Murky world of intangible asset values in the spotlight
By various estimates, half—or more—of the market capitalization of the S&P 500 index represents the value of intangible assets, such as brands, customer data, and the like. As valuation experts know, under current U.S. accounting rules, most of this doesn’t show up on corporate balance sheets. That’s a problem, points out a recent Wall Street Journal article.
Ancient accounting: The absence of the value of intangibles prevents investors from properly gauging their risks, according to Baruch Lev, an accounting and finance professor at New York University’s Stern School of Business. “It’s an incredibly important issue,” he says. “Investment in intangibles is almost completely obscured from investors. It’s 19th-century accounting.”
The problem of how to value such intangible assets has “vexed accountants for decades.” And the FASB, while “considering” the issue for its agenda, "hasn’t been able to find a solution in which the benefits of reporting intangibles outweigh the costs." Some investors and market analysts say a company’s stock price reflects the value of intangibles, so it’s not necessary to break out their values. On its blog, the Gartner Group disagrees, saying that companies could compile a second set of books with the intangibles valued (using Gartner’s formulas and methods), share the data publicly, and see how the competition and financial markets respond.
Marketers vs. appraisers: Another issue is who is best to value marketing-related intangibles such as brand names? Should it be accountants and valuation experts or marketing pros? Accountants point to recent data that show that the average brand valuation by marketers is way off target, based on actual prices paid. But the valuators on the marketing side say the accredited valuation experts and financial professionals are too conservative.
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Samsung challenges design patent damages law with the Supreme Court
Damages experts know that design patents are different. They are not subject to one of the key rules applicable in utility patent infringement cases: apportionment. But the rules may change. In its eternal fight with Apple, Samsung persuaded the U.S. Supreme Court to take a look at the applicable statute in the context of modern technology.
Failed ‘quest for apportionment’: The litigation goes back to 2011 when Apple sued Samsung for infringing critical features of the iPhone and iPad. The claims involved design patents related to design elements in the iPhone and utility patents related to the phone’s user interface. A jury awarded Apple just over $1 billion in damages, but the district court struck down about 40% of the damages. In the partial retrial on damages, the jury awarded Apple over $290 million. Samsung appealed the final judgment at the Federal Circuit.
In terms of design-patent-related damages, Samsung said the trial court committed legal error when it allowed the jury to award damages based on Samsung’s total profits from its infringing smartphones. Damages should have been limited to the “profit attributable to the infringement because of ‘basic causation principles.’” In essence, the patent holder should have to show what portion of the infringer’s profits, or its own lost profits, is due to the design and what is due to the article itself.
According to the Federal Circuit, Samsung was on a “quest for apportionment.” But, said the court, Congress specifically rejected apportionment for design patent infringement in Section 289 of the Patent Act (which is based on an 1887 law). The provision entitles the patent holder to “the total profit from the article of manufacture bearing the patented design.”
The Federal Circuit noted in passing that, in their “friend of the court” brief, law professors, supporting Samsung’s position on this issue, argued that allowing entire profits for design patent infringement “makes no sense in the modern world.” But the court declined to go there, saying this was a “policy argument” that should be made to Congress.
Out of step: Instead of taking the fight to the legislature, Samsung petitioned the Supreme Court for review. It argued that the lower courts’ reading of Section 289 is out of step with the times. Their interpretation rewarded “design patents far beyond the value of any inventive contribution." The Supreme Court recently granted the petition.
The exact question in front of the court is: “Where a design patent is applied to only a component of a product, should an award of infringer’s profits be limited to those profits attributable to the component?” Stay tuned.
For more on the parties’ and supporting briefs to the Supreme Court, click here. Find a digest and the Federal Circuit’s ruling in Apple, Inc. v. Samsung Electronics Co., 2015 U.S. App. LEXIS 8096 (May 18, 2015), at BVLaw.
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Try a spring cleaning angle for repeat BV business
So suggests an article in the CPA Practice Advisor. If valuation professionals can make their business owner clients realize that a periodic “business cleaning” is necessary, it could help eliminate the mindset that a valuation is more than a one-off activity. The valuation process “can both optimize a business’s existing strategy and prepare it for impending or eventual sale.” Plus, checking the value periodically and working to maintain and improve the asset is important, whether there are plans for a sale or not. Just like with your home, “a thorough cleaning is much more valuable than just the lemon scent.”
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How to improve hiring and retention at your BV practice
In a recent BVWire poll, respondents cited practice management the most as their biggest concern for 2016 (to see the full results, click here for a complimentary download). One of the concerns is about hiring and retention, so BVWire asked John Borrowman (Borrowman Baker LLC), a recruiter who has worked exclusively in the BV profession for over 20 years, to comment.
“BV practices will always face challenges when it comes to hiring and retaining the talent required to grow,” he says. “One fundamental reason is that business valuation is a business of judgment, and judgment only comes with experience. This is what creates such demand for staff with two to four years of experience. They have begun to acquire the judgment that makes them more valuable. Paradoxically, that experience/judgment also leads to greater job satisfaction (because things start to make sense) and a stronger disinclination to change jobs.”
