Restricted stock studies and pre-IPO studies remain the most cited methodologies for quantifying a discount for lack of marketability (DLOM), according to the results of our DLOM survey. Seventy-five percent of respondents (compared to 76% in our 2016 survey) use restricted stock studies, and 38% (down from 43% in 2016) use pre-IPO studies.
Other DLOM methods and tools cited include: Johnson/Park empirical method (Partnership Profiles) (32%), restricted stock equivalent analysis (19%), Finnerty study (18%), Longstaff study (13%), Chaffee study (12%), Pluris data (11%), and quantitative marketability discount model (QMDM) (11%). Thirty-nine percent of respondents use the Stout Restricted Stock Study (formerly FMV Opinions), and 14% of respondents cited the VPS DLOM Guide and Toolkit. Respondents were allowed to choose more than one method or tool.
Other results:
Nearly all (92%) of the respondents quantify separate discounts for a minority interest and lack of marketability when the valuation requires both; and
Three quarters of the respondents say that they “routinely” consider the 10 Mandelbaum factors in determining DLOM. Of all the factors, “restrictions on transferability” and “amount of control in the transferred shares” are the two most cited factors considered. The factor least cited was “costs associated with a public offering.”
We received 96 responses to the survey, which was conducted from September 19 to September 28. We’ll have more results in next week’s BVWire, and we will prepare a document with the full results that will be available to everyone. Thank you for your participation!
The AICPA’s decision to open up the ABV credential to non-CPAs has received nearly unanimous criticism from the ABV community. BVWire has learned that the matter will be discussed at the upcoming meeting of the AICPA Council (the organization’s governing body) October 21 to 23 in Amelia Island, Fla. A number of prominent CPA/ABVs will be attending the meeting to persuade the Council to take action that addresses their concerns and criticisms (spelled out in an Open Letter to the AICPA).
What to do: CPA/ABVs are being asked to contact their state Council representatives and apprise them of the issue and to give them their opinion before they attend the meeting later this month. The CPA/ABVs who will attend the meeting will ask the Council to: (1) suspend the change to the ABV criteria; (2) consider input from stakeholders and have the Council revote; and (3) if the AICPA still wants to issue a valuation credential to non-CPAs, a second credential should be created separate from the ABV.
In last week’s issue of BVWire, we included some comments from readers about two articles (see “Calculation Report Controversy” link) we posted, one of which urges valuation experts to stay away from calculation engagements and a rebuttal article that disagrees with some of the points made. Jim Alerding (Alerding Consulting LLC), who recently conducted a webinar with BVR on the matter and is one of the co-authors of recent AICPA guidance, has responded to some of the comments we received.
Reader comment: “(A) calculation of value can never be used in a USPAP engagement because all USPAP engagements involve an appraisal, which is defined in USPAP as an ‘opinion of value.’ USPAP scope of work is irrelevant.”
Alerding responds: “I would suggest your commenter take this issue up with Carla Glass (Marcum LLP) and Jay Fishman (Financial Research Associates), both of whom have made clear that the scope of work rule does indeed allow a scope under USPAP that would result in a calculation (the rebuttal article contains citations).”
Reader comment: “Therefore, a calculation of value has no place in situations where an opinion is needed, such as situations where a USPAP engagement is required and trial work in litigation.”
Alerding responds: “I am not sure what the commenter is referring to, but the only time that a USPAP engagement is ‘required’ by law is in real estate transactions. In business valuation engagements (which is what the SSVS calculation engagement applies to), there is no requirement for a USPAP engagement. The ASA requires that USPAP be followed in all of their business valuation engagements, but that is not a legal requirement. In fact, the ASA has a calculation engagement as part of its business valuation standards. Finally, the assertion that in litigation a calculation engagement is not appropriate is up to the trier of fact and not up to USPAP, the ASA, or the AICPA. There are cases where calculation engagements have been accepted by the courts.”
Reader comment: “It is unfortunate that the authors of the AICPA [guidance on] calculation reports use the term ‘value.’ The Appraisal Foundation and ASA should have objected to the use of that term, which is proprietary to the appraisal industry.”
Alerding responds: “The word ‘value’ is used throughout the appraisal and business valuation ‘industry.’ To suggest that the word or term ‘value’ is proprietary simply does not make sense. It is obviously in the public domain. Consider the term fair market value. Consider that Revenue Ruling 59-60 discusses the determination of fair market value. Under the commenter’s assertion, perhaps the IRS should have the proprietary use of the term. Further, note ‘[t]he objective of a calculation is to provide an approximate indication of value’ from the ASA BVS-I ASA BV standards. The ASA was, by far, the first group to allow a calculation. The quoted language calls the result of a calculation a ‘value.’”
