Don’t be tempted to use the “smoothing” method
Bob Buchanan (PCE Valuations) recently wrote that some appraisers are currently using the “smoothing” method to diminish the market volatility in business valuations, particularly appraisals related to ESOPs. “The suggestion is that because ESOP shares represent a retirement benefit their value should be viewed in a way that downplays short-term volatility,” says Buchanan. This method may be “less disruptive to ESOP participants and trustees,” he adds, but only in the short run.
“Smoothing” may affect some of the following factors:
- ESOP repurchase obligations
- Stock option pricing and exercise
- Stock appreciation rights (SAR) and exercise
- Warrant pricing and exercise
- Company’s financial audit
- Company transactions (sales and/or acquisitions)
- Fiduciary liability
“Underweighting”, “smoothing”, or “normalizing” valuation multiples are a departure from the FMV standard,” warns Buchanan. “We all want to get it right” when valuing a business, he adds, “but the only way to do that is to follow the standards of value that are set as guidelines.”
Bob’s full article is available here.
Canadian BV thought leadership now online and searchable
The Canadian Institute of Chartered Business Valuators and BVR have expanded an already strong partnership; as of today, BVR’s BVResearch now includes all past articles from CICBV’s Valuation Law Review and Journal of Business Valuation. This rich historical database will be augmented as new articles are published by CICBV in the future. All this content is fully indexed and searchable—for the first time. CICBV members enjoy free access to this new research database as a member benefit. P.S.: look for more significant additions to BVResearch in the coming months…
Experts discuss software company valuation this week
This Thursday, Mike Pellegrino (Pellegrino and Associates) and Rob Schlegel (Houlihan Valuation Advisors) will host “Software Company Valuation,” the latest installment of BVR’s Industry Spotlight Webinar Series. In their presentation, valuation experts Schlegel and Pellegrino (also a former software engineer) will examine the unique valuation challenges inherent in this complex industry. For more information or to register, click here. Two CPE credits are available.
Experienced Valuation Analysts for Chicago Office
Willamette Management Associates, a valuation consulting, economic analysis, and financial advisory services firm, seeks both valuation analysts and lost profit/economic damages analysts for our forensic analysis/litigation support practice. We seek analysts for our Chicago office at the manager, senior manager, and managing director levels.
We seek experienced valuation analysts who can manage complex controversy engagements from initial client contact, through due diligence and data analysis, to expert report preparation, up to (and including) expert witness testimony.
Our forensic analysis practice includes both consulting expert and testifying expert services in commercial litigation matters related to breach of contract, antitrust, bankruptcy, intellectual property infringement, fraud, tortious interference with business, dissenting shareholder rights and shareholder oppression, lender liability, gift and estate tax, income tax, and property tax. Our forensic analysts perform lost profits and economic damages analyses, intellectual property royalty rate and economic rent analyses, complex business and security valuations, event analyses, and forensic accounting analyses.
This is an opportunity to join one of the thought leaders of the valuation profession. MBA, CPA, or CFA credentials with at least five years of complex business valuation or economic damages analysis experience preferred. Strong writing and oral communication skills are essential. Please send resume and salary history to:
Willamette Management Associates
Is the fair value standard dead in divorce?
Reports of the death of statutory fair value in marital dissolution cases may be premature, but in a recent BVWire™, we noted the latest decision from Colorado, In re Marriage of Thornhill, to decline to adopt the standard. Not only do state family courts still retain their broad discretion to value a business according to the principles of equity and the facts of the case—but the Colorado Supreme Court saw “no clear national trend suggesting that a per se rule against marketability discounts is the majority view when it comes to valuing ownership interests in closely held corporations in divorce proceedings.” Although the court recognized the New Jersey Supreme Court’s decision in Brown v. Brown (2002), which extended the rule prohibiting discounts in shareholder dispute cases to divorce cases, it also cited several other decisions (in Oregon, Florida, and South Dakota) indicating that “most courts have left the decision of the appropriateness of marketability discounts in valuations within marital dissolutions proceedings to the trial court’s discretion.”
