January 3, 2007 | www.BVResources.com | Issue 52-1

ABV ‘Sponsor’ debate: Harris and supporters respond

We have received dozens of responses to our items on the ABV Sponsor Program (see BVWire #51-3), indicating the heated debate within the BV community about what one detractor likened to a “’McDesignation’…not dissimilar from a Ph.D. or ordained minister’s license that can be mail-ordered from the back of Rolling Stone.” 

But, “To the people who criticize the AICPA decision to waive the exam requirement for a group of deserving and qualified people, I say they should get the facts first,” says a supporter of the AICPA's Sponsor Program. “To get my CVA designation ten years ago, I had to take eight all-day classes in valuation theory and practice with an exam at the end of each, in a program prepared and sponsored by the AICPA. I then had to take a NACVA-prepared home exam and case study analysis, which took approximately 20 hours. I have now been doing valuations for the last nine years, and taking annual CPE courses to maintain my CVA. To say that I do not qualify for the ABV designation because I did not take an AICPA proctored exam ten years ago (when none was available) is ridiculous.”

Robert Harris, Chair of the AICPA’s National Accreditation Commission, agrees by emphasizing the selective nature of the Sponsor Program. “CPAs who become an ABV under this program have significant experience in valuation and are credentialed by other recognized valuation organizations,” he says. “Candidates falling short in their experience or in the quality of their work have been denied the credential.” Sponsors serve as “gatekeepers” of the program, he adds, to help the “hundreds of qualified CPAs who already have the experience, skills and specialized knowledge to perform valuation services at the competency level expected of ABVs.” 

For more on the ABV Sponsor Program, click here. And look for Chairman Harris’ complete response—plus more from supporters and the “McDesignation” school, in the next issue of the Business Valuation Update™. To subscribe, go here.

Risk-free vs. risk-adjusted rates:
Reconciling FASB requirements

In one of our best-attended telephone conferences of 2006 (Discount and Capitalization Rates, Part II), the panelists were presented with the question: “Do you encounter FASB Concept Statement No. 7 in your work and how do you reconcile it?” 

That is, FASB Statement 7 (Using Cash Flow Information and Present Value in Accounting Measurements) indicates using a risk-free (or close to risk-free) discount rate for discounting a stream of cash flows calculated using expected value. But, the questioner adds, “I thought that using a risk-adjusted discount rate, such as calculated from the Duff & Phelps [study] was the proper level?”

Jim Alerding responds, “If you look at Statement 7 in a vacuum, it’s probably not a very good document, and I’m trying to be kind…It was written by someone with no valuation training.”

Co-panelist Jim Hitchner concurs, describing a presentation he made to the FASB when they were deliberating FSAS 141 and 142. “We did a traditional discounted cash flow using CAPM, and then we said: ‘Here's what it would look like if we used a risk-free rate as the discount rate.’ What we found is that you had to have such a high probability of total loss or a crash or something to make that model fit (what I call) the more traditional model.”

For a transcript and/or CD of the “Discount and Cap Rates” telephone conference, which included in-depth discussions of all your most frequently asked questions, click here.

FSAS 157 may trump prior statements

In their telephone conference, both Hitchner and Alerding agreed that with the introduction of FSAS 157 on Fair Value Measurements (see BVWire # 48-3), the FASB is “doing a much better job at getting their arms around this” concept of a risk-adjusted vs. risk-free rate, which could easily warrant another “hour and a half” discussion, they said.

With that in mind, BVR is starting its 2007 telephone conference line-up with a bang: On January 11, 2007, Al King, author of the new release Fair Value for Financial Reporting: Meeting the New FASB Requirements (Wiley, 2006) will join Matt Crow (Mercer Capital) and James Travis (Plante & Moran) to delve into SFAS 157, which takes effect later this year. To register, click here.

Current, comprehensive resources for V.C. valuations

In another question to the Discount & Cap Rates experts, a listener asked: “What studies do you employ for early-stage company valuations?”

