Break out the bubbly

Is it time to break out the bubbly for a growing profession?   When BVR conducted the business valuation profession's first Business Valuation Firm Economics and Best Practices Survey in November 2006, we estimated that the “hardcore” BV profession—those providing business appraisals intended to comply with one or more professional association standards—was nearing the $1 billion benchmark in total revenues.  Our review of the just-collected data for the 2008-2009 update of this survey, suggests that we’ve flown by that target.  

Total business valuation revenues earned by firms who contributed financial data to this new survey (almost three times as many firms as in 2006) were more than $570 million.   “While hardly scientific, based on participation rates, growth rates, and market demographics, we venture to estimate that the business valuation profession is now already close to a $1.2 billion industry,” says David Foster, BVR CEO, who is editing this year’s edition.  “The analysis behind this forecast is fraught with estimates, but it seems worthwhile in any case because no one has tried to estimate the size of the business valuation profession previously.”  The 2008-2009 edition of Business Valuation Firm Economics and Best Practices Survey will be available September 1.   Drop an e-mail to davidf@bvresources.com if you’d like to be on the list to order a copy at the pre-publication discount of $199 (instead of the $249 list price).

Lake Tahoe and management projections

What do these two have in common?  Neil Beaton of Grant Thornton and James Catty of Corporate Valuation Services Limited will be hosting a must-attend one day conference on Friday, August 15th at the beautiful Lake Tahoe Hyatt Regency Resort, Spa & Casino titled “The Uses and Abuses of Management Projections.”  They’ll discuss bulletproof tools for management projections (spreadsheet auditor, Monte Carlo simulation and others), the NASD’s Rule 2290, court cases from the Delaware Chancery and other venues, using multiple scenarios and more.  Go to the informational page to listen to a just-posted four minute podcast discussing the highlights of this conference. To register for the conference click here.

More on the lack of confidence in our debt markets

Dexter Braff (Braff Group, Pittsburgh) responded to the July 2nd BVWire article titled "A private equity leader attempts to blame the accountants for credit market crisis… " that discussed an article in The New York Times where Mr. Schwarzman, co-founder of the Blackstone Group, blamed FAS 157 for the credit market crisis.  Braff wrote:

I also saw the article you cited in the New York Times and came away far more sympathetic to Mr. Schwarzman’s observations.  It comes down to the difference between fair market value and investment value.  In this situation, we are in the midst of an accelerating downward spiral in confidence in the debt markets.  Some is real.  But some is also a function of emotion and pure momentum – the same intangibles, we might add, that drove market clearing values for the dot coms to “unreal” heights. 

So it comes as no surprise that in this highly charged time, buyers of debt have fled the market, sending, in our opinion, investment values below what the pure risk-return (i.e. fair market value) fundamentals would suggest.  As middle market investment bankers specializing in health care, we see this type of situation quite frequently, when buyers flee the acquisition market in response to an unstable reimbursement climate.  While the underlying value of attractive acquisition candidates may have fallen with the risk of the unknown, did they drop to zero?  Of course not, even though buyers, at least temporarily, may be on the sidelines.  One final thought.  Mr. Schwarzman can’t have it both ways.  When an over-inflated, hyperactive market inflates the value of debt, that should be factored out as well.

In a related matter, on July 3rd, the International Accounting Standards Board (IASB) created a dedicated section of their website that outlines their response to the credit crisis and provides links to related meetings, announcements and speeches.  Access to this new section can be found here.  The core of the IASB’s response addresses:

1. Off balance sheet: The IASB should improve the accounting and disclosure standards for off balance sheet vehicles on an accelerated basis and work with other standard-setters toward international convergence.
2. Fair value in illiquid markets: The IASB should enhance its guidance on valuing financial instruments when markets are no longer active. To this end, it will set up an expert advisory panel in 2008.
3. Disclosure: The IASB will strengthen its standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations.

