Auditors & CFOs: ‘We will not train the valuators’
Valuation specialists heard that statement throughout day one of the first annual National Fair Value Summit, co-sponsored by BVResources and the American Society of Appraisers in New York City this week. Panelists from the “Big 4” accounting firms said it the most often, of course, and it bears repeating in full: “The auditors are not going to train the valuators on fair value measurements.” In addition, Tony Aaron (Ernst & Young) stressed the importance of valuators explaining their fact patterns, showing their work—especially behind their schedules; developing sound analytical theory, and keeping up with the evolving literature on fair value for financial reporting. Oh—and better keep to stated time limits. “Be honest about the time to completion,” advised Dale Shepard, CFO, Vertex Data Science, who sat on the CFO panel. “If you miss your deadline, rest assured that I will not use you again.” If that weren’t enough—“I will make sure my entire business network knows about your failure.”
PE needs you. Another hot conference topic: Must private equity firms heed the requirements of SFAS 157 and other FASB pronouncements (as well as guidelines from their own PEIGG, Private Equity Industry Guidelines Group)? When an attendee asked the question over the lunchtime meeting, a FASB spokesperson was adamant that PE firms must comply. “That’s all I wanted to hear the entire conference,” the attendee said. At his session on SAS 73 reviews, Aaron indicated that more and more, auditors are recommending that PE firms hire valuation specialists—another sign of big opportunities in this field. “Public relations is everything,” advised Shepard. “I was at GE under Jack Welch, and 95% of his success was PR.”
Income approach still preferred for valuing customer intangibles?
Valuing customer relationships has long been a controversial topic. Starting in about 2005, statements from the FASB and the SEC generally indicated that the income approach was the most appropriate method for estimating the fair values of customer-related intangible assets. But along came remarks by Joseph Ucuzoglu (SEC’s Office of Chief Accountant) before the AICPA ‘s 2006 national conference, that served as a “wake up call” to appraisers:
Some have suggested that the SEC staff always requires the use of an income approach to value customer relationship intangible assets. The staff has even heard some suggest that, as long as a registrant characterizes its valuation method as an income approach, the specific assumptions used or results obtained will not be challenged by the staff, because one has complied with a perceived bright line requirement to use an income approach.
“Let me assure you, these statements are simply false,” Ucuzoglu said. “While an income approach often provides the most appropriate valuation of acquired customer relationship intangible assets, circumstances may certainly indicate that a different method provides a better estimate of fair value.” Even when a registrant concludes that an income approach is the better approach, he added, “the staff may…question the result…when the underlying assumptions, such as contributory asset charges, do not appear reasonable in light of the circumstances.” (Ucuzoglu’s full remarks—touching on purchase price allocations, employee stock-based compensation, and more—are worthwhile reading, available here.)
What is the current best practice? “The general climate is one in which the customer relations are expected to be valued using the income approach,“ Bill Johnston told attendees at the ASA/BVR Fair Value Summit. At the same time, he emphasized the same “facts and circumstances” caveat as the SEC. For example, when customer relations are weak, of low value, and/or not the primary asset, Johnson believes that the cost approach makes sense. "I start with the presumption that there is customer value to be valued using the income approach, and deviate from that only if I can build a convincing case," he said. "If a client says their brand is strong and customer relations have no value, be suspicious."
The sub-prime disaster ‘only a drop in the bucket’
The latest posting from Rob Slee (MidasManagers.com) outlines the repetitive, ten-year transfer cycle of the U.S. economy. To paraphrase:
Basically, the first few years of every decade (think 1980-83, 1990-93, and 2000-2003) are recessionary years for the private capital markets. The fourth year of every decade is a transition year to profitability. Years five to eight are the go-go years; the private markets are open for business, when we feel the need to over-build, over-leverage, and ‘over-’ just about everything else…The economic house-of-cards starts falling in the eighth year (see 2008), and totally flattens by the end of the decade.
The economy has already tipped to the “dark side,” Slee says, beginning with the sub-prime slide and the current imbalance in asset classes such as private equity, hedge funds, and credit card portfolios. Business owners have until mid-2008 to sell, “or they will need to hold their companies until 2015 or so before they can maximize a sale,” he predicts. “These asset classes, which represent trillions of dollars, will be reset over the next three to four years, making the sub-prime thing seem like a drop in the bucket.”
How can business appraisers help shield their practices from any looming downturn? They can advise owners on implementing a conceptual business model now, Slee says. That translates into businesses owning—and leveraging—all intellectual capital and outsourcing all processes. “A good goal is to leverage intellectual capital by at least a 5:1 ratio.” Top-performing companies leverage their IC by more than 50:1, Slee tells business owners and their strategic consultants. “You’ve got work to do.” To read his complete article, “Get Strategic—or Get Out,” click here.
