Although most empirical studies find that the size effect has disappeared since the early 1980s, it shows up during times of high macroeconomic volatility, according to a new paper. For instance, high uncertainty triggers changes in bank lending policies, which hamper small firms’ ability to raise capital, the paper points out, and investors would require higher returns from credit-constrained small companies. The paper, which examines the U.S. and U.K. equity markets, also finds that, in those markets, “recession itself would not hamper raising capital for the small firms unless it coincides with the high uncertainty.” For example, the 2008 financial crisis was coupled with an uncertain economic environment, which resulted in an average monthly size premium of 1.615% during that year, the paper says.

The paper, “The Size Premium and Macro Volatility Risks: Evidence from US and UK Equity Markets,” is by Sungjun Cho, an assistant professor in finance at the Alliance Manchester Business School of the University of Manchester. The paper will appear in an upcoming issue of the International Journal of Finance and Economics. There will be additional details and comments in an upcoming issue of Business Valuation Update.

TAF releases VFR on contingent consideration

The Appraisal Foundation (TAF) has issued a Valuation in Financial Reporting (VFR) advisory on valuing contingent consideration, also known as earnouts. Contingent consideration must be reported at fair value as part of the purchase price in an M&A transaction. The valuation advisory “is a step forward in enhancing the public’s trust in business valuation” by making the process more transparent and “demystifying the black box of contingent consideration,” says Alok Mahajan, one of the advisory’s lead authors and Working Group chair, in a statement. The TAF points out that this VFR represents one of the only financial reporting valuation practice aids focused on valuation of options/real options. Therefore, the applications of the concepts extend beyond just contingent consideration.

Valuing IP associated with influencer marketing

Social media has transformed the “nobodies” of the past into new “somebodies” who have influence over the online audience. Businesses do endorsement deals with these “influencers” to sell their wares. This brings up an interesting question: How do you put a value on the intellectual property (IP) associated with influencer marketing? In an interview with Forbes, Doug Bania and Brian Buss, who are both with Nevium Intellectual Property Consultants (San Diego), talk about this new phenomenon. They have developed new techniques, using internet analytics tools, to determine both the valuation and potential damages for infringement of influencer marketing. For example, they developed the “relief from pay-per-click” method, which is a variation on the “relief from royalty” method. In the article, they advise companies to identify and organize their IP early on—a simple Excel sheet providing the description of the asset and the date registered will do. Also, companies should never let employees register IP assets such as domain names, websites, and social media accounts with a personal email address or using their own name. “Sounds simple, but this can get very messy over the years if you don’t keep track of the details,” they say. When doing due diligence on a recent case, they found that the company selling IP assets it thought it owned didn’t legally own them at all.

Bania and Buss are authors of two chapters on valuation for internet IP infringement and defamation in The Comprehensive Guide to Economic Damages, 5th edition. They also recently conducted a webinar for BVR, Valuing the Misuse of Intellectual Property Online.

New York Times' scathing article on appraisers wins Polk Award

In our coverage of the New York Times article on the “friendly” valuations used to increase the fortune President Trump received from his father, we called it “brilliantly written and fascinating.” The article has just won a prestigious Polk Award in Journalism, according to a news release. The extensive investigation by the Times revealed that manipulated appraisals of real estate and sham companies were used to transfer the elder Trump’s wealth to Donald and other heirs while slashing estate and gift taxes. Long Island University annually gives the awards in memory of George Polk, a CBS correspondent who was killed in 1948 while covering the civil war in Greece.

Good mix of topics at NYSSCPA BV Conference May 20

An interesting list of topics will be discussed at this year’s Business Valuation Conference put on by the New York State Society of CPAs May 20 in New York City. They include: cost of capital, cryptocurrency, damages methods, use of projections, contingent consideration, scaling the business model for your practice, and an interesting look back at 40 years of the business valuation profession.

