BVWire Issue #194-1  | November 7, 2018


Board of advisors shapes up for BVR’s new cost of capital platform

Experts from the who’s who of the business valuation world have joined the advisory board for BVR’s Cost of Capital Professional (CCP), the new independent service for estimating the cost of equity. The co-chairs of the advisory board are Ron Seigneur, managing partner at Seigneur Gustafson LLP CPAs, and Adam Manson, director of valuation data at Business Valuation Resources. The current members of the advisory board are:

  • Nancy Fannon (Marcum LLP);
  • Jim Hitchner (Financial Valuation Advisors/Financial Consulting Group LLC/ Valuation Products and Services LLC);
  • Harold Martin (Keiter);
  • Chris Mercer (Mercer Capital);
  • Dave Miles (ValueSource);
  • Chris Rosenthal (Ellin & Tucker);
  • Keith Sellers (University of Denver);
  • Chris Treharne (Gibraltar Business Valuations); and
  • Jim Reto (Kaufman Rossin).

The Cost of Capital Professional is designed to move away from a complex “black box” of applied mathematics and bring more flexibility, professional judgment, and common sense back into the process. It supports the build-up method and CAPM calculations for any valuation date and is available on a free-trial basis using CRSP market return data up to Sept. 30, 2018. Later, the platform will be available with a subscription and will contain FY2018 data and beyond. New data will be added in March 2019. To sign up for the free trial, click here.

Free webinar: Seigneur and Dr. Michael Crain (Florida Atlantic University), co-developers of the platform, will conduct a free webinar on November 20 to demo the new platform and discuss the thinking behind it.

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Business valuations need to preserve the human element

“If we remove the human element, our valuations will be nothing more than computer-generated nonsense,” writes Robert E. Kleeman Jr. (OnPointe Financial Valuation Group LLC) in Business Valuation Update. Kleeman, who has been in the BV world for over 40 years, says a lot has changed, including more of a reliance on data and a move away from using judgment, common sense, and reasonableness. “The one thing I can state has not changed is the need for practitioners to use their mental capabilities,” he writes. “Data are data. They must be converted into something usable to produce a valuation conclusion. The data and conclusion must be reasonable. The valuation professional must use his or her judgment in many areas of the engagement.” His article, “A Veteran Valuer Looks at the BV Profession,” gives his perspective on some other issues, including the danger of formulas, the state of BV training, and “credential madness.” The article is in the August 2018 issue of Business Valuation Update.

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Damodaran criticizes Netflix’s business model

A recent New York Times article delves into the astonishing growth of Netflix, the video streaming service, and names Professor Aswath Damodaran as one of the few analysts who doubt the company’s business model is sustainable. When talking to investors and business analysts, the company touts its ability to attract viewers around the world and expresses confidence that, in the foreseeable future, Netflix’s willingness to assume more debt to finance its growing original content will pay off.

But Damodaran and a few of other “Netflix skeptics,” as the Times calls them, remain unpersuaded. Damodaran’s discounted cash flow analysis shows a serious disparity between revenue and money spent on new content. As Damodaran sees it, Netflix shares, which have been trading at around $310 per share recently, are worth no more than $177 per share. Other analysts agree, calling Netflix’s stock price “baffling” and noting how, until now, the company has been unable to match costs and cash flow. Considering the number of competitors with deep pockets that are ready to develop and market content, Netflix’s stock price is poised to fall, these analysts predict. A classic case of price vs. value?

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New Forbes list points up right of publicity issue

When a celebrity passes away, a large chunk of value in the estate may come from the “right of publicity,” which is a form of intellectual property that covers an individual’s name and likeness. Typically, public interest in a celebrity increases after death, a phenomenon that gave birth years ago to the remark “good career move,” uttered by some callous folks in show biz. Be that as it may, the trend continues, evidenced by the Forbes list of “Top-Earning Dead Celebrities for 2018,” which puts Michael Jackson in the No. 1 spot once again, with earnings of $400 million over the past year.

Pending case: Valuation experts are anxiously awaiting the outcome of the Jackson estate case in Tax Court in which the estate and the IRS came up with widely divergent estimates for the value of the pop star’s name and likeness. Hopefully, the case will provide some guidance on this matter. Since Jackson died in 2009, his estate has raked in $2.4 billion in earnings, according to Forbes. His estate holds other income-producing assets, so not all of this revenue is from his name and likeness. Estates of other celebrities, such as Aretha Franklin, are also grappling with this issue, but not all states recognize a posthumous right of publicity.

A new chapter in the recently released Comprehensive Guide to Economic Damages, 5th edition, examines the right of publicity, which is not limited to celebrities. A notable case involved a kindergarten teacher who was awarded $15.6 million over the unauthorized use of his image by Nestle on labels of Taster’s Choice coffee.

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Home health and hospice M&A activity soars

For three quarters in a row, there have been at least 20 publicly announced acquisitions of home health or hospice companies, a much higher quarterly volume than during most of 2017, according to new data from (Irving Levin Associates). Private equity-backed home health companies were the most prolific buyers in the third quarter. During a recent BVR webinar, healthcare valuation experts Darcy Devine (Buckhead FMV) and Will Hamilton (Veralon) explained that hospice firms (that also often include home health) enjoy operating margins of 8% to 9% compared to the smaller margins of most other healthcare entities, which makes them attractive M&A targets.

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AICPA releases working draft on credit losses

The AICPA’s Financial Reporting Executive Committee has released for public comment a working draft on accounting issues associated with the implementation of FASB Accounting Standards Update No. 2016-13, “Financial Instruments—Credit Losses” (issued in June 2016), which “provides a new current expected credit loss (CECL) model to measure impairment for financial assets (and instruments) measured at amortized cost.” The standard, which becomes effective in 2020, replaces the incurred loss model with the CECL model, one of the most significant changes in the history of bank accounting. Comments on the working draft are due December 31.

