Boards decide: no early adoption for FAS 141R/IFRS 3
The Boards (FASB and IASB) have apparently decided, contrary to some conjecture (see the last week’s BVWire) that for any final Business Combinations statement—SFAS 141R and IFRS 3, respectively—the transition and effective dates will be as follows:
1. The Statement should be applied prospectively to business combinations for which the acquisition date is on or after the effective date (12-15-2008 for SFAS 141R and 01-01-2009 for IFRS 3).
2. Retrospective application to acquisitions completed before the Statement is applied* should not be permitted.
3. The Statement should be applied at the same time the final non-controlling interests Statements are applied.
4. The IASB decided to remove the proposed exception to prospective application for contingent liabilities recognized in a business combination for which the acquisition date is before the application date of the new business combinations Statement. The IASB will not require those liabilities to be reassessed.
The Boards still expect to issue the final Statements early in the third quarter of 2007. To read the complete project update, which notes convergences, compromises—as well as where the Boards still may differ (accounting for tax uncertainties, measurement of non-controlling interests and goodwill)—click here. (*Note: The four points above are directly quoted from the FASB project update, but the word “applied” in #2 may be incorrect, and “effective” may be more accurate. —Editor.)
Why ‘8 times EBITDA’ is not cheap—and other rule busters
Too often after completing a painstaking valuation, analysts will often be told that it is “common practice” to add a control premium of a certain percentage; or the target company is “cheap” if it trades below some arbitrary value (eight times EBITDA, fifteen times earnings, etc.) “Rules of thumb make us lazy,” says Aswath Damodaran (NYU Stern School of Business), who spoke to the gathering of the New York State Society of CPAs in Manhattan in May. His comments were not directed so much at appraisers as the “serial acquirers” who—despite or maybe because of the booming M&A market, may be in need of an intervention.
“Tell me, what is the average price for the market?” If you (or your client) can’t answer that, “then how do you know what is cheap?” On his website (click on the "Updated Data" menu), Damodaran continually updates datasets for U.S. (and global) firms with market caps greater than $50 million, including multiples on price and value to sales ratios, value to EBITDA, and more. “The data are useful the next time someone recites a rule of thumb,” he says, adding “most companies that look cheap deserve to be.”
A summary of the Professor’s complete presentation, “Acquirers Anonymous: Damodaran’s Seven Steps to Sober Valuations” will appear in the next (July) issue of the Business Valuation Update™.
To tax affect or not … may no longer be the question
When presenter Dan Van Vleet asked attendees at NACVA’s recent 14th Annual Consultants’ Conference in Washington, D.C. whether they tax affect the valuation of S corporation interests, the vast majority (80%) at his session said they do, while the remaining 20% do not. "Who's right?" asked Dan. "Neither. The answer is somewhere in the middle." Deciding not to tax affect may keep your appraisal safe from the Service, but is not fair to the taxpayer. At the same time, "the tax court won't allow the big discounts" that may have been acceptable before the Gross decision (6th Cir. 2001) and its progeny.
While Van Vleet’s model tries to find the middle ground of valuing the benefits of single taxation entities, there’s also a newer, simpler version by Nancy Fannon, which builds on traditional financial theory as well as the economic models, offering a clear view of the tax affecting issues to analysts, lawyers, and triers of fact. The introduction to her teaching on this Simplified Model has already appeared in the Spring issues of CPAExpert, Value Examiner, and Business Valuation Review, to much acclaim by appraisers—and relief.
“The CPAExpert [article] was understandable, logical, and concise,” says Ed Moran Jr. CPA/ABV, CVA, CBA (Horne, LLP). Fannon’s simplified model “is a clear lighthouse in a foggy S corporation world.” For an abstract of her CPAExpert article, published in the May 2007 BVU, click here. And look for BVR’s Complete Guide to the Valuation of Subchapter S Corporations: A Simplified Model, written by Nancy Fannon and published by BVR, available by the end of summer/early fall.
