| September 25, 2013 | Issue #132-3 |
Purchase price allocation shifts away from goodwill More value is being allocated to identified intangible assets and less to unidentified goodwill, according to a report from Houlihan Lokey on purchase price allocation. The analysis examined 511 transactions in which the acquiring company was based in the United States and publicly held. The study uses “purchase consideration,” which is the sum of the purchase price paid and liabilities assumed in connection with a business combination. The study excludes transactions involving financial institutions, which have uniquely large allocations to intangible assets. Changing mix: The percentage of the purchase consideration allocated to intangible assets increased to 32% on average in 2012, up from 26% in 2011. The percentage of purchase consideration allocated to goodwill, on the other hand, dropped to 31% on average in 2012, compared with 38% in 2011. Categories of intangible assets acquirers most frequently identified were customer-related intangibles (cited in 53% of deals), trademarks and trade names (41%), developed technology (39%), and in-process research and development (9%). Other intangible assets typically included were noncompete agreements, licenses, permits, and other contracts or agreements, according to Houlihan Lokey. It’s not surprising that more value is being allocated away from goodwill, which is subject to an annual test for impairment or if events occur that affect its value. Big news on Morningstar/Ibbotson valuation data Morningstar announced late last week that it no longer will support the valuation products in the Cost of Capital Resource Center. This includes the Ibbotson® SBBI® Valuation Yearbook, Cost of Capital Yearbook, individual company beta tear sheets, individual industry cost of capital tear sheets (by SIC code), and the three international cost of capital reports. Some of this information will be added to the SBBI classic edition—but reportedly not the elements most heavily used by appraisers. The Valuation Yearbook is the single most-used tool in the profession, and most appraisers consult this group of products regularly for size premia, industry risk premia, industry betas and market multiples, and international cost of capital data—and the all-important cost of capital figures for smaller businesses provided by the 10th decile splits (10a and 10b, plus 10w, 10x, 10y, and 10z). As we understand it, all of these crucial size premia and other datapoints, which are critical tools for the profession, will no longer be offered by Morningstar going forward. Stay tuned... IRS issues final ‘expense vs. capitalization’ regsThe Internal Revenue Service has issued final regulations (T.D. 9636) on deduction and capitalization of expenditures related to tangible property. The final regulations include rules for determining whether costs related to tangible property are deductible repairs or capital improvements. Changes made: The final regulations adopt the temporary regulations issued in 2011 (T.D. 9564), with a number of changes. One such change is in response to comments that the $100 threshold for property that is exempt from capitalization was too low. The final rules raise it to $200 and retain the rule that the amount can be increased in IRS guidance. Another change—a significant one for small companies—is that taxpayers with gross receipts of $10 million or less can elect to deduct (for buildings that initially cost $1 million or less) the lesser of $10,000 or 2% of the adjusted basis of the property for repairs each year. The final regulations, which will be published in the Federal Register on September 19 and apply to tax years beginning on or after Jan. 1, 2014, do not finalize or remove the temporary regulations governing dispositions of property under Sec. 168. Instead, to address significant changes in this area, revised proposed regulations were issued at the same time as the final regulations. Comments on the proposed regulations are requested within 60 days of their publication in the Federal Register (scheduled for September 19), and a public hearing has been scheduled for December 19. Boosting the value of a divestmentValuation experts involved in corporate divestitures would do well to read a new study from Ernst & Young. It concludes that sellers are not extracting all the value they deserve from buyers. Separation woes: The authors outline five practices that should be used to enhance the “value story” of a divestment: (1) a structured process for regular portfolio reviews; (2) appealing to a broad range of buyers; (3) articulating a unique story for each potential buyer; (4) a rigorous process; and (5) separation planning. This last process, separation planning, is easily underestimated. Therefore, care should be taken in assessing the value of stranded costs, one-time separation expenses, business continuity costs, and the impact of unwinding tax structures. Asked how they enhance the “value story” of a divestment, respondents say that they follow certain strategies, such as supporting the market/product growth story with an independent review, developing an M&A plan for potential investors, providing their own view