BVR Logo 18 February 2020 | Issue 11-2

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).

Conflicts of interest—and low cost or automated solutions—plague all the valuation disciplines

Business valuers are required (under the Red Book and IVS standards, for instance) to maintain objectivity. It’s often one of the most challenging parts of the profession, since nearly every engagement comes with pressure from clients or third parties to either raise or lower the conclusion.

Meanwhile, there’s always a sense that a low-priced or less independent practitioner will jump at the opportunity to provide the exact number the client demands. Most BVWire—UK subscribers have lost business to low-priced competitors or the many ‘£99 business valuation’ websites. It’s frustrating when a business turns to a tainted provider knowing they can get the number they want.

The real property valuers are currently receiving backlash for lack of independence—and perhaps observers of the negative coverage in the Times and elsewhere can help us all focus on the strength and independence of our best work. This isn’t a new problem—RICS, of course, was founded by royal charter in an effort to reduce speculating on land related to the railway system. However, conflicts are more plausible when the biggest property valuers (Savills, CBRE, Knight Frank, JLL) are also engaged in development and ownership on a grand scale. Combine this concentration with the fact that the Big Four audit essentially 100% of Britain’s listed companies, and any casual observer can see possible threats to independence. It gets worse when there’s an economic downturn.

Meanwhile, the real property market is controlled at the low end by ‘free’ and ‘instant’ property valuations from listing services like Zoopla. Their free valuation tool offers estimates, and then passes the names of owners who use it on to agents and surveyors as a lead source. Many have commented (here’s one example complaining that automated valuation tools are misleading) that the Zoopla estimate and the value provided by the full property valuation frequently have little in common.

Obviously, business valuers face these same problems, whether their work is for commercial, fiscal, contentious, financial reporting, transactional, or other purposes. For the most part, the small business valuation profession in the UK should be commended for ‘taking the high road’ despite pressures from the top—and from the bottom—of the market. There will always be someone willing to provide a business valuation for less money, but neither the clients, the public, nor the profession benefit.


Key issues in valuations for divorce

One of the best attended sessions at last fall’s ICAEW Valuations Conference in London was ‘Valuations in Divorce,’ led by PwC’s Sarah Middleton and Jonny Rodwell. These cases continue to show up in the courts—and in the morning papers.

Middleton and Rodwell managed to work around the celebrity gossip to focus on the most contentious valuation issues in recent cases. For instance:

  • Cooper-Hohn v. Hohn (the largest UK divorce settlement ever) offered the business valuation profession a great deal of guidance on business or personal goodwill. ‘Key man,’ management structure, relative transferability of the marital partners under new ownership, and transactions involving similar businesses all played an important role in determining this settlement. The Court concluded ultimately that Hohn was unlikely to work for someone else, and that the business had no market without him. As the Court of Appeal agreed, ‘it is speculative to suggest that a purchaser could be found to pay for an income stream that can and would walk out the door…’
  • Liquidity is nearly always a challenge in divorce valuations. As Middleton and Rodwell said, ‘despite having a large number of assets or being highly valuable, some companies face significant challenges in easily extracting cash.’ Asset breakup to cash can destroy the business, and may be costly and slow, so the business valuer must make a clear determination of how easily various assets (dividends, surplus cash, surplus assets, committed capital, external debt, preference share, etc.) can be converted to a transferable status.
  • A final issue that PwC valuers face regularly is marketability and liquidity discounts related to the value of shares. Middleton and Rodwell cited the 2017 Martin v. Martin case where the courts examined share-to-cash discounts of between 30% and 50%, and whether these discounts might value ‘account realisation difficulties twice.’

‘We need to be clear in how we differentiate and treat both the underlying riskiness of each asset class, and the risk around the robustness of our assumptions,’ Middleton concludes.

Current BUM and CAPM cost of capital rates now available from BVR’s Cost of Capital Pro

Year-end 2019 data are now available in BVR’s Cost of Capital Professional. The new update provides business valuers with current cost of equity, cost of debt, and WACC numbers, including:

  • risk-free rates;
  • industry risk premia;
  • equity risk premia;
  • betas for CAPM calculations; and
  • size premia.

