BVWire was on the scene in Toronto as over 600 attendees enjoyed three days of excellent sessions at the ASA-CICBV Business Valuation Conference jointly hosted by the American Society of Appraisers and the Canadian Institute of Chartered Business Valuators. The great thing about attending a conference such as this is the chance to collect valuable information, not only in the sessions, but also at the many networking opportunities the event offers. Below are just a few of the insights we collected both in the sessions and during the breaks.
John Paglia, Ph.D. (Pepperdine University), founder of the Pepperdine Private Capital Markets project, reveals that in five years appraisers of private companies say they will be putting more weight on sources from private markets than public markets to determine the cost of capital, a “huge change” for the profession.
The biggest BV problem in litigation is company-specific risk, says Roger Grabowski (Duff & Phelps). Judges are totally skeptical of it. With this challenge in mind, Chapter 16 of the 5th edition of his Cost of Capital: Applications and Examples book, co-authored with Shannon Pratt (Shannon Pratt Valuations), is devoted to this topic. Speaking of Pratt, at the Toronto event, he received the ASA Lifetime Achievement Award in honor of his legendary leadership, commitment, and dedication to excellence in advancing the business valuation profession.
John Stockdale, a sole practitioner and author of BVR’s DLOM guide, asks for feedback on his new paper on volatility.
Michael Badham (International Institute of Business Valuers) announces that the Saudi Arabia Institute of Business Valuation is a new member of the IIBV—a very positive development. The IIBV is a leader in BV education and provides ongoing training in locations such as the United Kingdom, Russia, Hungary, Australia, and South America.
For more from the ASA-CICBV event, see BVWire (free registration required).
Bill’s just rolling off after years of volunteer work as chair of the ABV Credentials Committee for the AICPA’s Forensic and Valuation Services section.
Michelle Gallagher will be continuing in the leadership of the committee–so talk to her if you have questions about the ABV exam!
The FVS has been participating in a series of ongoing business valuation projects, including:
- An expanded SSVS toolkit
- Their white paper on Intangible Asset Valuation–Cost Approach Methods & Procedures
- involvement with the IVSC (highlighted recently at BVR’s Lively Debate on International Valuation moderated by BVU’s editor Andy Dzamba)
- three BV University sections
- 64 new people passed the ABV exam in 2014 so far (another exam date starts this week)
- the AICPA Divorce Conference
BVWire reports that a new paper skewers the capital asset pricing model (CAPM) as “an absurd (having no rational or orderly relationship to human life; contrary to all reason or common sense) model because its assumptions and its predictions/conclusions have no basis in the real world.”
No common sense: The paper, CAPM: An Absurd Model, by Pablo Fernandez (University of Navarra, IESE Business School), goes on to say that many professionals are raking in big fees because of the use of “CAPM instead of common sense to calculate the required return to equity.” CAPM users are making “many illogical errors valuing companies, accepting/rejecting investment projects, evaluating fund performance, pricing goods and services in regulated markets, calculating value creation,” and so on, the paper says.
BVWire (free registration required) includes a link to the paper.
International BV players gathered recently in Toronto for a panel discussion on global BV education that was webcast live, reports BVWire. “There’s a global warming of the BV profession toward the ideas of valuation standards and education, and we need to be ready to respond to them,” said Bob Morrison, chair of the ASA Business Valuation Discipline Committee. “CICBV members are already asking for an international education and certification,” countered Pierre Maillet, who is with PwC in Montreal and is on the CICBV board. He warns that it takes years to develop these things, so the route is to support country-specific standards via the VPOs rather than a new international organization.
“Young people in our profession need a certification that’s global, portable, and recognized,” agreed Doug McPhee, global head of BV education at KPMG. “Otherwise, they’re struggling to align their training with their careers or with the regulators.” To prepare individuals as the profession changes, you need “entry education, continuing education, minimum work experience, standards probably around the IVS from the IVSC, and you need disciplinary procedures,” Maille says. Ben Elder, global director of valuation at RICS, points out that his organization takes a proactive approach to discipline by scrutinizing its members’ work and taking enforcement action where it sees fit.
“If external trends move faster than internal actions, you’re on the road to disaster,” says April Mackenzie, COO of the IVSC, quoting a business leader she’d heard earlier. “Education is what you have at a point in time, but competency is an ongoing commitment over time. What we need to do is find a way to recognize the right levels of competency. That’s where we have to start for the answer.”
The panelists agreed that, generally speaking, education should be standardized internationally. “But at the national level, and at the level of practicing internationally, you need to demonstrate an additional international competency,” said Morrison. “What good is the market approach in a local economy with no secondary market? Knowing that is a key part of international competency.” One route is for the IVSC to weigh in on whether VPOs meet the minimum standards of an international body for common, high standards.
While it’s unclear what tangible actions will be taken in the short term, it’s important to keep this dialogue going in order to move forward with a global unification of the BV profession.
BVWire subscribers (free registration required) have access to a free recording of the webcast.
