January 16, 2013 | Issue #124-3  

New DLOM survey asks: What approaches are BV appraisers using now, and why?

There are currently over 20 different methods for determining the oft-required (and oft-debated) discount for lack of marketability (DLOM). There are benchmark studies, analytical approaches, DCF models, securities-based models, and more. As of last year, there’s also the IRS DLOM Job Aid, which took a comprehensive and sometimes acutely critical look at the most common methods. First made public in 2011, the Job Aid challenged IRS engineers and examiners to “think like a valuator” and start with the baseline presumption that anything above a zero marketability discount requires detailed explanation and support.

Since then the debate over the many DLOM methods has continued, with little consensus among professionals, scant direction from the courts and the IRS, and no current insight on the best, if not most frequent, practices. Consensus might be years (or just a Daubert challenge) away, but in the meantime, we’d like to get a pulse on how BV practitioners and valuation analysts are approaching DLOM in their everyday engagements. To that end, we’ve put together a new online survey, which covers the 20-plus approaches and tries to narrow the most frequently applied. It’s just seven questions and will add to the BV profession’s knowledge base on this critical topic. We will publish the results in coming weeks along with comparisons to our 2009 DLOM survey results; to participate, click here now.

Don’t miss the webinar by the author of the IRS DLOM Job Aid. Did you know that Michael Gregory, former IRS engineering manager and now an independent consultant, was one of the chief authors of the IRS DLOM Job Aid? Get all his insights on working with the IRS and creating credible DLOM determinations in What Business Valuators Need to Know When Preparing a DLOM for the IRS on January 24, Part 4 of our current DLOM series. (For more on that continuing series, see the CPE item in this issue.)

Damodaran adds country-specific COC to his 2013
data update

For the past two decades, Professor Aswath Damodaran (NYU) has dedicated the first two weeks of every new year to what he calls a ritual. “I obtain/collect/download data on all publicly traded companies listed globally, using a variety of data sources, and then analyze and present the data, aggregated at a number of different levels: by country, by region (U.S., Europe, Emerging Markets, Japan, Australia & Canada) and by industry.” He also reports on various measures of operations and leverage, pricing and risk, including equity risk premiums and country risk. Damodaran has just completed his 2013 update, posting it here.

Each year, the professor also tries to add something new to the dataset “to keep it fresh,” he says in a recent blog post. This year, he has added company-specific estimates of costs of equity and capital (in U.S. dollars) in the individual company datasets. In making these estimates, Damodaran cautions that he had to make broad assumptions about country risk. For instance, he used the risk premium of the country in which a company is incorporated, rather than its base of operations. So analysts should take these COC estimates “with a grain of salt,” he says, and if they prefer a more precise estimate for a particular company, they should do a more detailed investigation.

Notably, the professor continues to be generous with his work and modest about his motives, admitting that while wanting to make the data available to all investors, he will also draw on it during the coming year for his own teaching and analysis. Since his own work necessitates completing the yearly update, he sees “little benefit in keeping it behind a pay wall or passwords,” and even though mistakes will happen, he hopes that no personal bias or view has colored the data and nothing he’s done is “opaque.”

FASB took on big projects in 2012, but made small advances, says BDO overview

During 2012, the Financial Accounting Standards Board spent most of its time working on major projects, including a convergence effort with its international counterpart (IASB). “However, none of the major initiatives were finalized,” says a new report on 2012 accounting standards by BDO:

For the most part, the Accounting Standards Updates (ASUs) issued in 2012 address narrow topics, many of which are industry-specific. As such, several significant projects are slated to be exposed for public comment this winter or perhaps completed in 2013. This includes the standards for revenue recognition, leases, financial instruments and other topics.

The 2012 “year-in-review” summarizes where the ongoing major projects stand and what analysts and investors can expect in 2013. It also recaps the new standards that were issued in 2012, “some of which will impact year-end financial statements this reporting season,” according to the BDO analysts, who have attached a comprehensive list of recently issued accounting standards to an appendix.

Top 2012 downloads mirror core BV engagements
and inputs

If our most popular free downloads of 2012 reflect the business valuation profession’s most critical and current concerns, they also show that appraisers are still interested in the assignments and valuation aspects that have been supporting the profession for years.

A “baker’s dozen” roundup of the most frequently clicked-on downloads for last year shows FLP—cases and discounts—leads the list, followed by a state-specific summary of economic information, valuing noncompetes, calculating discount rates, etc. Please visit our free download page to peruse the complete list of all our complimentary, BV-specific resources, and be sure to email the editor with any requests for adding to the list in 2013.

