In start-up businesses, do you bet on the jockey or the horse?
A start-up company will succeed based on the power of its product, market, and business plan—or so say some venture capitalists. Others are more inclined to bet on the “jockey”: the company’s assembled management team and talent. A couple of professors from the University of Chicago’s business school recently decided to investigate the odds, and found that in the VC race, it’s the “horse”—the quality of a company’s patents, stores and processes—that usually determines the winner. For more on their study of 49 companies that went public, go to www.chicagogsb.edu/capideas/dec05/1.aspx.
But more P.E. firms are now assessing the jockey. At the same time, a recent article at Workforce.com suggests that private equity firms and investment banks are beginning to give a company’s workforce—including its management team—the same careful analysis as its financials. “Ten years ago, maybe one-quarter of organizations were doing talent assessments before making an acquisition or an investment,” says a quoted industry rep. “Today that number is up to 75%.” The article, “Talent Getting its Due Diligence Before Deals,” is available at www.workforce.com/section/09/feature/24/42/70/index.html.
To find out where BV’ers place their bets, check out Early Stage Company Valuations, a recent BVR teleconference (May 23, 2006), available at BVResources.com.
The competition is getting ‘dinky’
Just when you thought it safe to assume that the “art and science” of business valuation is receiving its due, along comes the latest low-end competitor, a site that sells mortgage, loan, and other financial calculators for several hundred dollars—but offers to value your business for free: www.dinkytown.net/java/BusinessValuation.html. “Just enter your cash flow information for the next four years, your cost of capital and your expected growth rate,” say the site’s purveyors, and “we will determine. . . the net present value of your company.” Is it all so simple? Check it out and then let us know what you think; email the BVWireEditor.
IRS offers new guidance on extension to pay estate taxes
Taxes on a decedent’s estate are usually due in full nine months after the date of death. To prevent a “fire sale” of the assets, IRC §6166(a)(1) allows closely-held business interests to pay on an installment plan, if their assets are “active.” The question has often come up whether real estate assets, especially holding companies, qualify. A new IRS revenue ruling suggests that if the decedent (or the partnership, LLC, or company) uses an unrelated property management company to perform most of the activities associated with the real estate, then the interest is probably passive. To view the June 22, 2006 ruling, go to www.irs.gov/irb/2006-26_IRB/ar10.htm, also available in the Internal Revenue Bulletin at www.irs.gov/pub/irs-irbs/irb06-26.pdf.
More questions for the Service? Sign up for Ask the IRS telephone conference from BVR on July 27, 2006, featuring Michael Gregory, ASA, an IRS Engineering Territory Manager; and Roger Wilde CPA, ABV (Anacapa Valuations). Register at www.bvresources.com/conferences.
Need to keep tabs on key federal legislation?
We’re currently keeping track of several important BV-related Congressional Bills, including H.R. 5683, the proposal to repeal the “Death Tax” (see the June #45-4 of the BVWire™, available at BVResources.com). In the process, we’ve discovered a useful site, GovTrack, which “fetches” the status of federal legislation from official websites and then feeds updates to those who sign up for the free monitoring function: http://govtrack.us/congress/legislation.xpd. Keep in mind that these updates lag a day or two behind those posted at THOMAS, the U.S. Library of Congress site that is the major source for legislative feeds, and also provides the latest on Congressional votes, sponsors, and newly-made public laws (but does not provide automatic updates): http://thomas.loc.gov.
Getting the data on dire news
Last week the S&P Retail Index started sinking “in a sea of red,” according to MarketWatch.com, due to swelling geopolitical and economic fears and a Wal-Mart stock downgrade. The news prompted us to look at the sales of retail firms, which according to the Pratt’s Stats™ database, posted the following five year, median MVIC/EBITDA multiples:
Each data field had at least 200 data points—many over 300; for more information on the database, including its FAQ, go to www.BVMarketData.com.
FASB accused of straying from SEC on ‘transparency’
In the first release from their ground-breaking joint effort, US FASB and the IASB each published a “consultative document” outlining their preliminary views on a conceptual framework for financial reporting. FASB posted the document on its website, www.fasb.org; while the IASB first published theirs as a discussion paper, available through an online subscription—it has promised to post it publicly by July 17, 2006 at www.iasb.org. “The publication of the boards’ joint preliminary views reflects their shared commitment to build upon, improve and achieve the convergence of their existing conceptual frameworks,” according to a recent FASB statement, including creating a more “effective guide in developing global financial reporting standards.”
But at least one watchdog begs to differ. Last week, editors at CFO.com accused the FASB/IASB conceptual framers as “parting ways” with the SEC’s views on transparency. While SEC Chairman Christopher Cox has demanded transparency of financial information and the rules that govern its release, CFO.com says that in their preliminary report, FASB/IASB require only transparency of information. See www.cfo.com/article.cfm/1_comments/7157318?context_id=2984368.
FASB responds: A FASB representative has already accused CFO.com of releasing its story without seeking input from the organizations. BVWire has just extended an invitation for FASB to comment on the controversy, and was accepted . . . so stay tuned.
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