What to do about the dwindling real estate DLOC database

During the recent BVR Power Panel webinar, a question came in from the audience: What are your thoughts about using the 2022 Partnership Profiles data until the company produces a more up-to-date report? A bit of background here: As of Jan. 1, 2024, Partnership Profiles determined that there was an insufficient number of publicly registered partnerships and unlisted REITs with new data to update the Partnership Profiles Minority Interest Discount Database or create meaningful Partnership Real Estate Guideline Reports.

What to do: The 2022 data are fine to use for 2022 valuations, but the panel was skeptical about extrapolating that data forward without knowing how those discounts may have been affected in a different environment. Appraisers should consider using five-year averages of the discounts—just as you do in other instances, such as using historical data from studies of restricted stock, IPOs, mergers and acquisitions, and the like. Also, appraisers should consider the income approach to capture a minority stakeholder’s interest, if such an approach is possible.

In the April issue of Business Valuation Update, Bruce Johnson (Munroe, Park & Johnson Inc.) explains alternative analyses and what’s going on with the Partnership Profiles data, including the development of some new reports that cover a five-year time frame. Johnson is co-author, along with James Park and Spencer Jefferies, of the Comprehensive Guide for the Valuation of Family Limited Partnerships and LLCs. Plus, Park and Jeffries will be conducting a webinar for BVR that will give more details about this matter. Stay tuned for an announcement of when that webinar will take place.

The BVR Power Panel members were Ken Pia (Marcum), who also acted as moderator, Jeff Tarbell (Houlihan Lokey), Neil Beaton (Alvarez & Marsal), and Michelle Gallagher (Adamy Valuation). Next quarter, the BVR Power Panel will be back with more thought-provoking discussions. A recording of the last webinar is available if you click here (free for holders of the BVR Training Passport Pro).

Basic assumption drives valuers way apart

In an Illinois divorce case, different fundamental assumptions about the husband’s picture frame business yielded greatly disparate values from the two experts. Is the picture frame industry mature or is it booming? Of course, this basic assumption fuels the entire valuation, and it depends on how you look at it.

Two views: The wife’s expert assumed the business would experience “significant growth” based on “broad industry outlooks predicted for the retail sector, wholesale sector and home furnishing and wholesaling industry.” On that basis, the expert valued the business at $61 million. But the husband’s expert testified that the picture frame business was a niche sector that was mature and would not grow along with the broader industry trends. Under that assumption, the expert came up with a $20 million value.

The trial court agreed with the husband’s expert that this was a niche, mature industry but rejected his other inputs to the valuation, including the year used for the capitalization, the growth rate, equity risk premium, estimated goodwill, and more. But the court also rejected certain inputs the wife’s expert used, including sales rate increases, growth rate, and failure to include personal goodwill.

In the end, the trial court’s valuation fell in the middle, at $42 million, which was affirmed on appeal.

The case is In re Rozdolsky, 2024 Ill. App. Unpub. LEXIS 311, and a case digest and full opinion are available on the BVLaw platform.

Interested in more support for your DLOM?

There have been some rumblings in the business valuation profession about the validity of the traditional ways to estimate a discount for lack of marketability (DLOM). Is it time to consider other methods that are emerging in the profession? According to BVR’s 2023 Benchmarking Guide, more valuers are using additional sources to triangulate their discount estimates and test their conclusions. For example, the use of option price modeling is increasing. A 2023 survey revealed that 30% of respondents are using option modeling—up from 20% in 2018 (it was 7% in 2011).

Easy tool: Currently under development is an online calculator designed to estimate a DLOM based on the analyst’s choice of comparable public companies. The methodology it uses is based on the Margrabe options approach. Dr. Ashok Abbott (West Virgina University) is developing the calculator.

Want to try it out? A link to the calculator is at the end of a very short questionnaire that you can access if you click here. Thanks for your interest!

How AI can impact healthcare valuations

It’s very unlikely that AI will replace physicians (that’s good news!), points out an interesting article, “Generative AI in Healthcare: Valuation Considerations,” by Todd Zigrang and Jessica Bailey-Wheaton, who are both with Health Capital Consultants. The technology is a definite disruptor and is expected to increase the efficacy of the healthcare system by streamlining clerical work, increasing access to meaningful data, freeing up physicians to spend more time on patient care, and more. But these new value drivers come with risks, such as data bias and patient information being more susceptible to hacking, the authors point out.

