New to this edition: In addition to revisions to existing material and examples, there’s a new chapter on valuing stock options, preferred stock, debt, and startup ventures. There’s also a new discussion of economic obsolescence, “an issue that arises regularly but is not necessarily addressed by the valuation analyst,” writes Trugman in the September 2016 issue of Business Valuation Update.
When you purchase the book, you will get access to a special webpage that contains an index of all articles from Business Valuation Update, an index of all cases in BVLaw, among other features.
The estimation of a discount for lack of marketability (DLOM) is under increased scrutiny by users of valuation reports, the IRS, and others. Many valuation experts use restricted stock studies when developing a DLOM. However, certain characteristics of the issuer of the restricted stock can impact the discounts in the studies. A new model, the Restricted Stock Study Quintile Calculator (RSQC), is designed to adjust for those characteristics in order to develop a relevant sample for the subject company. The model is included in the VPS DLOM Guide and Toolkit by Jim Hitchner, Jim Alerding, Josh Angell, and Kate Morris.
How it works: The RSQC model permits estimation of a DLOM for a subject company by adjusting restricted stock discount data for differences in volatility, holding period, dividends, and other factors. The source of the restricted stock discount data is the Stout (FMV) Restricted Stock Study. The model matches the subject company to a quintile of restricted stocks from the study using criteria such as market value, revenues, profitability, etc. The median DLOM of the selected quintile from the RSQC, the restricted stock study equivalent discount (RSED), serves as a baseline estimate of the subject company’s DLOM. The RSED provides a preliminary estimate of the DLOM for the subject company given its illiquidity, volatility, holding period, dividends, and other criteria. The RSED may be further adjusted for differences between the subject company and the selected quintile for certain criteria using a regression analysis of the Stout (FMV) database, option pricing models, and/or a Mandelbaum factor analysis.
An article in the November 2017 issue of Business Valuation Updateillustrates a restricted stock study quintile analysis based on a hypothetical case study (a 20% noncontrolling ownership interest in a non-dividend-paying company).
In an interview with the AICPA, Gary Roland (a managing director at Duff & Phelps) discussed the development of the new Certified in Entity and Intangible Valuations (CEIV) credential and the impact the new Mandatory Performance Framework will have on fair value measurements. One question he was asked was whether the CEIV credential will address anything that wasn’t addressed previously in performing valuations. “The thing that jumps out at me the most is the increased focus on prospective financial information and the added depth of analysis and assessment of projections,” says Roland. “The CEIV credential puts greater emphasis on professional skepticism and will, generally, benefit valuations. I think the level of diligence existed before, but with more emphasis, there will be a more systematic framework applied.” Roland was the first recipient of the CEIV credential from the AICPA. He has been a valuation professional for more than 25 years.
At the recent ASA Advanced Business Valuation Conference in Houston, Andrew Fargason (Stout Risius Ross), a member of The Appraisal Foundation’s third working group that is developing best practices for control premiums, told the audience that the final document will be published before the end of this year. It will be VFR Valuation Advisory #3, dealing with the measurement and application of market participant acquisition premiums (MPAP) in the context of fair value for financial reporting. It does not address premiums in other contexts, such as tax or disputes. The fundamental perspective of the working group is that a premium for control is not always warranted. Also, the group recognizes an ongoing need for benchmark data, but they should not be used as the sole input for the estimation of a premium. Auditors (who follow TAF advisories) will scrutinize comparables much more closely in the future.
The previous two Valuation for Financial Reporting (VFR) advisories are:
In a new blog post, Professor Aswath Damodaran (New York University Stern School of Business) applies a process he uses to value a user at Uber to value a member of Amazon Prime. He also extends the analysis to the collective value of the company. He points out that he is a Prime member who is getting far more value from it than the $99 annual fee he pays, which leads to an interesting question. “If many of the 85 million other Prime members in October 2017 are getting the same bargain that we are, is this not an indication that Amazon has not just underpriced Prime, but is perhaps selling it below cost? As someone who has wrestled with valuing Amazon over the last 20 years, I have learned never to underestimate the company.”
EY has published a revised “Guide to Fair Value Measurement” designed to assist in interpreting ASC 820’s principles-based framework. It includes excerpts from, and references to, the FASB’s Accounting Standards Codification, interpretive guidance and examples, and industry-specific considerations.
