Leading appraisers note BV market trends for the new year
In his recent blog post “Working with Sophisticated Valuation Clients,” Rand Curtiss (Loveman-Curtiss) wrote “during the last few years, the fastest-growing revenue source for my practice has been financial compliance reporting work (such as asset valuations for purchase price allocation and impairment testing). In many of these engagements Curtiss acts as a review appraiser. He also noted in his blog post “Happy 2011: The New Estate and Gift Tax Law“ that “the equalization of the lifetime gift and estate tax exemptions at $5 million for 2011-2012 should generate a great deal of valuation work.
At the AICPA BV Conference last month, Ron Seigneur (Seigneur & Gustafson) remarked, “we’re seeing more commercial damages and forensic stuff instead of what we used to call the pure vanilla valuation case.” Stacy Collins (Financial Research Associates) agrees that “the industries are harder to understand and the corporate organizations are daunting by themselves, and the cases seem to be getting more complex.”
Neil Beaton (Grant Thornton) sees a roll-up coming for the profession. “The period of more new small practitioners may be ending,” he feels—agreeing with what Mike Crain (Financial Valuation Group) wrote about last month in the Journal of Accountancy. And there’s another “freight train” coming—IFRS. Working under FASB won’t be enough for the consolidated firms.
What are you noticing in the BV market? Email BVWire to let us know!
Also, learn of other trends in the BV market in the upcoming BVR 2011 Firm Economics and Best Practices Survey, which contains specific practice management data from over 500 business valuation firms.
Do “swing vote” shares deserve a premium?
There’s an interesting discussion on this topic at the Business Valuation Professionals group on LinkedIn (you’ll need to register if you’re not a member) begun by Kevin Czerak(Kutchins, Robbins & Diamond, Ltd.). He’s got a case where a 39% shareholder is trying to acquire the shares of a 14% owner.
One noteworthy response so far from Joshua V. Azran, CPA/CFF, CMA, CFE: In many circumstances the swing vote premium is simply an offset of the minority discount. Intrinsically, the argument can be made, but this is both difficult to quantify (extremely entity and situationally specific), and the “range” or “rate” can not be so easily defined.
The LinkedIn group is becoming increasingly popular…it’s a great place to raise a question and get some expert opinion in response. The swing vote query, as you’ll see, is just one topic.
Option pricing modeling more challenging in certain arenas
During last week’s webinar "The Use and Application of Option Pricing Modeling" James Walling (Grant Thornton) and Scott Beauchene (Strategic Value Group) advised listeners on the current state of option pricing models and their appropriateness and applicability to certain valuation scenarios. “When using OPM, not only do you need to know and understand the model you are using, but you need to think about the industry. Does the model fit?” asks Walling. “You also have to consider the stage of the company and how that stage will impact the outcome.” Certain industries, stage companies and capital structures make using the OPM methodology more challenging:
- Very long investment cycles
- Binary nature of outcomes
- High event risk makes price evolution very "jumpy"
- Early stage companies (Series A or earlier)
- High common ownership relative to preferred liquidation preference
- Similarity of risk profiles
- Common "friendly" capital structures
- 1x liquidation preferences
- Preferred is non-participating
Beauchene emphasized that appraisers need to understand the inputs they use in their models. “If we want to add more value to our clients, we need to step up the analysis of our inputs and assumptions and what they are doing to the models, rather than just relying on the results,” he believes.
Valuing a beer wholesale distributorship? Don’t even think of using a rule of thumb
“The beer distributorship landscape is littered with rules of thumb pertaining to valuation,” says Timothy R. Lee and Laura J. Stevens (Mercer Capital) in their recent whitepaper Understanding the Value of a Beer Wholesale Distributor. “One distributorship may not market in the same territory as another distributorship. It may not have the same margins or prospects for growth. Its facilities and fleet may be different. Why should every house have the same valuation?” the authors add.
Deferred IT spending–another reason to increase company-specific risk?
Writing for Pitchbook, Stan Mork (RSM McGladrey) acknowledges research by Gartner and others confirming that midsize companies have halted spending on IT upgrades and enhancements. Mork offers this very reasonable description of what this means to the value of private companies:
“Outdated, undersized, non-standard or custom-developed platforms point to cost, data integrity, regulatory and security risks. Buyers may find that significant enhancements to technical and business application infrastructure are required after the acquisition. Critical investments in a company’s web presence and customer relationship management system may also be needed.”
Given the vulnerable state of IT in many organizations, buyers should consider the following questions:
- Have the systems kept pace with changing regulatory requirements?
- Will a sizable investment need to be made after the acquisition?