ASA CEO search continues

Since Johnnie White, former CEO of the American Society of Appraisers, left the organization last month, the search for a new CEO has yielded over 75 applications, according to Garrett Schwartz, ASA international president, in his monthly message. The job posting will remain open through the end of March, with the organization’s search committee starting its work in upcoming weeks to screen applicants and conduct the first round of interviews. Final interviews, which the ASA’s board of directors will conduct, are scheduled for mid-May, and the board hopes to have a CEO hired soon after that.

Today is the deadline for TAF’s demographic survey

Please take a three-to-four-minute survey from The Appraisal Foundation (TAF) designed to gather demographic data about the appraisal profession and help shape the group’s current and future diversity-related activities. In 2021, the organization conducted its first survey, and the results will be compared to this new survey. The survey deadline is today, March 13, and you can take it if you click here.

Comments due March 31 on fair value exposure draft

The Business Valuation Resource Panel (BVRP) of The Appraisal Foundation (TAF) has issued an exposure draft of Valuation Brief #3: Professional Interactions Unique to Fair Value for Financial Reporting. It discusses some of the roles, interactions, and common issues encountered in the overall financial reporting fair value process among appraisers, management, and auditors. Comments are due March 31 and can be submitted if you click here.

The BVRP is a panel of leading business valuation experts, professionals, and academics appointed to provide input, recommendations, and updates from the business valuation discipline to the TAF boards. These briefs are designed as a “practical discussion” and are “not intended for other valuation contexts, nor to provide formal guidance or authoritative standards or commentary.”

ValuAsia Connect launches inaugural webinar (on ESG)

A new webinar series on valuations in Asia will have its first program on March 21 at 2:00 p.m. (Singapore time) on the topic of environment, social, and governance (ESG) factors and the regulatory environment that should be considered when valuing a business, asset, or liability. The International Valuation Standards Council (IVSC) and the Institute of Valuers and Appraisers, Singapore (IVAS) co-organized the webinar series, and the programs will address the evolving landscape of valuation practices in the Asia-Pacific region. The speakers on the ESG webinar are: Srividya Gopal (Kroll), Keoy Soo Earn (Deloitte), and Nicolas Konialidis (IVSC). BVWire registered for the webinar, which appears to be free—and we asked whether there will be a recording available for those of us in U.S. time zones. We have received no reply yet.

BV movers . . .

People: Two promotions to managing director at Prairie Capital Advisors Inc., a corporate advisory and investment banking firm: Hillary Hughes, ASA, CFA, who has been highly involved in the structuring and valuation related to employee stock ownership plans (ESOPs) on behalf of ESOP trustees as well as business owners, and Tom DeSimone, CPA, who has extensive experience in advising middle-market companies on ESOP transactions (representing both companies and ESOP trustees), mergers and acquisitions, financial opinions, corporate valuation, and other financial advisory services.

Firms: Jackson Thornton (Montgomery, Ala.) has acquired MST CPAs & Advisors, also headquartered in Montgomery, a firm that provides wealth management, strategic planning, outsourced CFO and business consulting services, technology consulting, and specialized industry services … FTI Consulting has acquired Madison Consulting Group, an independent actuarial consulting firm with offices in Madison, Ga., and Newtown Square, Pa.; the firm provides actuarial, data collection, compliance reporting, and expert witness services to regulatory agencies, law firms, insurance companies, managing general agents, and self-insurance programs … HHM CPAs, a firm with locations in Chattanooga, Memphis, and Cleveland, Tenn., has expanded to Florida by adding Bizzell, Neff & Galloway, based in Pensacola.

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

Recent Trends in the Valuation of Early-Stage Companies, March 14, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Antonella Puca (BlueVal Group) and Douglas Summa (IVSC). CPE credits: 2.0.

This presentation provides an overview of recent trends in the valuation of early-stage companies, including guidance in the most recent IVS 500, IPEV, and AICPA. Also, practical, step-by-step examples of how to handle some current challenges, such as the valuation of SAFEs, how to incorporate down rounds in the valuation, and how to roll forward stale rounds are given.

Statistical Modeling in Business Valuation, March 19, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Jeffrey L. Baliban (Baliban Economics Consulting LLC). CPE credits: 2.0.

This presentation will review basic descriptive statistics that help organize existing data by examining measures of both center and variation. Also, a review of how regression techniques can be applied to reach reasoned valuation conclusions is included.