“The bottom line is that the calculation engagement is a fact of the SSVS and also a fact of the ASA,” says Alerding. “As to the SSVS, I doubt it will be eliminated, although that is my personal opinion.”
Find out about firm performance, compensation, billing rates, marketing, practice development—and more—by taking part in the largest and most thorough analysis of best practices in the business valuation and forensic litigation services (BVFLS) profession, BVR’s Firm Economics Study. Once all responses are compiled, you’ll see how your firm stacks up against others. Those who participate will receive a free Executive Summary of survey results, plus a special offer to purchase the full report for $99 (regular price is $299) and a chance to win a free year of BVResearch Pro (a $1,595 value). The deadline for responses is October 19. Click here to participate now.
An analysis that compares appraisal rights in the U.S., France, and Romania is in the University of Pennsylvania Journal of Business of Law. Why is Romania included? The country apparently has a robust appraisal regime. “We selected these three countries because they are representative of strong, average, and weak capital markets, respectively, with varying levels of shareholder activism and litigation (high, normal, and low, respectively),” say the authors.
That’s the title of a recent paper that analyzed the pricing of 1,155 global PE buyouts and found “strong support” for a valuation effect from buy-and-build strategies. “Our results indicate that PE sponsors pay a premium of up to 47% at entry when the portfolio company acquires add-ons in the same industry within a two-year time window after the buyout,” say the authors.
A number of member-related developments at the International Valuation Standards Council (IVSC) are worthy of note. The Abu Dhabi government is the first emirate in the UAE to officially adopt International Valuation Standards (IVS) to its new rules and regulations for land and property valuations. Also, several new members have joined:
Shanghai Orient Appraisal Co. (China)—corporate member (the first in mainland China to join the IVSC);
Alforsa Real Estate (Bahrain)—corporate member;
Government of Ajman, Department of Land and Real Estate (UAE)—institutional member;
Bosnian and Herzegovinian Property Association—associate VPO member;
The Institute of Company Secretaries of lndia—institutional member;
Australian Institute of Business Brokers—associate VPO member; and
Rwandan Institute of Real Property Valuers—associate VPO member.
This year’s annual general meeting (AGM) will take place in Dubai at the Hilton Hotel Al Habtoor City, October 22 to 24. The agenda includes public and private meetings of the IVSC’s standards boards, meetings of the IVSC Advisory Forum, representing members of the IVSC, CEOs meeting, thematic presentations and panel discussions on major valuation topics, and networking receptions. For more details and to register, click here.
People: Jason Pierce, a business valuation principal at Edelstein & Co. LLP (Boston), has been recognized with USA 500 Club’s Biggest Giver Award, which recognizes a member who has gone above and beyond to refer and cultivate business for other members…A number of practitioners in the business valuation discipline of the American Society of Appraisers are the recipients of the ASA’s Rising Stars Award for 2018: Nicolas Ballian, a director in the São Paulo office of Duff & Phelps and part of the Valuation Advisory Services practice; Nicholas Janiga, a partner at HealthCare Appraisers in Denver; Fawn Romero, an associate at Prairie Capital Advisors; and Megan Salehli, a principal at Asterion Consulting.
Firms:Seattle-based Moss Adams is combining with AsTech Consulting as of November 1 to improve its cybersecurity consulting practice; 13 professionals from AsTech will join Moss Adams … San Francisco-based BPM LLP will combine with Kramer & Olsen Accountancy Corp. of Santa Ana, Calif.; all 14 Kramer & Olsen employees will stay at their current location and will operate under BPM, which has approximately 470 personnel and 40 partners … Pittsford, N.Y.-based The Bonadio Group will enter the Dallas-Fort Worth, Texas, market by opening an office in Irving, Texas; Jeff Wexler, a Bonadio partner, will lead the office … Savannah, Ga.-based Hancock Askew & Co. and Brand Tax Group of Tampa, Fla., will merge; Hancock Askew will open an office in Tampa, Fla., in addition to offices in Savannah, Atlanta, and Miami, which house 100 employees.
How can qualified appraisers come up with widely divergent values? Making different assumptions is one reason. The speakers will discuss typical assumptions that are disputed and provide the appraiser with information to mitigate disagreement early.
The ability to evaluate the contributions intellectual property and intangible assets make are becoming a required component of the business manager’s tool kit and is particularly important in the context of disputes and damages.
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