Don’t be tempted to use the “smoothing” method

BVWireIssue #93-3
June 23, 2010

Bob Buchanan (PCE Valuations) recently wrote that some appraisers are currently using the “smoothing” method to diminish the market volatility in business valuations, particularly appraisals related to ESOPs.  “The suggestion is that because ESOP shares represent a retirement benefit their value should be viewed in a way that downplays short-term volatility,” says Buchanan.  This method may be “less disruptive to ESOP participants and trustees,” he adds, but only in the short run.

“Smoothing” may affect some of the following factors:

  • ESOP repurchase obligations
  • Stock option pricing and exercise
  • Stock appreciation rights (SAR) and exercise
  • Warrant pricing and exercise
  • Company’s financial audit
  • Company transactions (sales and/or acquisitions)
  • Fiduciary liability

“Underweighting”, “smoothing”, or “normalizing” valuation multiples are a departure from the FMV standard,” warns Buchanan.  “We all want to get it right” when valuing a business, he adds, “but the only way to do that is to follow the standards of value that are set as guidelines.”

Bob’s full article is available here.

Please let us know if you have any comments about this article or enhancements you would like to see.