Damodaran posts his data update for 2023

At the beginning of each year, Professor Aswath Damodaran (New York University Stern School of Business) generously posts a great amount of data on his website that include risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. He does a series of posts on his blog based on these new data, which contain his thoughts on what the data are best suited for and some caveats for users. His first post explains some of these data and gives the background of his annual analysis.

Implied ERP at 5.94%. For the ERP, Damodaran uses a forward-looking method known as the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP in the U.S. to be 5.94% as of Jan. 1, 2023. His spreadsheet of ERP and country risk premia is available if you click here.

Absent a goodwill analysis, the court does its own

In a Tennessee divorce case involving the husband’s plastic surgery practice, neither valuation expert did an analysis that separated enterprise and personal goodwill. The husband’s expert relied mostly (90%) on the adjusted net asset value (NAV) but also considered the capitalized cash flow value (CCF), giving it a 10% weight, arriving at a value of $110,000. The wife’s expert relied 100% on the CCF and came up with a value of $350,000. Both experts acknowledged that their valuations included goodwill, and the husband argued that the personal goodwill component needed to be backed out and excluded from the marital property. The court, finding that the wife’s expert was “more experienced,” adopted her expert’s valuation and backed out $95,000, coming up with $255,000 as the value of the practice. This value included an amount in excess of the NAV representing some level of enterprise goodwill. The husband appealed, but the appellate court affirmed the trial court’s valuation, noting that it adopted a valuation “within the range of the evidence submitted.” In the end, the court did its own “analysis” of enterprise and personal goodwill.

The case is Chase v. Chase, 2022 Tenn. App. LEXIS 478, and a case analysis and full court opinion are available on the BVLaw platform.

The 2023 Pepperdine private cost of capital survey is now open

Every year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. A BVWire poll found that 40% of respondents use the survey results for estimating small private-company cost of capital. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. The direct link to the survey is here.

The survey results are used to produce annual Private Capital Markets Report (reports from prior years are available if you click here). The price for the annual report is normally $125, but it’s free if you fill out the survey—plus you’ll get it a week early.

Extra: Using the Pepperdine report produces very similar results for cost of equity as you get from other sources, including Kroll’s Navigator and BVR’s Cost of Capital Professional, according to an article in the February 2023 issue of Business Valuation Update,“COE Estimates From Leading Data Sets Are All ‘Very Close.’”

Accounting standards needed for crypto, urges paper

“We recommend that accounting regulators undertake standard-setting specifically for cryptocurrencies instead of allowing companies to choose which existing standard to apply and how to do so,” says a new paper, “Financial Reporting for Cryptocurrency.” Existing disparate practices by companies studied are causing “inconsistencies or distortions in their balance sheets, income statements, and statements of cash flow reporting.” The study analyzed the financial statements of 40 global companies that have exposure to cryptocurrencies and how they accounted for these assets. The paper appears in the journal Review of Accounting Studies, and the authors are Mei Luo and Shuangchen Yu, who are both at the School of Economics and Management, Tsinghua University, Beijing, China.

DealStats Hall of Fame members for 2022

Thanks to business brokers and other intermediaries who contribute data, DealStats is the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2022 are:

• Ryan Gipple, Berkshire Business Sales & Acquisitions (Chandler, Ariz.);

• Neal Isaacs, VR Business Brokers (Raleigh, N.C.);

• Stephen Goldberg, Sun Mergers & Acquisitions LLC (Hasbrouck Heights, N.J.);

• Jason Ward, TrueView Business Advisors (Houston); and

• Teija Heikkila, National Kennel Sales & Appraisals (Grand Junction, Colo.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Extra: DealStats has some enhancements planned for 2023—stay tuned for details!

NACVA adds to CVA and MFF ranks

The National Association of Certified Valuators and Analysts (NACVA) announced that 97 members recently earned their credentials. Of these members, 89 earned the Certified Valuation Analyst (CVA) credential (or are candidates) and eight members earned the Master Analyst in Financial Forensics (MAFF) credential. These members completed the training, exam, and credentialing processes for the two credentials. NACVA has more credentialed appraiser members than both the AICPA and American Society of Appraisers (ASA) combined.

CBV Institute issues exposure draft on adopting IVS

The CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, has issued an exposure draft that proposes the adoption and permitted (optional) use of the International Valuation Standards (IVS) as issued by the International Valuation Standards Council (IVSC). IVS would be adopted as an option alongside, rather than replacing, the CBV Institute’s existing standards. Comments are due by March 31, and the details are available if you click here.

