Have the last six months changed the business valuation profession?  

So much has been written about the general economy, and thanks to the new appraiser survey conducted by Robert Slee and John Paglia, as part of the Pepperdine Private Capital Markets Project, BVWire is happy to offer the following snapshot of some key factors.   Compared to six months ago, Slee and Paglia find that the appraiser market has generally grown, and that valuation approaches have stayed essentially stable.  You still have time to participate; the Private Capital Survey ends this Friday.  (Note:  BVR surveys the BV profession every two years in its Business Valuation Firm Economics & Best Practices Survey.  The next 2011 edition will be available early this fall.)


About same


Number of engagements




Time to complete a typical appraisal




Fees for services




Time to receive payment for services




Size of your BV department




Cost of capital




Market (equity) risk premiums




Control premiums




Minority discounts








Company specific risk premiums




Reliance on income approach




Reliance on market approach




Reliance on asset approach




And, after all this turmoil, what ERP and size premia are
you using? 

Paglia and Slee also asked appraisers what equity risk premia, size premia, company specific risk factors, and risk-free rates they are now using.   Again, after all the commentary on how to handle recent volatility (much of it reported by BVWire), here are the averages (note:--these are mean, not median, averages).

Market (Equity) Risk Premium


Size premium for private company with $250M in revenues


Size premium for private company with $25M in revenues


Size premium for private company with $1M in revenues


Average company specific risk premium for private company with $250M in revenues


Average company specific risk premium for private company with $25M in revenues


Average company specific risk premium for private company with $1M in revenues


Industry risk premium for typical manufacturing company


Industry risk premium for typical service company


Risk-free rate


Business appraisers should watch the growing “secondary market for private securities” for opportunities

“The public capital markets are broken,” Adam Oliveri, Managing Director for SecondMarket, told commercial lawyers at the ABA Business Law Sections annual meeting in Denver last weekend.  SecondMarket is one of the new centralized sales platforms for illiquid assets.

Here are some indicators of what’s wrong with the capital markets now:

  • The number of public companies listed on major U.S. exchanges has fallen from over 8,000 at the turn of last century to below 6,000 today.
  • Average annual IPOs have plummeted from 540 before the tech bubble burst, to 200 IPOs earlier this decade; the Valuation Advisors Lack of Marketability Discount Study counts only 36 in 2009.
  • “Time-to-exit is a joke,” Oliveri says. Angel investors’ capital is locked up; VC funds can’t sustain historical returns; ex-employees still hold shares in their former companies; and current employees (such as Facebook founders) have sacrificed salary for an IPO that statistics suggest may be a very long time away for the vast majority of them.

Enter SecondMarket and similar private exchanges such as sharespost (called the “Craig’s List” for PE assets) and Portal Alliance (trading in Rule 144 restricted securities). “Capital, resources, and people have been pouring into this space,” Oliveri says, permitting partial exits or “private IPOs” to take place. After its 2009 launch of the Private Company Market, for example, SecondMarket facilitated 100 transactions for $250 million of private stock; current listings of private company stock for sale now top $200 million.

So many questions, so many risks. Who are the buyers and sellers? What financial information/due diligence/research do they rely on? What SEC exemptions apply? Do private sales take place at discounted values (for lack of marketability); or are they enhanced by a “posturing” premium for access to private stock (such as Facebook) the buyer wouldn’t otherwise have? Bo Brustkern, Managing Director of Arcstone Partners, told ABA attendees of a recent “live” case that posed a substantial valuation problem: The CEO of a private company, whose common stock was recently valued at $0.30 per share for 409A purposes, was leaving the company — and said he would sell his 3,000,000 shares on a private exchange for $2.00 per. “How does a second market sale of private shares affect 409A values going forward?” Brustkern asked. Look for all answer and more comments from Brustkern, et al., in the next (June 2010) Business Valuation Update™.


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Litigation ‘crisis’ leads to more business courts—here
and abroad

“I’m always amazed by how few lawyers know that there are now business courts specifically designed to handle complex litigation,” the Honorable Ben Tennille (North Carolina) told a roomful of lawyers at last weeks’ spring meeting of the ABA Business Law Section in Denver, Colorado. As Chief Special Superior Court Judge for Complex Business Cases, Tennille has witnessed the nationwide and now global trend. A Google Alert for “business courts” brings him news every day, he says—the latest was from Ghana. China, Pakistan, Morocco, and other countries have already established business courts.

