What were the most significant BV developments in 2014? What can we expect for 2015? BVWire posed these questions to the editorial advisory board of BVR’s Business Valuation Update. Here are a few comments.
“Last year witnessed a growing skepticism of the capital asset pricing model in academia and elsewhere,” says Ted Israel (Eckhoff Accountancy Corp.). “It’s as if CAPM is cowering in the castle while the villagers assemble outside with torches and pitchforks.” However, he says nothing better has come along—yet. “Dohmeyer, Butler, et al. have offered up the implied private company pricing line, which is interesting but needs more vetting (and they invite it). All of this leaves the practitioner in a quandary over what to do.” Looking ahead to the rest of 2015, Israel says: “I think we better arrive at some consensus about the cost of capital.”
Speaking of cost of capital, the introduction of Duff & Phelps’s Valuation Handbook – Guide to Cost of Capital was a major advance, according to Ron Seigneur (Seigneur Gustafson LLP CPAs). “While many thought we would have a gap with respect to cost of capital information, Duff & Phelps has more than filled that gap. It provides solid information and is very well organized.”
Seigneur also points out that the changes in estate tax limits have “resulted in less than 1% of U.S. taxpayers being exposed to estate tax.” As a result, he says the need for estate tax-related planning valuations has subsided, especially after the surge BV practitioners witnessed at the end of 2012 and into 2013. “Those who focus on this work see softness in their work flows.” Seigneur sees 2015 as busier than ever with litigation work and M&A engagements. “As long as the current ‘irrational exuberance’ in the stock market lasts, we will all be busy—or should be.”
For more comments, see the Jan. 7, 2015, issue of BVWire, a free weekly ezine.
The New York business divorce case involving the valuation of a 50% interest in the company that makes AriZona Iced Tea has prompted comments from Gil Matthews (Sutter Securities Inc.). He tells BVWire that one of the “substantial” problems in the ruling is the decision regarding the discount for lack of marketability (DLOM), which resulted in a “material windfall” to the continuing shareholder.
The plaintiff’s expert argued for zero DLOM because the company was successful and there were a number of “expressions of interest” from potential acquirers. The defendant’s expert asked for a 35% DLOM. The court decided a 25% DLOM was appropriate. This “results in the petitioner receiving 3/8ths of the value of the company, inequitably valuing the continuing shareholder’s half-interest at 60% more than the petitioner’s half-interest,” says Matthews. The court gave four reasons for applying a 25% DLOM. One of the reasons is the transfer restrictions in the owners’ agreement, which is relevant to a DLOM, says Matthews. But the other three reasons the court gave seem “questionable,” he says.
- AriZona did not have audited financials. “However, the opinion also states that ‘Arizona’s financial statements can be readily audited, particularly when the shareholders are no longer battling with each other,’” Matthews says.
- Extensive litigation between the shareholders. “However, the petitioner should not be penalized for litigating and, in any event, the litigation will be concluded when the petitioner is paid,” he says.
- Uncertainty about AriZona’s S corp status. “However, the court concluded that S corp status did not add to the company’s value,” Matthews observes.
For more on Matthews’ comments and a link to the AriZona case (including a case digest), see the BVWire (free registration required).
BVWire attended the excellent AICPA-FVS conference in New Orleans. Here are just a few of the many interesting pieces of information we picked up.
Does the size premium still exist? Academics and investment pros say the size premium has vanished based on research that shows it’s been declining over time. But BV experts claim it’s alive and well (e.g., see Pratt and Grabowski’s Cost of Capital, 5th Edition).
What’s the most likely IRS audit trigger for estate/gift tax returns? It’s the presence of DLOM or DLOC in a valuation, according to a poll of attendees in a session on dealing with the IRS.
Consolidation is “running rampant” in the auto dealer industry in the wake of Warren Buffett’s purchase of Van Tuhl, the largest privately owned U.S. auto dealership group.
The IRS still says “no” to tax affecting in valuations, and the agency is looking for a test case to bring to court. But, according to a great deal of research, shareholder taxes definitely affect value.
At the conference, the AICPA honored four individuals: Hubert Klein (EisnerAmper LLP) as the Forensic and Litigation Services Volunteer of the Year; Jason MacMorran (P&N Consulting), Business Valuation Volunteer of the Year; Sheri Schultz (Fiske & Co.), ABV Champion of the Year; and Elizabeth Woodward (Dean Dorton Allen Ford), CFF Champion of the Year.
For more takeaways from the AICPA FVS conference, see BVWire (free registration required).
Looking for a source for the latest transaction multiples being paid for U.K .private companies? A new guide, BVB Insights: Data and Analysis on UK Private Company Multiples, 2014 Edition, has this information in over 50 industry categories.
Key insights: The highest multiples paid were in the telecommunications, healthcare, and IT sectors, according to the guide. The consumer discretionary and consumer staples sectors also show relatively high multiples paid. Some of the key drivers of multiples in this space include: private equity firms acquiring strong branded companies, North American buyers in the private education space, and consolidation in retail automotive by the U.K.’s three largest players. The lowest multiples were paid in the materials sectors (mainly U.K. manufacturers), “largely due to the relatively low margins in this sector (5.6%), being the lowest amongst the 11 industry categories,” says the guide.
The guide, compiled by Business Valuation Benchmarks Ltd., is available from BVR. For details and how to order, go to BVWire, (free registration required).
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.