Source: https://harriscompanyrec.com/blog/business_valuations/
Timestamp: 2019-04-19 23:06:30+00:00

Document:
The International Private Equity and Venture Capital Valuation Guidelines were developed by the Association Française des Investisseurs en Capital (AFIC), the British Venture Capital Association (BVCA) and the European Private Equity and Venture Capital Association (EVCA) and were launched in March 2005 to reflect the need for greater comparability across the industry and for consistency with IFRS and US GAAP accounting principles. Valuation guidelines are used by the private equity and venture capital industry for valuing private equity investments and provide a framework for fund managers and investors to monitor the value of existing investments. The new guidelines are based on the overall principle of ‘fair value’ in order to be consistent with IFRS and US GAAP.
AFIC, BVCA and EVCA also created an independent board (International Private Equity and Venture Capital Valuation Board – IPEV Valuation Board) reporting and accountable to a general assembly composed of all the endorsing associations to manage the evolution of the guidelines going forward.
The board monitors market practices in the use of the guidelines. It also proposes amendments to the guidelines following any relevant changes to accounting standards and market practices and formally reviews the guidelines every three years. The board has an advisory role and gives guidance on the application of the guidelines to all stakeholders in the private equity and venture capital industry including practitioners, investors, regulators and auditors.
The International Private Equity and Venture Capital Valuation Guidelines developed by the Association Française des Investisseurs en Capital (AFIC), the British Venture Capital Association (BVCA) and the European Private Equity and Venture Capital Association (EVCA) have been endorsed by the following regional and national associations.
BVK - German Private Equity and Venture Capital Association e.V.
Some of the endorsing associations have translated the IPEV Guidelines into local language. In the event of any inconsistency or ambiguity in relation to the meaning of any word or phrase in any translation, the English text shall prevail.
The going concern concept is one of the cornerstones of the financial accounting world. In essence, the going concern says that a Balance Sheet of a company must reflect the value of that company as if it were to remain in existence for and beyond the foreseeable future. The opposite of the going concern concept, so to speak, is to say that the company will fold within one year from the Balance Sheet date.
We will see in this article that the going concern concept is vital for us to be able to take as much of a rational view of a company as is possible. In this article, we will discuss the following key questions: who makes the going concern assessment and why?; and how do we arrive at the liquidation value of a company and/or its assets?.
Who makes the going concern assessment and why?
"When preparing financial statements, management should make an assessment of an enterprise's ability to continue as a going concern. Financial statements should be prepared on a going concern basis unless management either intends to liquidate the enterprise or to cease trading, or has no realistic alternative but to do so. When management is aware … of material uncertainties … which may cast significant doubt upon the enterprise's ability to continue as a going concern, those uncertainties should be disclosed. When the financial statements are not prepared on a going concern basis, that fact should be disclosed, together with the basis on which the financial statements are prepared and the reason why the enterprise is not considered to be a going concern.
any judgment about the future is based on information available at the time at which the judgment is made. Subsequent events can overturn a judgment which was reasonable at the time it was made.
the size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors all affect the judgment regarding the outcome of events or conditions.
Material uncertainties related to the types of events or conditions set out in paragraph 9 of this ISA may cast significant doubt upon the going concern assumption.
And now the auditor’s responsibility. In general, the IFAC position is conservative: there is no doubt that they allow for the auditor to have a key role in the assessment of a company from a going concern perspective. However, they take the now traditional view that the auditor need not be a bloodhound, searching through every nook and cranny in an attempt to get to the bottom of whether the going concern principle is valid or not. Moreover, the simple fact that the auditor did not say that the company should no longer be considered a going concern, does not mean that it is!