Closer to home, the current economic crisis has stalled some states’ efforts to set up a special forum for complex business litigation: Colorado, Mississippi, and West Virginia have received approval but no funding. However, business courts are already up and running in AZ, AL, CT, IL, DE (the long-standing Delaware Chancery Court), FL, GA, MA, ME (a business and consumer court), MD (business and technology), MS, NC, NH, NV, NY, OH, OR, PA, RI, and SC.

What’s sparking the trend? “There’s a view in this country that we have a crisis in civil litigation,” Tennille said. The Final Report by the American College of Trial Lawyers and the Institute for the Advancement of the American Legal System (2009) recognized the severity of the crisis and recommended changes, including early management of e-evidence, early mediation, early trial dates, and early and active judicial supervision. “That is exactly the way every business court is run, to increase efficiencies and lower costs,” Tennille says. They are “test labs” for experimental application of technology and procedure. Change is coming, and it will be “dramatic and hard,” Tennille promises. It will require new attitudes by attorneys, financial experts, and their clients. Case in point: Tennille decided Vernon v. Cuomo, an IP case recently reported by BVWire™. Not only did the judge “persuade” the parties to stipulate to a court-appointed expert (Mike Pellegrino), but he ultimately fashioned a sophisticated remedy—a fair value/royalty share arrangement—based on Pellegrino’s values.

Join the experts in New York 

What do Robert Cimasi, Jim Hitchner, Espen Robak, Peter Mahler, the Hon. Ira Warshawsky and the Hon. Jacqueline Silbermann have in common?  They are all presenting at the FAE/BVR Business Valuation Conference on May 17th in New York City. Hear these experts speak on business valuation and litigation support topics and earn 8 hours CPE.

And, the Empire Chapter of the ASA also has their annual conference May 7.   Contact Annie Bell at 212-714-0122 for information.  It’s a good month for CPE in the tri-state region.

BizMiner adds 7 year industry financial reports

Many appraisers and analysts, are discovering that they can’t capture the current full business cycle with the standard 3- and 5-year financial history reports available from RMA and other providers. Recognizing this, BizMiner (which offers industry data on 16,000 lines of business in 300 U.S. markets) now offers a choice of 3-, 5-. or 7-year Industry Financial reports.  The 7-year reports follow industry financials back to 2002—more than long enough to capture the ups and downs we’ve all seen.

CPE opportunity: control premiums webinar tomorrow

Andrew Fargason, a member of the Appraisal Foundation’s Working Group, Brad Pursel and Mark Edwards will examine current and emerging issues in “Control Premiums: Applications and Analysis,” a BVR teleconference tomorrow (Thursday, April 29). To find more information or to register, click here.  

Current securities claims winding down, losing value

As many predicted, a wave of securities litigation followed the credit market crash: In 2009, 7,137 claims were filed with FINRA, a 43% increase compared with 2008 (4,982 cases filed). Most of the disputes asserted breaches of fiduciary duty, misrepresentation/fraud, negligence, and breach of contract related to common stock and mutual funds. However, cases concerning limited partnerships interests showed a notable spike: 73 filings in 2009 compared to only 33, 19, and 21 in the respective prior years. Derivative and auction rate securities (which have only been tracked since 2008) were also featured in a substantial number of filings.

After the wave, there now appears to be a “winding down” of securities litigation, according to Michele Rose, a partner with Latham & Watkins LLP (D.C.), who spoke at the ABA Business Law Section’s spring meeting in Denver. The latest FINRA statistics show only 1,483 new cases filed through March 2010, a 14% decrease from the same period last year. Interestingly, while the percentage of cases settled has remained fairly stable, the value of the settlements decreased over the past year by 20%. “This could be the result of better lawyering,” Rose wryly observed, or it could be due to the economy.

Even at their peak in 2009, FINRA securities filings never reached the all-time highs of 2002 – 2005, following the collapse of the technology industry. “The [current] market crash did not focus on one particular sector or product—it was deep and wide,” explained John Kincade (Winstead PC, Dallas), who also spoke at the ABA meeting. Kincade believes cases concerning limited partnerships—hedge funds, brokerage firms, etc.—will see a comparative rise, especially in the energy arena. On average, 40% of all cases that go to final hearing will render an award on behalf of the claimant, a fairly consistent statistic that will keep securities lawyers and their financial experts busy.



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