At their meeting last week in London, the IVSC’s board of trustees announced former UK Chancellor of the Exchequer Alistair Darling as their newest member. Darling brings further celebrity and visibility to the business valuation and financial instruments standards world, having served as chancellor during the last economic crisis from 2007 to 2010. And ‘Alistair embodies the organisation’s commitment to building confidence in valuations,’ said Sir David Tweedie, chair of the IVSC board.

Darling’s initial response to the appointment is a refreshingly concise statement of what those in the business valuation profession have long accepted: ‘Getting valuation right matters. Valuation data plays a vital role in so many aspects of the global financial system. It acts as an enabler for prudent business and investment decisions, as an important element of company financial reporting, and as part of the mechanism for managing macro prudential risk,’ he said.

Darling also held UK ministerial roles at Treasury, as Secretary of State for Work and Pensions (1998-2002); Transport (2002-06); and Trade and Industry (2006-07). He was appointed to the House of Lords in 2015.

‘Valuing fractional interests in closely held companies is especially challenging,’ Andrew Strickland reports to BVWire—UK. ‘There is no observable marketplace for such transactions; the majority of the transactions which do take place are likely to be tainted’ by one of the following:

• The transactions are between family members, and there is no certainty that arm’s-length pricing was applied; or

• The transactions are within a quasi-partnership relationship with a shareholders’ agreement or articles of association provision regarding the valuation basis to be applied.

Strickland notes further challenges: ‘Layered on top of these difficulties with the evidence base is the increasing recognition of the importance of discrete cash flows as central to the valuation mission. Majority cash flows are available to the majority holder; the minority shareholder may be excluded from some of these cash flows. It is therefore technically a firmer base to consider the differences between majority and minority cash flows and to undertake the valuation from those two different starting points. These arguments militate against discounting a whole firm valuation in order to derive a minority value,’ he says.

And there is yet another complexity to consider: ‘An interest of 5% in a well ordered family company in which there are 40 other small shareholdings, none of whom are involved in the management, may be considered to be similar in many ways to a public company: if there is strong governance and no value leakage, both majority and minority holdings would be based on the same cash flows. The main valuation difference would be to reflect the reduced liquidity of the minority holding.’

Contrast this situation to ‘the hapless investor with a stake of 5% in a private company if there is a majority holder determined to squeeze out all of the perquisites of control for their own benefit. In such a circumstance there is both a governance deficit and value leakage, with the cash flows available to the minority being a world away from the control cash flows,’ he comments.

‘Standard discounts for different sizes of shareholdings have to be treated with some very considerable caution,’ Andrew advises. ‘We have to recognise that cases going through the courts leave a trail of evidence of the sorts of discounts which are considered to be appropriate to the circumstances of each case.’

Strickland offered BVWire—UK readers the following summary of discounts from a sample of relatively recent cases:

BVR has completed its latest quarterly update to the FactSet Mergerstat/BVR Control Premium Study (CPS), which includes an added 141 controlling acquisitions worldwide. The median control premium for these new additions is 18.1%, and the median implied minority discount was 15.3%. Median net sales were $185 million USD, and median deal value was $182 million USD.

As we’ve reported earlier, control premia in the UK tend to run higher. For the 1,224 total controlling UK acquisitions included in CPS, the median premium is 28.4% and the mean is 20.0%. These FactSet/BVR averages remain stable compared to the previous quarter.

In the coming months, the CPS will also begin to report invested capital premia. BVWire—UK readers interested in these upgrades should contact BVR.

Last month, at the RICS Business Valuation Symposium in New York City, it was evident that, in the realm of fair value for financial reporting, extraordinary progress has been made in the efforts to enhance the public trust in valuations. Interestingly, many of the speakers and attendees were personally responsible for a large part of the progress over the years. Collaboration is one important element of this success, and the event highlighted the teamwork that has gone on in the past and that will be key to moving forward on this matter.

Welcoming the attendees was Neil Shah, regional managing director for the Americas for RICS, who was joined by Mary Jane Andrews, president and CEO of the CBV Institute (formerly the CICBV, the Canadian VPO), and Johnnie White, newly named CEO and executive vice president of the American Society of Appraisers (ASA). These groups are working together to move the profession forward in the area of fair value for financial reporting.

Speakers reviewed where the business valuation profession has been, what’s going on now, and what’s in store for the future. Some highlights:

• The rise of financial reporting in the late 1990s, early 2000s triggered a diversity of practice and “black boxes”;

• Regulators became very concerned and questioned what they perceive as the fractured nature of the profession and its lack of unified qualifications, standards, and enforcement in this area of valuation;

• The Appraisal Foundation began issuing a series of financial reporting valuation advisories as best practices on such issues as customer relationships, control premia, and contingent consideration;

• In 2016, a landmark coalition was formed between the ASA, AICPA, and RICS in a major effort to launch the Certified in Entity and Intangibles Valuation (CEIV) credential and its Mandatory Performance Framework (MPF), which focuses on the level of documentation required to support a valuation expert’s work;

• The enforcement aspect of the CEIV is still in the works; the Big Four have trained their staff in the CEIV but have stopped short of getting their people credentialed until the quality monitoring process is ironed out;

• The IVSC has started to develop standards for financial instruments, which is of particular interest to global regulators;

• The PCAOB has come out with consolidated rules that focus on audits and the use of specialists; about half of the audit deficiencies the PCAOB has found relate to fair value measurements; and

• A “regulatory sea change” is coming with ISQM1 (2020) from the IAASB, which will closely examine internal controls in the auditing process—and will trickle down to valuation experts globally.

