Half of corporate executives admit gap between vision and value
A new study suggests that nearly 50% of business leaders (vice presidents, directors, and above) perceive a gap between their company’s strategy and its execution. Although these executives may have a clear vision for their companies and are 100% committed to pursuing them—the means to fulfill these value-enhancing strategies may still be a “murky mystery,” says surveyor Richard Lepsinger (OnPoint Consulting). Worse, even if the leaders know what they want, 64% of survey respondents “don’t have full confidence that their companies will be able to close the gap.” To read the full study, click here.
Can BV help close the corporate strategy gap—while driving its own profits?
How can business valuators help close the gap? “Successful strategy is about being different from competitors,” says Warren Miller, ASA, CPA, CMA (Beckmill Research). “As the Japanese have learned the hard way, imitation is not the way to prosperity. Innovation is.”
In Beckmill’s experience, says Miller, “The disconnect between strategy and execution results from managers (and consultants) who fail to align their choices of Strategy with the People, Architecture, Routines and Culture in their organizations. Think of asking a symphony orchestra to play hip-hop.”
Beckmill aligned these elements within their newly-developed SPARC framework, which aims to help companies increase value and lengthen the durability of competitive advantages. This positioning also allows the valuator to realize profitable "add on" consulting opportunities. For more on the “analyst-as-strategist” role, be sure to tune into BVR’s next telephone conference, “Joined at the Hip: Combining Valuation and Strategy to Enhance Value for Clients,” on September 20, 2006, featuring Miller and Thomas Box (Pittsburgh State University).
Controversial Jelke case currently on appeal
A “poor decision” for taxpayers is now on appeal in the 11th Circuit. In the 2005 case of Estate of Jelke v. Commissioner, the Tax Court considered three discounts in the valuation of a C Corp’s stock portfolio—for trapped-in capital gains, lack of marketability, and lack of control.
The estate provided expertise by William Frazier, ASA (HFBE, Houston), who testified to a dollar-for-dollar discount for the embedded tax liability in an asset approach—as is the general consensus among appraisers. “Unfortunately, Judge Gerber went entirely with the IRS expert,” Shannon Pratt wrote in the October 2005 BVU. “I believe the taxpayer was ill-served by the decision.” For a copy of Dr. Pratt’s original editorial, click here.
The 11th Circuit has already heard legal arguments, and will issue a holding soon. The big question: Will it follow the 5th Circuit precedent of Dunn (Estate of Dunn v. Commissioner, 2002), which found a dollar-for-dollar reduction for built-in capital gains—for which both Frazier and Pratt served as estate experts? “If Jelke had been decided in the 5th Circuit, it would have been a slam dunk,” Frazier tells the BVWire. Instead, the lower court all but “ignored” Dunn—and the BV community may be faced with a jurisdictional split if the 11th Circuit declines to reverse. Stay tuned…
Pratt’s Stats™ breaks the 9,000 transaction mark
What does the number 9,000 mean to you? Perhaps you think of Hal 9000, along with images of artificial intelligence and artistic odysseys; or perhaps ISO 9000 comes to mind, bringing thoughts of quality management and organization standards. Now, hopefully, the number 9,000 will trigger a new association: namely the 9,000 privately-held, information-packed business transactions which currently form the database for Pratt’s Stats™, the premier source of guideline company, guideline transaction, comparable sales, business comparable and/or market data. To learn more, click here.
Two easy questions to help select a public peer group
When it comes to identifying a peer group of public companies to use in the guideline company method, most analysts rely on data-searches by SIC (Standard Industrial Classification) or NAICS (North American Industrial Classification System) codes. The latter—which encompasses Mexican and Canadian along with U.S. data—has over 1,100 different codes, compared to the 800+ in the SIC. “The NAICS codes have a broader coverage and industries that didn’t even exist the last time the SIC was updated in 1987,” says Tim Lee, ASA, a Senior Vice President with Mercer Capital (www.mercercapital.com).
But perhaps the search is even easier. “You know, it’s funny—and it took me a few years before I realized, with the guidance of some older folks around here, that the first thing you do is ask the management team of the subject company what they do,” Lee says. “The second thing you do is ask them if they in fact peer themselves to a public company. And voila—you may have the basis for beginning your guideline company search.” Lee’s comments—along with those by Shannon Pratt and Alina Niculita, CFA (Shannon Pratt Valuations) are from BVR’s most recent telephone conference, Adjusting Multiples from Guideline Public Companies, transcripts and /or CD recordings available here.
BV/FLS are now leading niche markets in accounting profession
Business Valuation (BV) and Forensic & Litigation Services (FLS) are now the fastest growing practices among CPAs, according to this month’s survey by the AICPA’s Journal of Accountancy (JOFA), which devotes a special section to the emerging power of business as well as financial valuation. Long-time business appraisers and analysts may take exception with JOFA’s characterization of the profession as “an area of accounting,” but most will appreciate its confirmation of BV as a market leader, and a “complex” practice with an “acute” need for specialized training.
IRS proposes solution to ‘expense vs. capitalization’ debate
Currently, a company must capitalize the costs of property improvements—but it can deduct the costs of repairs, thus creating an ambiguity that has sparked many a company’s debate with the IRS. (Is a new factory roof a capital improvement or repair?) To clarify the question, the IRS has recently proposed new rules regarding a “repair allowance,” which would permit companies to multiply total maintenance by a prescribed percentage (based on the overall maintenance budget), resulting in an immediate deduction against income. Another proposed clarification: The 12-month rule, which would permit the deduction of any tangible asset with a useful life of 12 months or fewer. According to its recent announcement, the IRS is currently accepting comments on the proposed regulations.
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