Your recent announcement about the 13th Annual Fair Value Conference in Los Angeles may leave unwary readers with the impression that the MPAP guidance on control premiums in VFR #3 applies to all business valuation work. In fact, VFR #3 is very clear that it applies only to financial reporting valuations and not to any other type of valuation work. Does this mean that all other types of valuations are off the hook in terms of rethinking control premiums? No. In fact, control premiums were rethought and refought decades ago. The issue was resolved in the 1990s against application of control premiums because no one could ever rebut the arguments against them. It is only with VFR #3 that the possibility of “officially approved” control premiums has raised its ugly head once more.
Ironically, despite copious warnings in VFR #3 that the analyst must “very carefully” analyze any application of control premiums, the guidance itself contains a road map showing unscrupulous management and the valuation professionals who enable them to defraud investors, the SEC, and the PCAOB. As a way to point out this fundamental flaw in VFR #3, I am preparing an article for publication in the next few months explaining how the guidance can be used to enable such fraud. The bottom line: Please warn your readers off using control premiums under any circumstances unless they can provide absolutely bulletproof evidence and ironclad reasoning. Except in the rarest of circumstances, best practices demand that no control premium should ever be applied to a guideline public company analysis.
Eric Nath, ASA
Eric Nath & Associates LLC
San Francisco, CA
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