Business valuers are accustomed to risk, volatility, and increased forecast uncertainty. This is the basis of our profession, particularly when the proverbial “sky is falling.”

Still, last week’s commentary from Alistair Darling, the current chair of the IVSC, offers solace. He reminds valuers of “the standards that professionals follow when carrying out a valuation of an asset or liability matter.”

Darling refers to recent debates at the G20 meeting (including discussion of the 2007-08 financial crisis) to demonstrate that, “[i]f valuations are weak, or if the standards that underpin them are inconsistently applied or opaque, then the financial systems and markets that they exist in become much riskier and less stable.” Investment will be reduced, as it has been, and business activity will diminish. It’s easy to measure the effects on the London Stock Exchange, but, of course, the same holds true for the underlying assets of unlisted businesses.

Darling, writing on behalf of the member organisations of the IVSC, reminds all business valuers of the importance of their professional role in stabilising economic markets and crises:

[A] consistent approach to valuation, built on internationally-agreed and universally-adopted standards, makes markets more transparent and valuations more comparable. It supports and makes viable the efforts already underway to harmonise the financial ecosystem with common accounting, banking and investment rules, all of which reference and rely on robust valuations. In short, it reduces risk and brings greater confidence.

The “2Q 2021 Control Premium Study” report is now available from BVR. Despite well-reported deals in the UK, EU, and US with depressed sale prices and control premiums (the sale of Grubhub, at a very low 9.8% premium, is one prime example), the reported UK transactions stayed very close to the historic averages of about 30%.

The studyprovides analysis on equity control premiums, minority discounts on equity, and the invested capital control premium by industry sector, percentage acquired, deal size, whether there was a strategic or financial buyer, method of payment, transaction multiples, and many more.

Below is the global summary of control premium analytics, which include the number of completed deals, as well as the average and median control premiums, from 3Q 2016 through 2Q 2021. A second table summarising average minority discounts on equity is also included.

In the recent case of E v L [2021] EWFC 60, the court has reconsidered how the sharing principle applied to marriages that are short and/or childless.

Family courts in the UK generally follow the three principles of “needs”, “sharing,” and “compensation” when determining the distribution of marital assets. In E v L [2021] EWFC 60, the court reconsiders whether “sharing equally” should be on the same terms if the marriage was short and childless.

Prior to this case, the sharing principle was often sidestepped in favour of the needs of the two parties, but E v L rejected this precedent. The out-spouse demanded half of the marital assets (£5.5 million), while the moneyed spouse offered £600,000. Mr Justice Mostyn overlooked the short length and lack of children, finding that “discriminatory.” He wrote, “In my judgment for the court to start asking why there are no children, and whether this denotes a lesser extent of commitment to the relationship, is to make windows into people’s souls and should be avoided at all costs.”

The case confirms that business valuers need to scrutinise the increase in value of assets, or “marital acquest,” during the term of the marriage or cohabitation. In E v L, Mr Justice Mostyn said the accrual of marital assets works on the same principle no matter the length of the marriage and doesn’t simply disappear. Generally, shorter marriages will have smaller acquests than longer ones, and, here, the court awarded half of the value of the accrued value (£1,515,000) from the commencement of cohabitation to the date of the trial.

Now in its newly released third edition, Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations offers data on 18 categories of intangible assets including goodwill. The current update analyses more purchase price allocations (PPAs) than ever before (now 16,000 total); includes new and expanded charts and tables and a compilation of reported, vetted, and carefully analyzed data; and focuses on useful lives of intangible assets.

The data cover PPAs from 2007 to 2019 and can help corroborate conclusions in a valuation analysis and assist preparers and reviewers of a useful life (amortisation) estimate. Also, fully updated discussions provide current summaries of intangible asset valuation guidance, after all the regulatory oversight since Brexit and COVID-19. Raymond Rath (GlobalView Advisors) served once again as the editorial advisor of this BVR guide.

Most business valuers depend on forecasted cash flows to determine whether the founder or owners of a business are increasing value, and some will sense that managing directors or CEOs who have held the job for a long time tend to have less ambitious growth plans.

If you’re valuing a business with a CEO who has been in that job for 20 years, is that a positive or a negative? A new research paper confirms this assumption, reporting that there is a real bell curve relationship between CEO tenure and firm value. The top of the bell curve is in Year 14, the paper finds.

The authors, Francois Brochet (Boston University), Peter Limbach (University of Bielefeld Centre for Financial Research), Markus Schmid (University of St. Gallen), and Meik Scholz-Daneshgari (Karlsruhe Institute of Technology), further discovered that even the most financially successful CEOs “may be associated with declining firm value” toward the end of their long careers. “CEO Tenure and Firm Value” was first presented in 2015 but was released with current updates last week.

