Business Valuation Update
- How to Review a Report’s Valuation Methodology
- Ideas for Solving Two Problems in the BV Profession
- How Do Your Firm’s Benefits Stack Up?
- Using Rule of Thumb Data to Uncover Cooked Books
Valuers should lower equity risk premium component of discount rate
I am now convinced that the long-term arithmetic average general equity risk premium (currently 7.0%) is too high.
ESOP Trustee Evaded Fiduciary Duties by Delegating Valuation
Court finds ESOP trustee liable for causing plan to overpay; trustee “delegated” valuation to ESOP valuator without inquiring into valuation components, including projections, and without exploring “glaring” gaps (industry analysis) in valuation report.
Chancery Bases Fair Value Calculation on Income-Based Model
Flawed sales process makes merger price an unreliable indicator of fair value for statutory appraisal, Chancery finds; in accord with party experts, court uses discounted net income approach and adopts most of respondent expert’s inputs for its valuation.
Trustee Liable for Inadequate ESOP Valuation Vetting
Court finds ESOP trustee liable for allowing overpayment for company shares; trustee rushed transaction and failed to scrutinize financial advisor’s valuation ignoring red flags related to projections, use of control premium, beta, rounding up of values.
New Jersey Court Finds Defendant’s Actions Justify DLOM in Forced Buyout
In New Jersey fair value determination, following precedent, court finds defendant’s conduct justifies use of a marketability discount because he was oppressing shareholder who created “extraordinary circumstances” necessitating forced buyout; court rejec ...
Tax Court Corrects Prior Valuation of LP Interest to Startling Result
On remand Tax Court recalculates decedent’s minority LP interest in family partnership by relying entirely on DCF value and giving no weight to value of company’s timberland assets; newly calculated value is half the original value.
Court Stands Behind Earlier ESOP Liability and Damages Rulings
Notwithstanding errors related to the court’s liability and damages determinations, the court rejects trustee’s motion for reconsideration as an inappropriate effort to introduce new legal theories and a late attempt to present a competing damages methodo ...
Eleventh Circuit Affirms Tax Court’s Valuation of Trust’s Interest in LLC
Affirming FMV conclusion, appeals court says Tax Court did not err in focusing less on details of methodology parties’ appraisers used than on larger issue of whether hypothetical seller would be able to force distribution of majority of LLC’s assets.
The Specific Risk Dilemma—Is It in the Eye of the Beholder?
How do you quantify company-specific risk in a discounted cash flow valuation? More specifically, how do you reflect the risk of anticipated new legislation or the possibility of delay in a new company project? In our experience, it is an important valuation consideration and is often something that a valuer has considerable difficulty in applying his or her judgement to assess.
Valuer’s Q&A Corner
Business Valuation Australia is pleased to offer the new column “Valuer’s Q&A Corner.” In each issue, BVA will answer your critical business valuation questions with tips and advice from BV thought leaders. Please email your questions to editorau@bvresources.com and look for responses in each issue of BVA.
Seven Models for Estimating the Cost of Equity in a Global Setting: The Pros and Cons
What is a good method for developing the equity component of international cost of capital using the capital asset pricing model (CAPM)? Jim Harrington, director at Duff & Phelps (U.S.) and co-author of the 2015 International Valuation Handbook – Guide to Cost of Capital, explains that you can use a number of models to estimate the cost of equity capital in a global environment, but there is no consensus among academics and practitioners as to the “best” model to use.
Expert Perspectives on the State of Valuation in Australia
To celebrate the launch of its new graduate diploma of applied finance (business valuation), Macquarie University hosted a seminar titled “Perspectives on the State of Valuation in Australia.” The panel of valuation experts included Steve Bishop, Paul Brunker (Optar Capital), and Stephen Reid (Deloitte) and was chaired by Tony Carlton, director of the new program.
How Top M&A Practitioners Are Using DCF Techniques
Major investment banks routinely use discounted cash flow techniques to determine company value in mergers and acquisitions. However, the actual application of the methods is “far from routine,” say the authors of a study published in the Journal of Applied Finance. The study’s results “serve as yet another reminder that analytic techniques such as DCF do not make decisions but only inform them.”
Impact of the Current Environment on the Risk-Free Rate as an Input to the Capital Asset Pricing Model
The risk-free rate is the rate that compensates an investor for the time value of money and the expected inflation over an investment period. Valuers typically use Australian Commonwealth Government Securities as a proxy for risk-free rate when valuing assets with AUD-denominated cash flows.
