Have the last six months changed the business valuation profession?

John Paglia (Pepperdine University), Robert Slee (Robertson & Foley), and the Graziadio School of Business and Management at Pepperdine University just published the results of their ongoing Pepperdine Private Capital Markets Project, a research survey pertaining to privately-held companies and the markets in which they raise capital.

BVWire is happy to offer the following snapshot of some key factors specific to the appraisal profession.  This compares to similar data from Paglia and Slee’s project we reported here six months ago.    

Comparison: Today Versus Six Months Ago

Over 65% of the 252 BV respondents use the build-up method when determining the equity discount rate; and of those using beta, approximately 60% of respondents reported using an adjusted beta to calculate an equity discount rate. Just under 75% of respondents adjust the income stream to a “control” level when considering options for control adjustments, and the average control premium ranges from 15.4% on companies with $250M in revenues to 17.7% on $1M revenues.

New insight in lost profits damages

The new 2011 edition of The Comprehensive Guide to Lost Profits Damages for Experts and Attorneys, edited by Nancy Fannon, includes new chapters on:

• damages for early stage companies
• analysis of case law relating to reasonable certainty
• the benefit of bargain damages
• and more. 

Fully indexed and packed with over 900 pages of content, this guide is an indispensible resource for appraisers and attorneys.  It’s available for the first time next week.  Order here.

The NY Times plugs the BV profession—and
Pratt’s Stats

Referring to Inc. magazine’s recent article “2010 Business Valuation Guide” Times blogger Barbara Taylor says  “it’s no secret that this is a lousy time to try to sell your business…and main street businesses have been hardest hit.” BVR’s Adam Manson told Taylor that “acquisitions are recovering more favorably for companies with revenues over $5 million.” Manson based his comment on statistics he compiled from Pratt’s Stats that didn’t make it into Taylor’s article. The tables below outline the median valuation multiples for private and public buyers from 2005 to the present.

Taylor also quoted Toby Tatum (Alliance Business Appraisers) who stressed that the reason why businesses aren’t selling is the price. He also emphasized the importance of hiring a good appraiser —not only to give a business owner a solid valuation, but a solid consultation, too.

BVR continues to offer Inc’s graphic based on 3,666 transactions recorded by BVR from January 2007 to March 2010, as a free download here. 

Rule 26 amendments may contain traps for the unwary

We first reported the proposed amendments to Rule 26 of the Federal Rules of Civil Procedure back in a March 2009 BVWire, featuring the AICPA’s endorsement of the changes—particularly those exempting experts’ draft reports from discovery. Last September we reported that the U.S. Supreme Court ratified the rules, which just became effective on December 1, 2010.

Don’t open the floodgate of attorney communications: “Be careful,” warns Prof. Michael Devitt (Univ. of San Diego School of Law), who spoke at the recent 3rd Annual BVR/Georgetown Advanced Valuation Summit: Resolving Tax and Legal Issues. “The revised Rules contain lots of traps for appraisers.” Litigants can still discover draft reports by a testifying expert if, for example, they forms a basis for the expert’s opinion under the disclosure guidelines of Rule 26(a)(2)(B). “And the new rules apply only to discovery, not to admissibility at the time of trial,” Devitt warns. “So don’t rely on the new rules too much until you see how it all plays out. I don’t think they were all that artfully drafted.”

Likewise, the AICPA advises in a recent update: “Experts should not rely on the protection of these new amendments to open the floodgates to unabated communication with retaining counsel. . . As before, it will continue to be important for experts to exercise good judgment and educate their professional staff as the amendments are implemented.” The AICPA posting also has a summary table comparing the former Rule 26 provisions to the Dec. 2010 amendments, with accompanying explanation of the intended changes. It also notes that the ABA has posted a red-lined version of Rule 26, as amended.

Georgia adopts majority rule on goodwill value
in divorce

Only two state jurisdictions had yet to address the determination of professional practice goodwill value in divorce—and now only Alabama stands alone. In Miller v. Miller, 2010 WL 4704326 (Ga.)(Nov. 22, 2010), the trial court valued the husband’s solo medical practice at $314,000, based on the wife’s expert appraisal, which applied the market and capitalization of earnings approach. The husband asserted several challenges on appeal. In particular, capitalizing his earnings was inappropriate when he paid himself a “normal” salary and double-counted his income to determine property division and support. More importantly, he said, the trial court’s valuation included his personal goodwill, which the majority rule in most states currently bars from the marital estate.

