In most valuations, the question of "market participant" can influence the ultimate conclusion. So, appraisers need to be careful to avoid entity-specific synergies in most of their work--if one specific buyer in a group of likely market participants has a competitive advantage over the others, this fact generally should not influence the ultimate determination of value.
This is especially true in Topic 820 fair value valuations--though "FASB gives us some help here," said Mark Zyla, who is leading BVR's Advanced Workshop on Valuation Issues in ASC 805 session today. "Even though these are standards for SEC companies, the definitions help when doing private company appraisals," Mark believes.
"There are concepts of the principal market FASB has defined, but also concepts of highest and best use, and most advantageous market." Generally, the principal market is "the market with the greatest volume and level of activity for the asset or liability," said Mark. Importantly, if the entity is able to access this market, "the fair value is the price in the principal market, even if there is another market with a better price."
This distinction cannot be ignored. Fair value is determined in the most advantageous market "only when there is no principal market, or the entity cannot access the principal market."
Based on comments by Evan Sussholz from the Office of the Chief Accountant at the SEC, Mark suggests that appraisers consider whether the principal market is active--but also whether there are distinct groups of market participants (strategic vs financial buyers, for example), whether there are clusters within the groups, and whether the market is fragmented, or a monopoly, or has other competitive characteristics.
In response to a question from the audience, this means that synergistic value will likely be allocated to goodwill in the purchase price allocation work.
The SEC suggests some of these distinguishing characteristics when looking at potential market participants (these should not be entity-specific characteristics, Mark reminds us), and "how do the amrket participant characteristics compare to the reporting entity's own characteristics?"
- financial vs strategic buyers
- national vs regional competitors
- financial capacity
- acquisition strategy
- marketplace synergies
- market share
- complimentary assets--a group of assets might be worth more than the sum of its parts
- management capabilities--if the principal market acquired the assets, do they have the management capability to develop them?