When valuing an ambulatory surgical center (ASC), experts need to be aware of potential serious risks these entities face, especially with older patients who represent a major segment of ASC customers. The recent high-profile case of Joan Rivers illustrates this, as a visit to an endoscopy clinic for a routine procedure ended in her death. In addition to treatment-related risks, there are other risks that valuation experts need to examine.
Risk assessment tool: In a recent BVR webinar, Todd Sorensen and Kevin McDonough (both with VMG Health) discussed the valuation of ASCs and presented a tool for assessing the risks inherent in ASCs. The ASC Risk-Assessment Matrix measures risk along a number of lines, including service-area growth, competition, location, physician ownership, and more. For more details and to access a free copy of the matrix, go to the September 24 issue of BVWire (free registration required). There’s also a link to the archived webinar.
According to BVWire, preorders are being taken for the 2014 Valuation Handbook – Industry Cost of Capital, published by Duff & Phelps. Take advantage of the preorder price of $350 per book plus shipping and handling (versus the list price of $395). This preorder price expires soon! Follow the links in BVWire (free registration required) for more information and how to order.
This resource replaces the discontinued Morningstar/Ibbotson Cost of Capital Yearbook and will include additional methods to calculate cost of equity capital and new statistics previously unavailable that will allow for a more robust analysis. Over 200 U.S. industries are represented in the 2014 Valuation Handbook – Industry Cost of Capital. The book is published with data through March 2014. Quarterly updates (June, September, and December) are also available for $250 per year, but they are an optional add-on and not sold separately.
The Tax Court’s decision in Estate of Richmond set the appraisal community abuzz. Since then, many have commented on the two most obvious points: (1) the use of the net asset value method to determine the value of a holding company whose assets are mostly marketable securities; and (2) discounting for the built-in capital gains (BICG) tax by determining the present value of the future BICG tax liability.
But, in his recent BVR webinar, Prof. Jack Bogdanski (Lewis & Clark Law School), a long-time observer of the Tax Court, offered a unique perspective beyond the technical details. He called the decision a significant win for the IRS—if not from a numbers point of view, then from a theoretical standpoint.
For instance, even though the court agreed that a BICG liability discount was appropriate, it plainly rejected the estate’s proposed dollar-for-dollar approach, which was based on rulings in the Court of Appeals for the 5th and 11th Circuits. The Tax Court could do so, Bogdanski explains, because it is not bound by those decisions. What matters is the law of the circuit in which the executor resides. Here it was Pennsylvania, which is in the 3rd Circuit. Since the 3rd Circuit has not yet ruled on the issue, the Tax Court was free to come up with its own method. Assuming the estate will appeal—which it still has time to do—the 3rd Circuit would weigh in. But, Bogdanski stresses, don’t count on its overturning the Tax Court on this issue, particularly since the 2nd and 6th Circuits have disagreed with the 5th Circuit.
For more comments from Bogdanski, see the BVWire (free registration required).
BVWire attended the NACVA conference in Las Vegas that had some great sessions with speakers who generated a slew of new ideas and actionable takeaways. Example:
Watch what you write, advises Mel Abraham (Practice Builder Academy). You never know where it may end up. He mentions a colleague who, at the request of an attorney, wrote a letter explaining the concept of the blockage discount. Unbeknownst to the writer, the attorneys used the letter as the basis for adjusting a valuation—and the letter got attached to a tax return! Later, when the valuation was called into question, the expert got a surprise phone call asking him to explain what he wrote. The idea here is to state explicitly what the document you’re preparing is for and how it can—and cannot—be used.
For more tips, see the BVWire (free registration required).
BVWire reports that a Canadian trial judge’s ruling on expert draft reports is sending shockwaves through the legal and expert witness communities. Even though this opinion carries no weight in U.S. courts, it merits attention from practitioners in this country.
In a medical malpractice case, the Ontario Superior Court of Justice wrestled with a number of evidentiary issues related to the admissibility of expert evidence under Rule 53.03 of the Ontario Rules of Civil Procedure. The most controversial was whether it was appropriate under the rule for counsel to review draft reports of experts and provide input to shape expert reports. The court ruled that “counsel’s prior practice of reviewing draft reports should stop. Discussions or meetings between counsel and an expert to review and shape a draft expert report are no longer acceptable.”
The Canadian Bar Association (CBA) has criticized the opinion. The case is currently on appeal, and The Canadian Institute of Chartered Business Valuators has filed a notice to intervene. The participation of valuators shows that, even though the case involved a medical expert, the judge’s ruling is seen to affect all areas of expertise.
For more on this case, see the BVWire.
The second edition of a survey by Rusk O’Brien Gido + Partners is gathering transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries. The questionnaire analyzes the valuations of stock from actual transactions, including those between employee-owners and in ESOPs and mergers/acquisitions. The compiled data will include financial performance benchmarking data, valuation multiples for internal (minority interest) stock transactions, ESOP transactions, and merger/acquisition transactions. M&A data will include pricing data as well as data on transaction structures.
While the survey is designed to gather information on firms in the industry, valuation analysts and other advisers with industry clients can certainly participate with or on behalf of their clients. Survey participants will receive a discount on the completed study. BVWire (free registration required) has more information on the survey and how to participate.