Nath comments on Hitchner v. Damodaran

The author of a number of seminal articles on control premiums, minority interest valuation issues, and cost of capital, Eric Nath (Eric Nath & Associates) comments on a recent article in Business Valuation Update. The article covered a webinar Jim Hitchner (Valuation Products and Services) presented in which he challenged the views of Aswath Damodaran (New York University Stern School of Business) concerning the cost of capital.

“Your article ‘Hitchner Rebuts Damodaran’s Attacks on Cost of Capital Inputs’ might perhaps have been titled ‘Hitchner Attempts to Rebut Damodaran.’ My understanding is that probably 35% to 40% of appraisers (never mind academics) agree with Damodaran in whole or in part. Many of us never use historical data at all for ERP, size premiums or much of anything else. See the following article for detailed reasons why: The Big Myth. At this point the Pepperdine Survey is the best source of forward-looking required rates of return. Implied rates of return based on forecasts for some public companies is also a forward-looking approach, but it doesn’t really deal with lack of control or marketability/liquidity that impairs value for minority ownership positions in small private companies. It would be great to see the Pepperdine researchers figure out a way to get into the deeper, darker recesses of minority interests in smaller closely-held businesses, but at least for now the Survey’s venture capital and private equity segments get closer than anything else to what we need.” (signed) Eric Nath, ASA.

BVR surveys confirm Nath’s belief that over a third of appraisers look to Damodaran for estimating cost of capital. Also, BVR surveys have shown that about 30% of appraisers look to the Pepperdine Survey (the 2022 edition is now available if you click here).

Expert can’t testify regarding legal and state of mind opinions

In a case in Delaware Chancery Court concerning breach of fiduciary duty surrounding an acquisition, a well-known expert has had the court partially exclude his testimony. For example, one aspect of the report provided his opinions on facts omitted from the proxy statement. The court noted that this amounted to a legal opinion of materiality, which is an issue for the court, so he was precluded from testifying in that regard. Some other aspects of his report fell into a gray area, but it did not provide a meaningful basis for evaluation and was largely personal thinking and judgment, the court noted. The expert had testified in the high-profile Dell case presided by the same judge, Laster, who wrote: “His opinions on the sale process in this case thus differ from the helpful analysis he offered about the management-led buyout in Dell, which rested not only on his thinking and judgment, but also on a data set of management buyouts he collected.” The court ruled that the expert may not testify on certain subjects of his report.

The case is In re Columbia Pipeline Group, 2022 Del. Ch. LEXIS 180, and a case analysis and full opinion can be found on the BVLaw platform.

Survey regarding young ASA BV practitioners

The American Society of Appraisers, together with Business Valuation Resources (BVR) and the recruiting firm Borrowman Baker, is conducting a survey of ASA members under the age of 40 whose primary discipline is business valuation. The goal is to gain some insights and perspectives to help the profession better attract and develop the younger generation of practitioners. If you are an ASA member under 40 in the BV discipline, you should have received a link to the survey. If you have not, send a note to info@bvresources.com and we will send you a link. Responses are strictly confidential and anonymous and will contribute to the continued advancement of the profession. The survey will be open until September 30. Thank you in advance for participating!

Paper explores IPP investments in the US

An interesting paper examines the types of intellectual property products (IPP) capital employed by various sectors as measured in the National Income and Product Accounts (NIPAs) by the Bureau of Economic Analysis (BEA). The paper finds (not surprisingly) that investments in hard assets (e.g., plant and equipment) have decreased and have been replaced by investments in IPP. Also, there “still is a lot of heterogeneity in the types” of IP used among sectors, the paper says. For example, software capital is more prevalent in sectors such as information, finance and insurance, or management of companies than in sectors such as professional, scientific, and technical services, which continue to “invest heavily in the relatively more expensive R&D capital, as they had been doing since the 1980s,” the paper says. Consumer services and healthcare continue to be heavily invested in buildings (“expensive nonresidential structures”) but have also “increased their investments in a balanced mix of software and R&D capital but at much more modest levels compared to the rest of the capital-intensive sectors analyzed in this paper.”

‘Give back,’ urges 2022 NACVA Porter award recipient

A message to young business valuation professionals: “I know your time is valuable, but you have to give back to the profession. I can’t overemphasize how rewarding that is,” advises Philip J. DeCaprio Jr. He is the 2022 recipient of the Thomas R. Porter Lifetime Achievement Award as the NACVA member who has demonstrated exemplary character, leadership, and professional achievements to NACVA and the industry. DeCaprio, managing member of DeCaprio CPA & Associates (Branford, Conn.), has 57 years in the accounting and valuation professions and is called one of the profession’s “guiding stars” and “expert’s expert.” Over the years, he has volunteered on boards and committees at NACVA and the AICPA. At one time, he served as president of the Connecticut Society of CPAs, a “high point” in his long career. To watch an interview with DeCaprio, click here.

