March 20, 2013 | Issue #126-3  

BV surrenders top spot for fastest growing niche services, but not by much

Business valuation lost its No. 1 ranking of fastest-growing niche services in the latest study of the top 100 firms by Accounting Today (free registration required). Tax services in the international and state/local tax fields, respectively, took over the top two spots, forcing BV—which slipped only one percentage point from last year’s rankings—to the No. 3 spot, followed by attest services, forensic accounting and fraud, estate and gift planning, and litigation support. Notably, the year’s “biggest climber” was cash flow forecasting and management services—another niche in which BV appraisers have top-notch skills—which moved up eight spots from the 2011 tally.

A heightened regulatory environment—both in the transfer pricing arena and on the state/local front—may explain the eclipse of BV by the two tax practice niches. Regulation is also driving the continued strength of BV, according to one Denver-based professional whose firm recorded a 39% increase in BV revenue growth from 2011 to 2012. “The other piece … is that valuations related to litigation—corporate divorce, marital divorce—always seem to be hanging around,” he tells Accounting Today. “There’s an uptick in the corporate divorce arena,” particularly due to “shareholders parting ways and valuations related to buy-sell agreements.”

Last chance to participate in the only BV-specific firm economics survey

To see just how growth and change is accelerating in the business valuation profession, take this quick quiz, drawn from the early responses to BVR’s ongoing Firm Economics Survey:

  • What percentage of the responding firms have been providing business appraisal services for fewer than 10 years?

  • 11% of the firms participating so far are based outside of North America ... but what non-North American country has registered the most responses? 

  • The most common certification among appraisers currently registered for the survey is the CPA ... but what's second?

  • What level of analyst staff are firms hiring most frequently in 2013?

Answers: 37%, Brazil, ASA, junior analysts with little client contact.

For the answers to all your questions regarding BV firm performance, compensation, billing rates, marketing and practice development, practice acquisitions, and partner defections—and more—you’ll first want to first participate in BVR's 2013 Business Valuation Firm Economics & Best Practices Survey, which then saves you $250 off the post-publication price. Hundreds of your BV colleagues have already registered and responded, and you can do the same all at once or in phases, saving your answers if interrupted and returning at your convenience to finish. But hurry: the deadline for participating in the most complete, comprehensive BV-specific survey is April 1, 2013. Get started by clicking here now.

Valuation and Common Sense: a new—and free—book by the next Damodaran of España

  • “Cash Flow Is a Fact; Net Income Is an Opinion”
  • “Ten Badly Explained Topics in Most Corporate Finance Books”
  • “Are Calculated Betas Worth Anything?”
  • “Beta = 1 Does a Better Job Than Calculated Betas”
  • “Optimal Capital Structure: Problems With the Harvard and Damodaran Approaches”
  • “Market Risk Premium Used in 82 Countries in 2012: A Survey With 7,192 Answers”

These are just a few of the 25 chapters in Valuation and Common Sense, a new book by Pablo Fernandez, a finance professor at the University of Navarra, IESE School of Business (Madrid). Prof. Fernandez—a respected BV authority who speaks frequently at professional conferences in the U.S.—has just made his entire book available online, including the table of contents, which, in turn, provides links to the download for each chapter.

In “119 Common Errors in Company Valuations,” for instance, the author identifies three broad categories of valuation errors that occur when calculating: (1) the discount rate and company risk; (2) expected cash flows; and (3) residual value. He also discusses the conceptual, interpretative, and organizational errors common to public company valuations. “The author had access to most of the valuations referred to in this paper in his capacity as a consultant in company acquisitions, sales, mergers, and arbitrage processes,” Fernandez writes, and his new book takes a decidedly public company slant—but his generosity in making his book available to the international academic and BV community is decidedly “Damodaran-esque.”

New, long-term study of PE valuations may confirm regulators’ worst fears

A new paper by Oxford professors, “How Fair Are the Valuations of Private Equity Firms?”, presents the first long-term analysis of private equity funds to determine the extent to which interim valuations differ during the life of the fund—particularly when the PE firms are in the midst of raising a follow-up round of investment. By examining the quarterly valuations and cash flows for the entire history of 761 fund investments made by CalPERS (the largest U.S. investor in private equity), the Oxford authors came to three main conclusions:

  • First, valuations are largely conservative over the entire life of the fund, with interim valuations understating subsequent distributions by an average of 35% but tending to rise in fourth-quarter reports (when funds are normally audited);
  • Second, the exception to this general conservatism is when the fund managers are trying to raise another round of funds. During this marketing phase, valuations and reported returns are “inflated,” with a gradual reversal once the firm has closed its next round of funding; and
  • Third, the “inflated” fundraising values have little power to predict ultimate returns, particularly when performance is measured by IRR.

The authors’ findings—which they reached by performing a regression analysis of 330 funds in the midst of raising new investment—are “clearly relevant to recent regulatory concerns about conflicts of interest facing private equity fund managers,” they say. “It is hard to rationalize the pattern we observe except as a positive bias in valuation during fundraising.” Although using public market equivalent measures increases the predictability of fund performance significantly, “the results show that investors should be extremely wary of basing investment decisions on the returns—especially IRRs—of the current fund.”

