates and where it generates revenue—which can be in very different locations than the headquarters. They also discussed the source of data they use, application of country risk premiums, inflation differences, impact of currency exchange rates (forward rates versus spot rate), riskiness of the prospective financial information, and sovereign bond/yield considerations. A full recap of the conference is in the September issue of Business Valuation Update.

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

  Here’s what you’ll see:

• “Roundup of Recent and Planned Updates to Valuation Standards and Guidance” (BVR Editor). A recap for valuation experts, includes updated valuation standards charts, new planned guidance from the AICPA and Appraisal Foundation, SEC rules, FASB projects, lease accounting, Rule 702, proposed legislation, and more.
• "Recap of the ASA New York Fair Value Conference" (BVR Editor). Important takeaways from the recent conference on these topics: global cost of capital, ASC 718 valuations, ESG impacts on value, discount rate for intangibles, hard-to-value securities, SPAC warrants, and more.
• “Stark Law FMV: Precluded Reliance on Market Data From Business-Related Parties” (Timothy Smith, CPA/ABV). The precluded reliance doctrine has been explicitly affirmed in the new Stark regulations, requiring the industry to pay critical attention to this doctrine in establishing FMV for Stark compliance purposes.
• “Hitchner v. Damodaran on Inputs to the Cost of Capital” (BVR Editor). Jim Hitchner (Valuation Products and Services) responds to some severe criticisms Aswath Damodaran (New York University Stern School of Business) made during a BVR webinar about certain inputs to the cost of capital. Hitchner also offers some best practices and a handy tool to use as a reasonableness check on your cost of capital estimate.
• “Latest Inside Look at the ktMINE Royalty Rate Database” (BVR Editor). “Understand your data” is one of the main tenets of the valuation profession. Brett Schoell gives an up-to-date look at the ktMINE royalty rate database and answers some questions. He is the product lead for ktMINE’s suite of applications, and he supports ktMINE’s transfer pricing and valuation customers.
•  “Using Rule of Thumb Benchmark Data to Verify Financials” (BVR Editor). In addition to being used as a check to corroborate a value conclusion reached using other methods, rule of thumb data can be used to validate historical financials. This is particularly useful when valuing cash-intensive businesses. The article provides benchmark data for a dozen types of firms that do a lot of cash business.

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.

Put ESG impact in numerator, not denominator

Currently, there is no empirical evidence to support including the impact of environment, social, and governance (ESG) factors in the cost of capital, so it should be reflected in the cash flows. This point was made during a Big Four panel discussion during the recent ASA New York Fair Value Conference. Studies are being done about the relationship between ESG and returns, but the results so far have been “mixed.”

The panel of Big Four leaders included Josh Putnam (Ernst & Young LLP), Manish Choudhary (Deloitte), Martin Mazin (KPMG), and Adam Smith (PricewaterhouseCoopers). Myron Marcinkowski (Kroll) acted as moderator.

A full recap of the conference is in the September issue of Business Valuation Update.

Delaware court cites studies of appraiser bias

Valuation experts who testify should not assume that the courts view them as independent parties who are advocates for their opinion rather than for the client. We’ve heard judges say they perceive testifying experts to be hired guns, but a recent case actually cites some studies that they believe back up their feelings. In the Cellular case (see below for citation), the court wrote: “As this court’s experience with appraisal cases demonstrates plainly, valuation professionals reach outcomes that are influenced by the interests of the party that retains them, even when ostensibly acting as disinterested experts. Scholars have reached the same conclusions.” The first sentence contained a footnote to the Dole Food case (In re Appraisal of Dole Food Co., Inc., 114 A.3d 541, 557 & n.10 (Del. Ch.2014)) that cited cases “recognizing the omnipresent ‘widely divergent, litigation-driven expert valuations’ this court sees in appraisal proceedings.” The second sentence footnoted two studies, “An Analysis of Private Versus Public Firm Valuations and the Contribution of Financial Experts,” and “On the Added Value of Firm Valuation by Financial Experts,” that the court says present evidence of bias in expert valuations.

Later in the Cellular opinion, another, more recent, study was cited: “Are Business Valuators Biased? A Psychological Perspective on the Causes of Valuation Disputes.” That study, the court writes, “found ‘clear evidence for the existence of … engagement bias’ in purportedly neutral valuation professionals who were assigned randomly to perform valuation tasks on behalf of a buyer or a seller.”