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EOU: Solid growth in U.S. economy

The Leading Economic Index increased 0.5% in September, coming in at 111.8 points, the 12th consecutive month of gains, according to the September 2018 Economic Outlook Update (EOU). This upward momentum suggests that “solid growth in the U.S. economy will remain through the rest of the year and into 2019,” the report says. Consumer confidence remains high—it rose to 138.4, its highest level since September 2000. The Economic Outlook Update is issued monthly and quarterly. You receive permission to use the material and data it reports in your valuation reports (with proper attribution).

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Global BV News

KPMG Germany releases 2018 cost of capital study

This year’s study from KPMG includes 276 companies: 216 from Germany, 30 from Austria, and 30 from Switzerland. Among the findings: the average WACC across industries is 7% (same as the past three years); the average risk-free rate increased from 0.9% to 1.3%; and the market risk premium “remains almost stable,” at 6.5% (Germany), 6.7% (Austria), and 5.9% (Switzerland). To download a copy of the study, which has much more information, click here.

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OIV BV conference in Italy November 12

The Seventh OIV Business Valuation International Conference will be held at Bocconi University (Aula Magna) in Milan, Italy, on November 12. Admission is free, and the conference is brought to you by the Organismo Italiano di Valutazione (OIV), the Italian business valuation standard-setter. The sessions and speakers are: Critical Issues in Valuation of Non-Financial Liabilities (Andreas Ohl, PwC—IVSC), CEIV Mandatory Performance Framework and Quality Reviews (Tony Aaron, USC Marshall), Implied Cost of Capital (Mauro Bini, OIV), Valuation of Portfolio Company Investments of Venture Capital and Private Equity Funds (David Dufendach, Alvarez & Marsal) Cost of Capital—Update on the Size Effect (Roger Grabowski, Duff & Phelps), and Bank Valuation Using Multiples in U.S. and Europe. A Historical Perspective (Mario Massari, OIV). There will also be a presentation on a new publication, Business Valuation OIV Journal, a biannual e-journal supported by OIV and the IVSC. For a copy of the agenda and information on how to register, click here.

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BV movers . . .

People: Ethan A. Lee, CPA, ABV, CFF, has joined Cooper Norman CPAs & Business Advisors as a partner based out of the firm’s Idaho Falls, Idaho, office … Troy Rush, CPA, CFE, CVA, has been promoted to senior manager of the consulting services section at Ericksen Krentel (New Orleans) … Both the American Bankruptcy Institute (ABI) and the National Association of Certified Valuators and Analysts (NACVA) have recognized Shanté George of Baker Tilly as a 2018 “40 Under 40” emerging leader; she is a director of the firm’s national forensic, litigation, and valuation services (FLVS) group … Chad Miller, CPA, CVA, is a new shareholder at Anderson ZurMuehlen (Helena, Mont.) … By unanimous vote, Thomas Helling, president of EquityView (Minneapolis), was granted an honorary lifetime membership in the Minnesota Association of Business Valuation Professionals in recognition of his years of service and support to the BV community.

Firms: New York City-based Prager Metis CPAs has combined with S. A. Koenig & Associates CPAs of Syosset, N.Y., expanding its Long Island practice … Chicago-based Crowe has signed an agreement to welcome personnel from Sixred, an award-winning software consultancy specializing in cloud-based enterprise solutions; one principal and two managing directors will join Crowe … New York-based Citrin Cooperman announced it has merged with D&H Global Tax, with offices in Philadelphia, London and Pitman, N.J. … Kohn & Co. LLP (Reno, Nev.) will be joining Fargo, N.D.-based Eide Bailly on December 3; the union will add two partners, Beth Kohn-Cole and Beth Farley, as well as 13 staff members, who will be in Eide Bailly’s existing Reno office … Mack & Rohwedder (Scottsdale, Ariz.) has joined Albuquerque, N.M.-based REDW; the combined firm will operate under the REDW brand … Naperville, Ill.-based Sikich has acquired the business of Executive Alliance, a human resources technology consulting firm … Apex CPAs & Consultants (St. Charles, Ill.) is celebrating 20 years in business.

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CPE events

  • Portfolio Equations and Applications in Valuation (November 15), with Gary Schurman (Applied Business Economics). Part of BVR’s Special Series on Advanced Modeling and Methodologies.

    A discussion of valuing basket options, loan guarantees collateralized by a portfolio of risky assets, sizing and pricing risk tranches in structured finance, determining capital requirements for banks, risk assessment, and more.
  • FREE WEBINAR: Cost of Capital Professional: Transparent. Simple. Free. (November 20), with Dr. Michael Crain (Florida Atlantic University) and Ronald Seigneur (Seigneur Gustafson LLP).

    A first look at the newest resource for developing cost of equity capital estimates that will be available on a free-trial basis. This new cost-effective independent resource integrates data from multiple sources, including University of Chicago’s Center for Research in Security Prices (CRSP) data, Professor Aswath Damodaran’s data resources, and the U.S. Federal Reserve on Treasury bond yields.

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New and Trending
LinkedIn Discussions

AICPA Council Votes to Move Forward With Expanded Eligibility for Valuation Credential

Is a Merger Causing a Culture Clash in Your Organization?

OPM Backsolve and Convertible Debt Financing

Your discussion could be featured here—BVR’s LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you’re not already a member, request to join:

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We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:
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In this issue:

CCP advisors

Human element

Netflix: price v. value

Right of publicity

Home health M&A

Credit losses

U.S. growth

Global news

BV movers . . .

CPE events

LinkedIn discussions



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