New Pepperdine report on private cost of
capital released

The “2021 Private Capital Markets Report” is now available from the Pepperdine University Graziadio Business School. The report is the result of an annual survey of expected rates of return with respect to private companies. Respondents include senior lenders, asset-based lenders, mezzanine funds, private equity groups, venture capital firms, angel investors, privately held businesses, investment bankers, business brokers, limited partners, and business appraisers.

Range of returns: The survey reveals that loans have the lowest average rates (banks require a median return of 3.3% to 5.5% depending on loan size) while capital obtained from angels has the highest average rates (ranging from a median of 23% for later-stage financing to 43% for seed money). The full report contains details on each type of funding.

A BVWire poll found that 40% of respondents use this survey as part of their toolbox for estimating small-private-company cost of capital. The Pepperdine Private Capital Markets Project (details here) was originally launched in 2007 and was temporarily halted last year due to funding issues. Thanks to the ESOP Association and Employee Ownership Foundation stepping in as sponsors, the research has been able to continue. But, because of an ongoing funding gap, a small fee of $100 will be charged for the report. However, respondents to the 2021 survey will receive the report for free and should have already received coupon codes for this and other reports. The codes will expire at the end of this month, so, if you are planning to use one of them, please do it quickly. The 2021 annual report is available if you click here.

How many BV credentialed members are in the three U.S. VPOs?

The AICPA, American Society of Appraisers (ASA) and the National Association of Certified Valuation Analysts (NACVA) are the three main valuation professional organizations (VPOs) in the U.S. that issue business valuation credentials. How many members do these organizations have? Chris Mercer (Mercer Capital) revealed the figures during his session on the future of the profession at the NACVA conference this past June.

Changes coming: Mercer also set his analytic sights on the business of educating and credentialing by these three organizations, and his conclusions and predictions may surprise you. See the September issue of Business Valuation Update for all the details.

Recap of recent BV cases of note

A number of recent cases have emerged that contain various valuation issues. Here are the most notable:

• Judicial dissolution/breach of fiduciary duty: Guge v. Kassel Enters. was decided on appeal under the Iowa “election-to-purchase-in-lieu-of-dissolution statute.” The Iowa Supreme Court decided that, because the parties’ experts had “both included transaction costs in their valuations under a net asset approach, the district court’s failure to reduce the asset values to account for the costs to liquidate the corporation’s assets warranted reversal.” Additionally, since there was no evidence of an intention to liquidate the company or its assets, the court declined to adjust for the built-in gains tax consequences urged by the majority shareholder. Guge v. Kassel Enters., 2021 Iowa Sup. LEXIS 81 (June 18, 2021).

• Marital/goodwill: In Maginnis v. Maginnis, an unpublished opinion, the Kentucky Appellate Court remanded the decision as to the value of the husband’s business for, among other things, the Family Court’s failure to consider an apportionment of goodwill between enterprise and personal goodwill. It also remanded for a reconsideration of the maintenance award to the wife since that award is based in part on the value of the business and the income of the husband. Maginnis v. Maginnis, 2021 Ky. App. Unpub. LEXIS 378; 2021 WL 2483877 (June 18, 2021).

• Shareholder dissent: In Island Light & Power, the one-third shareholder dissented to a forced sale of the assets resulting in a liquidation of the company and of the shareholder Trust’s stock. In a resulting bench trial, the court rejected the fair value determinations of the experts for both parties and adopted its own methodology (as is allowed by Rhode Island courts, including its Supreme Court) to determine the fair value of the one-third interest the Trust held. Island Light & Power Co. v. Sara Golvinveaux McGinnes 2011 Trust, 2021 R.I. Super. LEXIS 48 (June 3, 2021).

Case digests and full opinions are available through BVLaw or the BVResearch Pro platform (along with over 4,000 other valuation-related cases).

The biggest challenges when benchmarking
a client

Valuation experts seem to be evenly split on what they see as their main challenge when doing an industry analysis. During a recent BVR webinar, attendees were asked about that. Here’s what they said:

• Finding the right industry (36%);

• Finding a reliable data source (33%);

• Getting local information (28%); and

• Other (3%).

During the webinar (free recording available), Galen Pugh of BizMiner addressed these challenges. BizMiner is a 20-year-old data analytics firm that collects U.S. industry and geographic raw data from 15 different sources and reports on over 5,000 industry segments. Because of the granularity of the data, you can benchmark a client against industry peers by drilling down to a specific line of business. For example, under restaurants, you can find different types, such as Chinese, steakhouses, food trucks, and the like. And you can drill down geographically to a ZIP code.

An audience member asked: “How many years of data do you have?” The standard report goes back five years, but you can get a legacy report that goes back to 2001 for some industries, according to Pugh.

A free recording of the webinar is available if you click here.

CVGA program for value growth
advisory services

A training and credentialing program is available for valuation professionals who want to advise business owners on ways to maximize the value of their firms. The Certified Value Growth Advisor (CVGA) program is a five-day course that focuses on the fundamental best practices that drive value of any business. You will also learn how to build on those drivers to develop a short-term tactical plan and long-term strategic plan for the client’s business. This course is designed to help your clients increase company value by two to three times over a two-to-five-year period. The next CVGA program is scheduled for November 8-12 and will be in a virtual environment. For more details, click here.

