August 9 , 2006 | | Issue 47-2

A better source for size premiums than Ibbotson’s?
“Does the small stock premium as presented in Ibbotson’s data include some of the difference in liquidity between the large stocks and small stocks?” a BVR subscriber asked recently. “Should we be concerned about double-counting the effect of large vs. small stocks?”

For the answer, we turned to Ashok Abbot, Ph.D., Associate Professor of Finance at West Virginia University (Morgantown). “Ibbotson has been revising their size premiums downward,” he says. “A better source is Kenneth French’s data on size premium.” To access the French data, go to

To find out more about Dr. Abbott’s innovative work on distinguishing marketability and liquidity, holding periods on and the effect on price from stock volatility, check out the transcript of the recent BVR Telephone Conference “Discounts for Lack of Marketability” by clicking here.

Senate passes pension reform bill; IRS will need to act
The Pension Protection Act of 2006 is currently on its way to President Bush’s desk, thanks to its passage by the House and, just this past Thursday, the Senate. Most sources expect President Bush to sign the bill over the current Congressional recess.

Of note to business appraisers: The new law enacts appraisal reform provisions, including the definition of “qualified appraisers” and penalties for incorrect valuations—effective immediately. This means the IRS and other federal agencies will be under considerable pressure to implement the new regs, “perhaps through the promulgation of temporary regulations,” says Peter Barash (Peter Barash Associates), the ASA representative on Capitol Hill. “ASA needs to lead the effort to ensure that [the] IRS does this in an appropriate way.”

For the House version of the bill (as enrolled/agreed to by the Senate), go to and enter "Pension Protection Act of 2006" in the search term. You may want to review section 6695A, among others, “Substantial and Gross Valuation Misstatements Attributable to Incorrect Appraisals.”

Marketing language for your BV website—NOT
“I am widely regarded as the most prestigious valuation and appraisal expert for prospective buyers or sellers of small private businesses,” says the owner of the web page at “My valuations are individually geared to your needs…If you’re a small business owner who is thinking of selling and looking for the highest possible valuation, I try to justify it for you. If you’re a prospective buyer, and looking for a ‘lowball’ number for negotiation, I try to justify it for you . . . for the lowest prices in the industry.”

The first step in avoiding fee disputes
What do you do when the scope of a valuation engagement suddenly changes—whether because of management needs, undisclosed research requirements, litigation or other issues? “As soon as that happens—you have to stop immediately and issue an amended fee agreement,” says a BVWire subscriber, who reminds all appraisers with financial responsibilities about the risks of failing to act right away. “I don’t mind working pro bono, but I like to be the one who makes that choice.”

What reasonable compensation criteria does the IRS use?

“We use the same sources you do,” says Mike Gregory, ASA, AVA, an Engineering Territory Manager with the Service’s large and midsize division, who recently led BVR’s “Ask the IRS” Telephone Conference. “We have to purchase them, just like you do.” Gregory’s presentation provided dozens of informative answers and downloads, including an Executive Compensation Articles Bibliography. The comprehensive list of nearly 100 articles from a variety of industry, valuation, and compensation sources came from the efforts of Bob Cimasi, MHA, ASA, CBA, AVA , FCBI, CM&A, CMP, and Tim Alexander, MLS, both with Health Capital Consultants (St. Louis). “They went out of their way to partner with the IRS and help us.”

For a free copy of this invaluable resource, click here.

August 15th deadline to sign up for CFA, Level I exam
Most business appraisers know that CFA stands for Chartered Financial Analyst®, a credential earned from the CFA institute. It also stands for “at least three grueling six-hour examinations, a minimum of 250 hours of self-study per exam—and a great passion for finance and valuation,” says Alina Niculita, CFA (Shannon Pratt Valuations, Portland). “But enough of the fun memories…”

The CFA charter is “the gold standard” according to the Economist. Niculita, also the former managing editor of the Business Valuation Update™, notes that business appraisers can use the CFA credential to broaden their financial knowledge base and gain entrée or advancement “in a variety of finance-related professions, including valuing closely-held companies.” For more information, check out For those wanting to register for the December Level I exam, the deadline is August 15, 2006.

Another August deadline: applicants to the Appraisal Foundation Boards
The Appraisal Foundation is just now winding up its search for qualified applicants to its Board of Trustees, Appraisal Qualifications Board (AQB) and Appraisal Standards Board (ASB). There are four seats available on the Board of Trustees, three on the AQB, and four on the ASB; applicants may only seek a seat on one board. “The Appraisal Foundation is interested in expanding the diversity of all Boards by considering applications from business leaders in valuation or involved in various appraisal disciplines.” For qualifications and additional application information, visit

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