“The fundamentals of what we do in BV are finance and economics, but we as an industry don’t teach it that way,” says Nancy Fannon (Fannon Valuation Group). As a result, much of the lack of understanding (and lack of consensus) on the tougher issues—such as the valuation of pass-through entities, derivation of the discount rate, and the marketability discount—may stem from this institutional lapse.
“I think a lack of understanding of much of this foundational knowledge has led to our general inability to convincingly conclude on the issues that plague us,” Fannon says. “How can we possibly make adjustments from market returns for size, liquidity, and taxes if we don’t initially understand what is already embedded in the market returns we are using?”
Solution requires self-motivation. One way to fill the “educational gap” in BV involves just buckling down. To delve deeper into the discount for lack of marketability, for instance, Fannon suggests that analysts “read Ibbotson’s SBBI cover to cover, then read the academic research that documents and discusses these issues.” Or start with your own particular area of interest—and then “read, read, read,” she says. Recently, Fannon put together a list of the books, articles, and other authorities that she began with for the Business Valuation Update (Feb. 2012). “Mike Crain gave me great advice about reading these types of studies, which can be very dense: Start at the front and back (summaries), then if it interests you, work your way into the body of it.” To help valuation practitioners supplement their professional libraries, we’ve made Fannon’s suggested reading list available as our latest free resource. To download your copy, click here.
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