Willamette focuses on tax transfer pricing

Taxation-related valuation and transfer pricing issues are the focus of summer 2021 Insights from Willamette Management Associates. The articles cover:

• Tax pass-through entities;

• Intercompany transfer price analysis;

• Income tax (Estate of Warne); and

• A review of judicial decisions (Nelson v. Commissioner).

The editors for this issue are Ben R. Duffy and Sam S. Nicholls. To download the articles, click here.

Agenda available for VSCPA conference September 29-30

One of our favorite events is the annual two-day conference held by the Virginia Society of CPAs (VSCPA). This year’s VSCPA Forensic and Valuation Conference will be held September 29-30 in Glen Allen. This will be an on-site event with the option of attending virtually. The agenda is now available, and it includes topics related to COVID-19, using statistics for lost profits, recent federal tax developments, goodwill, financial forensics tools, reasonable comp, and more.

For more information and to register, click here. Early-bird pricing is available through Aug. 31, 2021.

Cost of capital parameters in Europe as of
June 30, 2021

ValueTrust has released an eighth edition (dated June 30, 2021) of its “European Capital Market Study” that serves as a comprehensive compilation of capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. The study also includes trading multiples and total shareholder returns across a wide range of industries. Here are a few key findings:

• The risk-free rate in Europe increased from -0.14% as of Dec. 31, 2020, to 0.33% as of June 30, 2021;

• The implied market return is at 7.4% as of June 30, 2021, so, taking the risk-free rate of 0.33% into account, the implied market risk premium is 7.1%; and

• The implied sector return (unlevered) of the energy sector increased from 4.0% as of Dec. 31, 2020, to 5.6% as of June 30, 2021, which is the largest increase compared with the other sectors.

The full report is available if you click here.

Preview of the September 2021 issue of Business Valuation Update

Here’s what you’ll see:

• “Red Flags Appear in BVR’s DLOM Survey Results” (BVR Editor). There are a number of areas of concern in the responses to BVR’s recent survey on methodology and practice for estimating a discount for lack of marketability (DLOM).

• “Insiders Examine Michael Jackson Estate Valuation Dispute” (BVR Editor). Testifying experts for the estate give their main takeaways from this fierce dispute with the IRS.

• “Mercer Predicts a Shakeout in the U.S. BV Credentialing Landscape” (BVR Editor). Intense competition will trigger a consolidation among the three business valuation credentialing organizations in the U.S., predicts Chris Mercer (Mercer Capital), speaking at the recent NACVA conference.

• “Examining the ‘Reasonably Objective Basis’ Concept for Projections” Recent developments have raised the bar with respect to how valuation analysts document financial projections and forecasts with regard to a “reasonably objective basis.” But what exactly is this concept and where can analysts look for specific guidance.

• “SEC Comment Letters Reveal COVID-19 Impacts—and Much More” (BVR Editor). How to benefit from the great deal of useful information about fair value measurement issues in comment letters the Securities and Exchange Commission (SEC) sends after it reviews public companies’ financial statements and disclosures.

• “How Recent Insolvency Reform in the UK Impacts Business Valuations” (BVR Editor). Driven by the pandemic, the Corporate Insolvency and Governance Act (CIGA) 2020 is the largest reform to insolvency law in the United Kingdom in over 20 years. Although targeted to large companies, the impact on business valuation methods and standards will likely trickle down to smaller firms.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends.”

• Regular features: “Ask the Experts” and “Tip of the Month.”

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center.”

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the September 2021 issue of Business Valuation Update.

BV movers . . .

People: Peter Brown, CPA, CFF, ABV, has joined Green Hasson Janks (GHJ), a Los Angeles-based accounting and advisory firm, as partner and Forensic Services Practice Leader; he has served as a litigation consultant and testified as an expert witness in numerous disputes encompassing telecommunications, entertainment, construction, and real estate involving complex issues surrounding business valuations, business-interruption loss calculations, and fair-value calculations.

Firms: Houlihan Lokey will commence a tender offer to acquire GCA Corp., a global investment bank with over 500 professionals in 24 offices across America, Japan/Asia, and Europe … Chicago-based Baker Tilly is adding New York City-based Margolin Winer & Evens LLP (MWE), effective Nov. 1, 2021; MWE’s 130 team members will continue to serve clients locally and nationally from New York, increasing Baker Tilly’s New York team to nearly 400 professionals … Los Angeles-based B. Riley Financial Inc. has acquired the investment advisory business of 272 Capital LP … Pittsford, N.Y.-based Bonadio Group is adding Ganer + Ganer of New York City, a firm that provides tax preparation, financial statements, business management, and consulting services to a wide array of clients.

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

• Valuation of Specialty Pharmacies—Practical Considerations. August 24, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Jarrod Barraza (Home LLP) and Mike Gerling (Soleo Health). CPE credits: 2.0.

Take a deep dive into the recent developments with specialty pharmacies, including the regulatory backdrop, outlook, and market trends with a focus on operational considerations.

• Decoding the Cross-Professional Maze: A Guide to Persuasive Real Estate-Related Valuations. August 25, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Dennis A. Webb (Primus Valuations). CPE credits: 2.0.

Misunderstandings and blind spots affect valuations of virtually all businesses that have real estate as a principal asset. While business appraisers are not expected to value the real estate, they do need to know the right questions to ask.