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The Asset-Based Valuation Approach

Introduction Valuation analysts are retained to value closely held businesses, business ownership interest, and securities for a variety of transaction, financing, taxation, accounting, litigation, and planning purposes. For each engagement, analysts consider the three generally accepted business valuation approaches: the Income Approach, the Market Approach, and the Asset-based Approach. However, most anal ...

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Why We Shouldn’t Add a Size Premium to the CAPM Cost of Equity

A Critique of the Ibbotson Methodology In this paper, the author argues that the Size Premium in Excess of CAPM (and other similar size premium measures) should not be used by valuation practitioners because: a) it is inconsistent with the empirical evidence; b) it is constructed using a method that is inconsistent with how practitioners estimate their CAPM cost of equity; and c) it does not properly calcul ...

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Estimating Debt Betas and Beta Unlevering Formulas

Use of Benninga-Sarig to Estimate Debt Betas in a Valuation Engagement In the July 8, 2016 In re Appraisal of DFC Global Corp. Opinion (DFC Opinion), the Court of Chancery of the State of Delaware suggested that debt betas should be estimated for individual companies and it cited Pratt and Grabowski’s Cost of Capital as a source for debt betas based on the firm’s credit rating. In addition, the Court also a ...

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A Case for Mediation

What do You Have to Lose? Since only a fraction of the cases filed go to trial, it seems prudent to explore settlement sooner rather than later. It is not rocket science, and statistics support the claim that the earlier a case settles the lower the expense to achieve that settlement. If this is not enough to encourage someone to consider mediation sooner rather than later, then perhaps recent court statist ...

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The Best Learning Tool Ever

After Actions Reviews A firm’s intellectual capital is the most important source of its long-term wealth creating capacity. It must be constantly replenished and created to build the firm’s invisible balance sheet. Constantly focusing on doing rather than learning, creativity, innovation, and knowledge sharing is the equivalent of eating the firm’s seed corn. In this article, Ron Baker discusses the value o ...

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Licenses of Intellectual Property

The New Revenue Recognition Standard and Accounting for Licenses Wiley author, Joanne Flood, looks at how the new revenue standard affects reporting of licensing revenue. Copyright Wiley, 2016. To be published in February 2017 in the book: Wiley Revenue Recognition plus Website: Understanding and Implementing the New Standard (Wiley Regulatory Reporting). ...

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Lost Profits and Other Commercial Damages

A Case Study (Part II of II) This is the second of a two-part article. In the first part, Dr. Needham provided factual background regarding this commercial damages case where he served as plaintiff’s damages expert—the case ultimately went to trial. In this second part, Dr. Needham describes the financial data, discovery challenges, the Daubert motion to disqualify him, how the case was decided, and then se ...

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Lost Profits and Other Commercial Damages

A Case Study (Part I of II) Most commercial damages assignments call for the calculation of lost profits or lost business value. However, some cases, particularly those relating to lost profits, contain elements of additional economic damages. These situations require the expert to focus on multiple areas of loss while insuring each element does not contain losses claimed by another. In this two-part articl ...

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IRS Section 2704

NACVA Present at the Congressional Hearings on the Proposed Regulations In 2015, the IRS issued proposed section 2704 regulations. The proposal would severely impact valuations of family held businesses that are the subject of gifts. On December 1, 2016, hearings were held in Congress regarding the impact of the proposed regulations. NACVA members, Peter Agrapides, Robert Grossman, and Mark Hanson testified ...

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Damages Remedies

A Closer Look at Unjust Enrichment Financial experts typically calculate damages remedies that focus on a plaintiff's loss that is quantified either through lost profits or lost business value. In contrast, unjust enrichment is a damages remedy that measures the defendant's benefit or gain. While the three remedies all serve to quantify damages, an expert must understand the similarities and differences amo ...

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Goodwill

Why it Shouldn’t be A Dirty Word in the Valuation of Physician Practices The topic of goodwill in a physician practice acquisition continues to be hotly debated. There are very different viewpoints from reputable appraisers on how to value physician practices and whether hospitals can pay for goodwill in an acquisition. I often hear healthcare professionals involved in acquisitions say, “Hospitals can’t pay ...

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Objectively Supporting Discounts for Lack of Marketability

Using the Empirical Method Business appraisers around the country have historically used comparisons to the averages found in restricted stock studies to determine a discount for lack of marketability in their valuations of a privately held, noncontrolling interest in a business. While the average discounts from restricted stock studies are useful and indicate that discounts for lack of marketability do occ ...

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A Crisis is Brewing

What NACVA is Doing to Protect Our Industry On August 4, 2016, the U.S. Treasury in lock-step with the Internal Revenue Service (IRS) published Proposed Treasury Regulation 163113-02 (hereafter, the “proposed regulations”) which intend to drastically alter the application of current Internal Revenue Code §2704, particularly as it applies to valuations of family owned businesses and family farms. The propose ...

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Analyzing Complex Appraisals for Business Professionals by Shannon P. Pratt and John Lifflander

Appraisals from Real Estate, Machinery and Equipment to Business Valuation: Book Review by Michael D. Pakter The purpose of this book review is to introduce the reader to Shannon P. Pratt’s newest book, co-authored with John Lifflander. For those improbable few business valuation professionals who do not know who Dr. Pratt is, he is the Chairman and CEO of Shannon Pratt Business Valuation, Inc. and Publishe ...

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Inherited Property

The Tax Rules Were Never Friendlier, But Changes May be on the Way The biggest loophole in the tax code may soon be coming to an end—at least according to the messages sent by the Obama administration and its recent budget proposals. The American Taxpayer Relief Act of 2012 (ATRA) set a whole new tone for most estate plans when it took the dreaded estate tax off the table. However, it is no secret that the ...

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