BVWire Issue #154-4 | July 29, 2015

Is this email not displaying correctly?
View it in your browser.

New independent analysis tests IPCPL reliability

In a paper published in the latest edition of the ASA’s Business Valuation Review, the author describes an empirical test he conducted of the implied private company pricing line (IPCPL). This is a new method designed to eliminate the inherent problems in comparing public and private data and to add another approach in estimating the cost of capital for a privately held business.

High marks: The author, Igor Gorshunov, a business valuation and private equity professional, conducted an empirical test of the IPCPL cost of capital and the concept of margin reversion. He describes the test: “By arranging companies in the market by their operating profit margin we could observe the market valuation line (based on the market data) and steady-state valuation line, which represents the hypothetical valuation of the company based on the IPCPL cost of capital and constant growth rate. If both IPCPL cost of capital and the margin reversion concept are correct, these two lines should intersect at the point of average margin.” For the test, the author used 840 data points on private-company transactions sourced from Pratt’s Stats. Based on the test results, the author states: “This independent test indicates that IPCPL is a reliable source for small private companies’ cost of capital.”

The developers of IPCPL are Bob Dohmeyer, Pete Butler, and Rod Burkert. “We were introduced to Igor after he wrote this paper, and we have come to know him as a well-respected economist and mathematician,” Butler tells BVWire. “We certainly appreciate Igor’s interest and this is now the second formal independent validation of our work. It is always nice to meet someone in the industry who is open to new ideas. We look forward to others taking a look at IPCPL and the feedback that will come. We are hopeful that others will find it as useful as we have.”

In his remarks, Butler is referring to a recent paper on SSRN that calls IPCPL a “significant innovation in the valuation of privately-held, small-or-medium-sized enterprises (SMEs).” (See the June 24 issue of BVWire.)

See for yourself: Appraisers should read the material on BVR’s special IPCPL Web page and develop their own conclusions. On that page, you also have complimentary access to the IPCPL-based BUM WACC calibrator tool that is updated monthly. The Gorshunov article, “IPCPL and Margin Reversion: Implications for the Valuation of Small Privately Held Companies,” will be in the September issue of Business Valuation Update.

back to top

Damages expert presents ‘noisy’ royalty rate data

Damages experts working in intellectual property have a variety of sources from which to obtain royalty rate data. But can you simply gather and present data without fine-tuning it? An expert found out in a recent patent dispute involving ladies’ undergarments.

Revealing case: A holder of patents on camisole bras claimed a company’s “Oh My Gorgeous” bras infringed its patents. The patent holder hired a damages expert whose testimony the opposition attacked in a pretrial Daubert motion. The expert used data from several sources, including RoyaltySource, the Licensing Economic Review (LER), and a 2012 KPMG article on royalty rates across industries.

In terms of the RoyaltySource data, the opposition attacked the expert’s research, noting that it resulted in a summary of nine licenses, none of which involved the garments at issue. Instead, the licenses related to furniture products, enzymes for processing hemp, and spider silk textiles. Also, five of the agreements were between related parties and as such less relevant. One was not a proper license but an option to license.

As for LER, it used the same database as RoyaltySource and covered 15 industries. The expert said he used the most relevant ones but conceded that the LER data were “less relevant” than the RoyaltySource data. The opposition also challenged this material, saying that the expert performed a broad search of all “consumer goods, retail and leisure” and obtained data that provided nothing more than “generalities” of royalty rates for a wide range of goods. It was impossible to determine from LER what licenses formed the basis of the quoted royalty rates and what the terms of the specific licenses were. Without this particularized information, the patent holder was unable to prove that the LER data was meaningful to the hypothetical license at issue in this case, the opposition stated.

It also challenged the expert’s use of the KPMG article, which suggested that a 15% royalty rate could be used in nearly every case as a benchmark royalty rate.

Poor support: The court agreed that the licenses the expert considered from RoyaltySource were not comparable to the patents in the case and could have no bearing on estimating a royalty for camisole bras. The court also agreed that the LER data were much too broad to allow for a comparison with the patents in the case. And it agreed with the objection to the benchmark 15% royalty rate that the KPMG article put forth, saying it was akin to the 25% rule of thumb the Federal Circuit banned in 2011 in Uniloc. Ultimately, the court found that few aspects of the testimony were admissible.

Takeaway: It’s critical that experts go behind the data, read the license agreements, and analyze whether and how the source material applies to the facts of the case before formulating a royalty-based damages model for their case.

Find an extended discussion of Chico’s Fas, Inc. v. Clair, 2015 U.S. Dist. LEXIS 71716 (June 3, 2015), in the September issue of Business Valuation Update; the court’s opinion will appear soon at BVLaw.

back to top

Global BV news:
Damodaran examines country risk in new paper

A company’s exposure to country risk should not be determined by where it is incorporated and traded, according to Aswath Damodaran (New York University—Stern School of Business) in a new paper. “By that measure, neither Coca-Cola nor Nestle are exposed to country risk,” he points out. Rather, he says, exposure to country risk should come from a company’s operations. Therefore, country risk is a “critical component of the valuation of almost every large multinational corporation.”