'Essentials' track offered at National Divorce Conference

Valuation experts have a lot of sessions to choose from at the National Divorce Conference in Las Vegas May 8-10. In addition to three tracks of sessions, there is an “Essentials” track with some exciting topics and presenters: active/ passive appreciation (Bill Dameworth), cost of capital—20 different ways (James Hitchner), valuation of startups (Ron Seigneur, David Griffin), mediation (Lisa Ann Sharpe, Neil Beaton), double dip debate (Don Degrazia, Kim Willoughby), enterprise vs. personal goodwill (Joy Feinberg, Michelle Gallagher), and valuing hidden assets (Kevin Yeanoplos, Amanda Trigg). There are three other tracks to choose from at the conference, presented by BVR and the American Academy of Matrimonial Lawyers (AAML), which will bring together the leading matrimonial attorneys and financial and valuation experts.

Valuation data for Switzerland

Multiples, margin data, cost of capital components, and more can be found in EY’s summary report (as of 4Q18) of relevant market data regularly used in valuations in Switzerland. The analysis is based on the constituents of the Swiss All Share Index (excluding general financial and real estate companies) and data from S&P Capital IQ/Oxford Economics.

European takeover premiums

A paper by Professor Dr. oec. HSG Korbinian Eichner, M.A. HSG, examines 589 takeover premiums of closed European transactions that occurred between 2005 and 2016. Both the acquirers’ strategic considerations and target firms’ financial characteristics can have a substantial impact on the level of takeover premiums, according to the paper. “Although every deal is unique in its own way, there are factors which correlate strongly with historically observable premiums paid,” it says.

BV movers . . .

People: David Smith, ASA, CFA, has joined Memphis-based Mercer Capital and will lead the firm’s Houston office; he formerly led the Houston valuation practice of HSSK; Mercer also has offices in Dallas and Nashville … Elizabeth Ciccone, ASA, Esq., director and member of the Business Valuation and Litigation Support Advisory and Consulting Practice at Marcum LLP, has joined the University of New Haven (Connecticut) faculty; she will teach business valuation and valuation theory to graduate students within the law school program … Anthony J. Nitti, CPA, MST, has joined RubinBrown LLP as a partner in its Tax Services Group; he’s a well-known expert on the Tax Cuts & Jobs Act and conducted a session on Section 199A at the 2018 AICPA Forensic and Valuation Services Conference.

Firms: New York-based Anchin Block & Anchin LLP added to its advisory services with a new subsidiary: Anchin Digital Risk Solutions LLC … Cloud technology firm Tactical Cloud of Costa Mesa, Calif., will become part of Fargo, N.D.-based Eide Bailly’s NetSuite practice on February 25; NetSuite offers cloud-based business management software … Prager Metis CPAs expanded into Nevada with the opening of its first office there, located in Las Vegas … Several accounting firms were named to the “Fortune 100 Best Companies to Work For” list, including Plante Moran (No. 21), Deloitte (No. 26), EY (No. 34), KPMG (No. 36), PwC (No. 44), and Crowe (No. 68) … San Ramon, Calif.-based Armanino launched a blockchain practice offering a full range of specialized services … Whelan Barsky & Associates joined with Owings Mills, Md.-based Glass Jacobson … Bodine Perry, with offices across Ohio and Florida, has acquired Adams & Harper, a CPA firm on the east coast of Florida (Orange Park) … Eden Prairie, Minn.-based Boulay has merged with Anspach & Associates PLLC of Naples, Fla.; the merged entity will be known as Boulay and will continue to operate in Naples.

Please send your professional and firm news to us at editor@bvresources.com.

Upcoming BVR training events

• Valuing a Small, Owner-Operated Business (February 28), with David Coffman (Business Valuations & Strategies PC).
  
  Valuations of small (under $5 million) owner-operated businesses need to consider the unique characteristics of these firms. You’ll learn about these, plus reasonable owner compensation and how to deal with marketability and lack of control discounts.
  
  

• FREE WEBINAR: Cost of Capital Professional: Gain the Edge with New Enhancements (March 6), with Dr. Michael Crain (Florida Atlantic University) and Ronald Seigneur (Seigneur Gustafson LLP).
  
  The newest resource for developing cost of capital estimates now includes beta-adjusted size premiums, the ability to compute weighted average cost of capital (WACC), select arithmetic or geometric averages, and more. The webinar will provide a conceptual overview and practical demo of the platform.

New and trending LinkedIn discussions

The Absence of a Size Effect Relevant to the Cost of Equity

Is a Merger Causing a Culture Clash in Your Organization?

OPM Backsolve and Convertible Debt Financing

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