Prince estate valuation featured on latest AICPA podcast

In the shadow of the recent court decision in the Michael Jackson estate valuation dispute, the estate of pop star Prince is currently locked in a fierce estate and gift tax dispute. The IRS argues the executor has seriously undervalued the estate, and the executors claim the IRS’ calculations “are riddled with errors.” Valuation experts Josh Shilts (Shilts CPA, PLC) and Heather Tullar (Valuation Research Corp.), who are both on the AICPA BV committee, discuss the case in the latest in a series of AICPA podcasts, which is available if you click here. In the 45-minute podcast, they talk about the complexities that arise when working on a multifaceted engagement with a wide spectrum of hard-to-value or highly specialized assets. The speakers point out that Prince was well known for keeping tight control over the release and use of his music and for aggressively enforcing his intellectual property rights. Also, he died without leaving behind a will.

Extra: Shilts is the consulting editor for the recently published BVR Guide to Management Projections and Business Valuation: Analysis and Case Law.

The most popular option model for estimating DLOM

Almost half (48%) of respondents to a recent survey say they use option pricing models to estimate a discount for lack of marketability (DLOM), and the Finnerty model is the one most cited, according to BVR’s DLOM survey. Over half (57%) of those who use option methods use John Finnerty’s option model, with the David Chaffe and Francis Longstaff methods almost tied for second place (27% and 25%, respectively). Ten percent of survey respondents use the models from analyst Stillian Ghaidarov. A few respondents noted that they use Black-Scholes, but studies have shown that actual market behavior is different than what Black-Scholes theory suggests. The survey allowed for multiple choices, which accounts for the total being over 100%. Top valuation experts never rely entirely on one option model.

BVR’s survey on DLOM methodology and practice garnered over 200 responses. The full results are available as a free download if you click here.

Extra: Ghaidarov has a new framework for DLOM and he is looking for feedback on it—see details in the July 2021 issue of Business Valuation Update.

Earnouts trigger higher returns in M&A deals

Valuation experts who advise in M&A should be interested in a new research paper that examines earnouts. The paper finds that earnout-based M&As yield higher returns relative to the acquirer than M&As without earnouts, particularly in small deals and those involving a great deal of intangible assets. “Acquirers realize the highest returns from earnouts when the deferred payment is around 30% of deal value,” the paper says. “The Real Effects of Earnout Contracts in M&As” is by Leonidas G. Barbopoulos and Jo Danbolt, who are both with the University of Edinburgh Business School in Scotland. The paper appears in the Journal of Financial Research.

A sad note …

BVR is deeply saddened to share the news that our executive legal editor, Sylvia Golden, has passed away. She contributed all of the legal-related news to BVWire, and she oversaw the BVLaw platform, building it up to a resource with over 4,000 case digests and court opinions of business valuation and damages cases. She also made valuable contributions to many of BVR’s books and guides. Sylvia was an attorney who received her J.D. from the University of California at Berkeley, School of Law, and was an active member of the State Bar of California. She left the actual practice of law for a career as a legal editor, and we here at BVR had the great privilege of working closely with her for years, but it was all too short a time. She was a joy and a pleasure to work with, and we will miss her greatly. Her incredible dedication to her work continued right up until her final days, and it brought her much happiness. BVR sends its sincere condolences to her family, friends, and colleagues. Sylvia leaves behind a great legacy—her insightful writings will benefit valuation professionals for many years to come.

D&P/Kroll survey of cost of capital inputs

During a recent Duff & Phelps (a Kroll business) webinar, the audience was polled on various valuation and cost of capital topics. One question asked about the sources used for the equity risk premium (ERP) and the majority rely on the D&P recommended U.S. ERP (see below).

Which Methods/Data Sources Do You Use as the Equity (Market) Risk Premium (ERP) Input in Your Cost of Equity Estimates?

                                                                                                                 

Duff & Phelps recommended U.S. ERP                                                57.5%

Long-term historical average                                                                    31.1%

Professor Aswath Damodaran’s implied ERP                                      23.7%

Supply-side ERP published by D&P                                                      22.8%

Other implied ERP sources (e.g., Market-Risk-Premium.com)           10.1%

Other/not applicable                                                                                     3.4%

Professor Pablo Fernandez’s survey of ERPs                                       2.3%

This question was multiple choice, and respondents could choose more than one answer. There was a total of 730 respondents to the survey (17% were D&P/Kroll employees, and 83% were external/third-party participants). The full results of the survey are available if you click here.

Carla Nunes and Jim Harrington of D&P/Kroll conducted the webinar COVID-19 One Year Later—Impact on Cost of Capital and Related Valuation Issues and discussed the impact of COVID-19 on global financial markets and cost of capital assumptions one year after the outbreak. A replay of the webinar is available if you click here.

Global BV News

Updated version of IVS released

The latest edition of the International Valuation Standards (IVS) has been released, and it has an effective date of Jan. 31, 2022. Valuers can use the updated standards before the effective date and will need to make clear which edition of the IVS they are using when preparing a valuation report. Among other revisions, there is a new chapter, “IVS 230 Inventory,” as part of the intangible asset standards. IVSC member and sponsor organizations are provided with digital copies of IVS. Nonmembers/sponsors can access IVS through the IVS Online portal.