Doing better? After all of the time and effort spent in this area, the question is: Are we in a better position in terms of public trust and transparency? The consensus from the conference speakers and audience members is “yes.” For example, the nature of PCAOB inspections with regard to fair value measurements in the U.S. bears this out. Regulators in the UK and elsewhere appear to be pleased with the progress that has been made, although they have made no definitive public statements to this effect.

Some of the attendees at the BV leadership symposium noted that the users of business valuation reports are largely unaware of what’s happening behind the curtain, so they may still have a problem understanding higher fees due to the increased costs of increased regulatory requirements.

There will be more coverage of the RICS conference in the August issue of Business Valuation Update.

Valuation and Common Sense (2019, 7th edition) ‘explains the nuances of different valuation methods and provides the reader with the tools for analyzing and valuing any business,’ Pablo Fernandez, professor of finance, IESE Business School, tells BVWire—UK.

The 24 chapters may be downloaded for free at the following links:

Table of Contents, Acknowledgments, Glossary

1. 'Company Valuation Methods'
2. ‘Cash Flow Discounting: Fundamental Relationships and Unnecessary Complications’
3. ‘Cash Flow Valuation Methods: Perpetuities, Constant Growth and General Case’
4. ‘Valuing Companies by Cash Flow Discounting: Ten Methods and Nine Theories’
5. ‘WACC: Definition, Misconceptions and Errors'
6. ‘Valuation Using Multiples: Dispersion. Useful to compare and to negotiate'
7. ‘Price to Earnings Ratio, Value to Book Ratio and Growth’
8. ‘How to Value a Seasonal Company Discounting Cash Flows’
9. ‘Equity Premium: Historical, Expected, Required and Implied
10. ‘CAPM: An Absurd Model’
11. ‘CAPM: The Model and 307 Comments About It’
12. ‘The Equity Premium in 150 Textbooks’
13. ‘Market Risk Premium and Risk-Free Rate Used for 69 Countries in 2019: A Survey’
14. ‘Are Calculated Betas Good for Anything?’
15. ‘β = 1 Does a Better Job Than Calculated Betas’
16. ‘Valuing Real Options: Frequently Made Errors’
17. ‘Value of Tax Shields (VTS): 3 Theories with “Some” Common Sense’
18. 'Internet Valuations: The Case of Terra-Lycos’
19. ‘Valuation of Internet-Related Companies’
20. ‘Valuation of Brands and Intellectual Capital’
21. ‘Interest Rates and Company Valuation’
22. ‘Dividends and Share Repurchases’
23. ‘How Inflation Destroys Value: Taxes’
24. ‘119 Common Errors in Company Valuations’

Business valuators can download Fernandez’s current tables and figures (updated through May 2019) in an Excel format here.

The International Private Equity and Venture Capital Valuation (IPEV) Board’s current update reflects valuation guidance from IFRS 13, ASC Topic 820 (US GAAP), and other inputs and is available here. In addition to improved readability, and new explanatory comments, valuation-specific enhancements include:

• Clarifying that using the price of a recent investment should not be the default valuation technique. The guidelines reinforce the premise that fair value must be estimated at each measurement date as required by the relevant business valuation and accounting standards and a ‘careful consideration of the facts and circumstances.’

• Replacing ‘private equity’ with the term ‘private capital’ to prevent misunderstanding and highlight applicability to various types of private investments in debt and equity.

• Increasing detail on valuation considerations for early-stage investments.

• Further information on valuing debt as an investment.

Karin Lagerlund, IPEV Board member, says, ‘[T]he updated 2018 IPEV Guidelines will aid GPs in providing robust estimates of fair value that is required by their LPs.’

ICAEW Practical Business Valuation, 11 and 25 September and 11 and 25 November, London

IVSC Annual General Meeting and IVAS/IVSC Business Valuation Conference, 7-9 October, Singapore

ICAEW Excel Modelling—Investment Appraisal, Valuation and Business Cases, 18 October or 15 November, London

ICAEW Annual Business Valuation Conference—23 October, London

ICAS Corporate Insolvency Rules for Scotland Course, 31 October, Glasgow; 1 November, Aberdeen; 7 November, Edinburgh; 15 November, Perth

UK200 Group (the network of independent law and accounting firms) Annual Conference—13-15 November, Liverpool