BVR Logo 20 September 2022 | Issue 42-2

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).

Clarivate offers rankings, and IVSC updates guidance, on brand value

Clarivate, the data company, has produced its first annual ranking of the most significant new brands in “The Top 100 New Brands of 2022.” The timing of this report is interesting as the Business Valuation Board of the IVSC intend to release new guidance on brand value by the end of this month.

Clarivate reviews nonfinancial data to create their rankings of the impact of the brand, including:

  • Market footprint, which evaluates a measure of how dominant the brand is with each relevant category (and how many different product categories the brand covers);
  • Geographic and economic coverage, which is rated by the number of registries where the trademark appears, weighted for country GDP;
  • Online presence, which is determined by how many top-level and country-level domains have been registered to protect the brand; and
  • History, which assumes that a trademark that has sustained longer is more powerful and more valuable.

What are some trends?

  • China is the leading source of new brands this year, with 23 in the top 100.
  • Many of the top brands leverage very large, very well-established brands, by “carving out” existing businesses. One example, Yunex Traffic, is a new road traffic brand carved out of Siemens Mobility.
  • Brand introductions are most frequently led by global digital marketing investment. A company’s ability to perform in social media is a primary driving factor in brand value.

The digital world, where a brand may run afoul of a Twitter handle, for example, makes brand protection more expensive and brand research more demanding. It also means that financial claims against a poorly researched brand may come from unexpected sources.

Are your valuation clients now worth 44% less than last year?

The October issue of Business Valuation Update has some essential guidance for any business valuation expert in the form of “Valuation Considerations in High Inflationary Environments.” With UK predictions now in the 14%-to-20% range despite Liz Truss’ initial policies, no valuation completed in the next year will be unaffected by inflation.

The analysis, by William Harris, reviews US market returns. Among its findings are:

During high inflationary periods, the average P/E multiple for the S&P 500 index was 12.12, which is 44.45% lower than the multiple of 21.82 during low or normal inflationary periods. Furthermore, the average earnings per share for the index was noticeably lower. During high inflationary periods, the average earnings per share for the index was $58.52. This is 20% lower than the average earnings per share of $73.19 during normal inflationary periods.

Harris alerts financial experts to several factors to consider with respect to the lower multiples during high inflationary periods:

  • Stock prices are a reflection of investor expectations of a company’s future earnings potential;
  • During low or stable inflationary periods, there is a higher likelihood of economic growth as the Federal Reserve will not take measures, such as increasing interest rates, to slow economic activity;
  • Lower interest rates and stable inflation rates promote continued economic activity, and, as a result, investors are willing to pay a higher price for every dollar of a company’s earnings; and
  • In low and stable inflationary environments, companies typically achieve higher rates of real growth attributable to underlying market demand.

“Furthermore, investors’ rate of return expectations are lower as the stable economic conditions reduce the level of risk associated with their investments,” Harris says. The article offers a number of ways business valuers can account for this difference in this extraordinary period of inflation forecasts.

Forward-looking ERPs gain more attention

The author of a number of seminal articles on control premiums, minority interest valuation issues, and cost of capital, Eric Nath (Eric Nath & Associates), responded to BVR in support of Aswath Damodaran’s (New York University Stern School of Business) views concerning the use of forward-looking cost of capital indicators.

Nath says:

My understanding is that probably 35% to 40% of appraisers (never mind academics) agree with Damodaran in whole or in part. Many of us never use historical data at all for ERP, size premiums or much of anything else. See the following article for detailed reasons why: The Big Myth. At this point the Pepperdine Survey is the best source of forward-looking required rates of return in the US. Implied rates of return based on forecasts for some public companies also offer a forward-looking approach, but they don’t really deal with lack of control or marketability/liquidity that impairs value for minority ownership positions in small private companies. It would be great to see the Pepperdine researchers figure out a way to get into the deeper, darker recesses of minority interests in smaller closely-held businesses, but at least for now the Survey’s venture capital and private equity segments get closer than anything else to what we need.

BVR surveys confirm Nath’s belief that over a third of appraisers look to Damodaran for estimating cost of capital. The Pepperdine Survey includes many UK participants but is not widely used currently (the 2022 edition is now available if you click here).

If AI owns an asset, who owns the value?

The High Court is now reviewing a case that examines whether artificial intelligence can establish ownership rights to a patent. Last September, The Court of Appeal of England and Wales supported the UK’s Intellectual Property Office when it dismissed Stephen Thaler’s plea to have his AI system recognized as the inventor of two patents last September. Thaler applied for patents naming his AI system “DABUS” as an inventor in the UK, US, Israel, South Africa, and Australia.

Thaler then took his case to the Court of Appeal, which upheld that decision in a 2-1 judgment.

The case does not include a discussion of financial benefits or intellectual property ownership rights for artificial intelligence, so the business valuation profession can rest easily—at least for the moment.

Cliff Ang offers SSBV members new evidence of the lack of a size effect

Ang, who offered an impassion plea on 7 September to a large group from SSBV, has become the leading proponent of eliminating or minimizing the traditional size premia. His argument focuses on the change in market behavior since the early 1980s.

“In this regard, at best, there might have been a size effect prior to Rolf Banz’ publication in 1981,” says Ang. (Fama and French found a similar effect in 1992.) But the standard textbooks in business valuation all promote the use of a size effect, including the 2022 6th edition of Valuing a Business. But Ang reminds business valuers that even Banz wrote (in the original paper) “there is no theoretical foundation for such an effect,” recognising that size might be a proxy for one more unknown correlated factors.

Ang further reminded the SSBV audience that Sharp (not Banz) won the Nobel Prize for CAPM, which does not include a size effect. “The burden of proof is to show there is a size effect, but now things have been turned around so we’re trying to prove that there isn’t a premium,” he said.

Others now agree, including Fama and French again in 2012 and 2017. Ang even cites Horstmeyer and others in a CFA Institute blog post earlier in 2022 pointing out that large stocks outperformed small stocks since 1980.

EU-based studies, including the Kroll European Size Premia study, show inconsistent premia across the 10 deciles.

Ang’s new Applied Valuation book is due from DeGruyter early next year.

SSBV add their voice to the late Queen’s Book of Condolence

The entry by Andrew Caldwell on behalf of the Society of Share and Business Valuers simply states that SSBV:

[J]oins the people of the United Kingdom of Great Britain and Northern Ireland and the Commonwealth nations in mourning. The Queen was both a remarkable woman and an inspiration to so many people. She dedicated herself to a life of public service for 70 years. Our thoughts and condolences are with His Majesty the King and the Royal Family at this difficult time.

Dates for your diary

21-22 September: RICS Northern Europe Real Property Valuation Conference 2022, online

27 September: ICEAW Annual Business Valuation Conference, virtual, 9:15-17:15

28 September: Kroll Webinar on Cost of Capital in the Current Environment, online, 16:30

28 September: BVR’s Normalizing Owner Compensation + RCReports Case Study, webinar, 18:00-19:40

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, 17:30-19:00 BST

2-3 November: ICAEW Advanced Valuation Techniques, virtual classroom

10 November: Prevailing in an Unpredictable Market: the 15th Annual Houlihan Lokey Alternative Asset Valuation Symposium, New York City

14-16 November: CIMA and AICPA Forensic & Valuation Services Conference, Las Vegas

1 December: ICAEW Practical Business Valuation, four days, virtual classroom

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


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