BVWire Australia Issue #11-2 | 15 June 2015


New data on discount rates used in 41 countries

A new survey collects information about the discount rate (risk-free rate and the market risk premium) used in 2015 for 41 different countries, including Australia.

Pablo Fernandez, Alberto Ortiz Pizarro, and Isabel Fernández Acín (all with the University of Navarra in Spain) co-authored the survey.

Rate changes: The survey found that the average risk-free rate used in 2015 was less than the one used in 2013 in 26 countries (in 11 of the countries, the difference was more than 1%).

On the other hand, eight countries used an average risk-free rate in 2015 that was more than 1% higher than the one used in 2013. For the U.S., Europe, and U.K., most of the respondents use a risk-free rate that is greater than the yield for 10-year government bonds. The difference in the average market risk premium used was more than 1% for 13 countries in 2015 versus 2013.

“I started to do surveys to prove that expectations are not homogeneous and there is no single parameter in finance—not even the risk-free rate—that is homogeneous among people,” Pablo Fernandez tells Michael Crain (Financial Valuation Group), a leading business valuation practitioner and researcher, in an interview.

“People use different numbers and put different reasoning behind them. One survey I do every year is about the risk premium. This year I did the risk premium plus the risk-free rate. It’s interesting to see the variety of numbers people use and the different reasons behind the numbers they use.”

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Two factors that drive value creation in business valuation firms

In the latest video in his series The Entrepreneur’s Solution, Mel Abraham, a U.S. business valuation thought leader, addresses how business value is directly tied to the customer’s perception of value. He explores two frameworks on value creation: the value sectoring framework and the value focus framework.

Value sectoring framework. “Think about where you are in the context of what you provide to your customers and clients. Place it on two axes: one is the connection you have with your clients and the other is the distinction that exists for you in the marketplace.”

The questions business appraisers should ask themselves are:

  • What do you provide to your customers?
  • What do you provide to your clients?
  • What do you provide to the companies or the people that you serve in that process?

Abraham says that business valuation professionals need to understand four business models:

  • Commodity-focused: Lowest in terms of connection and distinction, thereby easily replaceable. Things such as loyalty and relationships do not apply. The only attributes that have an influence are price and convenience.
  • Connection-focused: There is a high connection with customers, but the distinction is low. There is a sense of loyalty, but, despite the good relationship with customers, the product or service is easily replaceable.
  • Incrementalism-focused: There is a high distinction, but the connection with the customers is low. The product or service is unique, but the relationship with the customer does not exist. It is able to generate high profits, but, once competition enters the market, the only way a business will win is if it has connected relationships with customers.
  • Value-focused: This is a high-connection, high-distinction business model that creates valued customers and important relationships.

Abraham says practitioners should strive to be valued and differentiate themselves on the basis of both connection and distinction.

Value focus framework. “This differentiates between the potential value and the actual value and tells you where your focus should be,” Abraham says.

Similar to the value sectoring framework, there are three quadrants to the value focus framework:

  • Collecting: When ideas, products, and services have low potential value. It’s a place to collect data from the market to increase the potential value and realise a higher actual value.
  • Continuing: If you have a high actual value but do not have a high potential value, focus should be on maintaining relationships with customers.
  • Cultivating: If you have a high potential value but do not have a high actual value, you need to cultivate the potential value in the marketplace using tools and strategies.

Final words of advice. Abraham says practitioners have to be brutally honest with themselves while evaluating their business. “Build a strategy around it. Remember, your aim is to get high-potential, high-actual value while having a high distinction and relationship in the marketplace. All of your success will be based on execution. The majority of failures are failures in execution, failures in taking action, concerted actions staying with it.”

Click here to watch the video.

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Employee share-scheme legislation passes House of Representatives

The government’s employee share-scheme legislation, which is set to change the way such shares or options are taxed, passed the House of Representatives the last week of May. The main goal of the change is to create special concessions for small startup companies that use such schemes to reward their employees through the issue of noncash incentives.