The 8th edition (30 June 2021) of ValueTrust’s “European Capital Market Study” compiles capital market parameters such as cost of capital and implied as well as historical risk premiums for European countries. The study also includes trading multiples and total shareholder returns across a wide range of industries. Here are a few key findings:

• The risk-free rate in Europe increased from -0.14% as of 31 December 2020, to 0.33% currently;

• The implied market return derived from STOXX Europe 600 is now 7.4%, so, taking the risk-free rate of 0.33% into account, the implied market risk premium is 7.1%; and

• The implied sector return (unlevered) of the energy sector increased from 4.0% as of 31 December 2020 to 5.6% as of 30 June 2021, which is the largest increase compared with the other sectors.

ValueTrust’s new “European Capital Market Study” is available here.

The International Valuation Standards Council (IVSC) announced that Marcus Morton, a managing director of valuation services at Duff & Phelps/Kroll’s London offices, has joined its Financial Instruments Board. The board’s mandate is to draft and consult on the International Valuation Standards (IVS) for financial instruments. The three other new board members are: Larry Levine, a managing director at Lincoln International LLC, based in Chicago; Manish Saxena, a partner in valuation advisory services at Grant Thornton, based in Bangalore; and Stephanie Sparvero, the global head of Bloomberg’s Evaluated Pricing Service (BVAL), based in New York City. These individuals began their three-year term last week.

Those concerned about standards for valuing complex financial instruments will also enjoy this thought leadership paper released by ICAS last month, written by Marie Gardner, head of research. Her “Valuation of Financial Instruments From the Perspective of Valuation Specialists” documents why fair value measurements (FVM) often become problematic for business valuation experts, including:

• Specialists often encounter clients who do not understand the complexity of the financial instruments they hold or of the valuation task; and

• Increased regulatory oversight can lead to an excessive emphasis on documentation and development of an audit trail, sometimes to the detriment of a high-quality FVM.

DealStats includes audited financial statements and transaction data for small and medium enterprise deals primarily in North America. It’s EBITDA multiples tend, therefore, to be lower than those reported by CapIQ or others that only track financials for private equity transactions.

Even still, DealStats reported a lower average EBITDA multiple for the second quarter, dropping from 3.9x to 3.8x, according to BVR’s DealStats Value Index (DVI) (see graph below). BVR’s analysts conclude that “there has been relatively little movement over the past three quarters, and no trend or clear direction has yet to emerge regarding the direction of EBITDA multiples in the near future.” This picture of stability in the SME market helps counter all the frothiness reported around the large well-funded deals and IPOs. DealStats will continue to monitor the trends in the EBITDA multiple.

Experts for the estate of pop superstar Michael Jackson presented a fascinating look at how the business valuations were done for the “U.S. tax trial of the century” at last month’s BVR webinar. While the system of review at the IRS varies extensively from the approach at HMRC’s SAVS, the business valuation issues that arose will be strikingly familiar to all BVWire—UK readers.

The case, Estate of Michael J. Jackson v. Commissioner, T.C. Memo 2021-48 (3 May 2021), triggered intense media attention and was closely watched by valuation experts because of the contentious issues involved. In dispute was the value of three assets: Jackson’s name and likeness, his 50% interest in a music publishing company (operating business), and an entity that held a catalogue of music.

The webinar panel consisted of Jay E. Fishman (Financial Research Associates) and celebrity licensing expert Mark Roesler (CMG Worldwide), who worked together on valuing the name and likeness. Also on the panel was music industry financial advisor David Dunn (Shot Tower Capital), who advised on the valuation of the publishing entity and the music catalogue.

Widely divergent opinions: There was a huge difference between the valuations of the estate and the IRS—so great that, if the government prevailed, the estate would have to pay an extra $500 million in taxes. Why such a massive difference? As in most cases, divergent values are the result of different assumptions and inputs (some legitimate and some questionable), and the panel went into great detail about these matters, including the valuation approaches, projections, discount rates, discounts for lack of marketability and control, tax affecting, and more.

In the end, the court sided with the estate on the name and likeness value and the value of the music publishing company. The court sided with the IRS on the value of the music catalogue. On the issue of tax affecting, although the Tax Court had ruled in the Estate of Jones (2019) that tax affecting was appropriate, it ruled that the facts and circumstances in this case did not support tax affecting.

A recording of the webinar, Power Panel: Estate of Michael J. Jackson v. Commissioner, is available if you click here (free to holders of BVR’s Training Passport and subscribers to BVR’s Desktop Learning Center). A case analysis as well as the U.S. court’s opinion are available at BVLaw.

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

6-14 September: Practical Business Valuation, ICAEW live online (four sessions) 09:30-12:30 BST (repeated 1-9 December)

23 September: Fried Frank Webinar on the UK’s New Cross-Class Cramdown Restructuring Provisions, virtual

27 September: COVID-19 and Valuation—The Latest Updates From Europe and the Americas, IVSC live webinar, 2:00 BT

6-7 October: IVAS-IVSC Asia-Pacific Business Valuation Conference 2021, virtual

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

28 October: IVSC Annual General Meeting, 14:00 BT, virtual

3-5 October 2022: 12th Annual International Valuation Conference, Riyadh, Saudi Arabia

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David Foster at ukeditor@bvresources.com.