The auditor's responsibility is to consider whether there is material uncertainty related to events or conditions which may cast significant doubt upon the entity's ability to continue as a going concern based on the auditor's knowledge of relevant events or conditions at the time of conducting the audit. The auditor's consideration of the going concern assumption applies irrespective of the accounting framework that has been used in the preparation of the financial statements, even if the going concern assumption is not specifically mentioned within that framework. The auditor cannot predict future events or conditions which may cause an entity to cease to continue as a going concern. Accordingly, the absence of any reference to going concern uncertainty in an auditor's report cannot be viewed as a guarantee as to the entity's ability to continue as a going concern. Management's assessment of the entity's ability to continue as a going concern is a key part of the auditor's consideration of the going concern assumption.
The auditor considers the going concern assumption for the same period for which management assumes responsibility, a period which should be at least, but is not limited to, twelve months from the balance sheet date.
In developing the audit plan … The auditor considers events and conditions relating to the going concern assumption at the planning stage of the audit, because this consideration allows for more timely discussions with management, review of management's plans and resolution of any identified going concern issues and thus may affect the nature, extent and timing of the auditor's procedures. ... In addition, the auditor remains alert to events or conditions relating to the going concern assumption that come to the auditor's attention throughout the audit since these may further affect the procedures to be performed.
Some of the key issues that IFAC sets out as events that the auditor ought to consider in this context are financial, adverse key financial ratios, operating and other. As perhaps we should expect, the events listed by IFAC are comprehensive, even though they say their list is not exhaustive. Let’s look at each of these four categories in turn.
IFAC discuss the position in which fixed term borrowings are approaching maturity but the company may have no realistic prospects of renewal or repayment. Alternatively, there could be evidence of over trading and an excessive reliance on short term borrowings to finance long-term assets.
The auditor must also look for indications of withdrawal of financial support and negative cash flows as shown either by the historical accounting records and/or by cash budgets or projections.
Clearly, anything prescribed under this heading could be dangerous, misleading, or simply not comprehensive enough. That is, depending on the state of the Economy in which the company is operating, the nature of the sector in which the company is operating and so on, the number and variability of ratios could differ from case to case.
Arrears or discontinuance of dividends no longer being declared; and the possibility that the latest declared dividends have yet to be paid, well after their due date. A persistent rescheduling of creditors’ payments and maybe the shift from buying on account to buying for cash would ordinarily be cause for concern. The need to reschedule formal loans would also be a cause for raised eyebrows in the context of the going concern principle.
Companies that find that they are unable to secure financing for essential new product development or other essential investments must clearly have pause for thought at least as to the view of others of their long term viability.
Of course, whilst each of these issues, either singly or collectively, could be considered serious for any company, taken in isolation, we could take a mistaken view of the situation. For example, even though a company might be having to reschedule its creditor and debt repayments; management could be taking steps to reorganise its affairs in such a way that it resolves its financing situation within the forthcoming financial year.
Finally in this section, we should make the observation that a company may receive a going concern clean bill of health; and yet a material uncertainty exists. That is, we need to consider whether the financial statements of a company adequately describe the principal conditions that give rise to a significant doubt about the entity's ability to continue in operation for the foreseeable future and management's plans to deal with these events or conditions; and state clearly that there is a material uncertainty related to events or conditions which may cast significant doubt about the entity's ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.
How do we arrive at the liquidation value of a company and/or its assets?
“A valuation is always determined as of a particular point in time, and generally should not be relied upon for other dates."
In actual practice, a combination of approaches is commonly used with differing weights given to each selected approach as appropriate.
The asset approach relies on a company's adjusted book value by substituting the fair market value of assets and liabilities for the stated value of assets and liabilities. This approach is most useful for valuing a company which has significantly undervalued assets. It may also be useful for valuing a company with substantial non-operating assets such as land or natural resources. This approach is generally not used, however, to value a company as a going concern .
The market approach is simple for the quoted company: just take the stock market value of the company at the relevant date and multiply it by the number of shares in issue. However, what about the private company that is not quoted on any stock exchange, and whose shares are thus very difficult to value. The solution here requires trying to find one or more public companies that are as similar as possible to the private company being valued. To use this approach, we must compare the private company to the public companies in terms of size, growth, gearing and so on to determine relative risk.
