BVWire Issue #193-5  | October 31, 2018


BVR christens new platform for estimating the cost of capital

The Cost of Capital Professional is the name chosen for BVR’s new, simple, independent service for estimating the cost of equity. The new platform is designed to bring more professional judgment and common sense back into the process, which has become too much of a complex “black box” of applied mathematics. It supports the build-up method and CAPM calculations for any valuation date and will be available in early November 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.

More flexibility: “The new platform is designed to bring back flexibility to the process,” says Ron Seigneur (Seigneur Gustafson LLP CPAs), one of the developers of the Cost of Capital Professional. “We give you the raw materials, and you use your professional judgment to shape the final result. You are not steered into a particular way of doing something. The platform will have certain default options, but you have the freedom to decide whether or not to use those options. We’re not using enough common sense anymore when it comes to cost of capital, so this platform brings more of that back into the process.”

Seigneur and Dr. Michael Crain (Florida Atlantic University), a co-developer of the platform, will conduct a free webinar on November 20 to discuss the new platform and the thinking behind it. They also gave an interview to Business Valuation Update, and you can read it if you click here. You can sign up for the free trial of the Cost of Capital Professional if you click here. BVR is looking for user feedback during the free trial period.

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Hot-button issues at BV firms large and small

In the days before the recent Joint ASA 2018 Advanced Business Valuation and International Appraisers Conference in Anaheim, Calif., the ASA held various classes as part of its accreditation process. BVWire attended the BV203 class, which focused on the asset approach as well as discounts and premiums. As an interesting aside, the course instructors, Rob Schlegel (Houlihan Valuation Advisors) and Bill Quackenbush (Advent Valuation Advisors), asked class participants—who were from Big Four firms as well as small firms—to identify some key issues their companies were concerned about. Here are the issues they identified:

  • The new fair value credential (CEIV). Smaller firms are waiting to see what the Big Four do in terms of credentialing their people.
  • Contingent consideration. The Appraisal Foundation will issue a revised draft (or final version) of the Valuations in Financial Reporting (VFR) exposure draft on Valuation of Contingent Consideration.
  • One large firm is seeing more debt-related valuations.
  • Private equity and venture capital. A final draft is in the works of the AICPA accounting and valuation guide to PE/VC.
  • Audit conflicts—concerns when doing valuation work for a client when the firm is also doing the audit work. Valuation “consulting” may not cause a conflict.
  • Troubles with the narrative when writing valuation reports, i.e., linking the numbers to the story of the company.
  • Management succession, i.e., disruption if a key person leaves—there’s a shortage of quality people.
  • Brexit—a class participant from the London office of a large firm says it’s causing an “evaporating client base.”

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Private-company EBITDA multiples down sharply in 2Q18

In the second quarter of 2018, EBITDA multiples (median selling price/EBITDA) for private companies plummeted to 2.8x, the largest decline reported in recent years, according to BVR’s DealStats Value Index (DVI). The relatively steady trailing three-month average trend line from the third quarter of 2014 through the first half of 2017 (see graphic) gave no clear indication that large fluctuations in multiples paid would ensue in the quarters ahead. From the third quarter of 2017 to the present, EBITDA multiples have trended down. EBITDA multiples across all industries were highest over a five-year period in the third quarter of 2017, at 4.7x.

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The DealStats Value Index (DVI) summarizes valuation multiples and profit margins for private companies that were sold over the past several quarters. The DVI is a quarterly newsletter and is complementary with a subscription to DealStats. If you are a subscriber to DealStats, you can download the current issue to see all the latest transaction trends if you click here.

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More on Florida’s decision re: Daubert

As we reported last week, the Florida Supreme Court recently invalidated a 2013 legislative amendment that required courts to use the Daubert standard to assess the admissibility of expert testimony. Dr. Michael Crain (Florida Atlantic University) says the high court’s recent ruling “marks a clear break of Florida courts from federal courts.” It means that, in state court, testifying experts are subject to the Frye standard, whereas, in federal court, expert testimony is subject to the Daubert requirements, Crain explains. “For forensic accounting expert witnesses, this likely means their work will be scrutinized less in Florida cases compared to federal cases,” Crain says. As he sees it: “Neither evidence standard is perfect. In the end, fairness to the parties concerns the courts. Fairness is about more than evidence quality.” Crain’s analysis of the recent high court ruling may be found here.

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Damodaran eyes cannabiz

Excited investors are rewarding new companies in the legal marijuana industry with large market capitalizations, according to Professor Aswath Damodaran (New York University Stern School of Business) in a blog posting. The cannabis market will be a “big one,” he says, with conservative forecasters predicting that global revenues from marijuana sales will increase to $70 billion in 2024, triple the sales today. In terms of investing, he sees potential in indirect players in the market, such as Scott’s Miracle-Gro and GW Pharmaceuticals (producing cannabis-based drugs for epilepsy and multiple sclerosis). The professor adds this caveat to his posting: “I have never smoked marijuana, but, on my daily walks on the boardwalks of San Diego, I have been inhaling a lot of second-hand smoke, leaving me a little lightheaded as I write this post. So read on at your own risk!”

