Business Valuation Update
- How to Review a Report’s Valuation Methodology
- Ideas for Solving Two Problems in the BV Profession
- How Do Your Firm’s Benefits Stack Up?
- Using Rule of Thumb Data to Uncover Cooked Books
BV News and Trends May 2023
A monthly roundup of key developments of interest to business valuation experts.
BVU News and Trends April 2019
A monthly roundup of key developments of interest to business valuation experts.
Valuing Two Tough Aspects of Damages: Pricing and Discount Rate
Bankruptcy court finds that the discount rate related to a contract damages claim should incorporate the risk factors present at the time of contract execution, making risk-free rate inappropriate.
BVU News and Trends June 2018
A monthly roundup of key developments of interest to business valuation experts.
Adjusting Risk Free Rates Is Not the Best Answer
Are the traditional discounts developed by appraisers too low in this era of the Great Recession? Are they producing values that are too high as a result? Many appraisers have declared that the current low 20-year bond rates are an aberration and in nee ...
Deviations From Historical Cash Flow and Their Implications to Effective Discount Rates for Lost Profits Analyses
The authors address the direct relationship between projected cash flows (that is, those being measured for risk) and discount rates in a lost profits analysis.
Court Adjusts Discount Rate to Reflect Current Economic Risks
Bankruptcy case discusses downward adjustment to discount rate used in calculation of lost profits damages to account for current market disruptions and risk.
New Model Accounts for Crucial Factors in IP Valuations
Existing methods for estimating the discount rate for an IP project are inadequate. Specifically, they fail to account for the following factors that are crucial in the pricing of capital costs for IP projects ...
Getting a grip on foreign discount rates
From the above data, it would appear that both Japan and the U.S. are developed countries, implying stability and lower risk than developing countries such as Brazil, Russia, or Thailand. But in researching for interest rate data on Japan, the public data available, which includes the Economist and the Financial Times, indicate the interest rate spread on 10-year government bonds to be substantially different for Japan is the U.S., implying that Japan as much lower in risk.
Was the DE Chancery Too Quick to Dismiss the Build-Up Method?
In response to BVU’s coverage of In re Orchard Enterprises, Ted Israel (Eckhoff Accountancy) finds much to compliment in the Chancery Court’s opinion, but also two major points to criticize regarding the court’s characterization of the build-up method (BU ...
The Probability-Weighted Expected Return Method: A Critique
Each year, business appraisers use the Probability-Weighted Expected Return Method (PWERM) to value tens of billions of dollars worth of private company common stock and common stock options. PWERM is one of the three approaches set for by the AICPA’s P ...
How to Use the Latest DLOM Study for the Johnson/Park Empirical Method
An example of how to apply the Johnson/Park empirical method, which is based on the fundamental concept of risk and reward. The annual study serves as a basis to determine how much of an increase in the rate of return is required to compensate investors for the lack of marketability of a subject interest.
The Discount Rate in Damages: Dunn’s Cases You Need to Know
The Discount Rate in Damages: Dunn’s Cases You Need to Know BV appraisers and litigation experts are especially invaluable to attorneys when it comes to compiling and calculating the financial evidence in an economic damages/business valuation case. Fr ...
“The small firm risk premium remains largely a myth”
This article is another installment in the long-running debate about whether small companies are riskier than large companies, all other things being equal.
Determining the FMV of Small Privately Held Promissory Notes
The appraisal of promissory notes is an area of business valuation that has not received much attention from academic journals. Appraisers are taught to use corporate bonds as comparable investments, but they are much too large and marketable to be used as a proxy for most privately held promissory notes. This article introduces the concept of using Business Development Company (BDC) rates to value small promissory notes.
The Market Price of Risk: Quantifying a COVID-19 Equity Risk Premium Using High-Yield Bond Pricing
The authors demonstrate how a high-yield option-adjusted spread is used when doing appraisals of private companies while considering the market volatility and economic slowdown caused by the COVID-19 pandemic.
Valuing Shareholder Loans in Divorce: What Is It Worth?
After a shareholder loan has been deemed to be a bona fide debt of the company, payable to the shareholder, the valuation analyst has yet another task: determining the fair market value of that debt.
Proper Valuation of Promissory Notes Requires Qualified Business Appraisers
Promissory notes are not something that appraisers are often asked to value. It seems simple enough—value is the unpaid principal plus accrued interest—right? The answer is no longer so simple. With increased IRS scrutiny (and power to impose appraisal pe ...
New Guidance in the IVS Update Effective Jan. 1, 2020
The IVSC’s International Valuation Standards have been adopted by more than 100 countries. Important components of the extensive recent update include guidance on deriving discount rates and a new section on complex financial structures.
Damodaran on How Inflation Plays Out in Company Valuations
Professor Aswath Damodaran (New York University Stern School of Business) presents a simple framework for assessing the impacts of inflation on the value of a private company. He also made some explosive remarks about certain inputs to the cost of capital.
Cost of capital controversies: It’s time to look behind the curtain (Part 2 of 3)
This article discusses and compares two sources of size premium data and it touches on the subject of the supply-side equity risk premium.
Appraisers Must Approach Earnouts With Care
Contingent payouts during acquisitions mitigate risk, help financing, motivate management, and help reduce the expectation gap with sellers. So it’s no surprise that current studies indicate the popularity of earnouts. Houlihan Lokey’s 2010 analysis shows ...
What Is the State of the Equity Risk Premium Today?
“The ERP is one of the most important issues we have to challenge as a profession,” said Roger Grabowski, speaking at the AICPA Business Valuation Conference last month. “When you do an analysis and come up with a rate of return for the discount rate that ...
Restricted stock discounts, 1991-95
We're very pleased that Bruce chose Business Valuation Update for the initial publication of this latest in a long series of restricted stock discount studies.I think it's particularly useful that he empirically identifies three factors that impact the magnitude of the discount for lack of marketability.
The Valuation of Convertible Notes Using a Binomial Model
The authors’ research reveals that there are numerous articles, chapters, and models with bad math, bad equations, notational errors, or undisclosed rounding in some equations. They present a version of the Goldman Sachs binomial model and suggest that valuators provide fully functional binomial models when requested so that reviewers can “look under the valuator’s hood.”