The discounted cash flow approach relies on multiple year projections based on management's reasonable estimates of the company's prospects. The reasonableness of projections should be considered by comparison to the company's historical results and the outlook for the company and the industry.
Projected cash flow is determined by depreciation to earnings to depreciation and subtracting capital expenditures plus or minus changes in working capital. A terminal value at the end of the projection period is then calculated. The appropriate discount rate may be the company’s own hurdle rate or it based on the company's weighted average cost of capital . A risk premium may be added to the discount rate as appropriate under the circumstances to determine a risk-adjusted discount rate: despite the very sophisticated methods of deriving discount rates, it is still common for management to add a fudge factor to cover for risk.
The formula approach, or rules of thumb, may be considered if appropriate. A formula may take many forms, such as a multiple of book value or a multiple of revenues. The advantage of using a formula approach is that it is simple and inexpensive to use. However, the disadvantage is that it may not reflect fair market value. Furthermore, a formula may not be dynamic enough to reflect changing market conditions in which a company is operating.
reasonable management compensation, key person risk, "excess" cash, and non-operating assets.
Determining the value of a business is one of the most difficult aspects of any transaction, since every business is unique.
hard figures, such as assets, liabilities, and historical earnings and cash flow are used.
soft , or subjective, figures, such as projected earnings, future cash flow, and the value of intangibles (e.g., patents, know-how, the quality of management, and leases at below-market rates) are also used. Soft figures also include such considerations as current market conditions, industry popularity, and, most important, the objectives of the seller or buyer.
With all this subjectivity, fair market value can be, at best, only a range of estimates.
In fact, the selling price of a company sometimes does not seem to have much relation to its estimated value. Moreover, ask appraisers the value of your business and they will respond, "What's the purpose of the valuation?": to sell it as a going concern, to sell it on a liquidation basis, to sell it on a break up basis. Different techniques can be used to arrive at different values, and each of the values may be correct for a specific situation. For purposes of this discussion, we are assuming that we are valuing a business based on the valuation techniques used for buying or selling a company as a going concern.
We have already seen some of what Deloitte and Touche have to say about valuing a business above; but their section on recasting, or adjusting, financial statements is new and interesting; and some of their ideas follow. We should bear in mind, however, that if we tried to apply these ideas in anything other than a considered and serious manner, we would have severe difficulties.
Fixed assets that have appreciated in value.
Intangible assets that may not be recorded on the books.
Unrecorded pension and other postretirement liabilities.
After identifying and quantifying applicable adjustments, you will have a more meaningful set of financial statements to use to make financial projections and to compare the company's performance with that of other companies.
The going concern principle is among the most important accounting, and therefore business, principles. Nevertheless, despite the definition of the principle being relatively straightforward, the application of it can be fraught with difficulties. At one extreme, we have many examples of companies that were given a clean going concern bill of health at the end of one financial year only to find itself in liquidation within 12 months of the end of that financial year. At the other extreme, we have the significant difficulties in trying to arrive at a fair value for a company that seems properly assessed as a failing company.
This article has discussed the role of management, auditors and others in the going concern assessment of a company and we have explored several of the issues facing someone who is trying to place a value on a business: for either going concern or non going concern purposes.
Equipment and Fixtures Index, Percent Good and Valuation Factors (AH 581).
• Offset printing presses (adopted by the Board in December 2009).
The nonproduction computers, semiconductor manufacturing equipment, and biopharmaceutical equipment valuation factor tables are a result of valuation studies conducted pursuant to Revenue and Taxation Code section 401.20. This revision also includes guidance to industry in identifying, gathering, and verifying data to submit to Board staff for the purpose of conducting a valuation study of their personal property/equipment.
All information is for use as of the 2012 lien date, January 1, 2012. The 2012 revision of AH 581 will only be available on the Board's website; no hard copies will be distributed. If you have questions regarding this publication, you may contact Mr. Isaac Cruz at 916-274-3355 or at Isaac.Cruz@boe.ca.gov.