Traditional telecommunications business enterprise values and their related intangible assets are in the midst of a major upheaval with rapidly changing technologies, customer preferences, and proposed regulations, according to Tom Mannion (BDO Consulting) in a blog post. “It is clear that IP assets are critical to the value of telecoms businesses, whether it is around patents (technology), broadcasting rights or Spectrum to provide mobile services,” he writes. “Any valuation of IP in a telecoms business will therefore need to take account of both the opportunities for (new) businesses as well as be cognizant of the risks inherent in quickly changing markets and customer preferences.” Mannion is a managing director with BDO Consulting’s valuation and business analytics practice.
When doing an industry analysis for a valuation report, you should consider not only current competition, but also potential competition—especially from the big players. Sometimes, the big firms sit back and wait while a smaller firm tests the waters with a new product or service. Later, if it looks promising, they jump in with deep pockets, which could have a devastating impact on the pioneers. For example, meal-kit provider Blue Apron has lost nearly half its value since it went public this past June, according to a report from the Associated Press. “Blue Apron has been facing increasing competition. Amazon, which recently bought grocer Whole Foods, is testing its own meal kits. And supermarket operator Albertsons recently bought rival Plated and plans to sell kits at its 2,300 stores.”
The Korean Accounting Standards Board has released the results of a Post-Implementation Review Project on K-IFRS 1113 Fair Value Measurement, the Korean translation of IFRS 13. The project reveals that the problems and difficulties in applying the standard include: a lack of relevant guidelines for valuation, significant differences in disclosures among firms, lack of skilled valuation professionals and related training materials, and conflicts of the standards and existing laws and regulations in Korea for valuation of tangible assets, subsidiaries, and associates.
Among the conclusions reached are:
More attention and effort are needed from the regulatory body to increase the usefulness of fair value information, such as the provision of qualifications for valuation experts;
Appraisal firms, valuation institutes, and others need to form practical working-level meetings on K-IFRS fair value assessment to narrow the gap between what is required in the standard and existing laws and regulations; and
In the long term, it is necessary to constantly improve the level of relevant infrastructure, such as fostering of valuation experts, accumulation of data, better capital market system, and higher ethical standards to increase the usefulness of fair value information.
People:Richmond, Va.-based Cherry Bekaert LLP has named Michelle L. Thompson as the firm’s managing partner and CEO, succeeding Howard Kies, who will retire; she is one of three women now helming one of the 25 largest accounting firms (others are Cathy Engelbert at Deloitte and Lynne Doughtie at KPMG) … Ana Maria Elorrieta, former partner at PwC in Brazil, has been appointed to the Board of Trustees of the International Valuation Standards Council (IVSC), the global standard setter for valuation practice and the valuation profession … Patrick McFarlen has joined EKS&H Capital Advisors LLC as a director; he was most recently with EKS&H LLLP … AAFCPAs co-managing partner Carla McCall was selected for the “Forty Women over 40 to Watch” list in recognition for her helping and promoting women’s career advancement; by the way, the firm is growing: It recently relocated its headquarters to larger space in Westborough, Mass. … Troy P. Segar has joined the upstate New York firm of DiMarco, Abiusi & Pascarella, CPAs PC as a principal.
Firms: Duff & Phelps has set up a new division in Italy devoted to business valuation to be headed by managing director Enrico Rovere, formerly with PwC, FCA Group, and Pirola Pennuto Zei & Associati …As part of its November 1 merger with Rea & Associates,Walthall CPAs will relocate two of its offices to current Rea locations; the merger will create a team of more than 300 professionals in 13 offices across Ohio … Happy 25th anniversary to Columbia Financial Advisors Inc. of Portland, Ore.; it provides business valuation, financial advisory services, and litigation support … GreerWalker Wealth Management (Charlotte, N.C.), which recently opened a new office in Greenville, S.C., celebrates its 20th anniversary … Vault.com named BDO USA LLP one of the 50 Best Internships for 2018 … Bowman & Co. LLP and The James Co., accounting firms based in Stockton, Calif., will merge as of November 1 … JCCS, a regional accounting firm in Montana, has acquired Lopach & Carparelli, a firm in Helena.
Heidi Gardner is a former McKinsey consultant and Harvard Business School professor who is now a fellow at Harvard Law School. After a decade of study, she finds conclusive proof that collaboration pays—for both employees and their firms—and technology plays a key role.
A recently issued document, “Application of the Mandatory Performance Framework (MPF),” provides suggested guidance for valuation professionals regarding the evaluation and use of PFI. This webinar will address key aspects of the new guidance that impact PFI.
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