BVR Logo 5 November 2019 | Issue 8-1

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, 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).

How to succeed as a business valuation expert, from a Queen's Counsel who's seen the best—and the worst

One of the most engaging—and humorous—presentations from the recent ICAEW Valuation Community Annual Conference at Moorgate Place came from Augustus Ullstein QC. Ullstein has a wide ranging practice, including personal injury, clinical negligence, product liability, sports law, construction, insurance, professional negligence, and Common Law. He’s also been involved in a number of high-profile cases, and he’s worked closely with experts in all these areas.

Ullstein shared his practical experience with the attendees. How practical? One policy he suggests for all experts was gleaned from a mentor (perhaps from Winston Churchill, who is generally credited with the quote), who advised him to ‘never pass a bathroom’ if given the opportunity during a day in court.

Other gems from Ullstein on how to succeed, whether it’s your first time or you’ve served the courts as a valuation expert for dozens of years, include:

  1. Do not be a full-time professional expert. ‘You should actively be at the cold front face of your area of expertise. I once had a football case and the expert was asked when he last refereed a match. The answer was “the World Cup in 1962.” If you haven’t had any experience in the last couple of years, you won’t be able to answer sensibly.’

  2. When you embark upon your work, make sure you have all the information you need. ‘Don’t let your solicitors inveigle you into preparing a report when you’ve only seen a small part of the information. That way disaster lies, because you’ll inevitably see something later on that forces you to radically change your position, doing disservice to your clients as well.… Furthermore, if you write and explain why you need documents that you don’t have, you’ll further assist the courts.’

  3. Reports should be succinct and clear. ‘One of the first things a judge reads is the experts’ reports. If the judge gets to his gin and tonic an hour earlier on Sunday night, you’ll do better in court when you testify.’

  4. Make sure the opinion you share with the court is yours, and not the opinion of your assistant.

  5. Be happy with your testimony. ‘Your report is something with which you need to be 120% happy … but if you’re skating on thin ice, it’s like being on the dentist chair with a sore tooth, waiting for the pain to start.’

  6. Have someone else in your office peer review your report.

  7. Errors of fact can be overcome, but making a mistake of integrity will spread like wildfire. ‘You may not work in the field again.’

  8. If there are experts meetings, the lawyers should not be there. ‘Similarly you should not accept instructions or agendas from solicitors for these meetings.’

  9. The more experience you can get in witness box training, the better. Over 50% of the business valuers at the ICAEW event indicated they’ve testified as an expert recently.

  10. The most important person in the court is the judge or the arbitrator. Ullstein suggests rotating your chair carefully when you sit down so that you return naturally to face the judge as you give your testimony. ‘More cases settle because of really good expert reports than almost anything else,’ he said, and the judges know this. Most are looking to you for the knowledge about business and value they need to make the right decision within the law.

  11. Do listen to the question, and only answer the question, ‘as succinctly as you can.’

  12. If you’re asked to comment on a document, turn to it, read it, and then answer the question. ‘Testifying isn’t a test where you’re not allowed to look at the material. If you believe you know what’s in the document, you’re almost certain to misremember.’

  13. Don’t argue with counsel. ‘It’s not for you to comment on the relevance. Nor feel that you have to deny every proposition from the other side. It helps your position to concede where a concession is necessary.’


Shares and Assets Valuation Fiscal Forum requests agenda topics for February meeting

The next SAV Fiscal Forum will be held on Tuesday, 25 February 2020, commencing at 1 p.m. This event, generally held in the autumn (since 2001), provides an opportunity for fiscal agents and the valuation community to share concerns and issues. Many changes in policy have resulted from past forums, as reflected in the past minutes available here.

The 2020 venue is the Royal Institution of Chartered Surveyors on Parliament Square. Valuers (or their firms) wishing to attend may notify Helen Malone by 14 January 2020. Additionally, if you would like to propose an agenda item or topic of conversation, this should also be submitted by this deadline. The final agenda will be circulated during the week commencing 10 February 2020.