First-ever automated interview questionnaire
This week Mel Abraham, CPA, CVA, ABV, ASA, unveils the first (we’ve ever seen) automated client interview software, a data-gathering tool for analysts to use in the due diligence phase of most business valuations. The web-based software allows the analyst-administrator to modify the template—deleting, changing, or adding questions and document categories depending on the particular engagement. The analyst can then setup a unique password-protected login for each client, which allows the client to login and work through the questionnaire. Once completed, the document can be automatically downloaded into a Word document. Price: $247. For more information, click here.
Gen X—a talented but moving target
Members of “Generation X” (born 1965-1981) now comprise 40% of the U.S. workforce—and nearly half of them move on from jobs after only three to five years, according to Jerry Love, CPA, CVA, ABV, who also spoke at the NACVA annual confab. His session (“Recruiting and Retaining Staff Considering Today’s Generational Differences”) summarized the values and work ethics of Gen X’ers as well as three additional demographics: “Boomers” (1943-1964) still dominate at 45% of the labor pool, while the up and coming “Gen Y” (1982-2003) account for 10%, and the remaining 5% are from the “Silent” ages (1925-1942).
With Gen X-ers at the core of today’s hiring market, the key challenge for BV firm managers and practitioners is to recruit—and retain—this maturing but mobile talent.
The requirements of technical training, certification, and increasing regulatory oversight are also unique challenges that BV recruiters face—in addition to finding the right professional “fit” for the firm. Gen X-ers are the most entrepreneurial and collaborative group, Love said, but they are also more likely to choose firms that offer a balanced lifestyle. To help identify and pitch the unique pros of your firm’s work environment, plus an opportunity to learn best practices from your peers, be sure to tune into Jim Alerding, Ron Seigneur, and Megan Nail in BVR’s next telephone conference, “Recruiting in the BV Profession,” June 26, 2007. To register, click here. As an extra bonus, registrants will receive a 29-page excerpt from BVR’s 2007 Business Valuation Firm Economics and Best Practices Survey, containing key data on hiring, promoting, and compensation.
More on Internet appraisal ‘scams’
In response to our recent item on “Bogus BV sites” (BVWire # 57-1), Chuck Engle CPA/ABV/CBI writes “that these inexpensive appraisals are not targeted at our client base. Many business brokers recommend an independent appraisal to aid in setting price expectations for many ‘Main Street’ (mom and pop) businesses. It may be that the $399 appraisals are targeted to this market and perform a service.” And while “I do agree that there is plenty of room for misunderstanding, it would be great if we could have a term for what we do in valuation…that could only be used by accredited valuators.”
We agree on both points: Legitimate sites may perform a viable service to help price small, family-owned businesses. However, their use of appraisal terminology—and false or exaggerated credentials—cast a confusing if not tarnishing shadow on the entire business valuation profession. For example, we still have not heard back from either of two sites professing to use the “CSBA” credential from the “Association of Certified Small Business Appraisers” (ASCBA). But we DID learn that the owner of Arrow Appraisers, Robert Malt, lists on his sample Summary Appraisal that he is “Founder and President of the…ASCBA.” Moreover, the “Certification” specifies:
My analyses, opinion and conclusions were developed, and this report has been prepared, in conformity with appraisal guidelines endorsed by the Association of Certified Small Business Appraisers (ACSBA) and other widely accepted and recognized valuation methods.
Another site professing to produce “CSBA-certified” appraisals: Biz Specialists. Once again, though the services they provide may be legitimate, the so-far unsubstantiated credentialing is misleading to consumers (at best) and damaging to the legitimate, hard-working practitioners in the BV profession.
Appraisal Foundation seeking candidates
The Appraisal Foundation is now seeking to fill spaces on its Board of Trustees (three at-large seats available), the Appraisal Standards Board (up to three vacancies), and the Appraisal Qualifications Board (four vacancies). The selected individuals will serve terms of up to three years commencing January 1, 2008.
“The Appraisal Foundation is interested in expanding the diversity of all Boards by considering applications from business leaders with an interest in valuation or involved in various appraisal disciplines,” including BV, which could use additional representation given the issues raised by the Pension Protection Act, USPAP revisions, etc. (For example, Noreen Dornenburg, Vice Chair, is the sole business valuation member on the 2007 Appraisal Standards Board.) For more information, check out the Foundation’s website, or contact Anne Haynes at firstname.lastname@example.org. Applications must be received by August 17, 2007.