Download Title Date

FLP Appraisals: Plan for the New Matrix


State-by-State Summary of Economic Resources


Valuing Covenants Not-to-Compete: An 11-Factor Checklist


Pellegrino & Associates' Discount Rate Calculator


September 2012 Duff & Phelps Update


CEO and Executive Compensation in Privately Held Companies in 2011


Goodwill Hunting in Divorce


Nancy Fannon's Reading Suggestions


Fundamental Principles of Patent Value


Valuation and Appraisal Glossary


Seigneur’s Law Firm Valuation Checklist


New Articles Ask Us to Rethink the Equity Risk Premium


Discount for Lack of Marketability Job Aid for IRS Valuation Professionals


One-of-a-kind guide to valuing government
contracting firms

Federal budget battles and unclear tax positions, plus domestic and international economic and political trends, create a challenging environment for government contracting firms and the business appraisers who value them. In Key Trends in the Valuation of Government Contracting Firms: A BVR Special Report, compiled by Jan Davis, with an introduction by Donald Nalley (Beason Nalley), BV appraisers and businesses will learn the unique characteristics of government contracts and the important considerations in deriving valuation estimates for firms that do business with the federal government. Highlights include:

  • Top value drivers in the defense and government services markets;
  • Special issues to consider when valuing a government contracting firm;
  • Necessary considerations for government contractors with set-aside status;
  • Customer list and backlog issues as related to purchase price allocations;
  • Lost profit issues unique to government contracting cases;
  • Government contracting firm acquisition multiples; and
  • Key sources of government data.

Why it’s important to cite BV certifications in reports

Occasionally, as part of the valuation practice within a public accounting firm, “we will review valuations and find the certification/representation missing from the valuation report,” says Lee C. Russell, an executive director with Ernst & Young and a member of the ASA’s BV Committee, who contributed the most recent E-letter to members. When asked about the omission, the appraiser may respond by saying one of two things, Russell says: “I’m not required to sign an individual appraiser certification/representation, because this report represents the conclusion of my company, not me personally,” or, “this report is not required to be in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP); therefore I’m not required to sign an appraiser certification/representation.”

But, as Russell points out, USPAP’s Standards Rule 10-3 requires “each written appraisal report” to contain a signed certification” that complies with a stated form. The AICPA’s SSVS-1 requires any written report to contain a similar representation, and of course, the ASA’s BV standards specifically require compliance with USPAP.

“If a valuation report is not required to be in compliance with USPAP, is a signed appraiser certification/representation still required?” Russell asks. “The answer is that it may very well still be required in most cases, depending on who the individual appraiser is.” If accredited with the ASA, appraisers are required to follow USPAP, and if a CPA, then SSVS-1 applies. In sum, Russell hopes this explains why reviewers in public accounting firms will look for signed appraiser certifications “as evidence to support their review conclusions, not only regarding valuation methodology and valuation assumptions, but first and foremost regarding appraiser independence and objectivity.”

Now available: complete session recordings for 2012 ASA BV conference. Those who were unable to attend the 2012 Advanced BV Conference can now purchase all conference materials and audio sessions. For more information, click here.

TAF seeks new trustees

The Appraisal Foundation has started looking for qualified candidates to fill three at-large seats on its Board of Trustees, which will become available at the end of this year. The TAF’s board oversees the funding, work, and members of the Appraisal Standards Board and the Appraisal Practices Board. The TAF board meets twice a year, and appointed members will serve three-year terms beginning Jan. 1, 2014. 

The Appraisal Foundation is particularly interested in expanding the diversity of its board by considering “applications from business leaders with an interest in valuation or involved in various appraisal disciplines,” says a release. Completed applications for the board vacancies are due by April 2, 2013. For information regarding applications, click here. For those who would like to request an application by email, please contact Arika Cole, and include the phrase "2013 AT-LARGE APPLICATION INFORMATION" in the subject line and your full name, email address, and phone number in the text.

Resolved to complete your CPE early this year?
Start here

BVR’s advanced series on DLOM continues on January 17 with How to Quantify and Support Your DLOM Using Rates of Return, featuring Bruce Johnson (Munroe, Park & Johnson), who will explain how appraisers can gather evidence from rates of return to arrive at a sound and defensible DLOM.

Later this month, on January 29, our Online Symposium on Healthcare Valuation begins with Healthcare Coding for the Non Coder, featuring Frank Cohen (Frank Cohen Group) and Mark Dietrich, who will tackle complex but absolutely critical Medicare and insurance billing codes when valuing healthcare interests and their related income streams.


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