| March 9, 2011 | Issue #102-2 | Forward to a Friend |
Duff & Phelps “C” and “D” exhibits can help you measure your subject company’s risk During last week’s BVU webinar Using the 2001 Duff & Phelps Report: Learn from the Master Roger Grabowski (Duff & Phelps) asked “is the Subject Company more or less risky than comparable size firms?” To answer the question Grabowski reminded listeners to look at the C Exhibits in the Duff & Phelps Risk Premium Report. “They are to help you not be criticized that all you did was take the average.” Stock market beta, price volatility, and accounting risk measures all confirm that smaller companies are inherently more risky, Roger says. Duff & Phelps offers two additional ways to evaluate this risk. First, there are 8 C Exhibits. C Exhibits statistics are calculated for portfolios grouped according to size and are averages since 1963. They show relationships between size and accounting risk measures. On the other hand, Exhibits D reported statistics are calculated for portfolios grouped according to risk, independent of size, and are trailing 5-year averages. They are used to calculate “alternative” risk premium for the build-up method. Grabowski also reminded listeners to check his article Problems with Cost of Capital Estimation in the Current Environment – Update which addresses how the current economic environment has created problems with the traditional methods we employ for estimating discount rates for equity capital. To access the free webinar, click here. Tax effecting revisited Mike Reibling CPA recently asked the following question in LinkedIn’s Business Valuation Professionals group: “I've had two encounters with attorneys who adamantly take the view that S corps should not be tax-effected ... period ... end of story. How have you all approached the same?” Several folks responded, including Chris Mercer, who said “I must be such a dummy. Should have hired those two lawyers to value Mercer Capital when we installed the ESOP a few years ago. Other things being equal, the sellers would have received 15% to 20% more. But our appraiser just went ahead and did the economic thing and tax effected the earnings. Darn!” Mercer also directed readers to the Mercer Capital website for articles on the subject. “Or better yet, read the chapter in Business Valuation: An Integrated Theory, which is also available at our website,” he adds. BV Law is another source of digests where this principle has been tested in court. Best way to gift property: FLPs or fractional interest? A father owned over 1,000 acres of California ranch land, worth $6.4 million at his death. The estate applied a 48% combined discount for lack of marketability and lack of control, because thirty years before, the father had gifted equal, undivided interests to his five children as tenants-in-common, reserving “full use and control” of the property throughout his life. The IRS disallowed the discounts, claiming that due to the retained life interest, Sec. 2036(a)(1) of the Tax Code included the full fair market value of the property in the estate. The Tax Court began by noting that when a person dies holding a fractional interest in property, discounts are often appropriate to reflect its lack of control and marketability. But their application depends on when the interests were separated. If the split occurs prior to death, then discounts might be appropriate. Control is also key: In this case, the father used the ranch for 30 years and paid all its expenses. “It was as if he retained the entire interest in the land during his life,” the court held, finding that ownership was divided after the father’s death and the property was taxable at full value. Read the complete digest of Estate of Adler v. Commissioner, T.C. Memo. 2-11-28 (Jan. 31, 2010) in the April 2011 Business Valuation Update; the Tax Court’s decision will be posted soon at BVLaw. Are discounts ever free from doubt? If one of the children passes away now, a fractional interest valuation would likely be appropriate, blogs tax attorney Charles Rubin (Feb. 7, 2011). In that case, “wouldn't the discount tend be a lot less than if a partnership was used, particularly if there is a right of partition?” asks one commentator. “That's probably the case,” Rubin replies. “However, you may avoid some of the issues that can be troublesome to partnership discounts.” Join the discussion or send your comments to the BVR editor for posting here. Skipping the business valuation in divorce—and other avoidable problems—highlight the AICPA’s new family law conference Operating agreements key in surgery center valuations In the recent Becker’s ASC Review Jason L. Ruchaber (HealthCare Appraisers) reports “there are five aspects of ambulatory surgery center operating agreements which can have significant negative implications on value:”
