December 12, 2012 | Issue #123-2  

Do BV firms pay a premium for credentialed talent?

“The simple answer is yes,” says John Borrowman, creator of the Borrowman Baker/BVR 2012 National BV Salary Survey Report. For instance, in breaking down compensation data by job functionality, the report reveals the average base salary for Level 2 employees (those with one or more BV credentials) is 4.4% higher than it is for Level 1 employees (those with no credential). “At Level 3,” Borrowman explains, “this differential or premium is 8.8%.”

At the same time, Borrowman is puzzled that the “premium” isn’t higher, given the emphasis that BV employers typically place on a prospect’s credentials. One possible reason: Although BV firms recognize the value of professional certifications, the marketplace may not have caught on yet, leaving less room for firms to charge higher rates for credentialed talent. For instance, the survey also indicates that BV firms do not appear to pay a premium for Level 2 employees with a graduate degree (as opposed to those without), but they do pay nearly 10% more for Level 3 employees with graduate degrees.

More highlights from the 2012 report. What’s the one factor that continues to have the biggest impact on bonus calculations for BV professionals? What salary target should you set to attract the best BV talent? To help establish your salary and retention policies for 2013, check out a copy of the Borrowman Baker/BVR 2012 National BV Salary Survey Report now.

Minority or control: How to characterize public company cash flows

After deriving cash flows from public company data, should BV appraisers consider these on a minority or a control basis? That was the last question to come in from attendees at BVR’s recent webinar on Control Premiums & Discounts. “The answer to that is yes,” said presenter Jim Alerding (Alerding Consulting). ”In some cases, you can consider those [derived cash flows] to be minority, and in some cases, you can consider those to be control.”

For example, Eric Nath (Eric Nath & Assoc.) has pointed out that “public company shares do not trade as minority interests, so he would not add a control premium,” Alerding said. Others might characterize the cash flows way under the market approach—particularly the guideline public company method—but then adjust them using a discount. “It is not an easy question to answer,” Alerding admitted, but depends on the specifics of the subject interest you are valuing as well as how you are using the public company data, i.e., to determine a minority discount, a discount rate, or for some other purpose.

That’s where “the rubber meets the road,” agreed co-presenter James Ewart (Dixon Hughes Goodman). BV analysts need to match the overall discount they are using not only to the underlying assets and their risks, but also to the assets/risks of the comparative data. “Just using general data does not cut it anymore,” Ewart said. “We need to be able to peel the onions back and be able to adequately explain why our interest has the characteristics that are similar to the characteristics of the underlying discount, which is derived from the public data, and be able to match those characteristics up.”

RAND royalty analysis could be the next big area for IP experts

To make sure the world’s various and sophisticated electronic devices can all work together, global standards-setting organizations (such as the International telecommunications Union and the Institute of Electrical and Electronics Engineers) require member companies to license “essential” patents at“reasonable and non-discriminatory,” or RAND, rates.

In a new case that pits Microsoft against Motorola, the parties have asked for a judicial accounting of a RAND royalty. According to Microsoft’s team of experts, the proper framework for determining a RAND royalty rate is an “ex ante, multi-lateral negotiation” involving full participation of essential patent holders as well as all potential implementers. On the other side, Motorola’s expert maintains that international standards clearly state that RAND license agreements are “bilateral in nature, such that they occur between only the patentee and the implementer.”

Not your typical Daubert case. At the outset, the federal district court noted the lack of any precedent on determining RAND rates and ranges. Moreover, although academic and standard-setting sources have discussed the importance of RAND rates and industry standards, the court said, “limited publication exists on the methodology a court should employ to determine a RAND royalty rate which in some way reconstructs the negotiation that would have taken place between Microsoft and Motorola.”

In the end—and citing the adaptability of the Daubert standard to new technical and scientific areas—the court permitted both parties’ experts to present their respective opinions at trial. Read the complete digest of Microsoft Corporation v. Motorola, Inc., 2012 LEXIS 152244 (Oct. 22, 2012), in the January 2013 Business Valuation Update; the court’s opinion will be posted soon at BVLaw. Note: Since that decision, the court held the RAND hearing and took the issue under advisement; according to its most recent ruling denying Motorola’s request for an injunction, it will issue a written order regarding a RAND rate and range in the near future. Stay tuned …

FASB’s Private Company Council will focus on four key areas, including goodwill impairment

At its inaugural meeting last week, the Private Company Council (PCC)—newly created by FASB’s parent, the Financial Accounting Foundation, to improve the standard-setting process for private companies—identified four areas to research “for agenda consideration,” according to a release. The areas focus on:

  1. Consolidation of variable interest entities;
  2. Accounting for “plain vanilla” interest rate swaps;
  3. Accounting for uncertain tax positions; and
  4. Recognizing and measuring, at fair value, various intangible assets (other than goodwill) acquired in business combinations.

“These four areas are often top-of-mind for users, preparers, and auditors of private company financial statements,” said PCC chair Billy Atkinson. “We are eager to review the research, and we look forward to discussing the issues in more detail at our next meeting in February.”

First professional conference of 2013 features keynote from Judge Laro

Don’t miss the Valuation, Forensic Accounting, and Litigation Services Conference held by the Florida Institute of Certified Public Accountants (FICPA) on Jan. 10-11, 2013, in Fort Lauderdale. Conference highlights include an opening address by the Hon. David Laro, Tax Court judge on “A View From the Bench.” Additional sessions include:

  • Cost of capital update;
  • How to navigate “nightmare” valuation cases;
  • Determining personal goodwill; and
  • Calculating credible lost profits damages.

For more information and to register, click here.

VC and PE funds do build businesses, says new Pepperdine study

A new study by Professors John Paglia and Maretno Harjoto (both at the Graziadio School of Business and Management, Pepperdine University) looked at the effects of private equity and venture capital financing among just over 6,800 small and mid-size business establishments from 1995 to 2009 to find that, after a financing event:

  • PE-backed establishments generated 129% more revenue growth and 257% more employment growth than their non-PE backed counterparts; and
  • VC-backed companies generated 846% more revenue growth and 608% more employment growth than their non-VC backed counterparts.

At the same time, the study reveals that minority, female, and foreign owners are less likely to receive PE financing (12.6%, 3.6%, and 38.8%, respectively) as well as VC financing (34.7%, 22.5%, and 45.6%). To read the complete report, “Did They Build That? The Role of Private Equity and Venture Capital in Small and Medium-Sized Businesses,” click here.

International valuation standards now online

The International Valuation Standards Council has just launched IVSonline, a new way for subscribers to view all current International Valuation Standards (IVSs) and supporting Technical Information Papers (TIPs) through their web browsers.

At present, IVSonline includes all approved IVSs and three TIPs, with more standards updates and published TIPs to come in 2013. Subscribers are able to search across all documents by subject, term, or phrase with fast links to all related material, according to the IVSC website. “There is also an automated glossary with all documents cross-referenced and available for copy or printing.”

Make your CPE resolutions (and reservations) now

If you’re still looking to fulfill 2012 CPE requirements, there’s still time to register for these BVR webinars:

Mark your calendars: To launch a productive new year, don’t miss BVR’s first ever “Advanced Series on Discounts for Lack of Marketability,” four programs consisting of:


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