Five Tips That Will Enhance Your Valuation Analysis
I recently had the honour of teaching two business valuation courses in Australia. The courses were offered by the International Institute of Business Appraisers (IIBV) and were sponsored by the Australian Chapter of the American Society of Appraisers (ASA).
More Common Sense—Less Theory and Fewer Models—Needed in Business Valuation
Pablo Fernandez is a professor in the department of financial management at the University of Navarra—IESE Business School in Spain (ranked No. 5 in the world for full-time MBAs by The Economist). A widely published author, he conducts a survey of market risk premiums and risk-free rates used in countries around the world. His recent paper, “CAPM: An Absurd Model,” created a stir in the business valuation community.
What to Do About Applying Size Premia in Australia
The size premium is an important valuation issue for two reasons: (1) it is difficult to estimate; and (2) its inclusion in deriving a cost of capital can have a material effect on the outcome of a valuation assignment. This article provides an overview of the current status of the size effect and size premia in Australia, examples of cases from Australian courts and tribunals in which size premia have been considered, and the issues and challenges faced in estimating size premia within the Australian market.
Asset Impairments: Issues, Challenges, and Guidance
As reporting season nears, companies will be required to assess the value of their assets held on the balance sheet and potentially record impairments against such assets. This can occur for a number of reasons but is typically due to adverse market conditions or a change in the market’s perception of a particular industry. Businesses continue to face difficulty identifying whether these changes mean that an impairment should be recognised and how to appropriately test for such impairments. Whilst Australian Accounting Standards Board (AASB) 136 sets out the indicators to consider when assessing whether an asset may be impaired, with the aim of ensuring that a company’s assets are carried at no more than their recoverable amount, the actual application is more problematic.
Now You Know What Is Happening in the Infrastructure Debt Market
We recently valued an unsecured debt instrument issued by a large European infrastructure asset owner on behalf of a number of Australian superannuation funds. As infrastructure instruments (both debt and equity) are an emerging asset class for a range of investors, we thought it would be useful to share some of our insights on recent trends and issues from an investment perspective.
DLOMs in Fair Value Cases: Lack of Marketability Does Not Cause Private Company Discounts
Are private companies worth less than public companies solely because they are not publicly traded or because of other identifiable factors (some of which would apply to various public companies as well)? A school of thought consisting of experienced and thoughtful experts believes they are. U.S. valuers Shannon Pratt and Roger Grabowski set forth this view ...
Indefinite Is Not Infinite—Solving a Dichotomy in Trademark Valuation
The valuation of an intangible asset is based on its useful life. For trademarks, appraisers regularly opt for an indefinite life, when no obvious factors exist that would limit the future economic life of the trademark. Almost all brands are however finite, and assuming indefiniteness can have two serious effects: one on value and one on accounting. The following article discusses such effects and suggests some guidelines and tools for how to analyse the life cycle of a brand and how to estimate its remaining useful life (RUL).
Valuing Startup Businesses—The Riskiest Work You’ll Do as a Valuer
Startup businesses are an important part of the Australian business scene. For example, in 2014, venture capitalists invested over $500 million into more than 100 firms, driven largely by a $250 million investment from U.S.-based Insight Venture Partners into Campaign Monitor. Even without that large investment, in 2015, more than 40 companies in Australia received over $200 million in venture capital funding, with an average per-firm investment of $2.4 million.
The Useful Life of Trademarks
Trademarks are often deemed indefinite simply because they can be continually renewed. However, almost no asset is imperishable, and the indefinite life assumption has serious consequences for the values ascribed to trademarks.
Why Valuation Experts Should Not Use the Term ‘Nonmarketable’
For the past two years, our firm has not used the term “nonmarketable” as a descriptive for a conclusion of value. We feel it is completely inappropriate to use a negative term when informing clients of the value of their controlling or minority interest. Rather, we use more positive terms that are part of a new paradigm of describing levels of value.
10 Chickens and a Cow . . . Swap Transactions in Mineral Projects: Valuation Considerations
A swap transaction is basically a barter transaction. I give you a cow, and you give me 10 chickens. What value did I receive for my cow? I received the value of 10 chickens. What value did you receive for your chickens? I paid you the value of one cow. Both of us thought that what we received—in my case, chickens—was worth an amount equal to or greater than what we gave up, in my case, a cow.