What to do: Borrowman says there are no short-term solutions. Over the long-term, he advises practices to do the following:
- Support the growth of BV-related coursework at the undergraduate level by bringing students on as interns and as full-time hires after graduation. As compared to the general population of finance and accounting grads, these job candidates are “self-selected” for the profession and much less likely to leave your practice after you have invested time and effort in training.
- Pay careful attention to individualized growth and progress of younger staff. Using a one-size-fits-all approach—or, worse yet, a catch-as-catch-can approach—will undermine retention efforts and can send a practice back to square one in facing the challenge of hiring all over again.
- Deliver soft-skills training alongside training in financial/analytical skills. The soft-skills training will help staff members grow to the full extent of their capabilities as business developers. Not everyone is cut out for this role, of course. If that means you have to eventually let some go, you will make a more informed decision if you have provided a genuine opportunity to grow.
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Updated data on A/E valuation and M&A transactions
An updated study is now available that includes transactional data on the fair market value of businesses in the architecture, engineering, and environmental consulting industries (A/E firms). The Architecture/Engineering Business Valuation and M&A Transaction Study, 3rd edition includes data from over 220 distinct stock transactions along with supplemental data from publicly available sources. This is the most comprehensive and reliable study of its kind for this industry.
Rusk O’Brien Gido + Partners’ team of accredited business appraisers with decades of experience valuing privately held A/E firms conducted the research and wrote the study. Among other information, it provides statistical data on 10 separate valuation ratios or multiples representing both minority and controlling interests in privately held firms, as well as minority interests in publicly traded companies and minority interests in employee stock ownership plans (ESOP) sponsoring companies. The study also provides insight into how mergers and acquisitions are being conducted in the industry, as well as 19 different financial benchmarking metrics.
Additional resource. BVR also recently published What It’s Worth: Architecture and Engineering Firm Value, which offers the latest methods and tips to valuing architecture and engineering firms.
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Eateries, car dealers lead poll for passive appreciation analysis
Full service restaurants and automobile dealers are the two most requested industries respondents want to have analyzed for causal factors and their elasticities. This analysis helps develop empirical support for isolating the passive component of a firm’s appreciation in value. During a recent BVR webinar on active and passive appreciation in a divorce context, Professor Ashok Abbott (West Virginia University) presented an updated version of his method for identifying significant economic environmental factors and their relative contribution to growth in revenues. He demonstrated the method by doing an analysis of several industries. He offered to perform additional analyses based on a survey of want-to-see industries. The survey is still open, and you can vote on all of the industries you’d like to see if you click here. Dr. Abbott will address them in the order of preference.
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New What It’s Worth guide to valuing automobile dealers
The latest in the new series of What It’s Worth guides brings you the expert insight you need to understand and value automobile dealers. Numerous experts who work with auto dealerships and study the valuation issues associated with this industry daily have contributed to the new guide, What It’s Worth: Automobile Dealership Value (formerly Key Trends Driving Auto Dealership Value). These individuals include accountants, brokers, M&A executives, former dealership employees and owners, and other consultants and advisors.
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Global BV news:
IFRS 2016 ‘Red Book’ now available
The International Accounting Standards Board (IASB) has announced that the 2016 edition of the Bound Volume of International Financial Reporting Standards (the “Red Book”) is now available. The Red Book contains all official pronouncements that have an effective date after Jan. 1, 2016. Accordingly, the 2016 edition includes the following changes made since Jan. 1, 2015: IFRS 16 Leases as well as amendments to IFRS 15 (effective date) and IFRS 10/IAS 28 (effective date of amendments). The Red Book is available in PDF format or a “bundled” print and PDF edition. For more information, go to the IFRS Foundation web shop.
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BV movers . . .
People: Earl Blackmon, shareholder at the Alabama-based firm Hartmann, Blackmon & Kilgore, was appointed to the Alabama State Board of Accountancy by Gov. Robert Bentley … Marc Fleischman has become the CEO of Tucson firm BeachFleischman, succeeding Bruce Beach, who led the firm as CEO since 1990. Fleischman has served as president since the firm’s founding and will continue to lead the litigation support practice. Beach will remain chairman of the board and senior advisor.
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Out with March, in with April CPE events
FREE WEBINAR: Valuation Handbook – Guide to Cost of Capital and the Risk Premium Toolkit: What you need to know in 2016 (March 30), with Roger Grabowski (Duff & Phelps).
ESOPs for Government Contractors (March 31), with David Bogus (Ellin & Tucker), Greg Wheeless (Bank of America Merrill Lynch), Peter Abrahamson (Verit Advisors), Jeffrey Kahn (Greenberg Traurig, P.A.), and Stanley Slabas (Verit Advisors).
NEW DATE: Case Study: Applying the Empirical Method to Determine a DLOM (April 5), with Bruce Johnson (Munroe, Park & Johnson Inc.). This is Part 3 of BVR's Special Series on Discounts for Lack of Marketability.
BVLaw Case Update: A One-Hour Briefing (April 6), with R. James Alerding (Alerding Consulting LLC) and Sylvia Golden (Business Valuation Resources).
Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist email@example.com.
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