Draft valuation report survey still open

Here are a couple of responses to last week’s BVWire survey on draft business valuation reports:

All drafts are incomplete and invalid work product, so after the delivery of the final product I shred all drafts and delete them from my computers.

Attorney involvement is limited to fact checking in areas where he/she may have more in-depth knowledge. I never send (or discuss) anything of substance to an attorney.

All my engagement letters state, "You should be aware that my policy is to destroy superseded drafts and work papers as I progress through the engagement."

What are your thoughts on sending a draft of your expert report on a litigation matter to the attorney with whom you are working?  The survey is still open so please take it here and we’ll report the results in next week’s BVWire.

Court case update:  order excluding expert testimony is vacated

The June 2008 issue of the Business Valuation Update (BVU) featured an abstract of Baldwin v. Bader, in which a minority shareholder brought claims against the controlling shareholders for wrongful issuance of shares and dilution of his interest.  A key component of the case centered around the value of personal guaranties of corporate debt by the corporation’s insiders, and the plaintiff challenged the defendant corporation’s expert testimony.

Judge Cohen, of the U.S. District Court (Maine), excluded the expert’s opinion regarding the value of the guaranties, based on a number of factors.  Significantly, the expert used a WACC method to calculate value.  The plaintiff’s expert, in response, told the court that the WACC method is more appropriately applied when valuing “medium-sized to larger companies,” where here, the subject company was a small business.  In more than thirty years, the plaintiff’s expert continued, he had “never seen a guaranty fee calculated using the methodology proposed.”

Shortly after this ruling, Judge Cohen retired from the bench, and the defendants asked for reconsideration.  It has come to our attention that the court has now vacated Judge Cohen’s exclusion, and the matter has been set for rehearing. 

What the court’s ultimate, reconsidered decision will be remains to be seen.  Any future developments concerning the challenged valuation testimony—as well as the final outcome of this case—will be featured in a future issue of the BVU (or BVWire.)

Despite IPO slowdown, Valuation Advisors adds transactions

After posting over 200 initial public offerings (IPOs) in 2007, the IPO market has been extremely slow during the first half of 2008.  As of June 20, 2008, there have only been 26 IPOs posted during the current calendar year.  According to IPOScoop.com, 16 of the 26 IPOs were priced upward over the year, while 10 have been priced downward. 

Despite the slowdown in 2008, Valuation Advisors, LLC, continues to capture information on these IPOs and includes the data in the Valuation Advisors’ Lack of Marketability Discount Study™ database (authored by Brian Pearson) located at BVMarketData.com.  IPO companies that were determined to have had transactions in their stock or options prior to the IPO are included in the Valuation Advisors’ database.  The pre-IPO transaction price per share is compared to the IPO price per share to derive an empirically-based lack of marketability discount.  After the recent update of new transactions at BVMarketData.com, the database now contains over 3,800 total transactions.

For more information on how to use the Valuation Advisor’s Lack of Marketability Discount Study™, BVR has posted to our Free Downloads page an excerpt of a Pearson telephone conference transcript (see Valuation Advisors’ DLOM Study).  To purchase the 2008 edition of BVR’s Guide to Discounts for Lack of Marketability, in which the excerpt originally appeared, click here.

Updated research results in BVDirectory

The word research derives from the French word recherche, to search closely or ‘to investigate thoroughly.'  We are all familiar with conducting research to acquire more knowledge and to discover new methods. This is never more necessary than when it comes to the business valuation profession.  We are constantly looking for new sources of valuation-related information in order to stay up-to-date, learn about trends in an industry, or to get raw data. 

Unfortunately, conducting research is both time consuming and costly. A quick review of typical search engine results for niche topics shows us just how unfocused standard search engines can be.  In an effort to more quickly and accurately focus your search results, the BVDirectory was just recently updated and contains information on 245+ publishers and 700+ products specifically pertaining to the business valuation profession. Check only the BVDirectory at the BVLibrary search page and then enter your search terms—you’ll find indispensable valuation and industry sources—including contact information, pricing and more.