- Is the company up to date and compliant with hardware and software licensing?
- Are staffing levels and expertise sufficient to maintain post-transaction stability? To support post-transaction objectives?
- Do internal or industry-standard benchmarks reveal areas of weakness?
While security, integrity and scalability of the IT infrastructure are more difficult to benchmark than other areas of due diligence, they represent a rapidly growing threat. Including IT in the due diligence process not only protects your investment dollars but also optimizes investment performance post-transaction.
When 409A valuations start to look like the 10 Commandments
Hat tip to Richard S. Meisner (Berman, Sauter, Record & Jardim) for blogging “409A Valuation is Key Issue in Facebook Litigation.” Quoting from All Things Digital:
“First, the ConnectU Founders try to leave this Court with the impression that the only valuation figure they knew was the $15 billion figure from the Microsoft press release, and that they, therefore, had reason to enshrine it as gospel. They also portray the one 409A valuation on which they rely here as some seismic event in the life of the company, as if an unexpected bolt of lightning from on high emblazoned $8.88 onto a couple of tablets. Both the impressions are false.”
Read the original post “When Facebook Bought ConnectU From the Winklevii (Or, Parsing Legal Filings for Fun)” for the story.
Add-on certification in intangible asset valuation approved by ASA
The International Board of Examiners has approved the Business Valuation Committee of the ASA’s proposal for a certification in intangible asset valuation. Bill Quackenbush, BVC chair, tell’s BVWire that “we are now entering the implementation phase, and are working on developing the exams and process procedures for applicants.”
The designation will be an “add on” available to those who hold an ASA designation in BV. Requirements will include taking the two Intangible Asset courses already in place, passing exams on these courses (and we will make accommodations for those who have already taken the courses without the exams), and the successful peer review of an applicant’s work product.
New industry-specific valuation guides contain transaction from multiple sources
In response to numerous calls from customers, BVR has created a new line of industry transaction and profile reports. Each report focuses on a specific industry and contains data from:
Reports on the following industries are currently available:
Upcoming reports in the works will cover HVAC companies, veterinary clinics, hotels/motels, law firms, and more.
McLean Group provides tips to creating reliable financial forecasts
“A company’s future often is dependent on a business projection derived from diligent and objective-directed gathering of competitive data and market intelligence,” write Zane N. Markowitz, Brian Sullivan, and Andy Smith (McLean Group) in NACVA Ambassadors’ QuickRead. The authors describe seven processes that should be considered when creating and analyzing a forecast:
- Time and involvement
- Management’s track record
- Identify and analyze key value and cost drivers
- Understanding key performance indicators
- Compare performance to industry
- Know industry competitors
- Know customers’ needs
For more details on each process check their article “Keys to Creating a Sustainable and Productive Financial Forecast.”
Start your 2011 CPE with lost profits damages experts
BVR’s Advanced Webinar Series on Lost Profits Damages features contributing authors to The Comprehensive Guide to Lost Profits Damages for Experts and Attorneys, these four programs will cover what every practitioner should know when approaching a valuation for economic damages. Series programs include (click the title for more information):
- Discounting Damages: Case Law & Methods - A Legal Perspective
Friday, January 7, 2011, 10:00am - 12:00pm PT
Featuring Robert Lloyd (U of Tenn College of Law) and Michael Crain (Financial Valuation Group)
- Damages in Patent Infringement Lawsuits
Friday, January 14, 2011, 10:00am - 12:00pm PT
Featuring Rick Bero (The Bero Group) and Robert Surrette (McAndrews Held & Malloy LTD
- Lost Profits in Trademark and Copyright Cases
Friday, January 21, 2011, 10:00am - 12:00pm PT
Featuring John Pilkington (Lone Peak Valuation Group) and John Slafsky (Wilson Sonsini Goodrich & Rosati)
- The Latest on Motions to Exclude Financial Experts: The Now-Routine Trial Tactic That Works
Friday, January 28, 2011, 10:00am - 12:00pm PT
Featuring Jonathan Dunitz (Friedman Gaythwaite
Wolf & Leavitt) and Robert Lloyd (U of Tenn College of Law)
Subscribe to the whole series and receive discounts of admission and the print and online editions of The Comprehensive Guide to Lost Profits Damages.
Best wishes to you from every one at BVR!
BVWire would be remiss if it didn’t end this last issue for 2010 with a note of thanks and celebration. We’ve weathered a bizarre couple of years as a profession together--but all of us at BVR hope and believe in a fantastic 2011.
Here’s wishing all of our good friends personal joy and professional success in the New Year!
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