BVR Logo 21 July 2020 | Issue 16-2

BVWire—UK is a free service from BVR focusing on the business valuation profession in the United Kingdom. We offer news and perspectives from valuation thought leaders, the High Courts, HMRC, the standard-setters, ICAEW, RICS, and more.

Please be in touch with your perspectives, news, and ideas—and pass this issue along to colleagues (complimentary sign-up instructions are here).

RICS host 'Impact of COVID-19 on Global Business Valuation' Town Hall tomorrow

The next in a long series of helpful free virtual panels occurs tomorrow evening 22 July. The session, Impact of COVID-19 on Global Business Valuation and Appraisal, features panelists from RICS, NACVA, the ASA, GACVA, and CBVI. NACVA’s COO/EVP Brien K. Jones moderates the session.

William (Bill) A. Johnston (managing director, Empire Valuation Consultants Group); the Chartered Business Valuation Institute’s Stephen Cole; Wolfgang Kniest from the Global Association of Certified Valuators and Analysts; and NACVA’s Lari B. Masten (Masten Valuation) will join Jones. RICS representatives include Leigh Miller, EY global valuation, modeling and economics leader, and Simon Rubinsohn, RICS chief economist.

How much less is a minority share worth now?

HMRC changes have increased the difficulty of providing support for rates of return for illiquid and difficult-to-market minority shares. However, business valuers are still completing valuations on behalf of minority owners for fiscal, buy-sell, and contentious purposes. The 2020 Discount for Lack of Marketability Study released late last month by Partnership Profiles offers objective rate of return measures to implement the empirical method developed by Bruce Johnson and James Park. This report provides current DLOM rates of return and includes a thorough explanation (and example) on how to apply them.

The Johnson/Park empirical method uses three approaches to measure the increase in return required to compensate investors for the lack of marketability of a subject interest. As the authors explain:

When determining the appropriate amount by which the interest should be discounted for lack of marketability, the effective increase in return should be sufficient to compensate an investor for illiquidity and the additional risks associated with ownership of a privately held interest.

BV needs ‘outside-the-box’ solutions to document COVID-19-era business valuations

COVID-19 has substantially affected the financial and economic characteristics of privately held and publicly traded businesses, particularly in regard to:

  • Capital markets and M&A activity;
  • Applying the discounted cash flow method;
  • Applying the guideline public company method; and
  • Applying the merger and acquisitions method.

Last month, Daniel R. Van Vleet, ASA; David Neuzil, CFA; and Joseph Thompson, CFA, ASA (all three are partners at The Griffing Group) addressed the potential distortions that can occur when traditional business valuation approaches and methods are mechanically applied. In Alternate Valuation Methods in the Era of COVID-19, Van Vleet, Neuzil, and Thompson argue that analysts need to think ‘outside the box’ when performing business valuations with valuation dates occurring during the first and second quarters of 2020.

They are particularly concerned that financial analysts avoid leaving themselves exposed by comparing ‘impaired’ comparables with ‘unimpaired’ assets. Now, experts ‘really need to use some caution and think about whether or not the valuation multiple that they are deriving accurately reflects COVID-19,’ says Thompson.

‘The valuation date for your particular assignment will determine how you conduct your valuation,’ Van Vleet confirms—because the ongoing volatility is different from any of the past economic disasters. The third week in March is pivotal since that’s the date when the LSE and US markets hit their cyclic lows.

Those using the DCF for financial reporting or other purposes face similar challenges with their cost of capital assumptions. ‘If you are just mechanically applying a cost of capital analysis, for instance, using a CAPM model or a buildup method of some type where you are using a risk-free benchmark as your basis to build your equity rate, you would potentially quantify a cost of equity capital that is lower in today’s current environment than what you would have back at the end of last year. That doesn’t necessarily make sense,’ Van Vleet demonstrates.

The Griffing Group suggests an adjustment to normal business valuation procedures to avoid double counting the impacts of COVID-19. ‘What we determined as a way to address this is to adjust the affected earnings of the subject company to quantify the unaffected earnings of that subject company, which we just called the unaffected earnings,’ Van Vleet explains. ‘If we applied the affected GPC multiples to the subject company’s affected earnings, a double counting error may occur because there is a false comparison going on there.’

IVSC interviews European Financial Reporting Advisory Group on new intangibles reporting issues and other topics

The new interview on the interaction between European views on IASB standard-setting and the valuation professions is now available from IVSC. The panelists, from the European Financial Reporting Advisory Group (EFRAG), include CEO Saskia Slomp; chair of the EFRAG Technical Expert Group Chiara Del Prete; and Senior Technical Manager Rasmus Sommer.
EFRAG is a not-for-profit association established in 2001, with the backing of the European Commission.

Both EFRAG and IVSC provide input to various regulatory organisations, and they share some board members. IVSC Europe Board member Jesús F. Valero is a member of the EFRAG Advisory Panel on Intangibles, and IVSC SRB member Colin Martin is a member of the EFRAG Financial Instruments Working Group.

The interview offers particular insight into EFRAG’s role ‘in a world where investment in intangible assets is becoming more mainstream.’ The new EFRAG Advisory Panel on Intangibles (API) was established three months ago to:

[P]rovide suggestions on how an entity’s reporting on the ways it creates, maintains and enhances value can be improved. The API is thus looking at how entities provide such information, what information is useful for users of financial statements and suggested alternatives to enhance and provide additional useful information in a cost-benefit and effective manner. The API is discussing real-life examples based on information reported in the financial statements as well as tailored examples developed for the purpose of the discussions.

The API will initially focus on the following sectors:

  • Biotech, pharmaceuticals, and healthcare equipment and supplies;
  • Interactive media and software; and
  • Household products, personal products, textiles and apparel, and luxury goods.
Dates for your diary

22 July: IVSC Standards Boards Update on Future Programmes, 14:00-15:00 BST, virtual conference call

22 July: Impact of COVID-19 on Global Business Valuation and Appraisal, 19:00-21:00 BST, virtual Town Hall

20-21 August: ICAEW Excel Modelling—Investment Appraisal, Valuation and Business Cases, virtual, 9:15-12:30 BST both days (repeated live 30 October and 4 December)

9-11 September: BVR/AAML Virtual Divorce Conference, virtual event

11-13 October: American Society of Appraisers International Conference, virtual event

9-30 October: EACVA 14th Annual Business Valuation Conference, Munich

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