TAF issues new discussion draft on control premiums

BVWireIssue #127-4
April 23, 2013

As part of its ongoing efforts to develop best practices for the appraisal profession, the Appraisal Foundation has issued a new discussion draft, The Measurement and Application of Market Participant Acquisition Premiums. This draft is from TAF’s Third Working Group, focusing on premiums in fair value for financial reporting purposes.
New acronym: The title of the draft incorporates the new term developed by the working group for what has been known as the “control premium”: the market participant acquisition premium. MPAP is the premium paid by market participants to acquire a controlling interest in an enterprise. It represents the enhanced value that market participants expect to realize as a result of gaining control through, for example, enhanced cash flows and/or reduced risk. In that regard, MPAP is equal to the difference between: 1) the price that these market participants would pay for subject controlling interest (fair value); and 2) the fair value of the marketable noncontrolling interest in the subject enterprise.

The draft recognizes the need for a benchmark control premium analysis (such as the FactSet Mergerstat/BVR Control Premium Study), but this should be used as a secondary or corroborating analysis. The text of the draft includes the following statement: “Exclusive reliance on observed transaction premiums without careful analysis of the subject entity’s relative financial performance, valuation multiples and other metrics can result in an unreliable fair value measurement.”

Written comments on the draft are due by June 14.

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