BVWire Issue #187-3 | April 18, 2018


Private firms lowball their cost of equity

Surprisingly, over half (54%) of privately held business owners believe their cost of equity is less than or equal to 12%, according to the “2018 Private Capital Markets Report” from Pepperdine University Graziadio School of Business and Management. Approximately 19% of respondents indicated their business cost of equity capital is in the range of 9% to 10%, the range most cited.

The findings of the survey represent “a significant misunderstanding by many business owners of their cost of equity,” the report says. The survey involves asking private capital market players what returns they project. The players are bank lenders, asset-based lenders, mezzanine lenders, private equity groups, venture capital, and angel investors. We note that the majority of private firms that responded had 20 employees or fewer, with 50% having no more than five employees. Also, over half of them had annual revenues less than $1 million.

For more information: Dr. Craig Everett, who runs the Pepperdine project, will give a presentation at the ASA/USC 12th Annual Fair Value Conference in Los Angeles on May 10. Also, check out an article, “Looking to Private Markets for Private Firm Cost of Capital” (purchase or subscription required), that describes Pepperdine’s private cost of capital model.

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Damodaran bares his FANG

Aswath Damodaran (New York University Stern School of Business) gives his update on the trials, tribulations, and valuations of Facebook, Amazon, Netflix, and Google—referred to as “FANG” by the professor—in his recent blog post. In terms of fallout, at one extreme, users could rethink how they share information online, which would disrupt the FANG companies’ business models. At the other extreme, this all could blow over. Damodaran believes the outcome will be somewhere between these two extremes and that “there are changes coming to these firms, from within and without, that will have value consequences.” One thing is certain: “CEO heads cannot roll,” as they did with other companies in trouble, he says. That’s because the power of the FANG CEOs is too entrenched. For example, Mark Zuckerberg controls more than 50% of the voting rights of Facebook shares, so he can’t be fired—unless he does it himself.

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CFOs surveyed on ERP

In a new paper, John R. Graham and Campbell R. Harvey of Duke University analyze the history of the equity risk premium from surveys of U.S. chief financial officers (CFOs) conducted every quarter from June 2000 to December 2017. The risk premium is the expected 10-year S&P 500 return relative to a 10-year U.S. Treasury bond yield. The average risk premium is 4.42% and is somewhat higher than the average observed over the past 18 years, the paper says.

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LEI points to robust growth throughout 2018

Despite the volatility in the stock markets and the weakness in housing construction metrics, the Leading Economic Index increased 0.6% in February, which marked the fifth consecutive month of gains for the index, according to the latest monthly Economic Outlook Update (February 2018 issue). While housing starts fell 7.0% (and are now down 4.0% from one year ago), existing-home sales increased 3.0% and are now up 1.1% from one year ago. Other highlights of note include consumer confidence climbing 6.5 points, to 130.8, the highest reading since November 2000. Likewise, consumer sentiment rose 4.0 points, to 99.7, the highest reading since 2004. There is a great deal more data in the issue that you are free to use in your valuation reports (with proper attribution). Don’t worry about the data being challenged in court—experts are allowed to quote from material similar experts normally use.

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D&P updates multiples in healthcare services

The S&P Healthcare Services Index declined 1.9% over the last month but outperformed the S&P 500, which declined 2.7% over the same period, according to the “March 2018 Healthcare Services Sector Update” from Duff & Phelps. Over the past month: The best performing sectors were specialty managed care (up 7.0%), home health/hospice (up 5.7%), and behavioral health (up 5.0%). The poorest performing sectors were pharmacy management (down 8.4%), distribution (down 7.1%), and commercial managed care (down 6.0%). The current average LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 2.13x and 13.9x, respectively.

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Willamette’s spring Insights issue is available

The Spring 2018 issue of Insights from Willamette Management Associates is titled “Thought Leadership in Breach of Fiduciary Duty Tort Claims—Valuation and Damages Analyses.”

