BVR Logo 21 June 2022 | Issue 39-1

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).

Putting a ‘tangible’ number on the value of human resources

Part 2 in a series of papers with perspectives on intangibles from the International Valuation Standards Council (IVSC), created by Kevin Prall and members of the Business Valuation Board, states that “human capital is the foundation from which all intangible assets are created, yet our understanding of human capital value creation and rigor around value measurement is less evolved than other intangible assets.”

How should human resources be analyzed by investors and measured by valuers? The authors note that human capital creates value that is “non-linear with varying a relationship between costs and value.”

Other characteristics of human capital value creation include:

  • Human capital has a “very long economic life based on the ability to transfer knowledge”;
  • This intangible asset networks with and leverages other assets to “drive higher and lower returns for those assets”; and
  • New tools are available to benchmark and quantify these valuation factors. The study mentions the UBS Glass Door Employee Review Monitor comparing over 8,000 leading employers, which offers industry and other comparables and “relative performance to peers.” Similarly, FactSet now offers human capital scores as part of its ESG data sets (Glassdoor reviews are also a very large factor in the FactSet scores).
The value of control trended lower in the UK last quarter

The 1Q 2022 Control Premium Study report, written by BVR’s economic and data editor, Priscilla Kisling, is now available. We have updated the online FactSet Mergerstat/BVR Control Premium Study platform as well. Login to your “My BVR” page to download the report.

The issue highlights control premium and minority discount data as of 1Q 2022. International averages based on 86 relevant transactions continue to show an extremely large range (in the last quarter, from -92.0% to 157.1%), with an average that dropped slightly, to 32.3% (the median was 24.6%).

The update also considers other discount and premia metrics on equity control premiums, minority discounts on equity, and the invested capital control premium by industry sector, percentage acquired, deal size, strategic and financial buyer breakouts, method of payment, transaction multiples, and more.

Below is an overall look at control premium analytics including US data, which include the number of completed deals, as well as the average and median control premiums, from the second quarter of 2017 through the first quarter of 2022.

New edition of Business Analysis and Valuation: IFRS is released

Cengage have released the 6th edition of Business Analysis and Valuation: IFRS Edition in the educational market, written by Krishna G. Palepu (Harvard University), Paul M. Healy (Harvard University), and Erik Peek (Erasmus University).The book uses IFRS-based financial statements and data to consider issues such as:

  • Strategy analysis;
  • Accounting analysis: the basics;
  • Accounting analysis: accounting adjustments;
  • Financial analysis;
  • Prospective analysis: forecasting;
  • Prospective analysis: valuation theory and concepts; and
  • Prospective analysis: valuation implementation.

Cengage also offer a fully updated companion website business valuation firms can use for internal training—with PowerPoint slides, an instructor’s manual, end-of-chapter questions and exercises, solutions, example spreadsheets, and more.

2022 UK market risk premium and risk-free rate indications from Pablo Fernandez

The results of Professor Pablo Fernandez’s latest survey of the market risk premium (MRP) and risk-free rate (RF) used in 95 countries in 2022 was released earlier this month. Many UK business valuers refer to this longstanding survey in their cost of capital analyses.

Currently, based on UK-only responses, Fernandez found a market risk premium of 6.1% (a median of 6.0%). As is typical, these rates are marginally higher than the averages for the US (at 5.6% and 5.5%, respectively). Also, not surprisingly, countries such as the Ukraine, Argentina, and Venezuela lead all nations, with rates between 28% and 35%.

The UK rate increased compared to 2020 (5.8%) and 2021 (5.6%).

Including risk-free rates, the UK’s average is 8.4%.

Fernandez notes that “many respondents use … an RF higher than the yield of the 10-year Government bonds. The coefficient of variation (standard deviation/average) of RF is higher than the coefficient of variation of MRP for the Euro countries.”

The paper also contains the links to all previous surveys, 2008 to 2021.

Fernandez is a professor of finance at the IESE Business School.