CCPro gives analysts the flexibility to choose the start year for historical return data based on which business cycle best offers a reasonable basis to make estimates of expected future returns. In addition, CCPro will be adding a small and micro-stock size premia split during the 2nd quarter to provide better support for risk analyses when valuing very small businesses.

CFAI argues listed companies cannot afford proposed ‘wasting asset’ treatment of goodwill

BVWire—UK continues to cover the response to early-stage efforts to amortize the world’s goodwill assets. The message currently: the process is in the early stage. Regulators in the UK, U.S., and elsewhere have received an outpouring of concern from auditors, financial leaders, and the business valuation profession. The auditors tend to believe that the existing process of impairment testing is costly and provides insufficient benefit. Others tend to feel that annual acquisition goodwill tests force listed companies to defend their business strategies and the impairment results are the only way shareholders can learn about potential problems.

Given the fractured points of view, if IFRS, IASB, or the U.S. FASB ultimately do anything to change the required valuation and reporting of goodwill, it will not be in 2020.

Two great position papers on how to account for goodwill from business combinations were published in recent weeks. First, the CFA Institute (CFAI) recently submitted its lengthy and very thought-provoking comment letter (41 pages) to UK regulators, and as part of the U.S. FASB’s Invitation to Comment (ITC) process.

Citing the Carillion failure, CFAI told the UK agencies:

Recent business failures in the UK and the related media attention have, again, raised the question of audit quality. There has been much in the press that has inflamed the reaction of many stakeholders (e.g., investors, politicians, pension trustees, and the broader public). We certainly don’t disagree that such business failures are problematic and create significant consequences for not only investors but also other stakeholders to an organization. While extensively reported upon by the UK media, there is much reaction to, but not significant analysis of, the causes of such business failures and the degree to which audit failures, aggressive accounting, fraud, or market conditions that resulted in liquidity issues contributed to the lack of timely recognition of such business failures.

Perhaps most dramatically, CFAI analysts and international regulators ‘have not considered the magnitude of the goodwill balances they would likely put on a schedule to amortize over a period of ten years.’

How much are we talking about? CFAI concludes that amortization would require US-listed companies alone to write off $5.6 trillion in balance sheet assets during this period—a non-cash accounting adjustment that would put many listed companies into negative net income situations for the next decade.

For this and other reasons, the CFAI has serious concerns about the reversion back to goodwill amortization.

The business valuation community is (for the most part) united in its opinion that, from a user perspective, the benefits of the transparency and information the current impairment model provides outweigh the costs. The cost-benefit issue was what triggered the international accounting regulators to revisit this issue in the first place. A coordinated effort is underway in the business valuation profession to continue to provide feedback to rule makers and to educate users on this important issue.

The second recent example of input from the valuation community on this issue comes from London’s IVSC, which issued their second position paper on the subject earlier this month. ‘Information Value of the Current Impairment Test: Leading or Lagging Indicator’ analyses the accounting framework to better understand why goodwill impairments in certain situations fail to be a leading indicator. IVSC identifies four primary reasons why goodwill impairments often lag market sentiment, and utilises examples to articulate the fact patterns which lead to these outcomes. (The first IVSC on amortising goodwill was covered by BVWireUK here. The final paper, ‘Practical Solutions to Enhance the Current Goodwill Impairment Framework,’ is due in April.)

Business valuation CPD diary

ICAEW Practical Business Valuation, 16-17 March, London; 14 & 26 May, London; 9 & 29 July, London; 9 & 19 November, London

HMRC Shares and Assets Valuation Fiscal Forum, 26 March (rescheduled), London

ICAEW Business Acquisition & Due Diligence, 22 April, 24 September, 25 November, London

ICAEW Annual Valuation Conference, 28 April, London

73rd CFA Institute Annual Conference, 17-20 May, Atlanta

Advanced Valuation Techniques, 11 June, London; 16 September, London

ASA-Europe Business Valuation Conference, 24 September, Prague (details available soon)

IVSC Annual General Meeting, 14-16 October, Chicago

EACVA 14th Annual Business Valuation Conference, 29-30 October, Munich

Our thanks to Marianne Tissier, Andrew Strickland, and Nick Talbot for their valuable contributions to BVWire—UK.

Want to share a news item? Have feedback or comments? Please contact
David Foster at or +011-917-741-3853.

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