Do appraisers need to specialize now?
Is your valuation work biased?
How do you value “synergy” in an impairment test?
“We actually try to figure out the cashflows from the competitive advantage,” said Mark Edwards (GT), speaking at the Hardball with Hitchner wrapup session at the AICPA National BV Conference this afternoon. But others try to deal with it by looking at the BVR/Mergerstat Control Premium Study and applying a control premium. ”I don’t particularly like the control premium approach here, though,” added Jim Alerding.
Ah well…congratulations to Robert…and we understand what you’ve done!
The long-awaited amendments to Rule 26 of the Federal Rules of Civil Procedure, made effective at the beginning of this year, have largely been “great,” according to attorney Edward M. Robbins (Hochman Salkin Rettig Toscher & Perez, P.C.), who presented in last week’s “Lawyers Roundtable,” part 2 of BVR’s 2011 Tax Summit, moderated by Jay Fishman (Financial Research Associates). Prior to the amendments, which specifically exempt draft expert reports from discovery in federal court proceedings, “you wasted a lot of time trying to ‘get behind’ the reports—and frankly, by the end of the day, it wasn’t worth your time,” Robbins conceded. “But you did it anyway because everybody did.” Under the amended rule, an expert’s compensation is still discoverable, along with any facts or assumptions the attorney may have provided the expert to form his or her opinion. But the bottom line: In federal court, “‘collaboration’ is no longer a bad word,” Robbins said, and attorneys and experts no longer have to “walk on eggshells” every time they communicate.
But not in Tax Court: Roughly 80% of the tax valuations that appraisers perform are related to federal tax cases, Stephanie Loomis-Price (Winstead PC) reminded listeners—and the U.S. Tax Court has not yet adopted an analogous rule to the amended Rule 26. As a result, “we still struggle with what we can say to our experts, what we can get from them, whether we can edit or even comment on their drafts,” Loomis-Price said. When an attorney writes on a draft report, the comments are protected under the work product privilege—but as soon as the expert receives the draft, the protection disappears. This means that tax experts should still “assume everything you do, say, or write will be discoverable to the other side,” Robbins said. Hopefully, the Tax Court will “see the light,” he added, and Loomis-Price agreed: Members of the tax bar as well as appraisal associations “ought to be pestering the Tax Court,” she said, to amend its rules.
Are you having issues with professional liability insurance for your BV firm? Let us know.
We've been hearing rumors of disappearing coverage, changing premiums, coverage exclusions, and new policy requirements demanded by providers of errors & omissions (E&O) insurance for business appraisers. Is this true? Are you among those affected? Let us know your experiences here (and you can get the results for free by leaving your email at the end, if you wish).
Thanks from your colleagues—and from BVR. We'll publish our findings in BVWire next week.
As we recently reported, the taxpayer in Estate of Turner failed to persuade the Tax Court to preserve the discounted value of a family limited partnership (FLP), due largely to the passive character of the transferred assets (marketable securities) and the partnership’s lack of any legitimate, non-tax business purpose, including any overriding investment philosophy.
Digging deeper into the data, “although we haven’t statistically analyzed the relationship between U.S. and international DLOMs,” says Brian Pearson, president of Valuation Advisors, the general trend appears to parallel results from the domestic data; that is, “the international discounts tend to increase over time from the IPO date,” he says. Predictably, analysts will want to use the international data when valuing international companies or a company that has a considerable portion of its sales, earnings, or operations overseas, using new tools that permit searches by aggregate or individual country, in addition to the existing search parameters for U.S. companies.
New from the Pepperdine Private Capital Markets Project Fall '11 Survey: During the past year, the bank loan success rate was 44% for businesses with less than $5 million in revenues; 72% for businesses with $5 to $25 million in revenues; and 90% for businesses with greater than $25 million in revenues.
That’s just one data point, provided by John K. Paglia, associate professor of finance at Pepperdine University, who will present more from the survey at next week’s AICPA National BV Conference in Las Vegas. BVWire will be there, covering multiple sessions, news, and updates. Stay tuned . . .
