Some valuation experts are of the opinion that calculation engagements are not a good thing for the profession. For example, Michael Paschall (Banister Financial Inc.) says in an article that the increasing use of calculation engagements “seriously compromises” historical valuation standards of reliability and independence. He feels that the dangers of calculation engagements are that they are being offered in contexts for which they were never intended, are prone to bias, and confuse users who don’t know the difference between a calculation and a full valuation.
Opposing view: During a recent webinar, Jim Alerding (Alerding Consulting LLC) made the case for calculation engagements and discussed recent AICPA guidance on this matter, which he co-wrote. Also, Alerding, along with Jim Hitchner (Valuation Products and Services) and Ed Dupke (Dupke Consulting LLC), wrote a rebuttal article giving what they say is the “real” story of calculation engagements.
We invite you to read these two articles, which we have made available as a free download if you click here. They are also available with your subscription to BVResearch Pro. We’d love to hear what you think!
By our count, there are almost 75 methods for estimating a discount for lack of marketability (DLOM), and more are in the works. It has been a few years since we did our survey on the different methods practitioners use for estimating DLOM, so we felt it was time to revisit the issue. Please take a short survey designed to narrow down the methods practitioners most frequently use. We will compare the results to our prior surveys, which showed some shift in methodology. We will publish the results in BVWire in the coming weeks. To take the survey, click here. Thank you!
People who regularly buy and sell businesses rely on the market approach much more than traditional valuation experts when valuing a company. One broker, who is also a credentialed valuation expert, first looks to transactional data and, if there are enough comps, does his valuation with that approach before using the income approach as a sanity check. Lance Schmidt, CVA, CBI, CBB, and a former CPA, is the president of National Business Appraisers (Mission Viejo, Calif.) and is a valuation expert as well as a business intermediary and business broker with 30 years of experience in both valuation and M&A or sales of businesses including a specialization in auto dealership valuations. He’s in the Pratt’s Stats Hall of Fame for business intermediaries who have contributed the most transactions to the database.
Good data: How many comps are enough? “If you have six or seven solid comps, then it’s sufficient, in my opinion,” says Schmidt. Of course, they have to be relevant, he points out, so you have to consider factors such as the time frame of the transaction. One idea he offers is to talk to the broker who submitted the data to make sure the comp is relevant. If the comps turn out to be not as solid as you thought, can you still use the data? Yes, says Schmidt, but in a different way. The data can be used as a benchmark that can be refined using certain techniques.
In 2016 and 2017, over 80% of purchase price adjustments in M&A transactions involved working capital adjustments, according to “SRS Acquiom’s 2018 Deal Term Study.” The purchase and sale agreement (PSA) commonly includes a purchase price adjustment provision to address differences between the target working capital the buyer expected at the time the PSA is signed and the working capital the buyer received at closing. Disputes often arise between the buyer and the seller as to the proper determination of the working capital based on the closing balance sheet. An article by Jeff Litvak, senior managing director, and Jason Tolmaire, senior director, both with FTI Consulting, explains how working capital is calculated, how working capital is included in the purchase price, and how disputes arise in the calculation of working capital.
In a recent article by Robert Reilly and Casey Karlsen of Willamette Management Associates, a number of sources were mentioned for identifying arm’s-length intellectual property royalty rate data. The sources mentioned are: ktMINE, RoyaltySource, RoyaltyRange, RoyaltyStat, IntangibleSpring, and Markables. The article, which appeared in les Nouvelles, the journal of the Licensing Executives Society, is titled “Intellectual Property Valuations for License and Other Transfer Purposes Part 1.”
Agenda released for 2019 AAML/BVR National Divorce Conference
The agenda is now available for the National Divorce Conference to be presented by BVR and the American Academy of Matrimonial Lawyers (AAML) in Las Vegas, May 8-10, 2019. Leading matrimonial attorneys and financial experts will give you critical insights in sessions covering financial, valuation, forensic, and legal issues surrounding this growing area of practice.
The conference will be at the Aria Resort and Casino, and there’s an early-bird discount if you register before December 31. You can register if you click here. We hope to see you at this unique event.
