BVU News and Trends January 2020
A monthly roundup of key developments of interest to business valuation experts.
Spend more time on the numerator, expert panel advises
Attendees at a recent online workshop were urged to spend more time on the numerator (forecasts) of the valuation equation rather than the denominator (cost of capital).
A simple look at betas—and other inputs to the income approach
When estimating a company’s cost of equity, we all know investors adjust for varying levels of risk.
Fairness Opinions and Projections
Join the expert panel of Craig Jacobson, Richard Peil of GlassRatner, and Jeff Rothschild for this advanced instruction on fairness opinions in 2019. Learn both legal and financial aspects of fairness opinions, with a special focus on the role of projections used in the underlying valuation analysis, with special insight on the interaction between management and the opinion provider. The legal environment for fairness opinions, including descriptions of best practices, will also be considered.
BV and litigation seminar in New Haven, Conn., September 26
There’s a unique opportunity to hear from a veteran valuation expert with many years of experience in court, and BVWire will be there! Appraiser Jim Alerding (Alerding Consulting LLC), who has testified in over 400 cases, will present a full-day seminar, Business Valuation and Litigation.
The Use of Financial Projections in Solvency Opinions
Financial projections are often a key input to the financial models used to assess solvency, but projections prepared by management or its professional advisors are sometimes overly optimistic. Here’s how to identify whether projections are reasonable and to assess the level of risk.
Takeaways From the AICPA FVS Conference
We attended many of the sessions at the AICPA’s 2017 Forensic and Valuation Services conference in Las Vegas along with over 1,000 attendees and found no shortage of tips, ideas, and advice.
City of Hialeah Emples. Ret. Sys. v. FEI Co.
Court rejects dissenting shareholder’s proxy challenge, finding board member statements about management projections are protected under applicable act’s safe harbor provision; also, court says financial advisor’s fairness opinion did not double count for risk in underlying DCF analysis.
Financial Advisor’s Fairness Opinion Not Materially Misleading
Court rejects dissenting shareholder’s proxy challenge, finding board member statements about management projections are protected under applicable act’s safe harbor provision; also, court says financial advisor’s fairness opinion did not double count for risk in underlying DCF analysis.
Management forecasts receive close scrutiny from courts
In assessing the soundness of valuations, courts in a variety of cases have been paying close attention to the management projections appraisers have used or decided not to use in performing their value analyses. If courts are scrutinizing projections for reliability and plausibility, experts hoping to prevail in the litigation context must do so as well.
‘Fanciful’ projections make DCF unreliable valuation tool in Delaware appraisal case
Management projections are the sine qua non of a discounted cash flow analysis, and, in a recent statutory appraisal action involving the pet product giant PetSmart, the Delaware Court of Chancery found they did not cut the mustard. The court called the projections, “at best, fanciful,” and concluded the most accurate measure of fair value was the merger consideration.
AMERICAN SOCIETY OF APPRAISERS: Business Valuation Committee Special Topics Paper #3: The Use of Management's Prospective Financial Information by a Valuation Analyst
According to AICPA Professional Standards: AT Section 301 Financial Forecasts and Projections, “financial forecast is the prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows. A financial forecast is based on the responsible party's assumptions reflecting the conditions it expects to exist and the course of action it expects to take.” In order for a valuation analyst to ...
Dunmire v. Farmers & Merchants Bancorp of W. Pa.
Flawed sales process makes merger price an unreliable indicator of fair value for statutory appraisal, Chancery finds; in accord with party experts, court uses discounted net income approach and adopts most of respondent expert’s inputs for its valuation.
Chancery Bases Fair Value Calculation on Income-Based Model
Flawed sales process makes merger price an unreliable indicator of fair value for statutory appraisal, Chancery finds; in accord with party experts, court uses discounted net income approach and adopts most of respondent expert’s inputs for its valuation.
Defense expert testimony supports ESOP valuation and fairness opinions
A recent ESOP decision involving allegations of breach of fiduciary duty and engaging in a prohibited transaction turned on whether the ESOP trustee’s financial advisor had performed proper due diligence and issued defensible fairness and valuation analyses.
Chancery achieves fair value with three imperfect valuation techniques
The whole is greater than the sum of its parts. Perhaps Chancellor Bouchard thought of Aristotle when he recently ruled in a statutory appraisal action that, even though the results of three common valuation techniques were unreliable indicators of value, in combination they established fair value.
Management Projections, Always Suspicious, Now Receive Even More Review
Management projections have always required scrutiny. However, now it seems they often require outright skepticism. And if they don’t receive this level of examination from the business appraiser, then they’ll get it from the auditors, the reviewers, the ...