Damodaran’s paper, “Country Risk: Determinants, Measures and Implications - The 2015 Edition,” was recently posted on SSRN. It gives an overview of overall country risk (sources and measures), discusses sovereign default risk, and examines sovereign ratings and credit default swaps (CDS) as measures of that risk. He also takes a look at country risk from the perspective of equity investors by looking at equity risk premiums for different countries and consequences for valuation. Finally, he explains how to move across currencies in valuation and capital budgeting and how to avoid mismatching errors.

back to top

Additional source of international equity risk premium data

The 2015 International Valuation Handbook - Guide to Cost of Capital includes country-level country risk premia (CRPs) and country-level equity risk premia (ERPs) that can be used to estimate country-level cost of equity capital globally, from the perspective of investors based in 55 different countries. During a recent complimentary webinar explaining how to use the book, the presenters mentioned additional sources of international equity risk premium data.

One top source is a survey that collects information about the discount rate (risk-free rate and the market risk premium) used in 2015 for 41 different countries. Pablo Fernández, Alberto Ortiz Pizarro, and Isabel Fernández Acín (all with the University of Navarra in Spain) co-authored the survey. The information is collected from professors, analysts, financial companies, and managers of nonfinancial companies.

Rate shifts: The survey found that the average risk-free rate used in 2015 was less than the one used in 2013 in 26 countries (in 11 of the countries, the difference was more than 1%). On the other hand, eight countries used an average risk-free rate in 2015 that was more than 1% higher than the one used in 2013. For the U.S., Europe, and U.K., most of the respondents use a risk-free rate that is greater than the yield for 10-year government bonds. The difference in the average market risk premium used was more than 1% for 13 countries in 2015 versus 2013.

The 2015 International Valuation Handbook - Guide to Cost of Capital, written by Duff & Phelps, is a must-have publication that includes data through March 2015 and builds on the same rigorous country-level cost of capital analysis previously published in the Morningstar/Ibbotson “international” reports.

back to top

Multiples in the healthcare services sector

The S&P Healthcare Services Index has increased by 6.1% over the last three months, outperforming the S&P 500 (a 1.1% decrease over the same period), according to the July 2015 Healthcare Sector Update from Duff & Phelps. The best performing sectors were emergency services (up 39.6%) and acute care hospitals (up 18.4%). The worst performing sectors were healthcare REITs (down 16.5%) and diagnostic imaging (down 15.6%).

The current median LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 1.8x and 13.1x, respectively. The sectors with the highest valuation multiples include: HCIT (3.7x LTM revenue, 20.3x LTM EBITDA) and emergency services (3.6x LTM revenue, 8.5x LTM EBITDA).

back to top

TAF seeks ASB members

The Appraisal Foundation is seeking candidates for vacancies on the Appraisal Standards Board (ASB). The ASB develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP). Members will serve initial terms of one to three years starting Jan. 1, 2016. The deadline for completed applications is August 3.

back to top

BV movers . . .

People: Paul Bardaro, partner of the CPA consulting firm Rucci, Bardaro & Falzone based in Malden, Mass., and Atkinson, N.H., has been named to the Hallmark Health System Inc. Board of Trustees … Jason Forschler has joined the New York City-based Perella Weinberg Partners as a managing director in its advisory business and will be based in the firm’s San Francisco office … Moss Adams, the Seattle-based accounting and business consulting firm, has hired Chad Gumm as a director and David Terry as a partner in the firm’s transaction services practice … Angela Marshall has joined Mountjoy Chilton Medley (MCM) CPAs & Advisors of Kentucky as a senior consulting manager in the Lexington office and will focus on succession planning, business valuation, transaction advisory services, real estate consulting, special projects, and general business development activities … Dominic Rispoli has joined the Chicago-based midmarket investment bank Lincoln International as a managing director and head of retail in North America and will be based in Lincoln’s New York City office.

Firms: The International Society of Business Appraisers (ISBA) awarded the Business Valuation Gold Seal of Trust Award to Gorfine, Schiller & Gardyn (GSG), a full-service public accounting and business valuation firm located in Owings Mills, Md. … Houlihan Lokey, an investment bank based in Los Angeles, has purchased the London-based advisory group McQueen Ltd. with the goal of expanding its consumer, food, and retail presence in Europe. This acquisition comes on the heels of Houlihan Lokey’s filing paperwork last week with the SEC for its IPO … Mercer Capital, a Memphis, Tenn.-based national business valuation and financial advisory firm specializing in corporate valuation, litigation support, financial reporting valuation, and transaction advisory consulting, and Erickson Partners, a Dallas-based valuation and litigation support firm, merged on July 1.

back to top

BV August kicks off with some fabulous CPE events

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist

back to top

We welcome your feedback and comments. Contact the editor, Andy Dzamba at: or (503) 291-7963 ext. 133
Share on LinkedIn



Not a BVWire subscriber?
Get on the list today.

In this issue:

IPCPL test

Royalty rate woes

Global BV news

Country risk

Healthcare multiples

TAF needs you

BV movers

CPE events












Copyright © 2015. All rights reserved.

Business Valuation Resources, LLC

1000 SW Broadway, Suite 1200
Portland, OR 97205
P: 1-503- 291-7963