Private cost of capital—good news for 2008? Slee is continuing to develop data on private cost of capital (see BVWire™ # 63-1). He will be speaking to the NY State Society of CPAs at their annual BV conference on May 19, 2008, in a talk titled "Private Cost of Capital." In the meantime, more law and business schools have picked up his course on private capital markets. “Imagine a world in which lawyers and MBA's are value-added to Main Street,” he says. Imagine business appraisers adding value right next door. “Now that's a world I want to live in.”
As the nation goes, so goes Maine…
…At least, when it comes to the majority rule on distinguishing enterprise from personal/professional goodwill in matrimonial cases. After dodging the issue in recent years, the Supreme Judicial Court of Maine addressed it head-on in Ahern v. Ahern (January 3, 2008), involving the valuation of a dental practice. “We now adopt the enterprise/personal framework for the purpose of evaluating the goodwill of a professional practice in the context of an equitable distribution of property,” the Court held. In this case, both parties’ appraisal experts “unequivocally” testified that the goodwill value of the dental practice resulted from the husband’s skill and reputation. “Although we do not presume to address all possible permutations of the enterprise/goodwill distinction—and we caution that these categories could prove overly simplistic when applied to the circumstances of other cases,” the Court said, it had “no difficulty” concluding that the personal goodwill value of the dental practice was “not a species of property subject to equitable division.” (Thanks to Eric Purvis of Dawson Smith Purvis & Bassett, PA (Portland, ME) for writing in to highlight the decision.)
We’ve added Ahern to “Goodwill Hunting,” our state-by-state summary of case law from all fifty U.S. jurisdictions, available here. At the same site, also look for: “Goodwill: Where Are We? How Did We Get Here? What Do We Do About It?”, the introduction by David Wood to BVR’s Guide to Personal v. Enterprise Goodwill (2008). With contributions from Jay Fishman, Mark Dietrich, Jim Alerding, Shannon Pratt, Kevin Yeanoplos, and others, the new Guide is a “first-class effort,” Wood says. Get your copy here.
Comparison of BV Standards ‘worth their weight in gold’
After all the debate on the proliferation of professional BV standards, a new article by Martin Lieberman and David Anderson called “Will the Real Business Valuation Standards Please Stand up?” is among the first to clarify where the competing standards are consistent—and where they are not. Published in a recent CPA Journal (Jan. 2008), the article begins with a comprehensive overview, from IRS Rev. Ruling 59-60 to the Uniform Standards of Appraisal Practice (USPAP) to last year’s issuance of SSVS 1 from the AICPA. In particular, a chart displays each standard from the five major professional organizations and itemizes the type of valuation reports that each permits. A second “Report Standards Comparison Chart” lists nearly sixty report items—from client engagements to limiting conditions to conclusions of value—and then identifies the minimum report requirements that each professional standard requires. These charts alone are “worth their weight in gold,” says Noreen Dornenburg, former member of the Appraisal Standards Board. To access the full article, click here.
Sources for industry data—an updated overview
“Where to Find the Competitive Data You Need,” a new article by Jane Hodges for BNET.com, is geared toward business owners who want to find “juicy tidbits” on their competitors. It also provides business appraisers with an excellent guide to gathering industry intelligence for a subject company—or for a client prospect. Included among the standard sources (SEC’s EDGAR for public companies, Dun and Bradstreet for private, LexisNexis for corporate legal filings, Moody’s for debt), are some new and not-so-obvious ones, such as:
- Patent and trademark websites
- KnowX, a fee-based site providing corporate “background checks”
- Internet domain-name registration sites
- Media clipping and analysis services
- Free news feeds
To get the complete guide, click here.
Start planning your BV conference schedule now
Summer may seem well beyond a February planning horizon—but one of the best ways to beat the midwinter doldrums (and make good on those 2008 business development resolutions) is to start looking at the terrific line-up of BV conferences slated for this coming season. May is when the action begins—not only with the NYSSCPA confab mentioned above, but also the “Current Topics in Business Valuations,” sponsored SoCal Appraisers and PricewaterhouseCooper in Los Angeles, CA on May 16, 2008—an annual event that usually sells out fast. The California Society of CPAs BV Section will be holding an all-day BV Conference on May 28, 2008 in Los Angeles, with a special focus on executive compensation.
Las Vegas is hands-down the most popular venue, starting with the AICPA/AAML National Conference on Divorce, May 8-11, followed by NACVA's 15th Annual Consultants' Conference, June 8-11. (The AICPA/ASA National Business Valuation Conference will also be held in Vegas in November, 2008). The Institute of Business Appraisers has just posted the dates for its annual Symposium, June 19-21, at the Pheasant Run Resort and Spa in Chicago. The 2008 ASA International Appraisal Conference will be in Minneapolis on August 3-6. The CICBV's 2008 National Conference in Quebec City, Canada will close out the summer on September 4-5.
For a complete, year-round listing of all conferences, seminars, and educational events, including contact information and registration links, visit the BV Calendar located in the left margin of our homepage, BVResources.com, or the links at the upper right margin of this email. Have an event you’d like to list? Be sure to email the editor and we’ll post BV-specific offerings online.