Witness the latest decision out of Indiana, in which the trial court applied a 25% minority discount and a 15% marketability discount to the wife’s 5% limited partnership interest in the family farming business. On review, the appellate court first noted the policy prohibiting discounts in statutory appraisal cases. It even observed that in this case, the wife was likely to sell her interest (back to her parents) “the day after divorce,” possibly at a premium value. Nevertheless, like the Colorado court, “we conclude that marketability discounts and minority interest discounts can be utilized by a trial court in dissolution proceedings when determining the value of ownership interests,” the court held, in Alexander v. Alexander, 2010 WL 2006427(Ind. App.)(May 20, 2010).
Where can you get all the latest on BV in divorce? Digests of the Alexander and Thornhill cases will appear in summer issues of the Business Valuation Update™, and the full-text of the courts’ opinions will join the hundreds of valuation-specific cases at BVLaw™. And take note: For a complete update of legal and valuation issues, consider the BVR 3rd Annual Summit on Business Valuation in Divorce, hosted by Morningstar Valuation Services, on Sept. 13-14 in Chicago. Speakers include top experts, attorneys, and judges from around the country, including co-chairs Jay Fishman and Bill Morrison. Other faculty include Mark Harrison, Mark Lutrell, Stacy Collins, Mark Sobel, Kevin Yeanoplos, Mark Dietrich, and more.
Focus on the estimate process in valuation, warns Damodaran
Aswath Damodaran (NYU Stern School of Business) shared one of his valuation pet peeves in his blog Musings on Markets: when a consultant, academic or appraiser takes a standard valuation equation, “does some algebra, moves terms around and then claims to have discovered a new and ‘better’ valuation model.” Damodaran explains:
“…the challenges we face are not in valuation theory but in estimation practice. Put another way, we know exactly how to value companies. What we do not have a handle on is how best to estimate growth, risk and cash flows.”
Damodaran urges appraisers to stop developing new models and start focusing on the best ways to “estimate cash flows for a cyclical firm, risk for a regulated company and growth for young start-up firm.”
Read the full blog post here.
Four components “really do make a difference” in tiered entity valuations
During the recent BVR teleconference, Will Frazier (Howard Frazier Barker Elliott) and John Porter (Baker Botts) discussed the use of tiered discounts when valuing a partnership interest or a fractional interest. Frazier identified four components that “really do make a difference” in a tiered entity valuation:
- Asset class: expected returns at each level
- Financial risk: leverage, profitability, specific company risk
- Governance risk: type of interest, control term of entity life, liquidity
- Distributions: full or partial payout, not payout, asynchronous
Frazier and Porter discussed in detail Astleford v. Commissioner (T.C. Memo 2008-128) because the Tax Court in the case accepted a substantial tiered discount where a taxpayer holds a minority interest in an entity that holds a minority interest in another entity. However, Porter warned “there is no black box or fixed formula about how to apply these types of tiered discounts. I think that the courts are looking at in the analysis is whether or not the overall valuation is reasonable because, after all, what the value of an interest is a question of fact.”
The December 9, 2008 BVR abstract of the case is available on the free download page here (scroll down to find the free file). Purchase the teleconference transcript here. John, of course, is also one of the co-chairs of the BVR/Georgetown Tax and Valuation conference in November.
Mercer’s LinkedIn objective is to make the phone ring
Chris Mercer (Mercer Capital) is a big fan of LinkedIn, which he uses to expand his network of fellow professionals, potential referral sources and prospective clients. At the recent NACVA/IBA conference in Miami, Mercer shared his strategies for using the social network. The first step is to create the best profile you can. “LinkedIn is your public profile on the web, and people will look at it on LinkedIn more than any other place,” he says. Chris believes photos help (of course, he’s handsome, so this might be biased!). “You wouldn’t you go to a cocktail party with a mask on,” he told NACVA/IBA attendees.
Mercer provided copies of “Professional Services Networking: Your LinkedIn Primer,” a 41-page guide he wrote on making the best use of LinkedIn. The Primer is available on his LinkedIn profile.
New insight in estate and gift tax valuation
Look for the 2010 edition of BVR’s Guide to Business Valuation Issues in Estate and Gift Tax, edited by Linda Trugman, next week. The Guide includes updates to issues such as tax-effecting S-Corporations, non-signing tax preparer penalties, legal challenges from the IRS, and many more.
Pre-order the Guide here.
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