The 2015 International Valuation Handbook – Guide to Cost of Capital includes country-level country risk premia (CRPs) and country-level equity risk premia (ERPs) that can be used to estimate country-level cost of equity capital globally, from the perspective of investors based in 55 different countries. During a recent complimentary webinar explaining how to use the book, the presenters mentioned additional sources of international equity risk premium data.
One top source is a survey that collects information about the discount rate (risk-free rate and the market risk premium) used in 2015 for 41 different countries. Pablo Fernández, Alberto Ortiz Pizarro, and Isabel Fernández Acín (all with the University of Navarra in Spain) co-authored the survey. The information is collected from professors, analysts, financial companies, and managers of nonfinancial companies.
Rate shifts: The survey found that the average risk-free rate used in 2015 was less than the one used in 2013 in 26 countries (in 11 of the countries, the difference was more than 1%). On the other hand, eight countries used an average risk-free rate in 2015 that was more than 1% higher than the one used in 2013. For the U.S., Europe, and U.K., most of the respondents use a risk-free rate that is greater than the yield for 10-year government bonds. The difference in the average market risk premium used was more than 1% for 13 countries in 2015 versus 2013.
The 2015 International Valuation Handbook – Guide to Cost of Capital, written by Duff & Phelps, is a must-have publication that includes data through March 2015 and builds on the same rigorous country-level cost of capital analysis previously published in the Morningstar/Ibbotson “international” reports.
BVWire was at the National Association of Certified Valuators and Analysts (NACVA) conference in New Orleans. Here are a few insights we picked up at the sessions.
- Keynote speaker Sam Allred, CPA, says practice development is about having a sincere desire to help people.
- One way to help clients do business with you is to accept electronic payments from them (e.g., PayPal, ACH, wire, Apple Pay).
- NACVA unveiled new standards that deal with an engagement to review another practitioner’s valuation report.
- The market approach may emerge as a more prevalent method for valuing intangible assets due to increased transactions and merchants in this space.
- “Relief from pay per click” is a new approach to measure damages due to trademark misuse over the Internet.
- When valuing family limited partnerships, make sure you read the entire document even if the lawyer says it’s a standard agreement.
- Don’t use the word “draft” to label a draft report—use “incomplete work product.”
- Pending research reveals there is significant double counting if you use a size premium and also DLOM.
- An extensive analysis of existing research reveals that shareholder taxes definitely affect value of PTEs, refuting the IRS and Tax Court position.
See more takeaways in BVWire. And there will be more details in the August issue of Business Valuation Update. Congratulations to NACVA for an excellent conference!
At the recent NACVA conference in New Orleans, former IRS manager Michael Gregory (Michael Gregory Consulting LLC) did a session on the recently released IRS job aid on reasonable compensation. Gregory worked on the job aid while he was with the agency. The IRS uses three sources of data when examining reasonable compensation: Watson Wyatt, RMA’s Annual Statement Studies and the Economic Research Institute (ERI), but ERI is used only for classification purposes, not for bottom-line numbers, according to Gregory.
In examining compensation issues, the IRS looks at ratios for red flags, he points out. For example, if a company is operating in the 25th percentile and its compensation is in the 90th percentile, the IRS is likely to “take a look.” Also, if compensation reported by a pass-through entity drops materially (without a corresponding drop in financial performance), the IRS will take note but will typically not take any action. However, if this continues in a second year, an audit could be triggered if the IRS feels the company is trying to avoid payroll taxes.
Gregory will conduct a webinar on the IRS job aid on August 6. He also has a new book, How the IRS Determines Reasonable Compensation with Job Aid Commentary by the Original IRS Champion.
At the annual business valuation conference hosted by the New York State Society of CPAs (NYSSCPA) in New York City, Nancy Fannon (Meyers, Harrison & Pia) challenged the traditional notions about the differences in value between a pass-through entity and the public-market C corporation. She presented research showing that shareholder-level taxes affect a firm’s value. The IRS and the Tax Court have refuted this conclusion, largely because the research has never been presented to support it. Fannon provides a suggestion for a new, more direct approach to pass-through entity valuation, which is included in a groundbreaking new book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle, that she co-authored with Keith Sellers (University of Denver). Fannon touched on the new IRS job aid on S corp valuation (available at www.scorpvalue.com). In terms of general valuation concepts, she agrees with the job aid. But academic research does not support some substantive underlying assumptions made in the job aid, she says. One of these assumptions is that personal income taxes paid by the holder of an interest in an S corp “are not relevant” in determining the fair market value of that interest. “The academic research presented in our book presents very compelling evidence that personal-level taxes paid by the holder of an interest are very relevant to the prices paid in the marketplace,” she says.
BVWire reports on a new survey that collects information about the discount rate (risk-free rate and the market risk premium) used in 2015 for 41 different countries. Pablo Fernandez, Alberto Ortiz Pizarro, and Isabel Fernández Acín (all with the University of Navarra in Spain) co-authored the survey.
