Netsmart case more about fair process than price

Private equity dealmakers are buzzing over last week’s decision by the Delaware Chancery Court to delay the proposed buy-out of Netsmart Technologies, Inc. by Bessemer Venture Partners and Insight Venture Partners.  The $115 million transaction, scheduled for a shareholder vote on April 5, 2007, will not go forward until the company provides supplemental disclosures to shareholders regarding the particulars of its agreement with the PE purchasers, including financial projections underlying the valuation and fairness analysis by William Blair & Co., LLC.

The suit to enjoin the sale, led by minority (3%) shareholder Levictus Partners LP, claimed the proposed price (at $16.50 per share) denied shareholders the “full value” of their interests. In its letter to the Board last November, Levictus contends “the proposed buy-out price represents approximately 1.5x expected 2007 revenues vs. comparable company public valuations of 2.5 to 5x revenues or more in your market space.”

Price wasn’t the Court’s primary focus, however.  In his March 14th ruling, Vice Chancellor Leo Strine Jr. pointed to Netsmart’s alleged failure “to engage in any logical efforts to examine the universe of possible strategic buyers and to identify a select group for targeted sales overtures.”  PE managers are worried that the ruling may presage a trend, increasing “the likelihood of other disgruntled shareholders [hooking] up with plaintiff attorneys,” according to PE Week.

While the PE context may be new, the Court’s concerns are not.  “The opinion goes more to ‘process’ than to value,” comments Neil Beaton (Grant Thornton, LLP), who last appeared in the front of the Delaware Chancery in the Gesoff case (See BVWire #47-1.)  “The signal the Chancery has been sending [corporate directors] in all of its recent rulings is ‘make sure the process is fair or you will most likely end up paying more.’” 

PEIGG updates PE Valuation Guidelines

The Private Equity Industry Guidelines Group (PEIGG) has just updated its U.S. Private Equity Valuation Guidelines, the first revisions since 2003.  Prompted by “the continued need for more consistency and transparency in private equity valuations” as well as the FASB’s issuance of Statement No. 157, Fair Value Measurements, PEIGG updated the Guidelines to assist private equity participants in complying with U.S. GAAP and fair value reporting requirements. The new Guidelines along with an FAQ are now posted at PEIGG’s website, under the "Valuations" link.

For a copy of the article highlighting the recent revisions and their applications to PE valuations by Guidelines drafter David Larsen (Duff & Phelps, LLC), which just appeared in the March 2007 Business Valuation Update™, "Valuing Assets Held by Private Equity Funds—New Guidance from PEIGG,” click here.

How ‘not to get killed’ citing Ibbotson supply side ERP

Several subscribers have recently requested more information on Ibbotson’s supply side equity risk premium (ERP)—currently 6.28%—which appears in the “Cost of Capital” portion of the BVU; a footnote explains that the figure represents “the historical equity risk premium adjusted downward to remove historical price to earnings growth.”

“Ideally, we would like people to read the entire chapter on Equity Risk Premium in the Stocks, Bonds, Bills, and Inflation Valuation Edition Yearbook,” says Michael Barad at Morningstar.  “A free alternative would be to read the Ibbotson and Chen white paper on the Stock Market Returns in the Long Run published in 2002,” but the data and examples may be outdated.

“I wouldn't recommend that anyone use an equity risk premium number they don't understand, and that is why we have an entire chapter on it in our SBBI book,” Barad says. “Without proper background, they will get killed by opposition.”

2007 SBBI Classic and Valuation Yearbooks now available

And just in time to prevent any premature demise, the 2007 editions of Stocks, Bonds, Bills, and Inflation® Yearbooks, originally published by Ibbotson, have just been released by Morningstar.  Featuring the familiar data and analysis, the SBBI® “Classic Edition” provides a comprehensive, historical view of the performance of U.S. capital markets dating back to 1926 while the “Valuation Edition” supports cost of capital estimations.  Both 2007 editions contain data through December 2006, and are now available for pre-order online.

New updates to critical sector of the U.S. economy

Small businesses drive the U.S. economy: They now account for 99.7% of all businesses and employ 57.4 million Americans, according to the latest statistical report from the SBA.  But while the majority of small businesses last at least two-years, less than half (44%) survive the four-year mark, says a recent MSNBC article.

Small businesses also drive the valuation profession—and only one source tracks the sometimes short-lived data on comparable small private business sales.  New updates to the BIZCOMPS® database, including 352 new transactions of “Main Street” businesses, have just been added to the database.  The 9,886 transactions in BIZCOMPS have median revenues of $368,000 and a $160,000 median selling price, and include 1,620 transactions in the restaurant industry, 938 deals in business services and over 770 deals in the area of personal service.

In addition to the  BIZCOMPS update, we have also recently added transactions to the Pratt’s Stats®, Public Stats™ and Valuation Advisors’ Lack of Marketability Discount Study™.  For more information, go to

Who doesn’t require up-front project fees?  

Engagement letters are standard practice among BV practices and professionals—99% of firms responding to BVR’s 2007 Business Valuation Firm Economics & Best Practices Survey now require them from new clients.  (The practice may be more widespread among BV firms than other professional service firms due to USPAP and other professional requirements.) 

But not all BV firms require an up-front retainer before taking on a valuation engagement—and among those that do, the percentages range from less than 25% to 100% of the anticipated project fees, depending on the client, the complexity of the assignment, and the context.  To see where your firm fits in the breakdown of retainer fees, please take a couple of moments to answer our on-line survey.  We’ll publish the results in next week’s BVWire.

Updated, all-in-one IASB standards just released

The International Accounting Standards Committee (IASC) has just published in a single volume all the official pronouncements, approved as of the first of the year, by the International Accounting Standards Board (IASB).  The International Financial Reporting Standards (IFRSs) Bound Volume 2007 provides the complete, consolidated text of the most current IFRSs, including Standards and Interpretations, supporting documentation and implementation guidance.  The book also includes historical summaries of each pronouncement.

The single bound volume sells for ₤60 from the IASC, or contact

IVSC extends comment period on restructuring

The International Valuation Standards Committee (IVSC) has extended the comment period on its proposed restructuring from March 9 until March 30, 2007 (see BVWire # 52-4 ).  “A number of constituents have requested more time given the significance of the issues raised by the proposal,” says the IVSC.  The proposal is available at the IVSC website.


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