The Georgia Supreme Court agreed with his recitation of the majority rule, and based on leading precedent from other states (including May v. May (W.Va.) and Steneken v. Steneken (NJ), available at BVLaw) it decided to follow “the vast majority of jurisdictions and include enterprise goodwill in the valuation of a professional practice as part of marital property.” Further, professional goodwill “does not constitute marital property in Georgia,” the court held. The court confirmed the wife’s expert valuation in all respects, finding that it did not erroneously double count the husband earnings and it adjusted for professional goodwill. Read the complete case digest of Miller v. Miller in the next (January 2011) Business Valuation Update.

Updated free download and new Goodwill Guide. In the meantime, we’ve also updated our free download, “Goodwill Hunting,” a state-by state summary of the leading decisions on the disposition of private practice goodwill in divorce, posted now among the plethora of BVR’s free resources. We’re also including the most recent court decisions and expert articles in the 2011 edition of BVR’s Guide to Personal v. Enterprise Goodwill (Book & Online Guide), making it the most current, comprehensive resource on this complicated and recurring topic. Look for the updated guide at the BVR bookstore by January 2011.

Consider control perquisites for each holding entity when quantifying DLOC

In her article “Shades of Control,” Sherry C. Smith (Zephyr Financial Corp.) asks “does the Subject Interest exercise control of the business being appraised?” The answer isn’t surprising: “often not yes-or-no, black-or-white or binomial…often some shade of gray.” Smith recently appraised holdings of 11 different entities for estate settlement purposes.  Because each entity was unique, she considered the control perquisites for each along a spectrum. Before attempting to quantify a discount rate for lack of control, the appraiser must understand the subject interest’s legal entity, read the entity’s governance documents, and gather market data, Smith advises.  To help appraisers “stratify the Subject Interest along the various shades of control,” Smith developed three templates, which she provides in her article published in NACVA Ambassador’s QuickRead,

Beauchene and Walling advise on option pricing modeling this week

This Thursday, December 16, Scott Beauchene (Strategic Value Group) and James Walling (Grant Thornton) will present the BVR webinar “The Use and Application of Option Pricing Modeling.”  These co-authors of rebutting articles in the BVUpdate will discuss the current state of option pricing models, their appropriateness and applicability to certain valuation scenarios, and what’s in store for the future.  Click here for more information.

Alfred King’s “Picasso” analysis admired in popular accounting blog

In a fine example of the collegiality found in blogging, Thomas I. Selling, PhD, CPA admired Alfred King (Marshall & Stevens) yesterday in an article “Entry Price vs. Exit Price: One (Really Smart) Appraiser's Point of View.”  King had responded to one of Selling’s posts about FASB, to which Selling responded:  “I have learned a great deal from my correspondence with Alfred; and although we don't agree on everything, we both will say without hesitation that the FASB's venture into exit prices has been a huge mistake.”

So Selling posted King’s email, as thoughtful and well-written as all of his articles. To illustrate the issues created by FASB’s SFAS 157, King uses an example of a Picasso painting up for auction:

“At an art auction at Sotheby's a Picasso is up for sale, and the bidding starts at $25 million and goes up in $1 million increments. At $29 million there are two bidders left; one of them raises to $30 million and the other drops out. Now the issue is "what is the value of the Picasso painting at that moment?

“Under the standard and well understood concepts of value most observers would feel the Picasso should be valued on the buyer's balance sheet at $30 million….under the FASB concept of Fair Value, the painting should be valued at only $29 million.”

Check out the article for King’s cogent (and amusing) article “Entry Price vs. Exit Price: "O what a tangled web we weave…" in the Accounting Onion. You’ll also find links to Selling’s articles on SFAS 157.

Join Beaton and Dufendach for last chance 2010 CPE

On December 22, Neil Beaton and David Dufendach (Grant Thornton) will provide their insight on “Valuations for IRC 409A Compliance.”  Since its 2005 implementation, this regulation has taken on a life of its own with new techniques, refinements of old ones, the consequences of a turbulent economy, and a pending practice aid update.  Beaton, author of BVR’s Guide to Valuations for IRC 409A Compliance and Dufendach will discuss this regulation’s past, present, and apparent future.  Click here for more information.

Participate in Morningstar’s cost of capital survey
 
Morningstar is conducting a survey to investigate how appraisers derive cost of capital in their valuations. The survey is only available until 12/17/10 and takes less than five minutes to complete.  BVWire will keep you posted on the results from our good friends at Morningstar.

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