What’s in the February 2023 issue of Business Valuation Update

Here’s what you’ll see:

• “New Research Strengthens Support for the Three-Stage DCF” (BVR Editor). Unpublished research from Roger Grabowski and Ashok Abbott reveals data on firm growth over three stages: startup, stabilizing, and long term.

• “COE Estimates From Leading Data Sets Are All ‘Very Close’” (BVR Editor). Jim Hitchner conducted a hypothetical engagement using Kroll’s Navigator, BVR’s Cost of Capital Professional, the Pepperdine study, and Damodaran’s data to estimate cost of equity (COE).

• “The Walsh v. Preston ESOP Case—Is It a Victory or an Escape?” (Jim Alerding). Commentary from BVR’s legal editor on an important ESOP valuation case.

• “Tom West’s Legacy to Appraisers: The Business Reference Guide” (BVR Editor). BVR was very saddened to learn of the passing of Tom West, co-founder of the International Business Brokers Association and founder of the Business Brokerage Press. Business valuers have him to thank for the Business Reference Guide, which contains pricing rules of thumb for almost 700 types of businesses.

• “New ‘Court Cases Method’ for DLOM Points Up a Conundrum” (BVR Editor). A new study analyzes court cases to determine a more legally defensible discount for lack of marketability (DLOM). But should business valuers look to court cases for “good” valuations?

• “The Valuation of Special Share Classes in the United Kingdom” (Andrew Strickland). A special analysis of a recent exposure draft concerning shares to employees in the United Kingdom (England and Wales, Scotland, and Northern Ireland).

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the February 2023 issue of Business Valuation Update.

BV movers . . .

People: Chris Overturf, CPA, CVA, has been appointed new managing principal at Washington, Iowa-based LattaHarris LLP; he works with individuals and businesses for tax planning and preparation, accounting, financial statement preparation, estate planning, business valuations, and general business consulting … Gavin G. McNamara, CPA/ABV, has been promoted to principal at Indianapolis-based Somerset CPAs and Advisors; he is on the firm’s healthcare team and focuses on transactional and integration/affiliation needs, including managing fair market value engagements, advising on transactional issues and conducting complex financial analysis and financial/operational due diligence … Corey S. Robinson, CVA, has been promoted to senior manager at Reading, Pa.-based Herbein + Co.; he works on quality of earnings reports, cash-flow forecasts, operational analysis, fairness opinions, and business valuations … Theresa Cameron, CVA, CFE, has been promoted to shareholder at Troy, Mich.-based Doeren Mayhew; she focuses her time on litigation and nonlitigation matters for various purposes, including family law, mergers and acquisitions, estate and gift tax, and shareholder disputes.

Firms: Spoor Bunch Franz of St. Petersburg, Fla., is adding Clearwater, Fla.-based Westbay CPAs and its five team members, who provide business valuation, forensic accounting, business consulting, and litigation support services to a variety of clients … New York City-based Citrin Cooperman & Co. is adding entertainment industry advisory firm Chapman Bird & Tessler of Los Angeles … Shreveport, La.-based Heard, McElroy & Vestal LLC is adding Curtis Blakely & Co. PC of Longview, Texas, a firm that provides auditing, accounting, tax, and consulting services to a variety of individual and business clients throughout east Texas … Princeton, N.J.-based Withum is adding Braintree, Mass.-based O’Connor & Drew … Fort Wright, Ky.-based VonLehman & Co. is adding Sherck Hussey Johnson & McNaughton (SHJM) of Indianapolis, which provides tax and audit services to a variety of clients throughout central Indiana, including those in the construction, nonprofit, and professional services industries … Clayton & McKervey of Southfield, Mich., is adding Howe & Holscher of West Bloomfield, Mich., which provides tax and consulting services to real estate and other closely held business clients … Farmington Hills, Mich.-based UHY LLP is adding Ross Langan & McKendree LLP of McLean, Va., a firm with three partners, one principal, and 19 professional staff who provide tax, audit, and accounting services to a wide array of clients.

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

CPE events

• Valuing Winery Losses—Understanding the Process and Addressing Common Issues. January 25, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Tim Gillihan (JS Held). CPE credits: 2.0.

Loss events, particularly wildfires, can have unique effects on a winery and create complications with respect to insurance claims for business income losses, property damage, extra expense, crop damage, and inventory losses.

• Boomers Want Out: Valuing Closely Held Entities. January 31, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Michelle F. Gallagher (Adamy Valuation) and Nick Adamy (Adamy Valuation). CPE credits: 2.0.

This webinar will explore what pushes baby-boomer business owners to the exit and how you can help them identify and meet their goals.