Writing for Business Valuation Update, Andrew Strickland (Scrutton Bland Chartered Accountants) notes that new techniques are now ‘sweeping away’ business valuation methodologies that have held sway for decades in the UK. Based on presentations he’s made to the ICAEW and other groups, Strickland documents the “seismic shift” in areas such as credentials and standards. ‘The competencies in evidence range from the specialist business appraisers working within the Big Four, together with other firms such as Duff & Phelps, FTI Consulting, and some specialist valuation boutiques at the top of the food chain. We then proceed by gradations, down to the lone sole practitioner with a hazy notion of business valuation based on some valuations undertaken for tax purposes long ago,’ Strickland writes.

Given this competency vacuum, ‘some firms provide their own internal training and others put their valuation teams through the ASA’s training program. Others use the CFA.’

Strickland turns to the manner in which business valuation disputes are now being argued in the courts to emphasise the evolution. ‘There is now far greater sophistication in the valuation tools that are used in practice, and those who are serious in their business valuation work recognise the importance of improved computational methods,’ he writes—with specific reference to the use of PE ratios from public companies.

Among other factors, Strickland highlights legal system reform, including the lack of anything comparable to the Daubert challenge against experts within the UK system. He also examines the dominance of the market approach (particularly for fiscal valuations prepared for HMRC) and the relative lack of good financial research resources that support business valuation.

Market approach dominates: For a very considerable number of years, the courts showed a robust resistance to the use of DCF techniques. They were suspicious that modest changes in assumption could have major impacts on value. However, this has changed over the last seven years, and now the DCF has been the main driver of the valuation conclusions in a small collection of cases.

Researchers from University of Bath, working in conjunction with a team at the University of Hong Kong, find that investors underreact to high goodwill-to-sales ratios. In The Invisible Burden: Goodwill and the Cross-Section of Stock Returns, the research shows stocks with high goodwill-to-sales ratios underperform for the first three years after acquisition, compared to their peers. Not surprisingly (except apparently to investors), firms with higher goodwill are more likely to experience impairment—and they’re less profitable.

The European Banking Authority (EBA) has published the Handbook on Valuation for Purposes of Resolution, which is addressed to national and EU resolution authorities. A bank resolution occurs when authorities determine that a failing bank cannot go through normal insolvency proceedings without harming the public interest and causing financial instability. The focus of the 97-page handbook is on convergence and consistency of valuation practices as well as the interaction with independent valuers across the EU. The handbook has been developed in consultation with the International Valuation Standards Council (IVSC).

In some European countries, it appears there is much more disagreement about the risk-free rate (RF) than the market risk premium (MRP), according to a new survey. ‘Market Risk Premium and Risk-Free Rate Used for 69 Countries in 2019: A Survey,’ by Pablo Fernandez, Mar Martinez, and Isabel Fernández Acín, is based on almost 2,000 responses from finance and economics professors as well as company analysts and managers. The authors state: ‘Due to “Quantitative Easing,” many respondents use for European countries a RF higher than the yield of the 10-year government bonds. The coefficient of variation (standard deviation/average) of RF is, on average, 2.75 times higher than the CV of MRP for 24 European countries.’

Total goodwill impairment recorded by European-listed companies in the STOXX® Europe 600 dropped 35%, to €18.5 billion, in 2017, according to the ‘2018 European Goodwill Impairment Study,’ from Duff & Phelps. Four out of the eight highlighted countries within the STOXX® Europe 600 saw a decline in the proportion of companies recording a goodwill impairment in 2017. Germany saw the largest increase, while Italy showed the largest decrease. The top three industries with the most significant drop in goodwill impairment amounts in 2017 in order of magnitude are (€ billions): financials and real estate (€8.1 to €3.4), telecommunication services (€7.0 to €2.4), and consumer discretionary (€5.0 to €0.9).

People: Several appointments have been made at the International Valuation Standards Council (IVSC): Richard Hayler, a partner at Singapore-based Deloitte, who specializes in valuation, financial, and accounting issues, has been appointed to the Standards Review Board, which oversees the work of the IVSC’s technical standards boards. Also, three new members have been appointed to the Business Valuation Standards Board: Wolfgang Ballwieser, professor emeritus at the University of Munich (Germany); Henk Oosterhout, managing director at Duff & Phelps (Netherlands); and Richard Stewart OAM senior partner with PwC (Australia) … Henry Ziff, managing director of Transworld Business Advisors UK LTD (London) is working with BVR to collect UK private-company transaction and financial data for DealStats.

Firms: U.S.-based Frazier & Deeter has opened an office in London, its first international location; the new office will offer business advisory services, including international tax, tax compliance, transaction advisory, and other services … For the second year in a row, Houlihan Lokey was awarded The Hedge Fund Journal’s Leading Valuation Firm for 2019 … RICS has announced a cooperation agreement with the American Society of Appraisers. The intent of the agreement is to further the work of shared standards, training, and resources to support business valuation professionals in the UK and internationally.

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