July 31, 2013 | Issue #130-4  

New insights into cheap stock valuations

“When working with private company equity security valuations, be very cognizant of the company’s financing history, especially recent (less than six months) financings,” says a new article explaining the AICPA’s updated guide on cheap stock. The article, by Rob Barnett, managing director of Valuation Research Corp. (VRC), goes on to say that you also need “sufficient understanding about the company’s current and evolving outlook with respect to its liquidity options.”

The 2013 AICPA Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation contains two valuation concepts that, although new to the updated version, are already being used in practice: a market approach known as the “backsolve method” and an income approach known as the “hybrid method."

“Each method is an extension of fundamental allocation concepts and methods, but is designed to better address specific circumstances or fact-patterns leading to a more comprehensive valuation estimate.”

Stars aligned for more M&A activity

Low interest rates and $1 trillion in cash sitting on U.S. corporate balance sheets add up to many companies looking to do an M&A deal this year. Forty-two percent of CEOs surveyed by PricewaterhouseCoopers say they're planning to complete a domestic deal this year. Thirty percent say they completed a domestic deal in 2012.

CEOs in the U.S. are more intent on M&A in 2013 than their global peers, says PwC, and they're concentrating on consolidation and expansion in the U.S. market. For now, things are restrained, but the “fundamentals for growth in the deals market are in place.”

Car dealer’s valuation of damages is a lemon

After the only U.S. distributor of the Japanese carmaker Suzuki filed for Chapter 11 bankruptcy at the end of 2012, it agreed to repurchase inventory and offered 220 car dealers the opportunity to continue as service and parts dealers with the successor owner. Ninety-seven percent accepted, but a Florida dealership did not. Instead, it filed a claim with the Bankruptcy Court (C.D. Cal.) for reimbursement for the fair market value (FMV) of its franchise under a state dealer protection statute, as well as for past and future lost profits damages due to breach of contract.

Spoken like a real estate broker: The court accepted the dealer’s in-house counsel as an expert for the purpose of valuing car dealerships. He stated the business’s FMV as of October 2011 was $330,000, without explaining how that date related to the bankruptcy proceedings and without accounting for the significant operations costs related to the franchise. He admitted he made no effort to obtain information regarding 2012 or 2013 sales. His opinion was without the “true economic analysis” an expert would perform in an “actual” valuation and deserved no weight, the court said. He never accounted for the fact that the dealer’s other car line businesses subsidized most of the operations costs for the Suzuki franchise. It is “as likely as not” that without that subsidy Suzuki sales and service operations would have lost money during the years the expert reviewed, the court found. His own statements, it went on to say, suggested that his activities, skills, and experience resembled those of a real estate broker who tried to determine “an appropriate listing price for a home being put on the market.”

Once the debtor met its contractual repurchase obligations, the dealer only had a right to lost profits for parts and accessories in stock at the time it tendered them to the debtor. Since new Suzuki-made cars were no longer available in the U.S., “a Suzuki car sales dealership is almost valueless,” the court added. Had the dealer accepted the debtor’s offer like all the others, “little or nothing would have changed for it.”

Find the complete digest of In re: American Suzuki Motor Corporation, 2013 Bankr. LEXIS 2276 (June 4, 2013) in the September issue of Business Valuation Update; the opinion will be available soon at BVLaw.

Looking for a few good valuation analysts

A blog item in BVWire News notes that The Appraisal Foundation is searching for qualified candidates to serve on two volunteer resource panels that will report to the board of trustees: the Business Valuation Resource Panel and the Personal Property Resource Panel. The purpose of the panels is to preserve and improve the public trust in valuation.

There are up to 10 vacancies on each panel, and terms will last approximately one year. Completed applications must be received by Aug. 30, 2013. For more information and an application, click here.

Exciting opportunities in oil and gas valuations

Development and investment in shale plays, the application of new technologies, increased M&A, and a growing number of oil and gas mineral rights holders who need gift and estate tax work create exciting opportunities and challenges for business appraisers and financial analysts appraising oil and gas companies.

New special report: Guidance From the Experts: Valuing Oil and Gas Entities dives into discussions of the unique characteristics and considerations owners and valuation professionals should consider when deriving value estimates for all companies along the oil and gas value chain.

Chapters authored by valuation experts in this field include:

  • Top value drivers in the oilfield services industry;
  • Best approaches to valuing oil and gas companies;
  • Valuations with and without reserve reports;
  • Using oil and gas royalty reports when valuing minority interests;
  • Valuing mineral and production rights; and
  • Current state of Marcellus Shale.

Front-burner valuation training events

Next week, there are two CPE events of particular interest to valuation experts.

Cost of capital: When it comes to cost of capital determination, the only constant may be uncertainty. As a newly compiled bibliography of BVR coverage shows (available via our free resources page), since 2008, no less than 14 BVR webinars and 27 articles in the Business Valuation Update have focused on cost of capital-related issues. At least seven court case digests covered in BVLaw have also touched on these issues.

To tie all this together, the August 8 Advanced Workshop on Cost of Capital will feature BV “hall of famers” Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and Ron Seigneur (Seigneur Gustafson). In an intensive, interactive, four-hour presentation, you will learn about everything from CAPM and the size premium to how to use available data and how pass-through entities affect cost of capital.

Economic damages: Reports & Reporting Standards in Litigation, Part 6 of BVR’s Online Symposium on Economic Damages, features experts Michael Crain (The Financial Valuation Group) and Jim Alerding (Alerding Consulting) discussing how financial professionals can navigate the standards, case law, and best practices that govern how their works are prepared. Attendees to this August 6 webinar will hear what can make the difference between a report being defensible or inadmissible.


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