A growing niche for valuation analysts? “Subjectivity in private company valuations will always exist, especially when market forces change as rapidly as they often do for private equity portfolio companies,” comments Professor John Paglia (Pepperdine). “However, consistent overvaluations of current portfolio companies when raising new funds can lead to economic imbalances through misallocations of capital. If business appraisers position themselves properly, they can increase their numbers of engagements [in the PE arena] and contribute to solving the overvaluation problem.”

When is the cost approach acceptable for computing the value of a lost business?

After an explosion destroyed a waste treatment facility for an oil refinery, the plaintiff insurance company paid the owners $6.1 million and then sued the defendants for causing the damages. The defendants admitted liability; the only issue was the fair market value of the plant just before the explosion, using the applicable “willing buyer, willing seller” standard.

At the same time, the business was composed of a specialized, integrated, and patented set of systems for which no market exists; each facility had proprietary component parts that were not regularly bought or sold as new, only used. Under these circumstances, the plaintiff’s expert used the cost approach. He spoke with former employees to determine that the facility had depreciated by 35%, yielding a remaining useful life of 65%. He also relied on the plaintiff’s industry consultant to apply a multiplier of 2.5 to replacement costs to account for reconstruction and reinstallation, and ultimately calculated $6.1 million in damages—or precisely the amount the plaintiffs had already paid out for lost value.

By contrast, the defendants’ expert simply summed up the value of used component parts to assess damages at $878,000, without any multiplier. The trial court roughly split the difference, awarding $3.8 million, and the defendants appealed, challenging the plaintiff’s cost approach as well as the multiplier. Although both were highly “disfavored,” the U.S. Court of Appeals for the 5th Circuit said that when no market exists to determine lost value—and when credible expert testimony supports the cost approach and its inputs, including depreciation—the $3.8 million award for replacement damages was appropriate. Read the complete digest of Factory Mutual Insurance Co. v. Alon USA, 2013 U.S. App. LEXIS 1481 (Jan. 23, 2013) in the May Business Valuation Update; the court’s decision will be posted soon at BVLaw.

Best practices for calculating business losses. On April 2, join Neil Beaton (Alvarez & Marsal) and Tyler Farmer (Calfo Harrigan Leyh & Eakes) as BVR’s Online Symposium on Economic Damages continues with Lost Profits vs. Lost Business, a complete discussion of when each damages theory is appropriate (are they always mutually exclusive?) and the best methods to support each to the requisite degree of certainty.

BVR expands its expertise into licensing
deals and data

Business Valuation Resources has just acquired EPM Communications Inc., publisher of The Licensing Letter and other newsletters, reports, and studies that cover the current $147 billion market for licensed trademarks and brands related to entertainment, sports, fashion, toys, art, and more.

“BVR’s expertise is valuations,” says CEO David Foster in a release. “When you get down to it, that’s a significant part of what EPM does for the licensing community with its retail sales data, contact databases, royalty rates, and deal listings. Meanwhile, EPM’s consumer research provides context for the deal-makers we all serve.”

“This is a win-win combination,” adds BVR President Lucretia Lyons, in which both BVR and EPM will bring new perspective and creativity to serve the increasingly sophisticated information needs of their respective clients.

Clarification: IRS couldn’t agree on consistent approach to tax affecting

Last week’s item on the IRS indicated that one of its managing groups developed a “single approach” to tax affecting. “I believe that is misleading,” writes Michael Gregory, the former IRS territory manager whom we quoted in the piece.

“I want to clarify that the IRS Engineering function (where the business appraisers are located) developed a consistent approach on how to approach S-Corp tax affecting issues,” Gregory says. That group developed a “reasonableness” approach, depending on the particular facts of the case, after considering “a host of issues for applying specific methods.” But this approach “was not adopted across the IRS uniformly,” Gregory says, and “there are those in the IRS that view the issue as a legal issue rather than factual,” which they believe—based on existing Tax Court precedent—would foreclose tax affecting in any case.

FASB releases printed guide to codification project

FAS 157 by any other name would be … FASB ASC Topic 820, but for those who still need guidance for all the standards in the FASB’s codification project, the Financial Accounting Foundation (FAF) has just released a new print edition of the Board’s Accounting Standards Codification®, “the single, authoritative source of U.S. Generally Accepted Accounting Principles (U.S. GAAP) for public and private companies, and not-for-profit organizations,” according to the accompanying release.

Auditors and valuation analysts and can use the new, four-volume bound edition of the Accounting Standards Codification® as a reference tool in conjunction with its continually updated, online version, available at

IFRS admits FASB to new international forum

Yesterday the trustees of the IFRS Foundation announced that the FASB would be among the inaugural members to the Accounting Standards Advisory Forum (ASAF), the new group that will advise the International Accounting Standards Board on the development of International Financial Reporting Standards. The IASB will chair the new advisory body, which will consist of various members of the global accounting standard-setting community, who will serve at least two years, according to an IFRS release.

The FASB appointment comes despite the SEC’s failure to approve the use of IFRS by U.S. public companies and after decade-long convergence efforts between the FASB and IASB that have still not succeeded in harmonizing IFRS with U.S. GAAP.

March CPE madness begins

Don’t miss these two championship webinars this month:

  • On March 21, tune in for Valuing Brands, when Mike Pellegrino (Pellegrino & Associates) and Ira Mayer (EPM Communications) examine how to assess and quantify what can be a firm’s most valuable asset: its identity and impact in the consumer marketplace.


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