March 21, 2012 | Issue #114-3  

Is the BV profession on its way to recovery, too?

We’ve been reading the same news reports you have: that the jobs market, the housing market, and the general economy are all showing signs of “real” (if slow) recovery. But what about the BV market?  Three years ago, during the steepest economic slide, we asked BV professionals to tell us how the financial crisis was impacting their hiring practices and growth plans. Most participants were adopting a cautious “wait and see” attitude. Several, however, glimpsed a few treasures amidst the turmoil. To wit:

  • This is a great opportunity to hire talent if you also have the ability to wait this out and be poised for whatever comes next. Fantastic time to build infrastructure, create awareness in the marketplace, and get one's house in order.
  • The economic downturn has created opportunities in both tax and dispute resolution. Financial reporting and tax assignments are increasing for both asset impairment and gifting. During stressful economic times, [shareholder] disputes and also divorce increase. The biggest problem is availability of qualified appraisers. We are actively engaged in a search for good people to add to our practice.

What have you been doing since the downturn? In our latest online survey, we’re asking BV professionals to tell us about their hiring (or hold) plans, and whether the economic lull provided time to improve internal processes and/or business development. What practice areas are now poised for growth, and which areas are on the wane? The survey won’t take but a few minutes to answer, and the results will give you (and your BV colleagues) a snapshot of the profession in these unpredictable times. To participate in the survey, click here. Look for the findings in the next issues of the BVWire.

New articles ask us to ‘rethink the equity risk premium’

This week, London’s Economist ran an article that analyzes the history of the equity risk premium and asks, “What will the future reward for equity investors be?” The first step is to define the ERP more precisely, say the authors of “Shares and shibboleths: How much should people get paid for investing in the stockmarket?”  To do this, the article cites a series of papers published just last year by the Research Foundation of the CFA Institute entitled: “Rethinking the Equity Risk Premium.” The abstract states:

In 2001, a small group of academics and practitioners met to discuss the equity risk premium. Ten years later, in 2011, a similar discussion took place, with participants writing up their thoughts for this volume. The result is a rich set of papers that practitioners may find useful in developing their own approach to the subject.

More on the ERP. “In retrospect it looks as though the circumstances of the times, rather than the immutable laws of finance, may have been responsible for the size of the premium,” says a companion piece to the Economist’s first article. In “Too Much Risk, Not Enough Reward,” the authors state:

In recent years the premium seems to have evaporated. The Tokyo stock market is 75% below the peak it reached at the end of 1989. Treasury bonds easily outperformed American equities over the ten years to the end of 2011. The addiction to equities may itself have been part of the reason for the premium’s decline.  

Speaking about European markets, the article concludes: “Equities may offer better future returns than government bonds (which were selling off this week), but a reasonable estimate of the premium is only four percentage points a year,” which would be “only a little below the long-term average for America.”

Income approach is best in bankruptcy, with ‘nuances’

Thirty years ago, the guideline public company method was the primary method to determine enterprise or “reorganization value” in bankruptcy, “but today the income approach” is preferred, say Jesse Ultz and Jeffrey Risius (both Stout Risius Ross), co-presenters of the recent BVR webinar, “Valuation in Bankruptcy.”  “Some of the things to think about are no different than valuing a business outside of bankruptcy,” Ultz said, but there are some “nuances” that appraisers and insolvency experts should keep in mind. In considering the growth rate, for example, has the business bottomed out or it does it still have huge growth potential once it puts the stigma of bankruptcy behind? At what point will it reach a normalized level and hit a steady rate of growth?

The rate of return also presents “unique factors,” Ultz says. “There are really two types of companies in bankruptcy: You have good companies with bad balance sheets and you have bad companies with bad balance sheets.” With the former, the only issue is “right-sizing” the capital structure; the company poses financial but not operational risks. But a bad company with a bad balance sheet may also be a bad operator, “and the business might not be viable on a standalone basis even if it is well capitalized.” Or consider—the business “might not be a bad operator,” Risius said, it might just be a company with a “bad base business.” (Think Smith Corona and the typewriter 15 years ago.)

Look for a comprehensive overview of all the finer points to valuing a business in bankruptcy, based on the Ultz and Risius presentation, in a future Business Valuation Update.

FASB adds a new project on private companies

The FASB has received more than 7,000 comment letters in connection with its recent initiative to create a Private Company Standards Improvement Council (PCSIC), which would work jointly with the FASB to develop criteria for determining whether and when exceptions or modifications to U.S. GAAP are warranted for private companies. (For more on the PCSIC, see BVWire #109-2.)

In her “2012 Chairman’s Outlook on the FASB” webcast last week, Leslie Seidman said the trustees of the Financial Accounting Foundation (FAF) plan to discuss all of the feedback at their next meeting in May. “We have heard a wide range of views—at one end, the perspective that significant changes are required; and at the other end, the view that there should be no differences in recognition and measurement,” Seidman said, as reported by the Journal of Accountancy. (For instance, the AICPA believes that any board with private company oversight should be independent of the FASB.)

The FASB is developing a decision-making framework to determine when deviations from U.S. GAAP are appropriate for private companies; if FAF establishes the new PCSIC, then the board will wait for the council’s feedback before finalizing its framework.

