December 8, 2010 | Issue #99-2 Forward to a Friend

Should the unemployment rate factor into reasonable compensation determinations?

On their BVR reasonable compensation webinar last week, Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos) and Ed Rataj (CBIZ Human Capital Services) were hit with numerous audience questions, one of which was whether appraisers need to take the unemployment rate into their reasonable compensation analysis.  Rataj dissected the statistic and pointed out that despite the current high unemployment rate, salaries for higher level positions – and for professionals with at least a college degree – have actually increased over time.  The unemployment rate at these higher, managerial levels is more like 3-5% and therefore not a factor demanding much attention.  Yeanoplos articulated the paramount challenge to reasonable compensation efforts: “RMA is problematic, in fact, most of the data is problematic.  But we need to understand the problems in order to confidently bifurcate the number to distinguish between comp and ROI.”  For up-to-date guidance on reasonable compensation check BVR’s recently released Reasonable Compensation: Application and Analysis for Appraisal, Tax and Management Purposes by Yeanoplos and Ron Seigneur (Seigneur Gustafson).

When building a model, less can be more

Commenting on a recent WSJ blog post “Economists' Grail: A Post-Crash Model“ Aswath Damodaran (Stern School of Business, NYU) says “there seems to be consensus that conventional economic models did a poor job predicting the magnitude of the last crisis and that we need to do better.”

How?  Professor Damodaran thinks we should do less. In his blog post “Are complex models the answer?” he responds: When faced with more uncertainty, strip the model down to only the basic inputs, minimize the complexity and build the simplest model you can. Take out all but the key variables and reduce detail. I use this principle when valuing companies. The more uncertainty I face, the less detail I have in my valuation, recognizing that my capacity to forecast diminishes with uncertainty and that errors I make on these inputs will magnify as they percolate through the valuation. More good news: if I am going to screw up, at least I will do so with a lot less work!!.”

Your opinion still matters

When Attorney D. Charles Mauritz’ (Duffy Kekel LLP) spoke in BVR’s conference room last Friday at NACVA’s local chapter meeting, he placed a heavy emphasis on the most valuable contribution a valuation expert brings to the table—an opinion. Mauritz reiterated the all-to-familiar phrase that valuation is “more art than science,” and that it’s the appraisers who produce reports that are more science than art who worry him.

While it is important to present the data in a report, it’s how you interpret the data that truly matters. As your report flows from introduction to conclusion, clearly state your opinion about why your determinations and processes are relevant. In essence, a valuation report should leave the reader with no “whys”—Why did the expert choose these comparable transactions and not others? Why did the expert weight the income approach higher than the market approach? Why did the expert arrive at 6% for a company specific risk premium? A valuation report should provide answers and an expert’s opinion, not leave the reader with questions. “That’s what we [attorneys] are paying you for,” says Mauritz.

High praise for free risk-free rate lookup tool

BVR was recently reminded by a group of BVR Risk-Free Rate Lookup Tool devotees of its power and ease of use.  BVR programmed the Tool so it pulls data directly from the Federal Reserve Board and you can enter any date for which you want to get the rate.  Here’s what the Tool returns for December 3, 2010:




1-month Treasury constant maturity



1-year Treasury constant maturity



5-year Treasury constant maturity



10-year Treasury constant maturity



Federal funds



Prime rate



Moody's Aaa



Moody's Baa



20-year Treasury constant maturity



The data can be downloaded directly into Excel by clicking on the “CSV” option below the table. 

The intersection of Keynes, Einstein and business valuation

“A cornerstone of business valuation is the formula for present value, which takes Einstein’s much admired compound interest formula and turns it on its head, using it as a divisor, writes Raymond J. ("RJ") Dragon (Rotenberg Meril Solomon) in his recent blog post, “Present Value and the Power of Time in Financial Economics.” “So PV(CFn) = 1/(1+r)^n, enabling us to take a cash flow in period n and determine its present value.”

On the other hand, John Maynard Keynes’ famous adage “In the long run, we are all dead” is also applicable to BV. Dragon presents a chart to demonstrate that “the present value of $1 using a 25% discount rate is only 1 cent in year 19, and that 99% of the total value of the perpetuity is based on the cash flows in the first 20 years. By year 28, the value of $1 is effectively zero, the perpetuity is ‘dead.’” So it appears Keynes gets “the better of this argument.”

But in fairness to Einstein, Dragon poses the question “what would happen if we grew the perpetuity at the long–term growth rate?”  We have to wait until Dragon posts Part II of his article to learn the answer.

Mercer Capital’s checklist for year-end portfolio company fair value measurements

Mercer Capital’s recent article “5 Things To Watch For In Year-End Portfolio Company Fair Value Measurements” contains a useful checklist “to help fund managers measure the fair value of portfolio company investments”  under ASC 820. Mercer elaborates on these five questions:

  • Are you using the right valuation methods?
  • Are you using the right guideline group?
  • Are you carefully vetting cash flow forecasts?
  • Are you reconciling to prior fair value measurements?
  • Are you double-checking your math?