of synergy opportunities to buyers or developing a range of potential upsides. However, no more than 50% of respondents implement these strategies. Clearly, more companies need to follow these practices to enhance divestment value. The study says: “The greater the clarity sellers are able to provide, the greater the likelihood that they will extract more value from the sale.” Divorce award linked to copyrighted scripts fraught with imponderablesHow meaningful is an award of future proceeds derived from a spouse’s copyrighted film scripts when there is no baseline value? This is only one of several valuation questions triggered by a recent New York court decision. Backstory: The husband was a film and television director who also wrote screenplays, and the wife was a lawyer turned dentist who owned her own practice in New York City. The husband’s most recent film premiered at the Sundance Film Festival last year and is slated for release this November. He owned a production company, which he had formed for billing purposes one year before the marriage. At trial, the court considered the company little more than “a conduit to receive payment for work he is hired to do.” Because it was not a “true” business in the sense of being saleable and the wife did not contribute to it in any way, she had no right to any of the $124,000 value an appraiser had determined. The husband also acknowledged that he had copyrighted four scripts, which he had not listed in his statement of net worth. He said he had optioned one and had one made into a film that was sold, but two remained unproduced and unsold. Since neither party had proof of the value of the works at trial, they agreed that there could be no distributive award or credit or offset to the wife at that time. But, said the court, because the husband created these works during the marriage, the wife had a right to “half of such sums paid to the defendant for the sale or use of these works.” But there was a caveat: The wife had no right to the compensation the husband earned as a result of making future modifications to the works, the court went on to say. And, in what appears to be a contradiction, it specified that the wife was to receive “25% of any fees or royalties [the husband] earns from the four copyrighted scripts, as well as 25% of any sums earned from the sale of all or any part of the copyrights, or any sums paid for the right to make any derivative works from the scripts.” Muddy plot: The court did not set down a procedure for quantifying value changes in the scripts created during marriage, but its express limitation on the size of the award due to modifications is troubling to Jim Alerding (Alerding Consulting). It may diminish, if not eliminate, the wife's claim to any of the proceeds. “That seems like a hole wide enough to drive an 18-wheeler through for the creating spouse—a way to totally negate the value to the receiving spouse,” Alerding explains. Also, the order gives rise to more questions than it answers: “So does that mean that if the husband modifies a script even a little, any future royalties for it go only to the creator? Even though the judge talks about compensation for those changes only, how do you measure that if those changes are required to continue the existing royalty?” Alerding wonders. Find a detailed discussion on A.C. v. J.O., 2013 N.Y. Misc. LEXIS 3524 (Aug. 12 2013) (slip op.), in the November Business Valuation Update; the opinion will be available soon at BVLaw. What’s in the October issue of Business Valuation Update Here’s what you’ll see:
To read these articles—plus a digest of the latest court cases—see the October issue of Business Valuation Update (subscription required). Powerhouse lineup of CPE events IP Valuations for Licensed Property Acquisitions (September 25); Weston Anson and Jeff Anderson (both CONSOR) and licensing expert Ira Mayer (EPM Communications) examine opportunities and complexities of buying active, dormant, and languishing brands. Reasonable Compensation in Marital Dissolution (September 27); James Ewart (Dixon Hughes Goodman) addresses the quantification and analysis of the most subjective and discretionary expense for many owner-operated businesses: compensation. Part 3 of BVR’s Advanced Webinar Series on Business Valuation in Divorce. Lost Profits in Early Stage Companies (October 1); Neil Beaton (Alvarez & Marsal) and John Du Wors (Newman Du Wors) reveal the analysis of economic damages for early-stage companies that can pass muster in most courts. Part 8 of BVR’s Online Symposium on Economic Damages. Asset Tracking and Fraud Analysis in Divorce (October 4); Donald DeGrazia (Gold Gerstein Group) and Donald Glenn (Glenn & Dawson) show how to identify, analyze, and quantify claims for fraud in marital dissolutions. Part 4 of BVR’s Advanced Webinar Series on Business Valuation in Divorce. Advanced Workshop on Estate & Gift Valuations for the IRS (October 10); Former IRS territory manager Michael Gregory (Michael Gregory Consulting) gives an inside look at how to survive an IRS review of estate and gift valuations, including S corporation and FLP valuations, DLOMs, and control adjustments.
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