Last week, the board also added a new project to clarify the definition of a “nonpublic entity.” The board is currently soliciting feedback from investors, creditors, and other stakeholders; among other things, it wants to know whether:

  • Financial statements are providing useful information that appropriately reflects the economics of the entity’s activities, resources, and obligations;
  • Financial statements include information that is unnecessary, redundant, or confusing;
  • Proposed changes in accounting and reporting will result in communication from a company or organization that is more clear, complete, and comparable; and
  • The costs of implementing and complying with a new standard are justified by the increased benefits of the information improvements.

Free video: how to use the new Risk Premium Calculator

In his webinar last week, James Harrington (Duff & Phelps) discussed the new, 2012 edition of the Duff & Phelps Risk Premium Report and the new Duff & Phelps Risk Premium Calculator. Harrington presented an in-depth analysis of the more than 30 pages of updated data and analysis in the Report, which he co-authored. He also delivered a thorough example of how to use that new data and then gave a live, guided tour of the Risk Premium Calculator (which he co-created).

BVR has now posted a video of Harrington’s presentation at its Free Resources Page. For more information on the 2012 Duff & Phelps Risk Premium Report or the Duff & Phelps Risk Premium Calculator, click here.

The Appraisal Foundation to host first BV Roundtable

“Regulators, auditors, standard setters, and others have expressed concern over the consistency in standards, education and qualifications, and oversight in the business valuation profession,” says a news release from The Appraisal Foundation (TAF).

To obtain “insight on the state of the business valuation profession,” TAF is hosting its first public roundtable discussion: “The Business Valuation Profession as It Relates to Financial Reporting: Where Are We Headed?” The roundtable will take place during the afternoon of Monday, April 23, 2012, in Washington, DC. For more information, contact Paula Douglas Seidel at 202-624-3048 or

Mass. firmly adopts FV standard in divorce

Massachusetts first established the fair value standard in divorce with Bernier v. Bernier—a case that has since become familiar to appraisers across the country for its ultimate holding that the value of a closely held corporation should not be “unfairly deflated” by a marketability discount, absent extraordinary circumstances such as an imminent sale or cash liquidation.

In a recent case, a wife tried to carve out an exception for her minority holding (24%) of highly restricted shares in a family-owned corporation. Although the business was not under any threat of sale, as a “practical matter,” the wife could not “sell, transfer, or pledge her shares”; nor could she convert them into cash.  These facts warranted her expert’s application of a 15% minority discount and 30% marketability discount, she argued

The facts of this case were different, the Massachusetts Court of Appeals agreed, but the Bernier principles still applied. That is, because the wife’s businesses were not about to be sold or converted to cash, “liquidity, a hallmark of the marketability discount, is of little consequence,” the court said, and no DLOM applied. Further, although Bernier did not squarely address the application of a minority discount, dictum “made clear that such a discount should not be applied absent extraordinary circumstances,” the court held. Read the complete digest of Caveny v.Caveney, 2012 Mass. App. LEXIS 32 (Jan. 12, 2012), in the current Business Valuation Update; the court’s opinion is posted at BVLaw.

A day with Damodaran, brought to you by San Fran VRT

How would you like to spend an entire day learning from Professor Aswath Damodaran (NYU Stern School of Business), accompanied by economist Stephen Wood (Insight Economics)? Then book your calendar (and possibly your flight) for Friday, April 20, when the Valuation Roundtable of San Francisco hosts its 26th annual meeting at the Claremont Resort & Spa in Berkeley, Calif.

This year, Wood will kick off the gathering by addressing the state of the economy in this election year. The recovery from the recession has been erratic, Wood says, with some measures of economic activity surpassing their pre-recession peaks but many others lingering below their previous cyclical highs. Substantial downside risks are still present, including massive fiscal deficits and burgeoning federal debt. How will the economy navigate these shoals? Wood will provide VRT attendees his exclusive insights.

The bulk of the day, however, will be devoted to lectures by Damodaran, including three hours on “The Dark Side of Valuation: How to Value Difficult Companies.” After a break, the Professor will end the day with two hours on “Valuation Pitfalls” and how to avoid them. Each session will invite questions and participation from attendees. To take advantage of this unique opportunity, contact Claudia Martin at 408-961-6320 or

Spring forward with CPE

With the daylight stretching ever longer these days, you’ll have time to fit in a few more CPE credits just before the busy season:

  • On Tuesday, March 27, join Dennis Peronne and Jean-Pierre LoMonaco (both from the Valuation & Information Group) for Valuing Skilled Nursing Facilities, an in-depth look at one of the most peculiar but pervasive business entities in the healthcare sector. This 100-minute webinar is part 3 of BVR’s Online Symposium on Healthcare Valuation, which continues with monthly installments through the end of this year.
  • On Tuesday April 3, our Online Symposium on Litigation & Economic Damages continues with Raw Deal: Purchase Price Disputes. Join experts Jeff Litvak and Kenneth Mathieu (both FTI Consulting) for part 9 of the ongoing Symposium as they examine the unique issues associated with these disputes, including the appropriate measurement of damages, the date of the measurement, and the all-important inputs to the pricing.



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Copyright © 2012 by Business Valuation Resources, LLC
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