Unless these studies are refuted, they may keep showing up in future opinions. In the meantime, testifying experts may have to deal with the hired-gun perception a judge may have.

An analysis and full opinion of the case, In Re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56, are available on the BVLaw platform. Also, there is commentary on the case in two articles by Gil Matthews (Sutter Securities) and BVR legal editor Jim Alerding (Alerding Consulting) in the June 2022 issue of Business Valuation Update.

Divorce Highlight: Forging the attorney-expert relationship

“One of the things I suggest to younger family lawyers is to make relationships with experts,” says Jay Fishman (Financial Research Associates) in a recent interview with Family Lawyer Magazine. Attorneys need a stable of valuation experts who have expertise in different areas, he says, and they want experts who are not just competent technically, but ones who can effectively explain things, especially to a trier of fact.

Fishman will co-present a session, Untangling the Web of Complex and Startup Businesses, at the AAML/BVR Divorce Conference—where valuation experts and attorneys will meet up over three days in Las Vegas (Sept. 18-20). The AAML is the American Academy of Matrimonial Lawyers, so this is the perfect event to forge some relationships! Attendance is expected to be half experts and half attorneys. To see the full agenda and to register, click here.

Global BV News

Continued slowdown in global equity capital market activity, per S&P Global

S&P Capital IQ released its mid-2022 summary of major global capital investment activity, which includes IPOs, SPACs, reverse SPACs, and the other usual categories. These transactions are rarely helpful in business valuations (even for larger enterprises), but all market participants follow them as a proxy for general business conditions. The first half of the year has shown dramatic drops in capital flow in all sectors compared to 2021. S&P notes that the UK and US have largely dropped out of the IPO market. The largest global IPO in the first half was LG Energy, in South Korea. The UAE had three deals in the top 10, led by Dubai Electricity and Water Authority; China had two; and India, the US, and Indonesia had one

Secret witnesses may appear in overvaluation case

In a New Jersey class action, plaintiff shareholders of publicly held Ascena Retail Group alleged that the company misrepresented the value of its goodwill and trade names to inflate the stock price artificially. Ascena, a clothing retailer, had acquired another clothing retailer (the parent company of Ann Taylor and LOFT) in 2015. In June 2017, the company announced a $1.3 billion impairment charge against the goodwill and trade names, causing its stock price to plummet. But the plaintiffs contend that the company should have taken the impairments earlier because there were multiple contemporaneous indicators that its assets were impaired. The company filed a motion to dismiss the complaint, and the court granted it but did so without prejudice. This allows the plaintiffs to amend their complaint and go back to court—and they say they have “confidential witnesses” that will show that the company knew the assets were impaired earlier.

There are many details in the case, which is In re Ascena Retail Grp., Inc. Sec. Litig., 2022 U.S. Dist. LEXIS 114434; 2022 WL 2314890, and a case analysis and full opinion are available on the BVLaw platform.

Corona is still the most valuable beer brand, per Brand Finance study

Corona has retained the No. 1 spot on the list of the world’s most valuable beer brands, according to “Beers 50 2022,” an annual report from Brand Finance. During the pandemic, the Corona brand hit some trouble because of the similarity of its name to coronavirus, which put off some consumers, especially in the United States. Despite that, Corona’s value jumped 21%, to $7 billion, in the wake of the entertainment economy reopening post-COVID-19. Not far behind Corona is Heineken in the No. 2 spot, with Budweiser, Bud Light, and Modelo Especial rounding out the top-five valuable brands. The fastest-growing beer brand is Desperados (up 57%, to $564 million), and new entrant Kronenbourg saw its brand value grow 40%, to $601 million. What’s become of some of the once-famous U.S. brands, such as Pabst, Schaefer, Schlitz, and Miller (the “Champagne of Beers”)? They’re still around but not on the Brand Finance Top 50 list.

New valuation credential planned for healthcare compensation

During a recent BVR webinar, Tim Smith (TS Healthcare Consulting LLC) told the audience that a new credential is in the works for valuing the compensation of healthcare providers (physicians, physician assistants, and nurse practitioners). The credential (including professional standards) will be offered by the American Association of Provider Compensation Professionals (AAPCP), a relatively new nonprofit group whose members advise and lead healthcare organizations on provider compensation, contracting, planning, recruitment, retention, strategy, and, yes, valuation. The fair market value of physician compensation and related arrangements is an area subject to increasing scrutiny and complex regulations. The determination of FMV is handled by staffers at healthcare systems as well as external valuation experts, and both these groups are among the ranks of AAPCP members.