SPGMI/CapIQ expands natural language processing product to quantify market sentiment

S&P Global announced an expansion of Xpressfeed last week so that its London-based market intelligence division could launch Textual Data Analytics (TDA). TDA, SPGI’s press literature reports, allows listed company investors to ‘incorporate more qualitative measures of company performance into their investment strategy by quantifying sentiment and behaviour during company calls.’

Active portfolio managers assess market value better than index funds about half the time, and BVWire—UK questions whether natural language processing of the ‘sentiment’ of company performance call will improve active manager performance. For the business valuation profession, this analysis could be another data point supporting the analyst’s judgment.

Many of the large business valuation firms in the UK rely on CapIQ, so they may have access to TDA as part of annual subscriptions for their analysts. ‘Our textual data analytics package of 40 behavioural and sentiment scores will further enrich our existing transcripts coverage, while offering clients a new alternative data set via our Xpressfeed delivery channel,’ says Warren Breakstone, managing director and chief product officer of data management solutions at S&P Global Market Intelligence (SPGMI).

TDA says that companies that exhibited good sentiment in their earnings and M&A calls outperformed the equities markets by over 2% a year between 2010 and 2017 (every model, when backtested, produces superior results—how else do you create an AI algorithm?).

This doesn’t mean analysts and valuers should change their guideline comparables formulas to reflect the ability of certain executives to project positive energy on earnings calls. This assessment is what valuers do every day, generally with private companies that do not hold such meetings. The key is understanding the business principles and economics, not the natural language elements, when using the income or market approaches to business valuation.

Next ICAEW advanced valuation techniques seminar 12 November

The next session of the advanced BV workshop provides ‘a detailed and insightful understanding of the interaction between cash flows, risk and financing.’ The course also explores specialised valuation topics such as the valuation of early-stage firms and distressed firms. ICAEW plans to offer the seminar again several times in 2020.

Learning outcomes:

  • Model equivalence and an overview of less commonly used models (e.g., EVA, APV and real options);
  • An enhanced cost of capital process—matching risk-free rate, market risk premium, beta, alpha, and country risk assumptions;
  • Valuing early-stage and distressed firms;
  • Addressing complex cash-flow issues relating to taxes, terminal value models, growth, deferrals, capex, and depreciation;
  • Computation of discounts for lack of marketability and control premiums; and
  • Impact of firm life cycle on leverage, financing choices, and value.

Any of the following topics can also be addressed during the workshop at the choice of the participants, and an overview of relevant valuation approaches provided:

  • M&A valuation issues;
  • Private equity valuation model;
  • Valuing options and convertibles;
  • Share-based payments (IFRS 2);
  • Real options analysis;
  • Monte Carlo; and
  • Specialised industries (e.g., extractive industries, valuing financial institutions, renewables)

Registration is available at the link above.

Do business valuers need to reduce their profit forecasts due to an IFRS 16 'headwind'?

IFRS 16, now in effect, has been called many things, and an excellent new analysis by The Footnotes Analyst supports a new conclusion: Lease-heavy companies may increasingly see their profits suffer as they comply, particularly if lease liabilities are inflation-linked. Business valuers may need to consider this new factor if they’re doing a DCF analysis for enterprises with significant long-term leases.

‘Capitalised lease liabilities of an inflation-linked lease do not include expected inflation,’ the author states. ‘This [may] result in a lower liability and lower initial expense compared with an equivalent lease with no inflation link.’

In Beware the IFRS 16 Inflation Headwind, the 28 October post examines Tesco—an obvious case study as a large listed enterprise with extensive long-term (averaging 30 years, in some cases) right-of-use liabilities—in an industry with compressed margins. The conclusion should catch the attention of any analyst looking at investment opportunities or enterprise values:

We estimate that Tesco’s inflation-linked leases result in a pre-tax profit headwind of about 2.2 percentage points of growth. If inflation were included in the measurement of the lease liability instead, we estimate it would increase from the reported £10.3bn to approximately £15.2bn.