The Delaware Chancery Court just provided a good checklist of documents to request and require in a “books and record” action by the controlling member of a limited liability company (LLC), particularly when the purpose of the request is to ascertain the value of the member’s holdings, not just in the LLC but in its subsidiary. In this case, the LLC held the assets of a company that owned and operated eight wine brands. When the subsidiary started to founder, the LLC’s limited partners petitioned the Delaware Chancery to access the books and records of the LLC as well as the subsidiary. The LLC objected under Delaware law, maintaining that since the subsidiary was near insolvency, the valuation was zero (or a simple matter of mathematics), the request was “meaningless.” The LLC also said the relevant operating agreements gave members no separate contractual right of access to the sub’s records.
The court disagreed on both points. The operating agreements gave members inspection rights equal to those provided by Delaware law. And under the case law, since the defendant had no separate value from the subsidiary, it would be “unfair” to require the member to attempt to value its holdings without providing access to the records of the LLC’s only asset—in particular, those records pertaining to value, the court held. It then approved most of the petitioner’s 16-item request for books and records, excepting only those that did not relate directly to value (e.g., the subsidiary’s ability to pay its creditors) and permitting redaction for trade secrets. Read the complete digest of DGF Wine. Co., LLC v. Eight Estates Wine Holdings, LLC, C.A. No. 6110-VCN (Del. Ch.)(Aug. 31, 2011), in the November Business Valuation Update; the court’s opinion is posted at BVLaw.
Advanced Workshop on Valuation Issues Under ASC 805 and Business Combinations, a four-hour “live” and intensive workshop by Mark Zyla (Acuitas), will feature several hands-on, practical examples and case studies on applying fair value standards for financial reporting to business combinations, and will air on Thursday, Nov. 3.
Judges Roundtable: View From the Bench, Part III of BVR’s Tax Summit, with Hon. David Laro, Hon. Julian Jacobs, Hon. Mary Ann Cohen (all U.S. Tax Court), moderated by Jay Fishman and hosted by Georgetown Univ. Law Center, on Friday Nov. 4.
Valuing a Majority Fractional Interest concludes the Tax Summit and features Neil Mills-Mazer (Internal Revenue Service), who will introduce his controversial “minority premium” model of fractional interest valuations, on Friday Nov. 11.
In its meeting prior to last month’s national conference in Chicago, the ASA’s Business Valuation Committee approved a proposal representatives from the business valuation, machinery and technical services, and real property sections to design and teach a “multi-discipline course in valuing health care entities,” reports Linda Trugman, chair of the BV Committee, in her monthly e-update to members. “The committee will also be making a recommendation to the Board of Governors to go forward with this initiative,” Trugman adds. “I know that many of you are interested in health care valuation and we are looking forward to meeting those needs.” Another major item on the agenda: the design and implementation of a strategic plan, which the committee will continue to work on over the next few months.
In his remarks to the National Association of State Boards of Accountancy last week, FASB chairman Leslie Seidman announced a “new technique” to solicit feedback from the financial community regarding its standards convergence project with the IASB. Starting with the joint release of a revised exposure draft on revenue recognition in the next few weeks, the boards will hold workshops with representatives from certain key sectors, asking companies to prepare “before and after” examples of their common transactions under current GAAP and the proposed standard. “This will reveal whether companies understand the requirements and help identify any unintended consequences,” Seidman said. “We then plan to use these materials to discuss the results with users of financial statements to help them understand the nature of any changes that may result. We have other forms of field work planned,” he added, “which we view as an essential element of our due process to evaluate the costs and benefits of new standards. We welcome your input and involvement in the process.” In addition to addressing the status of the international convergence project, Seidman also discussed his views on the SEC’s proposal to incorporate IFRS and “where we stand on the issue of standard-setting for private companies.” Read his complete remarks here.
