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.
If you are a subscriber to Business Valuation Update, you can take advantage of a free trial offer to test out a new DLOM Calculator designed by Marc Vianello (Vianello Forensic Consulting). The July issue of BVU contains an article by Vianello,“How Probability Affects Discounts for Lack of Marketability.” This article presents a methodology for determining DLOM that combines probability-based time and price volatility variables in conjunction with the formula put forward by Francis Longstaff, Ph.D. The new DLOM Calculator embodies this methodology.
Free trial: The article contains a promotional code that allows for free access to the DLOM Calculator. The code was originally good through July, but it is now extended through August. And, once you activate the code, it will give you 30 days of free access. You must be a BVU subscriber to receive this free trial offer. If you are not a BVU subscriber, you can subscribe by clicking here.
The terms “valuing” and “pricing” mean very different things, but, in a recent interview with BVWire, Dr. Aswath Damodaran (Stern School of Business, New York University) points out that they get used almost interchangeably. “I think when we do that we misstate two very different concepts.” This difference is often highlighted by the sale of a recently appraised business at a price far from its assessed value.
Join the discussion: Dr. Damodaran will join BVR for an exclusive special event, Price and Value: Discerning the Difference, an Advanced Workshop, on September 10 in New York City. He will give his overview of the valuation process, but then he’ll focus on “something that we don’t spend enough time on—the pricing process.” What is it that drives the pricing process? How does this differ from the valuation process?
“I’ll use the companies I’ve been valuing for the last few years because they’re the lab experiment to show how value and price can diverge,” he said. He’ll focus on factors that affect price and how this creates a gap between price and value. “There is no question there’s a gap,” he says. “This is the core of the problem. If you are doing the wrong thing given your mission for the valuation, then you’ll come up with the wrong number.”
Your homework: In preparation for his “class,” he suggests that you review the last five valuations you did. “Think honestly about what your mission was with each of them,” he says. Were you doing a valuation for a transaction? A legal setting? Goodwill amortization? Outline the motive you had when you did the valuation. Then ask yourself: Was my mission—given that motive—to price the company or to value the company? “Look at the actual valuation that you did and see if it was consistent with your mission—and whether your mission was consistent with what you started off doing.”
Bring this all with you to his session to stimulate the discussion. “I’m not saying that everybody has the same mission,” he says. “But each of us has a mission and what I’m pushing for is to be honest about what the mission is before we start putting numbers down and drawing on rules about the right things to do.”
Space is limited: Exclusive premium seating is available on a limited basis for a select group to attend this presentation live in New York while it’s being webcast worldwide. For those who attend the live event, there will be a pre-event luncheon with Dr. Damodaran and an extended 30-minute live Q&A session. You’ll also receive a complete recording and transcript of the event.
To reserve your spot to attend in-person, contact BVR today: email@example.com; (503) 291-7963 ext. 2.
“Explain everything” when writing a business valuation report, advises Howard Lewis (International Society of Business Analysts; RiskGuidance Co. LLC). Lewis, formerly with the IRS, spoke at the recent NYSSCPA Business Valuation Conference in New York City, which was covered by BVWire. He says the most common problem with reports is the failure to explain certain conclusions, especially discounts and multiples. “Don’t just state—explain.”
Court cases are a great resource to understand how to craft a report. He asked conference attendees whether anyone knew or could explain what the Gallagher case says about report writing. No one raised his or her hand. “I was shocked that no one appeared to know this case,” Lewis said later. “It’s a great report-writing case.” The judge destroyed both sides over their reports.
Free download: The full text of the case, Estate of Gallagher v. Commissioner, T.C. Memo.2011-148, is available from BVR on its Free Resources page (registration required).
A working draft of a new tool to calibrate the cost of capital for small companies is now available for use—and your feedback is wanted!
The tool, the Build-Up Method/WACC Calibrator, was developed by the team that gave us the implied private company pricing model (IPCPM). This is a cost of capital methodology for the valuation of small privately owned businesses (up to $50 million in revenue). IPCPM is powered by the implied private company price line (IPCPL), which uses a statistical sample of 500 small- and lower-middle-market transactions reported in the Pratt’s Stats database.
The IPCPM/IPCPL team, Bob Dohmeyer (Dohmeyer Valuation Corp.), Pete Butler (Valtrend), and Rod Burkert (Burkert Valuation), joined forces with Toby Tatum (Alliance Business Appraisal) to develop the tool, which is designed to calibrate your cost of capital developed with other sources (build-up method, total beta, etc.).
How to get it: The BUM/WACC Calibrator and user’s manual are available for download on the BVR website’s IPCPL page. The tool will expire every month, so you will need to download the updated version. Also on the IPCPL page, you’ll find links to more information on IPCPM and IPCPL, including free downloads of articles that explain the new methodology.