FTI experts review the sources of disputes in private equity valuations

There are dozens of reasons for legal disputes in every private equity transaction—and business valuation is often at the centre, argue Karthik Balisagar, Lun Yaoguo, and Ishani Vora, FTI Consulting.

Writing for the Global Arbitration Review (and republished by Lexology), the experts offer particular focus on disputes resulting from disagreements over bases of value, hindsight, and valuation approaches.

They highlight three important High Court decisions:

  1. Byers & Ors v Samba Financial Group [2021] EWHC 60 (Ch);
  1. In the matter of Nord Anglia Education, Inc, Cause No. FSD 235 of 2017 (IKJ); and
  1. Wright v Rowland & Anor[2017] EWHC 2478 (Comm).

After considering pre- and post-closing disputes of all types, the authors pay particular attention to cases where financial experts (accountants, valuers, and investment managers) have been implicated—particularly because of the use of hindsight or incorrect assumptions about the basis of value. The Byers case is particularly valuable here, the authors argue.

The selection of discounts and the weighting of valuation approaches (see the Nord Anglia Education case) are two other common sources of disputes.

EY update transfer pricing guide

The EY Worldwide Transfer Pricing Reference Guide 2020-2021 offers an encyclopedic review of 131 jurisdictions and gives an overview of transfer pricing tax laws, regulations, rulings, documentation requirements, transfer pricing returns and related-party disclosures, transfer pricing methods, benchmarking requirements, and much more. The most recent update for the UK highlights the continued importance of Part 4 of HMRC’s Taxation Act of 2010 and how, since April 2018, the UK transfer pricing legislation operates by reference to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations the OECD published on 10 July 2017. There’s also an interactive map to quickly check how the OECD Model Tax Convention is applied in individual countries.

Kroll also release updated UK CAPM and inflation indicators

Kroll continue to publish regular updates on the global economic and financial market conditions that influence business valuations in the UK (they began this process in 2014). In the last week, they’ve released updated equity risk premium (ERP) and inflation indicators.

The ERP, along with accompanying risk-free rates, are a key input used to calculate the capital asset pricing model (CAPM) and other models. Kroll regularly reviews fluctuations in global economic and financial market conditions that warrant a periodic reassessment of the ERP and the accompanying risk-free rate.

These projections come at a time when the FTSE 100 is the only major global stock index that’s reported a positive return during the first five months of 2022. The S&P 500 is down about 20% while the FTSE 100 remains essentially flat.

Their current guidance for the UK risk-free rate is 3.0. Kroll describe this rate as “normalized, since market conditions now suggest a number which they deem to be ‘abnormally low.’” Prior to this period, their rate had been 2.5—lower than historical averages but still an increase. A table summarising the historical risk-free rates since 2014 is also available.

Kroll also note the reduction in value caused by inflation increases since June 2020. Long-term inflation expectations (used to adjust long-term growth rates in the terminal years of DCF analyses) are significantly higher when compared to June 2020. For the US, for example, inflation estimates over the long-term rose from 2.0% in June 2020 to 2.6% in May 2022. For Germany, long-term inflation expectations have surged from 1.6% in June 2020 to 2.6% in May 2022.

Dates for your diary

21-29 June (today): ICAEW Practical Business Valuation, virtual classroom

9 July: Society of Shares & Business Valuers’ The Absence of Size Effect With Clifford Ang, London and virtual, 17:30 BST to 19:00 BST

13-15 September: IVSC Annual General Meeting, Fort Lauderdale, Fla.

3-5 October: 12th Annual International Valuation Conference, Riyadh, Saudi Arabia

19 October: Society of Shares & Business Valuers How to Lose at the Tax Tribunal With David Bowes, London and virtual, 17:30 BST to 19:00 BST

7 December: Society of Shares & Business Valuers’ Causation and Financial Losses: Factors to Consider With Prem Lobo, London and virtual, 17:30 BST to 19:00 BST

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

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

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