The portfolio of Fiat Chrysler brands is worth €10.4 billion based on a preliminary purchase price allocation valuation using an 1% average royalty rate, according to a white paper from MARKABLES. ‘The royalty rate [used by acquirer PSA Peugeot] might seem surprisingly low, considering the awareness and reputation of famous passenger car brands. However, it reflects weak profitability in the consumer vehicles sector, overcapacities, technological changes and environmental issues,’ the report concludes.

This makes Fiat Chrysler (their brands include Fiat, Chrysler, Dodge, Jeep, Ram, Alfa Romeo, Lancia, Abarth, Maserati, and SRT) the 12th most expensive brand portfolio ever acquired. The 1% average royalty rate ‘is in line with the royalty rate applied in 2011 when Fiat took over Chrysler,’ the MARKABLES paper says.

In other brand news, Duff & Phelps announced last week that they’re changing their name to Kroll (D&P’s private equity owners acquired Kroll in 2018). The new brand is supposed to emphasise a broader range of services and what the firm is calling a ‘tech-forward’ approach to solving risk and business problems. For most of the UK business valuation community, where Duff is a dominant brand, this change will not come easily. In any case, ‘Kroll’ intend to continue to publish research, including rankings of brand value such as their Fourth Annual Indian ‘Celebrity Brand Valuation Study 2020: “Embracing the New Normal.”’ (Virat Kohli, captain of the India national cricket team, has topped the powerful celebrity brand list for the fourth year in a row, even though the COVID-19-related year reduced total brand values in India and drove a larger percentage of the value to social media.) The report is a deep analysis of how endorsements affect the brand value of celebrities alongside other factors such as age, fees charged per endorsement, social media presence, and the like. It also examines the impact of the pandemic on both brand value rankings and the celebrity endorsement space.

BVWire—UK notes a 15 February decision by Judge Richard Hacon of the High Court that denied a claim by an ex-employee against the digital forensics company MDS Ltd for copyright. The new decision offers fairly large protections against such claims for IP developed during a term of employment—reducing but not eliminating this risk.

Most business valuation engagements require assessment of IP and technology—as operating assets, capital investment, and because of additional intangible benefits and risks.

Some of the key risks are included in the Lexology book Getting the Deal Through, written by White & Case lawyers Deborah Lincoln, Dr. Philip Trillmich, Lindsey Canning, and Tom Matthews (their book also offers extensive guidance on tech due diligence and transfer challenges when selling these assets).

Among the issues business valuers should consider when assessing technology in small and medium enterprises, the authors highlight:

• Identifying any registered IP rights and applications for registration;

• Verifying that a member of the target group is the registered proprietor or applicant;

• Confirming whether there have been, or are, any challenges to the validity or ownership of these IP rights;

• Identifying any defects in their chain of title that could pose future risk;

• Reviewing the terms of any licences of intellectual property granted to, or by, the company and assessing whether they’re transferrable and whether they create operational restrictions or barriers to growth;

• ‘Reviewing the target group’s agreements with past or present employees, contractors and consultants to assess whether a member of the target group owns all rights in inventions and other works created by them and has imposed appropriate confidentiality obligations on them’ (similar to the exposure highlighted in the MDS case);

• Assessing the SME’s use of open source software;

• Determining whether the organisation has an appropriate enforcement policy to protect their IP, often based on how they responded to previous IP claims, if any; and

• ‘Reviewing agreements relating to the material IT systems used by the target group, including licences, support and maintenance agreements and outsourcing contracts.’

From 6 April 2021, Practice Direction 57AC will introduce significantly tighter requirements that will apply to all business valuer witness statements in the Business and Property courts, including those in claims that have already been issued. PD 57AC and its accompanying Appendix: Statement of Best Practice in Relation to Trial Witness Statements intend to achieve greater uniformity in approaches to witness evidence between individual courts.

The new regime defines the purpose of such witness statements (in Paragraph 2.1) to be: ‘to set out in writing the evidence in chief that a witness of fact would give if they were allowed to give oral evidence at trial without having provided the statement.’

PD 57AC also seeks to minimise practices where legal representatives attempt to alter or influence the valuation expert’s recollection or opinion. In the past, some of these practices in document-heavy commercial cases have been both subtle and coercive, so it remains to be seen how impactful on court culture the new direction is.

The new requirements: Much of the directive instructs legal counsel during the preparation of business valuation experts. Counsel are now ‘required to explain to the witness the (i) purpose and (ii) proper content of such a statement, (iii) the proper practice in relation to its preparation, and (iv) ensure they have read the confirmation of compliance statement at PD 57AC para 4.1 (Appendix, para 3.9).’

Lawyers must further ‘avoid doing anything to alter or to influence a witness’s recollection beyond refreshing the witness’s memory from documents they had themselves created or seen at the time (Appendix, para 3.2; para 2.6). Particular caution should be exercised before showing a witness any document they did not create or see at or around the relevant time (Appendix, 3.4).’

The courts appear to recognise a potential problem with multiple drafts of an expert report. The appendix now stipulates that ‘preparation should involve as few drafts as practicable, to avoid corrupting recollection through repeated revisions (Appendix, para 3.8).’

