Inflation, volatility trigger increase in ERP, per Kroll

Kroll has increased its recommended U.S. equity risk premium (ERP) from 5.5% to 6.0% when developing USD-denominated discount rates as of Oct. 18, 2022. This is matched with the higher of a normalized risk-free rate of 3.5% or the spot 20-year U.S. Treasury yield as of the valuation date if it is higher than 3.5%, Kroll says.

Big picture: “Starting in mid-January, as inflation continued to surprise with increasingly higher-than-expected readings reaching levels not seen in 30 to 40 years in some countries, global equity markets became more volatile,” says the firm in a recent update. “Investors have tried to ascertain the magnitude and speed at which central banks will raise interest rates, leading to a potential decrease in the value of companies in various industries due to an increase in discount rates.”

In the same update, Kroll issued its recommendations for Canada, the eurozone (from a German investor perspective), and the United Kingdom.

Court uses old transaction to value a dental practice

In a North Carolina divorce case, the wife’s stake in a dental practice was valued based on what she paid for it two years before she and her husband separated in 2015 (the valuation date). She had purchased a 50% share of a father-son practice from the father, who continued to work at the practice and was paid as an associate. She paid $1.2 million, which was based on an appraisal that included $1 million of goodwill. At the date of separation, she was still carrying the $1 million of goodwill on the books. The elder dentist was still working at the practice, which had a long history and excellent reputation in the community.

No experts retained: At trial, neither the husband nor wife offered up a current valuation of the practice, so the court examined the price paid for the wife’s stake two years before, concluding that it was an arm’s-length transaction. The court also investigated what happened to the practice in those intervening two years. It noted that the balance sheet still carried the $1 million of goodwill and that the elder dentist who had sold out was still working at the practice. “Persons looking at the practice would not see any change that might impact the goodwill,” the court wrote. Therefore, the court valued the business at essentially what was on the balance sheet (the $1.2 million purchase price less some small accounting adjustments).

The wife appealed, but the appellate court affirmed the trial court’s decision, noting that, although the valuation approach was “rudimentary,” it was “sufficiently reliable” considering both parties chose not to retain experts to prove otherwise.

The case is Logue v. Logue, 2022-NCCOA-625; 2022 N.C. App. LEXIS 644; 2022 WL 4350119, and a case analysis and full opinion can be found on the BVLaw platform.

Appraisers have highest exclusion rate under Daubert, per PwC study

Under Daubert, appraisers were excluded more often in 2021 than any other type of financial expert witness, according to the PwC survey, “Daubert Challenges to Financial Experts (2000-2021).” Of the three most common financial experts (economists, accountants, and appraisers), appraisers had a 38% exclusion rate in 2021, followed by accountants (32%) and economists (27%). Over the 22 years of the study, appraisers have the highest exclusion rate (44%) of the three. The exclusion rate includes full and partial exclusions.

The annual study analyzes challenges to financial expert witnesses (appraisers, accountants, economists, and others) under the Daubert standards from 2000 to 2021. These are the years following the U.S. Supreme Court’s Kumho Tire decision, which expanded Daubert’s reach to financial expert witnesses. For the full report, click here.

Customer relations is the top intangible, per MARKABLES study

Customer relations is the most important of all intangible assets, accounting for 25% of enterprise value, according to a new study from MARKABLES. Next in line are software and technology, at 18% of enterprise value each, and last comes trademarks, at 8%. “Looking at the development during the last 15 years, customer relations showed the highest growth, while trademarks suffered badly, from a once leading position to last place,” says the study. The analysis was compiled from the MARKABLES database of almost 40,000 intangible assets acquired and valued globally in mergers between 2005 and 2021. The analysis reveals size, composition, and value drivers of different intangible assets.

AICPA FVS conference offers a ‘select 7’ option

Almost 60 sessions are offered at the upcoming AICPA & CIMA Forensic and Valuation Services Conference November 14-16 in Las Vegas live and online. For those virtual attendees who want to pick and choose some sessions, a “select 7” option is available so you can focus on specific topics that match your needs. With this option, you can choose any seven sessions from the main conference agenda. You will receive access, agenda creation, and material download instructions a few days before the conference starts. What’s more, you can adjust your agenda at any time. Check it out! For more details, click here.

Agenda available for ASA winter Fair Value conference

Ray Rath (Baker Tilly US LP) has put together a fine agenda for the winter edition of the ASA Fair Value Virtual Conference on December 15. The half-day event includes these topics and speakers: AICPA Business Combination Guide with Gary Roland (Kroll) and Mark Edwards (Grant Thornton), AICPA Cheap Stock Guide—Task Force Update with Amanda Miller (EY), Working Capital Adjustments and Treatment of Cash with Charles Sapnas (Valuation Research Corp.), and Simple Agreement for Future Equity with Vincent Covrig (Crowe LLP). The event offers up to five hours of CE credit. For more details and to register, click here.

New CBV Insight on damages published

A new paper examines two damages approaches generally used in a disputed matter: reliance damages and expectation damages. The paper (available if you click here) also reviews court decisions in Canada that provide guidance in the selection of the appropriate damages approach. The paper explains that, in the context of breach of contract disputes, the goal of expectation damages is to put the innocent party in the same position as if the contract had been performed. If it is not possible to calculate what the profits would have been if a contract had been performed, the reliance damages approach can be used. The premise of this approach is to put the plaintiff in the position he or she would have been in had the contract never been made. The paper’s authors are Ivy Tse and Eric Mah, who are both with Secretariat in Toronto. They both have the CBV designation from the CBV Institute, Canada’s valuation professional organization (VPO).

BV movers . . .

People: Heather Baranowski, CPA/ABV/CFF, MST, CVA, has been promoted to managing director at Cohen & Co.; she’s in the firm’s Pittsburgh office, and her primary focus is on providing business valuation and litigation support services within the area of family law … Bridget Triepke, CPA, has joined Houston-based Weaver as a director in the valuation services practice; she has over 15 years of healthcare valuation and transaction advisory experience and will help lead and expand the firm’s healthcare advisory services practice nationally.

Firms: Savannah, Ga.-based Hancock Askew & Co. LLP has acquired Becker CPA, PA, a Tampa, Fla., area tax and advisory practice … Milwaukee-based Wipfli LLP has acquired the Oliver Group of Louisville, Ky., an executive coaching and leadership development firm … Calgary-based MNP is adding in Bailey Kearney Ferguson of Wallaceburg, Ontario, a firm that provides accounting and tax services to clients throughout southwestern Ontario … CliftonLarsonAllen LLP (CLA) is adding Salinas, Calif.-based Hayashi Wayland, a firm that has industry niches in agriculture, hospitality, wineries and vineyards, nonprofit organizations, and governmental agencies; the deal increases CLA’s California team to more than 700 people … Portland, Maine-based BerryDunn has opened a new office in San Juan, Puerto Rico; the firm has been operating there since 2019, so the local employees will have a new place to call home.

CPE events

• Look Under the Covers: Finding Assets and Income for a Divorce Valuation. November 10, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Michele Laws, CDFA, MAFF, CVA, CPE. CPE credits: 2.0.

The speaker draws on firsthand experience of being subject to the various ploys a spouse takes to hide assets. She got the short end of the stick but will show you how to help ensure that your client is not in the same boat.

• DLOM: A Practical Look at a Complex Matter—Part 1. November 16, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Pasquale Rafanelli (Empire Valuation Consultants). CPE credits: 2.0.

Someone estimated that there are almost 70 ways to estimate a discount for lack of marketability (DLOM). This two-part session will examine the methods, from rules of thumb to complex approaches.