When appraising oil and gas refineries, look for these primary valuation drivers: revenue, plant capacity, utilization percentage, gross refining per barrel, operating costs, depreciation and amortization, capital expenditures (and cost of capital), and the discount rate, say Siby V. Abraham and Jeffrey W. Kennedy. The two speakers, from Deloitte Financial Advisory Services, were presenters at the first annual Energy Valuation Seminar, hosted last week by the Houston ASA and chapter president Tim Stuhlreyer of Convergent Capital Appraisals.
“There’s a lot of work for all of us in the coming couple of years,” Kennedy added, particularly given industry and economic factors such as consolidation, a shift to independents, regulatory oversight, and liability risks. Further, for valuations within the oilfield services industry (and in light of recent industry events), analysts might consider an upside risk premium adjustment to cover any potential liability risk. But they should also ask themselves: has the market already adjusted for the risk?
“Valuing Oil & Gas Assets in the Courtroom,” by Rhett Campbell, Thomson & Knight, LLP (2002).
Series of Recommended Evaluation Practices by the Society of Petroleum Engineers (SPEE)(2002), featuring Inclusion of Hedging Positions in Reserve Reports, Discounting Cash Flows, Reporting Multiple Rates of Return, and Calculating Internal Rates of Return. See also: “Perspectives on the Fair Market Value of Oil and Gas Interests,” Monograph 2 (2002), and “Guidelines for the Practical Evaluation of Undeveloped Reserves in Resource Plays,” Monograph 3 (2011), both available for purchase at SPEE.
Also available from SPEE: 2011 Survey of Parameters Used in Property Evaluation.
SEC Compliance and Disclosure Interpretations: Oil and Gas Rules (Regulation S-X), last updated Oct. 2009; see also “Modernization of Oil and Gas Reporting Rules,” Federal Register (Jan. 14, 2009).
As expected, nearly two-thirds (65.1%) of respondents to last week’s online survey say that they have read the IRS DLOM Job Aid, and more than a quarter (27.1%) will in the near future. Only 7% of respondents won’t read the Job Aid or say it’s not relevant to their practice.
What may be more surprising: just over half (53.3%) of respondents who’ve read the Job Aid believe that it adds “nothing new to the discussion” of determining marketability discounts. Of the remaining half, nearly three-quarters (72.7%) believe that the Aid’s most important contribution is its broad overview of DLOM methods, while more than a third (36.4%) focus on its implicit assumption that analysts will have to defend every percentage point of a DLOM above zero.
To find out just how the profession is vetting this document and absorbing it into current tax practices, tune in to BVR’s special 100-minute webinar, FMV Responds to the IRS DLOM Job Aid, featuring Lance Hall (FMV Opinions) on October 12, 2011.
“The liquidity discussion in the BV community is not dissimilar to the one that we have about the effects of taxes on value,” says Nancy Fannon (Fannon Valuation Group), responding to continuing discussions in the BVWire as well as the greater BV professional community.
“Valuation models in place today effectively treat pass-through entity owners as if they were the only investors ‘smart enough’ to benefit from tax savings,” Fannon says. “However, an abundance of academic research (not to mention common sense and the practical advice that CPAs routinely offer their clients) demonstrates that all investors engage in strategies to reduce or avoid taxes. Our current pass-through entity models fail to consider that the benchmark from which analysts adjust value already has a healthy measure of tax-avoidance baked into it,” she says (emphasis added).
Moreover, “investor taxes do not correlate directly with value,” Fannon adds. “Far from it.” As in the case of determining liquidity discounts, “it seems that only the BV community—and those to whom we have perpetuated this view, including the courts and the IRS—ascribes to this notion.” Similar to the liquidity debate, “advances in academic research seem to make little difference to the models that gain favor, persist in our industry, and seem to be perpetuated on every conference agenda,” observes Fannon, who has been speaking and writing on the topic of taxes and value for the past few years. She is currently completing an article with Keith Sellers (Univ. of Denver), with whom she’ll be conducting an AICPA webinar in early 2012; for more information, visit Fannon’s website. For an immediate overview, consider, “Pass-Through Entity Valuation Update: The Significant Impact of Academic Research on the Debate,” a recent BVR webinar featuring Fannon and Sellers (May 2011).