The PD and appendix require that witness statements should be as ‘as concise as possible without omitting anything of significance’ (Appendix, para 3.3). Witnesses are also now required to provide a list of documents that they have had reference to in preparing the statement (PD 57AC, para 3.2). This must be done in such a way that they can be easily located at trial (Appendix, para 3.5).

The appendix permits legal representatives to assist the witness as to structure, layout, and scope. Importantly, they may not propose content for approval, amendment or rejection (Appendix, para 3.13).

This was a big week for bitcoin and the other cryptocurrencies. Elon Musk bought and then complained that the assets were overpriced. And, for the first time, over 1 million individual purchasers traded bitcoin on one of the more popular wallets. Another institutional investing consultant suggested that all corporate portfolios should contain 1% cryptocurrency.

While very few businesses consider bitcoin to be a significant part of their cash management or treasury strategy (and no matter what we individually think about this investment trend), more BVWire—UK readers are likely to find themselves valuing these assets. Accounting rules don’t really exist, though IFRS suggests using the intangible asset rules. There are few market comparables, or business valuation standards or guidelines, to rely on.

Once again, The Footnotes Analyst offers thoughtful guidance for business valuers in their 15 February 2021 edition. How should experts analyse companies that hold bitcoin and other cryptocurrencies? In this regard, the accountants and the business valuation profession are likely in some agreement, since both recognise that a cryptocurrency is not cash and that it can’t be treated on the balance sheet—or in valuation analyses—as just another foreign currency.

Here’s how The Footnotes Analyst succinctly defines the problems for analysts: ‘[C]ryptocurrencies are not regarded as a currency for accounting purposes. This is because they are not considered legal tender, are not issued or backed by a government or state, and are not directly related to setting prices for goods and services.’ Nor are they cash equivalent, which must have ‘insignificant risk of changes in value.’ Bitcoin moved between 33,000 and 59,000 USD since the beginning of 2021.

What’s the conclusion? Since no other asset class works using existing IFRS, the authors conclude that valuers view cryptocurrencies as indefinite life intangible fixed assets—or, in exceptional cases, as inventory. ‘Intangible assets are defined as “identifiable non-monetary assets without physical substance” (IAS 38). This broad definition seems to encompass cryptocurrencies and hence, in the absence of specific rules, this appears to be the most logical classification,’ they conclude.

The IVS are once again under agenda consultation, but, like the current 2020 version, some of the most extensive proposed revisions come within IVS 200, the section dedicated to valuing businesses and business interests. This includes updates to professional governance (which will be reviewed by BVWire—UK in a future issue) and particularly in clarification of the definition of business interests.

Here is the red-lined draft of the proposed additions to IVS 200 Businesses and Business Interests:

20.1. The definition of what constitutes a business, may differ depending on the purpose of a valuation, but generally involves an organisation or integrated collection of assets engaged in commercial, industrial, service or investment activity. Generally, a business would include more than one asset (or a single asset in which the value is dependent on employing additional assets) working together to generate economic activity that differs from the outputs that would be generated by the individual assets on their own. A collection of Plant and Equipment (IVS 300 Reporting) and/or Real Property Interests (IVS 400 Real Property Interests) without the presence of other assets, or intangible components such as a workforce, would typically not be a business.

20.2 Individual intangible assets, or a group of intangible assets might not constitute a business but would nonetheless be within the scope of this standard if such assets generate economic activity that differs from the outputs that would be generated by the individual assets on their own. If the assets do not meet these criteria, a Valuer should defer to IVS 210 (Intangible Assets) and IVS 220 (Non-Financial Liabilities).

20.3 The commercial, industrial, service or investment activity of the business may result in greater economic activity (i.e., value), than those assets would generate separately. The excess value is often referred to as going concern value or goodwill. This excess value may constitute a separate asset under certain bases of value in certain situations. The absence of excess value does not automatically mean that the asset or group of assets does not constitute a business. In addition, economically, substantially all of the value of assets within a business may reside in a single asset.

20.4 Businesses can take many legal forms, such as corporations, partnerships, joint ventures and sole proprietorships. However, businesses could take other forms such as a division, branch, line of business, segment, cash generating unit, and asset group that can consist of parts of one or more legal entities.

20.5 Interests in a business (e.g., securities) can also take many forms. To determine the value of a business interest, a valuer should first determine the value of the underlying business by applying these standards. In such instances, business interests should be within the scope of this standard but depending on the nature of the interest certain other standards may be applicable.

Today, 2 March: COVID-19 and Business Valuation—One Year Later—What Worked and What Didn't With Jim Hitchner, paid webinar, 18:00-20:00 BT

4 March: Valuing Small and Micro Businesses Using the Income Method, 18:00 BT. BVR webinar featuring Gregory R. Caruso

18 March: Cleary Gottlieb Webinar on the UK's New Investment Regime: Changes and Challenges, 18:00-19:00 BT

21 March: EACVA Business Valuation Virtual Conference 2021, online

29 March: IVSC Advisory Forum: Impact of COVID-19 on Valuation, virtual

20 May: ICAEW Virtual Valuation Conference, 8:55-16:00 virtual

14-15 June: ICAEW Advanced Valuation Techniques, virtual classroom taught live by Steve Shaw

21-25 June: NACVA Business Valuation & Financial Litigation Hybrid & Virtual Super Conference

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