More evidence of hot growth in the business valuation profession
Over 450 BV firms have submitted financial and operation data for the 2008-2009 edition of the Business Valuation Firm Economics & Best Practices Survey (due out in early September). Of these, an amazing 12% performed their first appraisal in the last twelve months. (This is an even a higher growth rate than in the last survey 18 months ago, in which 9.4% of respondents had opened their doors in the preceding year). Many reactions to this growth are possible. For certain, one response is pride since business valuation is growing at a faster rate than any other major profession, including legal, medical and accounting. From a business point of view, however, practioners need to manage this influx of new “competitors.” A more crowded space means that issues like “brand” and “niche specialization” will be ever more important going forward.
Draft valuation report survey—the results are in!
The BVWire posed the question— “What are your thoughts on sending a draft of your expert report on a litigation matter to the attorney with whom you are working?” —and you answered. Here is how your colleagues are treating their draft valuation reports (percentages rounded):
- I send a draft but place a disclaimer on it that reads “Incomplete Work Product” or something similar – 41%
- Other (responses here typically included a hybrid of the selectable answers, with most stating that they either (i) send a draft or read/discuss concepts, and (ii) send a draft with numbers blanked out and destroy all copies) – 24%
- I sometimes send drafts but rarely if ever keep a copy – 18%
- I never send a draft to an attorney – 12%
- I always send and retain copies of my drafts – 6%
- I send a draft but with all numbers pertinent to my valuation blanked out – 0%
- I will read some or all of the report to the attorney or review it electronically with the attorney – 0%
Here is one of the many comments we received:
I have never thought that business valuation is a solo effort. It is, I believe, the result of the work of many professionals, including the business valuer, in a process that takes a high-resolution still photo (the report or basis for testimony) of a moving train (the business) passing close in front of the valuer. For such an exercise, the perspective of the train's designer (internal business plans, projections and records) and of its engineer and his team (CEO, CFO, COO, CTO, etc.) are likely to be necessary for the valuer to get a clear picture (definition of the interest being valued and standard of valuation used) of the train (clearly written and supported report), at the right moment (valuation date), from the right azimuth (purpose of valuation) and with clearly visible background (contextual perspective).
Have any comments on the results? Send them to BVWire@bvresources.com.
'Sustainability Value:' A new definition of value?
World Finance raises an interesting question in a recent article—is sustainability a new factor in contemporary business valuations? Cheryl Hicks of the World Business Council for Sustainable Development believes there are increasing signs of sustainability performance in business valuations. An instance of this was the 65.5% premium paid in the acquisition of Alcan, Inc., where Alcan’s CEO stated that “Alcan’s track record on sustainability, environmental stewardship and stakeholder relationships” were significant contributing factors in the massive premium paid.
The article goes on to posit that “enlightened” CEOs are already communicating “sustainability value” as a new definition of value, and that the historic intangible asset valuation journey could serve as a model for sustainable valuations (remember: it was once thought impossible to assign value to intangibles such as brand, reputation and patents). For more interesting thoughts to ponder, read the full article here.
New financial reporting valuation guidelines
William A. Johnston, ASA (Empire Valuation Consultants, New York), provided the BVWire with the following abbreviated write-up on The Appraisal Foundation’s recent Discussion Draft:
On June 10, 2008 The Appraisal Foundation released its first Discussion Draft from its Intangible Asset Working Group entitled “The Identification of Contributory Assets and the Calculation of Economic Rents.” The Appraisal Foundation is seeking to tackle key financial reporting issues by forming groups of leading practitioners to address key concerns where there is diversity. Given that there has been limited guidance in the past in the financial reporting realm, these best practices should be quite useful and lead to better fair value reporting for companies.
The Discussion Draft provides a solid framework to work within, and many key issues are addressed. However, not all issues were resolved, including the following:
- Are iterative/circular charges acceptable? (The paper generally discourages such an approach and discusses alternatives).
- Should deferred revenue be included to calculate a working capital charge?
- If working capital is negative, should there be no charge or a “reverse charge”/positive cash flow applied?
- For in-process research and development, should charges be applied when no revenues are being generated?
The issues above do not necessarily have a clear-cut answer. It will be interesting to see where the debate leads us to on this and future efforts by The Appraisal Foundation working groups in establishing best practices for financial reporting valuations.
Bill’s full write-up can be found as a Free Download here.
What are valuators talking about?
At the late-June IBA Symposium in Chicago, lively discussions took place regarding three hot topics: 1) the nature of illiquidity; 2) whether to calculate deductions for built-in capital gains as if they would happen immediately or by taking the present value of future tax benefits; and 3) when should subsequent events be included in a valuation report
At the first utterance of “illiquidity discount,” multiple hands shot up, all with the same question: how does this differ from a discount for lack of marketability? The speaker acknowledged that he was unable to give definitions that would adequately differentiate the two, and instead chose to defer to the “statistician in the room;” namely Dr. Ashok Abbott (West Virginia University). Dr. Abott then provided a 15 minute explanation, complete with examples. His presentation included a discussion of marketable public stock which had to be sold at an increasing discount to current market prices as the block size increased. At the end of the discussion, some of the room remained confused, while others still did not believe a difference existed between illiquidity discounts and marketability discounts.
The next notable discussion occurred after mention of the Jelke case (see the January 2008 issue of the Business Valuation Update, available as a Free Download here) and the topic of embedded gains. Do you deduct embedded gains and if so, do you deduct them dollar-for-dollar (as if they would happen immediately) or discount the future tax benefits back to the present value? Reviews were mixed, but many participants, including the presenter, said that if they were to deduct, they would deduct the embedded gains dollar-for-dollar (which the Jelke court agreed was appropriate, while the dissent referred to this as “adopting the doctrine of ignoble ease”—essentially calling the decision an easy way out of difficult mathematics). But what are the benefits of adopting such a doctrine, you may ask? Some additional thought from the group was, with so much uncertainty regarding future tax rates and timing of the sale, the easy road may not be any less accurate than the more complex method of discounting to present value.
The last significant discussion covered what was “known or reasonably knowable” on the valuation date and whether it could be used in a valuation report. The answers to the first question, “Would you use year end financials that would not have been available for several months after the year end valuation date?” were virtually all yes. But what if those financials were revised many months after the valuation date? Responses were mixed. Further questions dealt with what is “foreseeable” and whether a consistent way to handle this existed. Discussion even included what the courts considered to be “foreseeable,” and how subsequent events, foreseeable or not, factored into rulings (see BVWire #69-1 for more viewpoints from the courts).
The August issue of the Business Valuation Update contains an expanded discussion of these three topics. Have any comments on these subjects? Send them to BVWire@bvresources.com and we may publish them next week.
Free webinar—'Getting Ready for SFAS 141R, Business Combinations'
In conjunction with Compliance Week magazine, Matthew R. Crow, ASA, CFA, and Travis W. Harms, CFA, CPA/ABV (both of Mercer Capital, Memphis, TN), will present a free webinar on July 31, 2008 (2:00 p.m. EDT) which will cover an overview of SFAS 141R and the resultant valuation implications.
SFAS 141R brings substantial changes to fair value accounting procedures in business transactions. As previously noted in the BVWire (#69-3, June 25 2008), a recent study by Deloitte found that SFAS 141R would cause 40% of those surveyed to "rethink" deal strategy and affect planned deal activity, while only 4% said their companies have already finished assessing the valuation impact of the new rule. Click here to sign up for the free webinar.