The U.S. Department of Labor's Employee Benefits Security Administration will re-propose its rule on the definition of a fiduciary, says a new DOL release. “The decision to re-propose is in part a response to requests from the public, including members of Congress, that the agency allow an opportunity for more input on the rule,” says the DOL.
Valuing a Majority Fractional Interest, Friday, November 11, featuring Neil Mills-Mazer (IRS).
When a dentist incorporated his solo practice back in 1980, he also signed a non-compete, effectively agreeing not to compete against his own corporation (of which he was sole shareholder, officer, and professional employee). More than 30 years later, when he sold the practice to another dentist, he allocated nearly $550,000 of the purchase price to his personal goodwill and then reported the sale on his federal income taxes as long-term capital gain income. After the IRS re-characterized the goodwill as a corporate asset and treated the proceeds as a dividend, the taxpayer sued for a refund in district court, which found for the IRS--and the taxpayer appealed.
Held: the U.S. Court of Appeals for the Ninth Circuit found that under the facts of the case, the dentist effectively transferred his personal goodwill to the corporation through the original non-compete. For federal tax purposes, his professional goodwill became a corporate asset and its sale proceeds constituted a dividend to the taxpayer. Look for the complete digest of Howard v. United States, 2011 WL 3796723 (C.A.9 (Wash.))(Aug. 29, 2011), in a future Business Valuation Update; the 9th Circuit’s opinion will be posted soon at BVLaw, where you can also find the federal district court’s opinion.
For a current, comprehensive guide to valuing dental practices—including sample reports: check out BVR’s Guide to Valuing Dental Practices, edited by Stanley Pollock, who is both a dentist and a business appraiser. The new guide contains two sample appraisals of dental practices and chapters on valuing orthodontic practices as well as professional goodwill.
Over the past 12 months, the government services market has underperformed the broader market. Valuation multiples in the defense and government services market have dropped dramatically since 2005 as defense budgets have flattened out, while the broader markets have actually recovered substantially. The rebound in the public markets has taken place at the same time as budget pressures on government contractors have depressed government contractor valuations.
The new white paper came out of GT’s recent Government Contractors’ Roundtable, which produced several summary reports. Of further interest: look for an analysis of government contractors with a “set aside clarification” by Donald W. Nalley (Beason & Nalley) in the next (November) BVUpdate.
One possible solution: Seaman’s study on LEAPS (Long Term Equity Anticipation Securities) avoids the volatility dilemma altogether. “LEAPS put options for the companies (or ETFs) that you choose already contain the market’s volatility estimates for those specific companies, not just for the market as a whole,” Seaman says, who also wrote, “The Effects of Current Economic Troubles on Discounts for Lack of Marketability,” for BVUpdate.
In its just-released Accounting Standards Update No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, the FASB amends ASC 350 to allow entities to “qualitatively assess whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount,” says the Valuation Research Corporation. If it is “more–likely-than-not” that the fair value of the reporting unit is less than its carrying amount, then the entity would proceed with step one of ASC 350’s two-step goodwill impairment test. However, if a review of qualitative factors indicates that the reporting unit will clear the “more-likely-than-not” hurdle and its fair value exceeds its carrying value, then “no further fair value measurement needs be performed,” say VRC analysts.
Remember when the Federal Circuit reversed a record-setting $358 million award in Lucent v. Gateway, because the plaintiff’s damages expert failed to prove that its patented calendar feature furnished a substantial basis for consumer demand of Outlook? Well, on remand to district court, Microsoft (Gateways’ successor) immediately challenged the plaintiff’s new damages expert under Daubert. On the day of the hearing, however, the Federal Circuit issued Uniloc v. Microsoft, which abolished the 25% “rule of thumb” and required plaintiffs “in every case” to apportion damages between the patented/unpatented features of the accused product, and the Lucent court postponed the hearing to permit both sides to re-brief the issue.
