BVR Logo 20 July 2021 | Issue 28-2

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, IVSC, 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).

Duff & Phelps/Ogier article compares independence requirements for lawyers and business valuers

Providing expert financial analysis advice during litigation becomes more difficult—and often unpleasant—when the lawyers who hired you don’t understand that business valuers are held to the same professional standards as
they are.

BVWire—UK subscribers might want to include a new short article by Colin Everson, associate managing director at Kroll/Duff & Phelps, and David Welford, the BVI Dispute Resolution partner at Ogier. Valuations Can Play a Key Role in Contentious Cases,” which appeared last month in Global Banking & Finance Review, makes the simple but often overlooked point that the two professions share a similar definition of independence. Using this third-party source might make discussions easier than trying to educate lawyers on BV standards yourself.

Everson and Welford draw simple and clear professional parallels:

  • “The independence of the valuation exercise is mission critical. Valuers must be alert to potential conflicts of interest that might arise.”
  • “The obligations of a valuation expert are to the court, not to fight the client’s case. At the same time, the expert must be prepared to robustly defend their methods and conclusions against challenge from the other side.”
  • “The credibility of any analysis depends on the expert’s ability to stand behind it without lurching into advocacy of the client’s position.”

“Lawyers will recognise the tension created by professional obligations sometimes outweighing their duty to the client,” the authors hopefully and wisely conclude. “Ultimately, we are all in the value business.”

iiBV update their IVS-compliant core business training modules

BVR and the International Institute of Business Valuers (iiBV) have completed the current updates of their core Advanced Business Valuation course. The five e-learning modules qualify for iiBV 210, 211, 212, 213, and 214 credits, which align with the current International Valuation Standards from IVSC.

The five modules cover the following outline of essential topics:

  • International Cost of Capital: Global Education by iiBV:
    • Introduction and course objectives
    • Review of CAPM and inputs
    • Country risk
    • Relative volatility model (RVM)
    • Erb-Harvey-Viskanta country credit rating model
    • Country yield spread model
    • The Damodaran model
    • Summary and special topics
    • Review questions
  • Valuing Early-Stage Companies: Global Education by iiBV:
    • Introduction
    • Definitions of value
    • Stages of company development
    • Developing rates of return
    • Financing early-stage companies
    • Estimating value for early-stage companies
    • Modeling complex capital structures
    • Modelling complex capital structures—current value method (CVM)
    • The option pricing model (OPM)
    • Probability weighted expected return method (PWERM)
    • Hybrid model
    • Review questions
    • Case studies:
      • Current value method case study
      • OPM case study
      • PWERM case study
      • Hybrid method case study: Salalah Ltd., Part II
  • Valuing Minority Interests: Global Education
    by iiBV:
    • Overview of control premium and discount for lack of control
    • Example of adjustments to cash flow for nonmarket expenses
    • When should a control premium be considered?
    • Common assignments requiring minority interest valuations
    • Measuring the control premium
    • The market participant acquisition premium
    • Discount for lack of marketability (DLOM)
    • Black-Scholes option model
    • Initial public offering studies
    • Restricted stock studies
    • Sanity check
    • Review questions
  • Valuing Intangible Assets: Global Education
    by iiBV:
    • Introduction
    • What is an intangible asset and why do we need to value them?
    • Identification of intangible assets
    • Documentation of intangible assets
    • Categories of intangible assets
    • Characteristics of intangible assets
    • MPEEM valuation methodology for intangible assets
    • Contributory asset charges (CAC) in the MPEEM
    • Tax amortization benefit (TAB) in MPEEM
    • Greenfield method and relief from royalty method
    • Profit split method and other methods
    • Case study—Wahmi Limited
    • Course review questions
  • Black-Scholes Option Modeling:
    • The Black-Scholes option model
    • The language of options
    • The assumptions within the Black-Scholes model
    • Some of the intellectual heritage behind the model
    • Core building blocks of model
    • Euler’s number or the exponential number and natural logarithms
    • Continuous compounding and discounting
    • Application to the BS model
    • Volatility
    • Volatility and returns
    • The risk-free rate and dynamic hedging
    • The “N” function in the BS model
    • The derivation of N(d2)—strike price
    • The value of N(d1) in the model
    • Application to private companies
    • Course review questions

The entire course set is available for £361.