The IRS business valuation community is “very fractured,” leading to inconsistencies on audits, says former IRS manager Michael Gregory (Michael Gregory Consulting LLC). He will conduct a four-hour “mock audit” where he will assume the role of IRS valuer and go up against a business valuer in an estate tax audit based on an actual case. “This is but one example of what might really happen on a business valuation audit today,” Gregory tells BVWire. “However, the example is directly on point with how such an audit may transpire with an IRS audit team.” His opponent in the mock audit will be Bryant Lancaster (Lancaster Financial & Valuation Services), and it will take place on September 25. Click here to register.
The Institute of Chartered Accountants of India (ICAI) released a set of valuation standards known as Indian Valuation Standards (confusingly with the same acronym as the International Valuation Standards, “IVS”). Rajesh C Khairajani, a valuation partner at Indé Global, wrote an article that provides an overview of the new standards. Indé Global is a member firm of KNAV International Limited, a U.S. firm.
Preview of the October 2018 issue of Business Valuation Update
Here’s what you’ll see:
“New Guidance in Updated Edition of Economic Damages Book” (BVR Editor). The editors of The Comprehensive Guide to Economic Damages, Nancy J. Fannon, CPA, ASA, MCBA (Marcum LLP), and Jonathan M. Dunitz, Esq. (Verrill Dana), talk about the new edition of the book and give some insights on economic damages.
“Aruba Networks: Should Appraisals Rely on Unaffected Market Price?” (Gilbert E. Matthews, CFA). Delaware appraisal decisions in recent years have effectively endorsed the concept that the price paid in an arm’s-length transaction is “fair value” when there has been a “robust” sales process. This article examines the “troubling” ruling in which the court based its appraisal solely on the unaffected market price.
“Testing the S Corp Value Premium for Realism and Reasonableness” (Sarah B. von Helfenstein, MBA, CVA). Not long ago, we attended the author’s session at a NACVA conference where she presented on this topic. We asked her for this article, which has some key takeaways from that session as well as from a longer paper she wrote.
“Industry Snapshot: Home Hospice Firms” (BVR Editor). An at-a-glance overview of the valuation nuances of home hospices firms, based on a webinar presented by Darcy Devine and William Hamilton, who are both with Buckhead FMV.
“Recap of the AM&AA 2018 Summer Conference” (Robert Brackett, CPA, ICVS, CGMA, CVA). The Alliance of Merger & Acquisition Advisors 2018 Summer Conference had a single track focused on doing business in the intermediary market. Attendees included investors, intermediaries, consultants, and industry partners, from across North America, Europe, as well as Asia.
People: Timothy Smith has opened a new practice, TS Healthcare Consulting, in theDallas-Fort Worth area, which will focus not only on valuation, but also on healthcare consulting and litigation support services … William Hamilton has joined Buckhead FMV, an Atlanta firm that specializes in healthcare valuation and consulting; he’s formerly with Veralon of Philadelphia … Lucas Frank has joined BKD as senior managing consultant in the firm’s forensics and valuation services department … At Fort Worth, Texas-based Whitley Penn,Robert Allen rejoins the firm as managing director in the forensic, litigation and valuation group; also, Michelle Starr joins as a forensic litigation and valuation services director in the Houston office … New York-based Marcum admitted Bradford Taylor to the partnership group; he’s with advisory services in the firm’s Boston office and provides valuation, litigation support, and financial analysis services … Best Lawyershas named Joseph S. Goode, managing partner of Laffey, Leitner & Goode LLC, Milwaukee’s “Lawyer of the Year” in Franchise Law; he’s a contributing author to The Comprehensive Guide to Economic Damages,5th edition.
Firms:Garden City, N.Y.-based JanoverLLC has launched a cannabis industry practice group, headed by Marsha Ellowitz and Jason Hoffman, who have focused on this industry for over five years … Anglin Reichmann Snellgrove & Armstrong of Huntsville, Ala., has added Bloomer Geri & Co. of Pensacola, Fla.; the combined firms will operate under the name Anglin Reichmann Armstrong … Stout has added three offices in Asia as part of a newly formed joint venture with Bluepeak Group Ltd., a Pan-Asian firm that provides M&A and corporate finance advisory services; the offices are in Shanghai, Singapore, and Hong Kong.
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