Concerns about the distributor method

BVWireIssue #133-1
October 2, 2013

The multi-period excess earnings model (MPEEM) has been the traditional method of choice in the valuation of customer relationships. But in the May 2012 issue of Business Valuation Update (BVU) Ed Hamilton and PJ Patel outlined the distributor method (DM) as a more suitable alternative for some circumstances. Now a response by Dan Guderjohn and Robert Reis in the October 2013 issue of Business Valuation Update raises concerns about this method.

Conceptual and practical issues: The basic premise of the distributor method is that the returns to a customer relationship asset are analogous to the economic profits earned by a hypothetical intermediary. It attempts to show how the subject company’s economic characteristics would differ if the investment in customer relationships were relegated to an outside entity. Guderjohn and Reis (both with Corporate Advisory Associates), say that, “on further inspection, a number of concerns, both conceptual and practical, become evident.”

For one thing, the distributor method ignores any potential value in the relationships between a company and its distributors, according to the authors. “Contractual agreements and value-added services provided by a distributor can generate customer relationship value at the distributor level,” they say. Also, they point out that distributors are not homogeneous. “While conjuring up a hypothetical distributor might sound easy, it becomes a very difficult task once one begins to consider the myriad forms a distributor can take,” they contend. The article details more of the authors’ concerns.

Learn more: Hamilton and Patel (both with Valuation Research Corporation), the authors of the original BVU article, will conduct a session on the distributor method at the upcoming ASA Advanced Business Valuation Conference October 13-16 in San Antonio. BVWire will be there—we hope to see you!

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