Under both IFRS 16 and US GAAP, lease liabilities and right-of-use assets are now remeasured each period. For Tesco and many other businesses with leases that are adjusted for changes in the inflation index, ‘remeasuring the liability increases the carrying value of the right of use asset, producing a rising depreciation expense and an operating profit headwind.’

BVWire—UK highly recommends this 28 October analysis. While the effect on future profits as reported under IFRS and GAAP may not always be as dramatic as depicted here, the authors also point out ‘it is unusual to exclude inflation from liability measurement in financial reporting. Other liabilities, such as pension obligations or environmental liabilities, must include the effects of inflation, either explicitly in the forecast cash flows, or by applying a real discount rate to the cashflows excluding inflation.’ So the business valuation impact of IFRS 16 has few comparable models for analysts to follow.

UK buyers deepen 'local' footprint with UK target companies

BVWire—UK had the pleasure of catching up with well-known experts Konstantine Mossios and Sandra Mossios of Business Valuation Benchmarks (BVB) at the ICAEW conference in London on 23 October. ICAEW members have complimentary access to the 2019 BVB Insights ‘transaction bible,’ which offers normalised EBITDA multiples for over 40 industries in the UK, here. Nonmembers can visit the BVB site directly to learn more about the most comprehensive source for private-company deal multiples, industry summaries, and buyer motivation.

There was lively discussion at the BVB exhibit booth during the event, ranging from topics such as judges gaining more valuation experience and the educative role of valuation experts to the uncertain climate giving rise to more UK buyers targeting other UK companies to increased opportunities within the local valuation community to network and share best practices.

Private debt is now available for smaller UK companies 'overlooked' by clearing banks,
BDO says

Steve Carr, corporate finance director for debt advisory of BDO London, commented in a client communication last month that BDO has ‘witnessed lots of instances where debt funds have provided solutions that clearing banks have been unable to match (albeit this comes at a price).’ Carr points to the funds’ business model, which only rewards the raising and deployment of capital. The result is sometimes ‘more innovative structures.’

This trend must be considered when analysing liquidity and WACC issues for middle-market enterprises. For instance, as Carr comments, ‘post-credit crunch, the majority of debt funds targeted businesses with EBITDAs in excess of £8m. As this space has become more congested, we have seen more lenders actively targeting companies in the lower mid-market with earnings of between £3m and £5m EBITDA.’

Select smaller companies have been able to negotiate terms that keep their cost of debt in line with larger competitors. Carr notes specific opportunities for smaller companies to push:

  • Permitted releveraging, where a borrower agrees with the lender that he or she can take on more debt as the business grows; and
  • Much looser covenant controls.

He also comments that debt funds tend to act rationally and predictably, even in difficult situations such as stressed refinancing and amendment processes. This ‘enables a smoother and typically quicker negotiation between stakeholders.’

Debt deal teams are also staying in their jobs longer, reducing a common problem for owners and management who suddenly need to reeducate their lenders—a frustrating experience that adds significant risk to smaller-company performance and survival.

Not every business is seeing increased liquidity from debt sources, but business valuers should note Carr’s summary when assessing this risk area. If you accept this argument, it’s logical to conclude that the discrepancy between large- and small-company multiples could be decreasing, even in this destabilised period.

Dates for your business valuation diary

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

ICAEW Forensic and Expert Witness Conference,
7 November, London

ICAEW Advanced Business Valuation Techniques,
12 November, London; 17 February 2020, London;
11 June 2020, London; 16 September 2020, London

UK200 Group Annual Conference, 13-15 November, Liverpool

ICAEW Practical Business Valuation, 11 and 25 November, London; 16-17 March 2020, London; 14 and 26 May 2020, London; 9 and 29 July 2020, London; 9 and 19 November 2020, London

HMRC Shares and Assets Valuation Fiscal Forum,
25 February 2020, London

ICAEW Business Acquisition & Due Diligence,
22 April 2020, London

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

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Please contact David Foster (Executive Editor) at: or +011-917-741-3853

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