Under the current law, startup employees issued shares or options have to pay income tax at the time they receive such shares or options. The new law, effective 1 July 2015, will mean employees will typically not be liable to pay upfront tax on an option until it is converted into a share and becomes something of actual value.

The May federal budget contained minor changes to the proposed ESOP legislation, including:

  • Excluding eligible venture capital investments from the aggregated turnover test and grouping rules (for the startup concession);
  • Providing the capital gains tax discount to employee share-scheme interests that are subject to the startup concession, where options are converted into shares and the resulting shares are sold within 12 months of exercise; and
  • Allowing the Commissioner of Taxation to exercise discretion in relation to the minimum three-year holding period where circumstances outside employees’ control make it impossible for them to meet this criterion.

Ben Travers, KPMG executive remuneration partner, welcomes the drafted changes and says they realign employee share schemes with international practice. “The new rules, to apply to grants from 1 July 2015, will benefit all taxpayers, in particular by shifting the taxing point of rights to acquire shares, including options, from vest to exercise. This means the taxing point will coincide with the economic benefit received at exercise and revives the effectiveness of the options.”

However, Travers says that, while the legislation introduces specific concessions for certain startups, the scope of the concessions deny access for listed companies and unlisted companies incorporated for more than 10 years, thereby limiting their application. “Disappointingly, cessation of employment remains a taxing point, and there is no proposed increase to the amounts eligible for concessions under the $1,000 exempt and $5,000 salary sacrifice plans,” he adds.

The legislation is expected to pass the Senate anytime now. Stay tuned to BVWire—Australia for more on this evolving story.

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Business entry and exit difficult in Australia: Productivity Commission

A Productivity Commission draft report reveals that governments can do more to reduce impediments to setting up and closing a business in Australia.

Commissioner Dr. Warren Mundy says that, while the rate of new-business establishment in Australia is “relatively high,” very few businesses in Australia could be characterised as “innovators.”

“When businesses struggle, regardless of what the best option is, it is often easier to close them than to restructure,” Mundy says. “Even when businesses should close, the process takes too long and is too expensive, and thereby ties up business resources that could be used in other productive activities,” he adds.

Mundy says the Productivity Commission has identified a large number of regulatory issues—largely in the hands of state, territory, and local governments—that, if addressed, would make business entry and exit easier and less costly.

The draft report’s recommendations are:

  • Financing options for new small businesses would be improved through the introduction of a crowd-sourced equity arrangement that balances the financing needs of businesses against the risk preferences of different types of investors;
  • Formal restructuring of companies through voluntary administration should be possible when a company is not yet insolvent;
  • A simplified liquidation process should be introduced to reduce the time and expense of winding up businesses with recoverable assets of little value; and
  • The exclusion period and restrictions on bankrupts should be reduced from three years to one year.

Dr. Mundy says the commission is looking forward to reading submissions to the draft report and participating in public hearings in the coming months.

Download the report here.

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Fair market value, market value, and fair value explained

In the July issue of Business Valuation Australia (subscription required), Hugh McPharlin (Edwards Marshall) clarifies fair market value, market value, and fair value in accounting, legal, and valuation contexts. “One of the issues that plagues the valuation profession is the lack of clarity concerning the use of these expressions,” McPharlin says.

In his quest to clarify what each term means and explain the context within which each term should be used and understood, McPharlin will examine the:

  • Relevant judicial findings, particularly MMAL Rentals v. Bernard John Bruning (9 December 2004) and Candoora No 19 Pty Ltd v. Freixenet Australia Pty Ltd & Anor (19 September 2008); and
  • Market value for taxation purposes.

Subscribe to Business Valuation Australia to read McPharlin’s full article.

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We welcome your feedback and comments. Contact the editor, Sonia Nair, at
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In this issue:

New data on discount rates

Value creation

Employee share scheme update

Barriers to business

BV terms explained





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