Extra: BVR offers several resources for business appraisers who are valuing firms in the cannabis industry, including The State of Legal Marijuana Markets and The Cannabis Industry Appraisal and Accounting Guide.

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ASA to give credit for iiBV courses

The American Society of Appraisers (ASA) will recognize and give credit as having fulfilled the education requirements toward ASA accreditation to students who successfully complete iiBV courses delivered in all languages. The iiBV (International Institute of Business Valuers) has completed license agreements with the Saudi Authority for Accredited Valuers (TAQEEM) and the National Association of Valuers of Serbia (NAVS) to enable those organizations to deliver iiBV business valuation courses and examinations in Arabic and Serbian, respectively, that the ASA will accept as fulfilling the education requirements for accreditation. The iiBV courses are originally based on the ASA Principles of Valuation courses and have been modified for international valuation, accounting, and economic and legal considerations. The iiBV said in a release that it is continuing to expand its curriculum of courses and to deliver these courses both in-class and online.

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From the vault: Origin of the market approach

When doing research using BVResearch Pro, you may stumble on some very interesting things in addition to what you’re specifically looking for. For example, we were researching a topic under the market approach, and, in the search results, an article, “The Valuation Profession—A Brief History,” written by James Catty, popped up that traced the concept of value back to Plato and Aristotle, who believed that the value of an object was created by and existed only in the mind of man. “Res tantum valet quantum vendi potest” is a quote from Roman philosopher Seneca (c. 4 B.C.-65), paraphrasing Aristotle, which means: “A thing is worth only what someone else will pay for it.” “This can definitely be considered the origin of the market approach,” Catty writes. “To a large degree, Aristotle’s view is still relevant today both for taxes and financial reporting, where, however, at various times, the term ‘value’ can take on different meanings.”

BVResearch Pro has over 10,000 articles, publications, legal digests, webinar transcripts, white papers, and more from the world’s foremost thought leaders in business valuation.

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Global BV News

TEGoVA to develop European BV standards

Delegates of The European Group of Valuers’ Associations (TEGoVA) voted in favor of developing European Business Valuation Standards (EBVS), according to a report. These standards will be tailored to the needs of real estate valuers who also undertake business valuations as well as real estate valuers seeking to diversify into the field of business valuation. TEGoVA will develop training programs for real estate valuers who wish to develop business valuation skills. A committee of business valuation experts within the ranks of TEGoVA’s members will draft the EBVS in the coming months. The report did not mention that the new standards would include or be based on International Valuation Standards (IVS) from the IVSC. TEGoVA is a European nonprofit association composed of 72 valuers’ associations from 37 countries representing more than 70,000 valuers in Europe.

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Free webinar on global valuation standards

Get an overview of recent updates in global valuation standards during a free webinar on Wednesday, November 7, conducted by Lance W. Doré, president and CEO of The Doré Group. We hear that a mix of BV experts and real estate professionals have already signed up. The webinar is presented by the Royal Institution of Chartered Surveyors (RICS). For more details and to register, click here.

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BV movers . . .

People: Chris Rosenthal, director and leader of the disputes, forensic, and valuation services practice at Baltimore-based Ellin & Tucker, was elected chair of the Business Valuation Resource Panel with The Appraisal Foundation; he will assume his chairmanship Jan. 1, 2019, and will serve a one-year term … Richard (Rick) Gray has joined Caler, Donten, Levine, Cohen, Porter & Veil PA (CDL) in West Palm Beach, Fla., as a director of business valuation and litigation support; he has more than 27 years as a CPA and has the certifications of ABV, CVA, and ASA … Julian Dozier, CPA, ABV, CFF, CFE, has been admitted as a shareholder at Thomas Howell Ferguson PA CPAs in Tallahassee, Fla. … Michael Schultz has joined the Dublin, Ohio, office of Rea & Associates as a manager on the firm’s business valuations team.

Firms: Washington, D.C.-based Raffa, known for its work in the nonprofit and social sector, combined with New York-based Marcum on October 1; Raffa, majority-owned by women partners, adds to Marcum 18 partners, 11 of them women, and 280 associates, bringing Marcum’s team to 250 partners and more than 1,700 associates … Roanoke, Va.-based Brown Edwards is acquiring the Newport News, Va., practice of Dixon Hughes Goodman, effective October 31 … Councilor Buchanan & Mitchell (CBM), with offices in Bethesda, Md., and Washington, D.C., will add Chaconas & Wilson of Washington, D.C., on November 1; the expansion will create a firm of 97 team members, including 12 partners … Weaver will open a new office in New York City in the Times Square/Theater District; the new space is more than three times larger than the previous temporary space the firm occupied.

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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:

CoC Professional

Hot-button issues

Private firm multiples

Florida and Daubert

Cannabis market

ASA-iiBV pact

History lesson

Global news

BV movers . . .

CPE events

LinkedIn discussions



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