Business valuers can’t afford to use bad data—an ESG case study

Large data providers Refinitiv/LSEG and SPGI have backed European and UK efforts to add environmental, social, and governance (ESG) metrics to financial reporting disclosures for listed companies. Now Moody’s is in the game as well, and their new tool to “generate real-time predicted environmental, social, and governance scores” adds a new twist. The Moody’s ESG Score Predictor provides analysts with “quantitative data” (is that redundant?) for private equity portfolio companies and those who invest in them. This brings ESG ratings into the private small- and medium-sized enterprise market.

While these expensive rating tools may increase disclosures that help investors assess risk, they are not auditable for purposes of business valuation. Every valuer BVWire—UK has discussed ESG ratings with says simply that they can only capture the benefits or disadvantages of environmental, social, or governance characteristics through cash flows or perhaps with adjustments supported via industry risk premia—or by adjusting their transaction or listed company comparables.

The ESG rates available now are also not replicable—a problem documented in an updated academic research study that documents the changes in Refinitiv’s methodology for creating ESG ratings. The authors, Florian Berg (Massachusetts Institute of Technology), Kornelia Fabisik (Frankfurt School of Finance and Management), and Zacharias Sautner (Frankfurt School of Finance and Management and ECGI), take some pleasure exposing the failures of this methodology while pointing out that every investor from BlackRock to the World Economic Forum on down now emphasise how critical these ratings are to current investment strategy.

Rewriting History II: The (Un)Predictable Past of ESG Ratings, which has been updated several times since its original release last year, is worth reading as a warning to any financial analyst who relies on models and third-party data to value private assets—in other words, every business valuer.

The authors began by comparing the ESG ratings of listed European companies using the 2018 and 2020 “rewritings” of the Refinitiv product (they imply that similar revisions influence the other ESG rating services, too, but single out Refinitiv because it appears the most frequently in academic literature).

First, they discover that the data rewriting is ongoing—so users of the outputs would get different results depending on whether they’re using a historical update to match their valuation date.

Furthermore, the researchers find that “retroactive ratings changes” have altered the rankings and classification of firms and quantiles—generally to make the rankings more closely mimic returns data. More than four-fifths of the ratings change downward between the two rewritings, with little relationship. One example from the study of the trustworthiness of these ratings for business valuers is:

After inspecting the two downloads, we observed that the ESG scores for identical firm-years differed between the two data versions—in some cases dramatically. In fact, not a single ESG score was the same across the two versions. Thirteen percent (13%) of the sample observations were subject to a score “upgrade,” that is, the rewritten ESG score was higher than the initial ESG score. Even more remarkably, 87% of the observations were subject to a score downgrade. The effect of data rewriting is also economically large. While the overall ESG score in the rewritten version is on average 20.6% lower than in the initial version, the percentage deviations from the initial to the rewritten version for the E, S, and G subscores are -47.4%, 8.6%, and 116.2%, respectively.

Large private companies may require independent financial and valuation reviews, just like their listed competitors

The UK’s consultation on corporate governance and audit reform, announced in March, asserts that large private enterprises—and their directors—should be held to the same reporting standards as listed companies. The Big Four and even, to some degree, international regulators such as the IASB have criticised the government’s proposals, designed to “restore trust,” for potentially adding significantly to reporting requirements on the newly defined “public interest entities” (PIEs). The government proposes to expand the definition to include the largest 1,500 or so private companies in the UK.

As proposed, directors of these companies (including nonexecutive directors appointed by private equity investors) would need to carry out a review, disclose details of the procedures, and make a statement as to whether they consider the procedures to have operated effectively. Audit committees would decide whether the statement should be subject to external analysis.

Conflicts may abound: Proposed restrictions on nonaudit services that an accounting firm can provide to large private equity assets may cause some problems. Where business valuation services are required, the big audit firms may need to outsource more frequently than they currently do for these clients.

Dates for your diary

23-24 August: Excel Modelling—Investment Appraisal, Valuation, and Business Cases, ICAEW live online, 09:30-12:30 BST

6-14 September: Practical Business Valuation, ICAEW live online (four sessions), 09:30-12:30 BST

13-16 September: IMAA's Damodaran on Valuation, live online (repeated 8-11 November)

24-26 October: ASA International Conference, Las Vegas and online

27-29 October: IVSC Annual General Meeting (programme and format information to come)

Want to share a news item? Have feedback or comments? Please contact
David Foster at

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