Last chance—AAML/BVR Divorce Conference starts Sunday September 18

Connect with divorce attorneys from across the US at the AAML/BVR National Divorce Conference in Las Vegas September 18-20. Can’t make it to Vegas? You can attend virtually. The AAML is the American Academy of Matrimonial Lawyers. Conference attendance is expected to be half experts and half attorneys. To see the full agenda and to register, click here. Up to 20 CPE/CLE credits are available.

Global BV News: European BV conference in Vienna November 3-4

The 15th annual conference of the European Association of Certified Valuators and Analysts will be held in Vienna on November 3-4. More than 300 attendees are expected to hear from some of the most renowned speakers in the business valuation field while connecting and networking with other valuation professionals. Keynote speeches will be presented by Professor Dr. Dr. h.c. Ulrich Blum on Outright Economic Warfare: Can It Be Contained? and Bradford Cornell, Ph.D., on ESG and valuation. For more information and to register, click here.

What’s in the October 2022 issue of Business Valuation Update

Here’s what you’ll see:

• “Young BV Practitioners Speak Out About the Profession” (BVR Editor). You may be surprised at the comments from a panel of young valuation experts who were asked to give their perspectives on the profession at the recent Business Valuation and Financial Litigation Super Conference hosted by NACVA in Salt Lake City.

• “Valuation Considerations in High Inflationary Environments” (William Harris, ASA, CFA, Trugman Valuation). With inflation at its highest level since the Great Inflation, valuation analysts will have to consider macroeconomic factors that have not been present in the US economy in over 20 years.

• “Accounting for Inflation in the Income Statement Forecast” (William Harris, ASA, CFA, Trugman Valuation). An example from an actual engagement that demonstrates the manner in which inflation can impact a valuation. This is a companion to the above article.

• “Recap of NACVA’s Summer 2022 ‘Super Conference’” (BVR Editor). Business Valuation Update traveled to Salt Lake City for the Business Valuation and Financial Litigation Super Conference hosted by the National Association of Certified Valuators and Analysts (NACVA). This is a recap of some of the sessions we attended. Several sessions deserved longer treatment, so we’ve devoted separate articles to them (also in this issue).

• “Mercer Examines the State of the BV Profession” (BVR Editor). In a keynote address at the Business Valuation and Financial Litigation Super Conference hosted by the National Association of Certified Valuators and Analysts (NACVA), Chris Mercer (Mercer Capital) addressed the aging of the profession, consolidation, how the VPOs are adapting, and what the future might hold for valuation theory.

• “Key Industry Updates for Various Types of Stores and Retailers” (BVR Editor). The economy, high inflation, the Russia-Ukraine war, and the pandemic continue to impact firms in all industries, so it’s important for valuation analysts to keep up with these developments. Here are some recent and very targeted updates for various retail stores from the Vertical IQ industry research platform.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet Mergerstat/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues.

To stay current on business valuation, check out the October 2022 issue of Business Valuation Update.

BV movers . . .

People: Peter L. Lohrey, PhD, CVA, CDBV, has joined New York City-based Anchin as a director in the Litigation, Forensic and Valuation Services group; he has over 35 years of experience in the forensic accounting and valuation profession, specializing in fair value reporting matters, commercial damage calculations, and business valuations for tax and litigation purposes … The National Association of Certified Valuators and Analysts (NACVA) has named its outstanding members for the third quarter of 2022: Pasquale Rafanelli, CPA, ABV, ASA, CVA, CBA, MAFF, CFE, CDFA,® a senior manager at Empire Valuation Consultants in New York City, and Baria Jaroudi, CPA, ABV, CVA, CBA, a senior manager of the business valuation department at Briggs & Veselka in Houston.

Firms: San Francisco-based BPM LLP has become certified as a B corporation, one of only 15 accounting firms in the U.S. to achieve the distinction; “BPM’s B Corp status furthers our commitment to ESG (environmental, social, governance) and broader sustainability initiatives,” the firm said … Salina, Kan.-based Pinion (formerly K·Coe Isom LLP) is adding Helena, Mont.-based Anderson ZurMuehlen & Co., a firm that provides tax, audit, accounting, advisory, and technology services, with a team of 217 personnel in offices across the state of Montana.

Please send your professional and firm news to us at editor@bvresources.com.

CPE events

• Auto Dealerships Are Running Hot: Key Valuation Metrics Unique to Auto Dealers, September 14, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Alan Haig (Haig Partners) and Nate Klebacha (Haig Partners). CPE credits: 2.0.

Buy-sell activity is red hot in this industry, and valuations are different than in other industries. Learn the unique characteristics that set dealership valuations apart from others.

• The New Stark FMV Is a Game Changer: The Rejection of ‘Survey Says’ for Stark-Compliant Physician Compensation, September 15, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Timothy R. Smith (TS Healthcare Consulting). CPE credits: 2.0.

This is Part 2 of a BVR webinar series that provides a critical and in-depth assessment of the new definitions of fair market value under the regulations for the federal physician self-referral law commonly known as the Stark Law.