New articles announced from Journal of Business Valuation and Economic Loss Analysis

Berkeley Electronic Press’ latest issue of Journal of Business Valuation and Economic Loss Analysis includes the following articles:

Exclusive from BVR; 2011 Business Reference Guide available now on-line

BVR just received the update to the online Business Reference Guide.  Over 72% of all the content has been updated – a very large update indeed.  While the print version of 2011Business Reference Guide, which includes all this new data—will not be available until the first week of the new year, any appraiser who needs the latest updates on a business type can get it now in the on-line version.

North American M&A activity dips last quarter

In the recent issue of Grant Thornton’s Dealmaker, Nisha Raghava (Grant Thornton) reports North America M&A activity fell 9% during the 3rd quarter of 2010 from the 2nd quarter. However, deal value rose 8%, an indication that the transactions were larger. “Both strategic and financial buyers are flush with cash and appear to be eager to get back into the market,” says Reghava.

NW executive compensation survey updated

The 2010 - 2011 Northwest Executive Compensation Survey (by Milliman, and offered exclusively to appraisers through BVR) compiles compensation information for the top five executive positions, including CEOs, CFOs, COOs, chief technology officers (CTOs), and top marketing/sales executives from over two hundred NW companies headquartered in Oregon, Washington and Idaho. The survey data provide:

  • base salaries
  • bonuses
  • total cash compensation
  • equity compensation
  • pay relationships to CEO
  • perquisites
  • incentive plan performance measures
  • long-term incentive plans
  • long-term incentive program changes
  • equity ownership
  • retirement plans
  • annual pay adjustment trends

Video demonstrating the FMV DLOM Calculator available as a free download

In the BVR video “The FMV Calculator,” Kyle Vataha (FMV Opinions, Inc.) demonstrates the step-by-step use of the Calculator and answer listeners' questions. The FMV DLOM Calculator uses data in The FMV Restricted Stock Study and applies the same methodology FMV Opinions uses in-house.  Based on a variety of financial metrics of the appraiser’s subject company, the Calculator streamlines the process for determining a discount for lack of marketability (DLOM) by automating the comparative analysis with restricted stock issuers and adjusting for market volatility and the additional illiquidity of private company stock.  The Calculator also allows users to inflation-adjust all underlying restricted stock data.  BVWire estimates the calculator will save 2-4 hours of work for each minority share valuation.

Need CPE by year-end?  Check out these BVR CPE opportunities

BVR’s Training Program will close out 2010 with two excellent webinars:

  • On December 16, Scott Beauchene (Strategic Value Group) and James Walling (Grant Thornton) will join BVR for “The Use and Application of Option Pricing Modeling,” a 100-minute examination of the proper implementation of valuation techniques that have come under increased scrutiny as of late.  Through their presentation, Beauchene and Walling, co-authors of rebutting BVUpdate articles, “Does Black Scholes Overvalue Early Stage Company Allocations?” (January, 2010) and “Lognormal Distribution vs. Empirical Observations – A Defense of the Option Pricing Method” (March, 2010), respectively, will discuss appropriate utilization of this valuation tool and its application in light of a practice aid update and a turbulent economy.  For more information, click here.
  • We close out 2010 with expert appraisers Neil Beaton and David Dufendach (Grant Thornton) joining us for “Valuations for IRC 409a Compliance” on December 22.  Since the implementation of this rule in January 2005, it has taken on a life of its own.  As Beaton notes in BVR’s Guide for IRC 409a Compliance, because of "exposure to many bright minds and questioning professionals, new techniques and refinements of old ones have surfaced and are now being implemented."  Join these two experts to hear how changes in implementation, interpretation, and economic environment have impacted 409a valuations.  For more information, click here.

BVR’s training program kicks off 2011 with Advanced Webinar Series on Lost Profits Damages

In January, BVR will continue hosting more authors from the Comprehensive Guide to Lost Profits Damages in the Advanced Webinar Series on Lost Profits Damages.  Covering such areas as discounting damages, patent, trademark, and copyright damages, and motions to exclude experts, these four webinars will present hands-on need-to-know insights for any practitioner.  For more information on the series or how to get your all access pass, click here.


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Copyright © 2010 by Business Valuation Resources, LLC
BVWire™ (ISSN 1933-9364) is published weekly by
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December Events

The Use and Application of Option Pricing Modeling
December 16, 2010
10:00am - 11:40am PT
Featuring: Scott L. Beauchene and James Walling

Valuations for IRC 409A Compliance
New Date: December 22, 2010 10:00am - 11:40am PT
Featuring: Neil Beaton and David Dufendach


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