Feedback wanted: This tool is a work in progress, so your feedback is important. Download the Calibrator and try it out. Then, go to BVR’s LinkedIn page and join in the ongoing discussion about this tool and share your thoughts. The discussion is: The Implied Private Company Pricing Model: New Developments. Others are already trying it out, so you can see what they have to say.
If an expert loses a Daubert challenge, is it the finish for his or her career? Not necessarily. There are many reasons why a court may find testimony inadmissible, according to a report in BVWire.
One reason is that the trial court simply gets it wrong. Instead of being a gatekeeper and scrutinizing the qualifications of the expert and the methodology used, the court looks at the underlying data, disapproves of it, and excludes the expert’s testimony. With any luck, the expert is vindicated on appeal, as was the case in the 2013 Manpower case (available at BVLaw), in which the 7th Circuit found the trial court overstepped its bounds and reversed. Whether the testimony is good enough to withstand cross-examination and convince the jury is a different issue. Chances are good that an expert facing this situation works again.
Share your experience: How have you avoided or dealt with Daubert losses? Give us your comments!
Extra: BVR is working on a new special report on Daubert cases that will present a wealth of case law and in-depth analysis of the admissibility issues facing experts.
Promising young business valuators competed in the third annual BVR/SPU Valuation Challenge at Seattle Pacific University (SPU). This year, for the first time, university teams and faculty from across the U.S. competed in the challenge. Also, unlike other finance competitions, students valued a real U.S. private company using special appraisal information in a contest judged by 20 of the nation’s senior valuation experts. The experts selected six teams from among 18 U.S. university first-round entrants to come to Seattle for the final round.
Top teams: The competition was won by the University of Denver. Portland State University took second-place honors, and SPU was third. Middle Tennessee State University, University of Maryland (University College), and William Paterson University were the other participants.
BVR provided research support to the competing student teams. Moss Adams provided a full valuation report with only names and some locations changed. Three local experts—Willis Eayrs, deputy chairman of the International Association of Consultants, Valuators and Analysts (IACVA); Joseph Maas, principal of Synergetic Finance; and Miranda Rickert, senior analyst at Moss Adams—judged the competition’s final round. William Hanlin, CEO of IACVA, participated as a consultant.
BVR congratulates all of the students who competed in this year’s Valuation Challenge and gives its thanks to Dr. Herbert Kierulff, SPU professor, who runs the event. They’re all winners in our book. For more information on the BVR/SPU Valuation Challenge, click here.
“People do business with people they know, like, and trust … and can find!” says Rod Burkert (Burkert Valuation Advisors, LLC). “A killer profile on LinkedIn and presence on other social media platforms can help when the barriers of physical location and time zones are crumbling.”
Poll results: A recent survey of 250 participants in the Practice Builder Academy reveals that BV professionals are lacking when it comes to using social media to build their practices. Of the 75 individuals who responded, 73% say they are not using social media to grow their sphere of influence.
The Practice Builder Academy (PBA) is a 12-month mentoring program that teaches proven strategies to BVFLS professionals who want to build their practices and re-design their lives. A second program will be opening for the next wave of PBA participants at the NACVA Conference in Las Vegas (June 17-20). Burkert and co-creator Mel Abraham, a valuation and entrepreneur expert, will have a booth in the exhibit hall, so if you’re attending the conference, stop by for more information.
Learn more: Burkert offers more practice building tips in the upcoming July issue of Business Valuation Update (subscription required).
Several top business valuation thought leaders tell BVWire that, in terms of career advice, valuation analysts should develop a specialty, whether it be related to an industry or a particular type of valuation (such as lost profits, intellectual property, ESOPs, etc.).
“Find a niche where you can position yourself as an expert as early as you can in your career,” advises Rod Burkert (Burkert Valuation Advisors LLC). “The temptation is to say you can do all valuations,” observes Lance Hall (FMV Opinions). However, the profession has advanced to the point where being a generalist may not be the best idea. “Business valuation has become a true specialty,” says Gary Trugman (Trugman Valuation Associates). “It is not meant for the practitioner who wants to do a little of this and a little of that. When you’re sick, you go to a specialist—not the family doctor.” Specialization can also enhance the value of your services, as Hall points out: “Once you invest in specialization, it’s easier to differentiate your services and maintain higher fees.”
Time to go “hot tubbing,” said U.S. Tax Court Judge David Laro to chuckles in the audience at a recent presentation, according to a report in the BVWire. No, he doesn’t mean to go soak in a warm bath. He’s talking about a very different method of giving expert testimony that he favors over traditional cross-examination. He sits at a table with the two experts flanking him and opens a conversation. Without fear of being attacked over their credibility, the experts feel free to have a collegial discussion about their work on the case. Judge Laro believes this technique can lead to a more equitable outcome.
Judge Laro, the author of the seminal Mandelbaum decision, made his remarks at a recent luncheon sponsored by the Business Valuation Association. More coverage appears in the June issue of Business Valuation Update. Judge Laro’s Mandelbaum v. Commissioner, T.C. Memo 1995-255 (1995), is available at BVLaw.