Rate changes: The survey found that the average risk-free rate used in 2015 was less than the one used in 2013 in 26 countries (in 11 of the countries the difference was more than 1%). On the other hand, eight countries used an average risk-free rate in 2015 that was more than 1% higher than the one used in 2013. For the U.S., Europe, and U.K., most of the respondents use a risk-free rate that is greater than the yield for 10-year government bonds. The difference in the average market risk premium used was more than 1% for 13 countries in 2015 versus 2013.
“I started to do surveys to prove that expectations are not homogeneous and there is no single parameter in finance—not even the risk-free rate—that is homogeneous among people,” Pablo Fernandez tells Michael Crain (Financial Valuation Group), a leading business valuation practitioner and researcher, in an exclusive interview. “People use different numbers and put different reasoning behind them. One survey I do every year is about the risk premium. This year I did the risk premium plus the risk-free rate. It’s interesting to see the variety of numbers people use and the different reasons behind the numbers they use.”
Read the full Fernandez interview in the July issue of Business Valuation Update (subscription required).
The value of a food celebrity’s restaurants may figure into his divorce case—if his estranged wife has her way, according to BVWire.
Food fight: The wife of Bobby Flay has filed legal documents to set aside their prenup to give her more of a bite out of her husband’s success. She claims the agreement should not be enforced because she’s the reason he became wildly successful, TMZ reports. The wife is also making allegations of adultery, which could bolster her case. Under the terms of their prenup, Flay, who’s worth an estimated $20 million, only has to pay wife Stephanie March $5,000 a month. Flay has a number of cooking shows on Food Network, has written several cookbooks, and owns a bunch of restaurants, including Bar Americain, Bobby Flay Steak, Bobby’s Burger Palace, Gato, and Mesa Grill.
BVR recently served up a webinar, Valuing Restaurants: A Case Study, presented by expert Lynton Kotzin (Kotzin Valuation Partners LLC). Kotzin went through a detailed numbers example of the valuation of a company that owned a group of Subway sandwich shops.
A powerhouse lineup of speakers will be at the annual business valuation conference in New York City on May 18, hosted by the New York State Society of CPAs. The speakers and topics include:
- Nancy Fannon: Withstanding a Daubert Challenge; S Corp. Tax Adjustment;
- Chris Mercer: Unlocking Private Company Wealth;
- Mark Zyla: Fair Value Measurements;
- Panel Discussion: Business Divorce and Appraisers with Sam Rosenfarb (Rosenfarb LLC) and Peter Mahler (Farrell & Fritz, P.C.);
- Valuation Issues in a New York Divorce: Jeffrey Gilbralter (Klein Leibman & Gresen LLC) and Adam J. Wolff, Esq. (Kasowitz Benson Torres Friedman LLP);
- Brian Pearson: Fairness Opinions; and
- Juli Saitz: Preparing Expert & Rebuttal Reports
This is the premier event for valuation and forensic professionals in the New York City area. For details and to register, click here.
An internal IRS document is now available that reveals the agency’s most current thinking on the valuation of S corps, one of the hottest topics in business valuation. The document was written to help IRS professionals who are examining S corp valuations—and it presents a wealth of information for valuation analysts.
How to get it: The 33-page Job Aid, entitled The IRS Valuation of Non-Controlling Interests in Business Entities Electing to be Treated as S Corporations for Federal Tax Purposes, is posted on several websites, including the website of Jim Hitchner’s Valuation Products and Services. The Job Aid is included on a dedicated web page created by Business Valuation Resources that also includes articles, videos, and other resources devoted to S corp and other pass-through entity valuations. Michael Gregory (Michael Gregory Consulting), while working at the IRS, was a champion of the IRS internal team on valuing S corps. Gregory will host a webinar on June 16 for BVR and he will give his unique insights on the Job Aid.
BVR’s new S corp webpage also includes information on a new book, Taxes and Value: The Ongoing Research and Analysis Relating to the S Corporation Valuation Puzzle, which is a major advance in thinking about S corp valuations. A special 4-hour workshop that will reveal a new approach to PTE valuations will be held on May 20. The workshop will be conducted by the new book’s authors, Nancy Fannon (Meyers, Harrison and Pia LLC) and Keith Sellers (University of Denver).
The Appraisal Foundation and its Business Valuation Resource Panel have asked BVWire and the valuation associations to distribute this survey of the business valuation community and its members’ areas of expertise, so that TAF can better “serve and inform the business valuation community.”
If you have any questions about the survey (some of the questions are potentially confusing), you can contact TAF at 1-855-414-9332 (toll free) or via email at SurveyofValuers@westat.com.
TAF has notified us that the survey server has limited bandwidth, so try again if you can’t get in the first time…the questionnaire is fairly short and your answers are confidential.
Did the total value of announced M&A deals in 2014 exceed those in 2013? What were the top five seller industries in 2014, in number and dollar value of announcements? Which U.S. states announced the greatest number of corporate sales/divestitures in 2012? The answers to these questions—and more–are all in a new free download of selected data from the newly released 2015 Mergerstat Review, which gives you quick access to selling price multiples by industry and premiums paid by industry. The link to the free download is included in the April 15 issue of BVWire (free registration required).