Here’s a sampling of the articles: “Application of Sales Projection Method in Measuring Trustee Breach of Fiduciary Duty Damages” (Justin M. Nielsen); “ESOP Trustee Considerations in Multistage Stock Purchase Transactions” (Scott R. Miller); “Adjustments to Financial Statements for ESOP Contribution Expense” (Frank R. (“Chip”) Brown); and “Reasonableness of Shareholder/Employee Compensation Guidance for Closely Held Corporations” (Robert F. Reilly).

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Pratt’s Stats Hall of Fame

Pratt’s Stats now lists over 29,000 private-company M&A transactions thanks to business brokers and other intermediaries who contribute the data. Individuals who send in the most transactions are inducted into the Pratt’s Stats Hall of Fame every quarter. For the cumulative year 2017, they are:

  • Greg Kells, Sunbelt Business Advisors (Ottawa, Ontario);
  • J.G. Garner, Associate Equity (Irving, Texas); and
  • Arthur Berry, Arthur Berry & Co. (Boise, Idaho).

BVR wishes to thank these individuals and all of the other brokers who help maintain Pratt’s Stats as the most reliable data source of its kind.

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Global BV News

Convergence on China’s mind

In an interview, Dr. Zhang Guochun, the secretary general of the China Appraisal Society, said that convergence of valuation standards is one of several ways he’d like to see the valuation profession evolve over the next few years.“ Convergence of valuation standards is important as economic globalization drives the need for alignment in our systems and approach,” he says. “IVS has become the most influential professional valuation standard worldwide and countries should actively seek convergence, either directly or through existing standards, so that it becomes the benchmark for valuation practice worldwide.” IVS is the set of global valuation standards from the International Valuation Standards Council (IVSC). The China Appraisal Society has 3,000 institutional member firms, a practicing appraiser membership of 34,698, and a nonpracticing appraiser membership of 3,864, making it the largest valuation professional organization in the country, Dr. Guochun remarked.

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BV movers . . .

People: Jay E. Fishman, FASA, managing director at Financial Research Associates, has become an AQB Certified USPAP Instructor … Lucas LaChance has been admitted to principal at Lane Gorman Trubitt of Dallas; he heads the practice growth department … Maryellen Sebold has joined RSM US LLP as a financial advisory services partner in its Los Angeles office … Bryan Saftlas has joined Hoberman & Lesser CPAs LLP of New York City as a partner … Dan Schoenleber, principal in the transaction advisory and litigation support practice at Brown Smith Wallace, is now a Certified M&A Specialist (CMAS).

Firms: Enterprise, Ala.-based Carr Riggs & Ingram has acquired Dallas-based Auerbach Albert & Gold LC, which will operate under the name of Carr, Riggs & IngramPorter and Co. PC (Greensboro, N.C.) has been accepted as a full member of the AutoCPA Group of accounting firms that focus on automobile, motorcycle, and other dealerships … Grant Thornton, RSM, and BDO took the top three places in the Experian/MarketIQ annual survey of U.K. M&A activity’s top 20 financial adviser rankings by volume … Boyer & Ritter, Crowe Horwath, and Dixon Hughes Goodman have provided the National Automobile Dealers Association (NADA) with professional support and technical analysis to prepare the NADA’s new comprehensive guide to the Tax Cuts and Jobs Act of 2017.

Please send your professional and firm news to us at

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CPE events

  • Valuation Considerations for Venture and Early Stage Companies (April 19), with Liza Bowersox (Venture First), Stuart Neiberg (Venture First), Laura Markley (NRV), Neil Bagchi (Bagchi Law), and Patrick Connolly (Foley Hoag).

    A panel comprised of a venture capitalist, attorneys, and valuation experts will cover best practices and guidance on techniques to value early-stage companies.

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New and Trending
LinkedIn Discussions

The “Value” of Beer—and Breweries—Is Rising!

Thoughts on the Usefulness of Historical Private Company Transaction Multiples?

Bright-Line Rules for Tax Affecting S Corps?

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at:
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In this issue:

Private COE

FANG valuations

ERP study

Robust growth

Healthcare multiples

Willamette Insights

Pratt’s Stats HOF

Global news

BV movers . . .

CPE events

LinkedIn discussions

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