Answered panelist Gary Trugman, “The one study I’ve used a number of times over the years is the QED Report on Venture Capital Financial Analysis, by James Plummer. That was a 1987 study,” he adds, “but I think there’s a lot of really good data there.”

But alas, Plummer’s book appears to be out of print. We’ve put out a request to the author (at QED Research, Inc.) to help track down copies. In the meantime, Professor Josh Lerner at Harvard Business School has compiled one of the most current, comprehensive bibliographies on venture capital as well as private equity analysis, available here

Professor Lerner also offers that the new textbook by Wharton’s Andrew Metrick, Venture Capital and the Finance of Innovation (Wiley, September 2006) is definitely worth checking out, as it covers the relationship between risk and return in venture capital, historical statistics on V.C. investment performance, total and partial valuation methods and data, and more (available at Amazon.com and most online sellers). 

For those who’re riding the current PE boom, “I also have a short note on private equity valuation,” Lerner says, which is a top-seller at Harvard Business online.

How the majority of BV firms avoids receivable ‘headaches’

The vast majority of BV practices (79%) requires up-front retainers before beginning a project, according to BVR’s soon-to-be-released 2007 Business Valuation Firm Economics & Best Practices Survey. The standard amount is 50% (the median is 50% and the mean is 52%), as shown in the table below. The second, third, and fourth most popular alternatives are 25%, 33%, and 100%, respectively. Many business owners in more traditional fields would envy these cash flow characteristics, which alleviate the more common headaches associated with receivables: 

What percent of project fees do you require as down payment?


















To pre-order your copy of BVR’s full survey report, click here

Lawsuit contends PCAOB is unconstitutional

A creature of the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) has generated almost as much controversy as the accounting scandals which helped create it. Last October, for example, PCAOB’s standards on auditing stock options received praise (see article). And just last month, the PCAOB proposed its revised standards on auditing internal controls over financial reporting; click here to read the new release.

But a recent Forbes.com article accused the PCAOB of “backing down” from its watchdog role. The Board was supposed to stop auditors from “blinding themselves” to corporate fraud because they were “raking in billions of dollars from the sale of consulting services” to their clients—“but now, the oversight board is delaying an audit rule that would have forced accounting firms to stop selling tax advice” to their audit clients.

And then, just before the holidays, a federal judge heard arguments that the PCAOB is unconstitutional because it is unaccountable to government. In their lawsuit, the Free Enterprise Fund and the Competitive Enterprise Institute contend that the five-member Board is a “quasi-private organization” that has greatly enriched auditing firms by creating “needlessly complicated” rules—costing the economy over $35 billion. “At the same time,” CEI attorney Hans Bader tells BVWire, “it has repeatedly disciplined small accounting firms for failing to exhaustively document the value of insignificant assets of small businesses, driving up the costs of audits.” To read the challenger’s arguments, click here.

ASA leader passes

On a sad note, ASA Executive Vice President Jerry Larkins passed away on December 27, 2006, after a long illness and surgery. “Jerry was an incredible leader for the ASA,” says Laurie Sanders, ASA Director of Communications and now its acting Executive V.P.  Beginning as the ASA’s membership director in 1999, Jerry advanced to the COO and then Executive V.P. in 2004. “He was instrumental in working to simplify and streamline the application and accreditation processes,” Saunders notes. “He was a tireless member advocate, and took the organization from a ‘loss’ position in 2004 to a position today of financial strength.

“Jerry had a special way about him,” she adds, “that touched people’s lives in a very intimate, emotional and spiritual way.” Cards may be sent to ASA International Headquarters at 555 Herndon Parkway, Suite 125, Herndon, VA 20170. In lieu of flowers, Jerry’s family requests contributions to: Capital Hospice (www.capitalhospice.org), the Gay Men’s Chorus of Washington (www.gmcw.org), or Food & Friends (www.foodandfriends.org).

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