Keep current on the rule. Since Uniloc, we’ve covered nearly half a dozen new cases that interpret expert damages evidence under the courts’ more stringent application of the entire market value rule. This Thursday, October 6, don’t miss Craig Jacobson (Citrin Cooperman) and Stephen Lieb (Frommer Lawrence & Haug) in “Patent Damages: The Entire Market Value Rule.” This installment of BVR’s Online Symposium on Litigation & Economic Damages will discuss how the increasing dominance of intellectual property as a value-driver has placed a new burden on patent damages in general and entire market value analysis in particular.
HOUSTON, Texas (Sept. 20, 2011) In a new research project funded by The Appraisers Research Foundation (TARF), a novel application of the Discounted Cash Flow Method for assessing Percent Good Factors for used machines and equipment has been suggested by Prof. S.A. Smolyak of the Central Economics and Mathematics Institute (CEMI) of the Russian Academy of Science (RAS).
The suggested application is grounded in the principle of highest and best use and accounts for such factors as the salvage value of equipment, and associated property and profit taxes without requiring cash flow forecasts of the income obtainable from using the equipment. The latter feature makes it possible to apply the method to intermediate-stage technological equipment, for which the monetary benefits that arise can’t be assessed in an immediate manner.
This research has been prepared under the sponsorship of a grant from TARF and is under the review process for possible publication with The Appraisal Journal. The full report is available on the TARF website: www.appraiserresearch.org.
The most pertinent results may be achieved from this method when the equipment depreciation process is treated in a continuous time formulation.
Prof. Smolyak received editorial assistance for this research from Dr. Michael Milgrim, for many years the editor of the International Valuation Standards, and from Andrey Artemenkov, MRICS. He also received assistance in developing ideas in this research from Prof. Georgiy Mikerin, from the State University of Management, Department of Economic Measurements, in Moscow, and Igor Artemenkov, FRICS, Russian Society of Appraisers.
The Appraisers Research Foundation, a non-profit located in Houston, Texas, funds research projects that will benefit the appraiser community and is actively seeking proposals. For information on the Foundation, go to http://www.appraiserresearch.org and click on Research Results. For information on applying for a research grant, click on the Grants tab.
Estate of Giustina v. Commissioner, T. C. Memo. 2011-141 (June 22, 2011), is a US Tax Court case involving the value, for estate tax purposes, of a 41.128 % limited partner interest in Giustina Land & Timber Co. LP ("GLT") owned by Natale Guistina at his death on August 13, 2005. GLT owned and operated 48,000 acres of timberland in the area of Eugene, Oregon.
The estate valued the holding at $12,995,000 for estate tax purposes. The IRS contended that the value was $33,515,000. The IRS issued a notice of deficiency determining a $12,657,506 deficiency in estate tax and a $2,531,501 accuracy-related penalty under section 6662 of the Internal Revenue Code.
Both the taxpayer and the IRS employed experts to determine the value of the GLT holding. The estate's expert employed four methods, two that were based on the expected cash flow of GLT as an operating entity, one method based on the asset value of the timber holdings, and one method based on the price of shares of publicly-traded timber companies. These values were used to calculate a weighted average value of $12,995,000.
The IRS's appraiser also calculated a cash flow value, an asset based value, and a value based on the price of shares of publicly-traded companies. His approach produced a weighted-average value of $33,515,000.
The stark difference between the value conclusions of the two appraisers was primarily attributable to two factors. First, the IRS appraiser assigned considerably more weight to the asset value approach, as compared to the cash flow approach. The asset value was considerably higher than the cash flow value. By comparison, the estate's appraiser gave more weight to the cash flow approach than to the asset approach. Furthermore, the estate's appraiser applied a 25% haircut to the cash flow approach value to reflect the fact that the limited partners of GLT would have to pay income taxes on the partnership's income.
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