Smith heads the credential committee at the AAPCP, and he is the author of the just-released Complete Guide to Fair Market Value Under the Stark Regulations.

What to do when job candidates take their sweet time

You’ve found a promising candidate to fill that vacant analyst spot and made an offer—but you can’t get an answer. The candidate gives you a date for an answer but then keeps delaying it. Consider an option that may not immediately come to mind, which is simply to retract the offer, advises John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years. “The wiser course, obviously, is to avoid putting yourself in that position,” he says. “As the employer, you control the process up until the moment you actually make an offer. At that point, power tips to the candidate. Your goal is to strengthen your control beyond the point where you might ordinarily give it up.” Tactics include sharing a hiring timeline with the candidate and stressing that a prompt response will be needed if an offer is made. Also, give candidates everything they need to make a decision (such as a benefits summary) and make sure they know they can ask questions. After all this, if the candidate keeps delaying an answer, you’re justified in retracting the offer, Borrowman says. “Someone who consistently makes and breaks commitments is not likely someone you want in your practice.”

In his latest newsletter, Borrowman also explores remote work arrangements, how to smarten up your hiring process, and trusting gut instincts.

Global BV News

Takeover premiums in Canada increased in the first half of 2022

The median takeover premium of Canadian public companies in the first half of 2022 was 40%, a 7% increase from the prior year, according to “Canadian M&A Insights” (Summer 2022) from Kroll. The Canadian M&A market had 925 completed transactions in the first half of 2022, down from 1,008 in in the first half of 2021, likely due to economic precariousness, the report says.

Hitchner rebuts Damodaran’s attacks on cost of capital inputs

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

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

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

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

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

Healthcare whistleblower case regarding FMV can proceed

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

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

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

Divorce spotlight: valuing a family business with complex ownership

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

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

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

Paper investigates patent valuation methods

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

DealStats users spark enhancements to the database

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

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

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

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

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

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

Global BV News

IVSC launches Asia office in Singapore

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

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

Here’s what you’ll see:

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

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

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

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

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

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

The issue also includes:

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

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

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

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

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

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

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

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

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

Estate attorney sued over alleged undervaluation

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

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

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

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

Valuing Nightclubs, Bars, and Adult Cabarets

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

SME transaction values rise to 4.5x for 1Q2022

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

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

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

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

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

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

Global BV News

CBV Institute membership grew 4% in 2021

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

Recording available of MAPPI webinar on IP valuation

• No discounts in New Jersey shareholder buyout case

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

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

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

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

  Takeaways from the ASA’s first ESOP conference

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

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

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

  Feedback wanted on ‘social value’

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

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

You can take the survey if you click here.

Is the IRS Job Aid on reasonable comp still relevant?

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

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

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

Global BV News

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

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

Valuation opportunities in the MENA region

ESOP valuations may be at a turning point

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

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

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

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

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

Appeals court affirms modified liquidation value in shareholder dispute

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

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

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

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

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

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

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

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

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

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

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

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

The DCF is ‘untestable,’ per new paper

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

Date change for webinar on new Stark FMV regs

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

Global BV News

CBV Institute’s new board reflects commitment to diversity

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

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

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

• Damodaran tosses some dynamite during BVR webinar

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

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

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

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

  FASB hits ‘pause’ on goodwill project

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

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

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

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

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

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

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

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

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

  Submitted for your approval: the BV Zone

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

  Global BV News

  Recordings available of free webinar series from the IVSC

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

  Preview of the July 2022 issue of Business Valuation Update

  Here’s what you’ll see:

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

The issue also includes:

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

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

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

Husband shuns BV expert, loses case

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

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

Comment on COE data sources survey

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

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

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

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

Long-term inflation estimates rise, per Kroll infographic

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

Human capital and valuation explored in new paper

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

ASA announces keynote for its annual conference

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

CPA firms continue to have trouble finding staff

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

Global BV News

New edition released of Business Analysis and Valuation: IFRS

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

CBV Institute launches LinkedIn page for students

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