Read Ruchaber’s article “5 Valuation Pitfalls in Surgery Center Operating Agreements” for more information on each of the five aspects. For more information on valuing an ambulatory surgery center (ASC), attend BVR’s webinar Ambulatory Surgery Centers: Current Valuations, Benchmarking, & Forecasting on Tuesday, March 22nd. Todd Sorensen, Elliott Jeter and Kevin McDonough (VMG Health) will provide an in-depth look at the valuation challenges inherent in ASCs. Multiple valuation methods are more important than ever for early stage IP engagements At AUTM, Ken Levin, from the Department of Veterans Affairs, moderated a discussion on valuation and what industry thinks of the valuations Technology Transfer Officers put on their IP properties. His advise to these IP managers should be regarded seriously by any appraiser doing IP valuations work. Mr. Levin would have done Socrates proud, leading a lively, interactive session, full of noteworthy valuation factors, admissions and omissions, shining a light on the purpose and importance of valuation PRIOR TO negotiations for commercialization. The discussion focused on best practices, and one practice that was generally agreed upon is to look at as many comps as possible. Use comps to set the bounds of the negotiation discussions. In a sense, they provide a way to “argue back.” The discussion naturally turned to sources, with general agreement that the best source is your own files. The second best source is the SEC, the only database in the world that has mandatory submissions of the full text of license agreements, many times with non-redacted royalty rate data. What you are looking for is similar licenses of similar technologies in a similar time frame. They are not easy to find, and you have to stretch the definition of comps once in awhile. One attendee suggested their organization uses the term “analogies” instead of comps. This topic is of primary importance to the AUTM audience, evidenced by the steady flow of traffic at the Technology Transfer Tactics booth, which offered several books with contracts and royalty rates, and at the BVR booth, which featured the ktMine database of 8,000 licenses with non-redacted royalty rate data. One panelist stated matter-of-factly the reason why: NOT having comps when entering negotiations is setting yourself up for failure, as industry (on the other side of the table) is looking for them. This Wednesday, March 9th, BVR presents Finding & Analyzing Royalty Rates. In this webinar, expert David Jarczyk provides an in-depth examination of key strategies for locating and breaking down intangibles licensing information for use in business valuation studies, such as purchase price allocations, capitalized value determinations for after-tax royalties using the relief from royalty method, and goodwill impairment analyses under SFAS 141r/SFAS 142. Jarczyk will also turn the spotlight on the intricacies of license agreement construction, with a special emphasis on identifying terms that impact valuation such as upfront payments, milestone payments or mandatory payments. CPE credit is available. Don’t forget free resources from BVR These were the most popular downloads from the Free Resources section at www.bvresources.com last month:
Fair Value has more than one definition in shareholder oppression cases Hat tip to Rick Warner (Edward G. Detwiler & Associates) for reviewing the article “Equitable Considerations in Dissent Appraisal and Oppression Valuation Proceedings Regarding Fair Value” by Michael Zdeb (Holland & Knight LLP). In this part one of a two-part article, Zdeb discusses “the relationship of the fair value legal concept used in appraisal actions and the valuation standards of various professional associations employed in providing expert testimony and reports.” “For those of you who are tasked to determine fair value in shareholder dissent or oppression cases, it’s a good article to add to the library,” Warner writes in a recent issue of the ASA E-Letter. For $20, you can hear from top ASA experts on the current international standards convergence timeline The ASA has lined up the following all-star list to review the current impact of the IASB and other convergence efforts:
Topics under consideration during this 90 minute webinar on March 16 include:
Bullish global M&A activity forecast for the next two years Merrill Datasite just published The Future of M&A, based on a survey of global M&A professionals. The report covers three areas of M&A: valuations, regulatory changes and economic conditions. Over 90% of survey respondents forecast “bullish” expectations for the next year. Many respondents agree that there are “loads of cash on the sidelines and both financial buyers and strategic buyers will use it to propel the market forward.” Valuing an Internet-based company? Learn from an expert While there is no denying the continued growth of online commerce many appraisers are at a loss when it comes to valuing a business whose assets are so intangible that even its retail space doesn’t physically exist. On March 17 expert appraiser Mike Pellegrino (Pellegrino & Associates) will cover what everyone should know when appraising one of these businesses in “Valuing Internet-Based Companies,” the latest installment in BVR’s Industry Spotlight Series. Join Pellegrino as he explains how subtle differences in assets, operations, and marketplace can throw any valuation off the rails. To find out more or to register, click here.
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