Damodaran posts his first data update for 2024

At the beginning of each year, Professor Aswath Damodaran (New York University Stern School of Business) generously posts a great amount of data on his website that include risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and other data—all of which are free. He does a series of posts on his blog based on these new data, which contain his thoughts on what the data are best suited for and some caveats for users. His first post explains some of these data and gives the background of his annual analysis and contains links to his data.

Implied ERP of 4.60%: For the ERP, Damodaran favors a forward-looking method known as the “implied” ERP as opposed to the “historical” ERP. He backs this number out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He estimates the implied ERP in the U.S. to be 4.60% as of Jan. 1, 2024 (trailing 12-month cash yield).

Extra: Damodaran’s data on implied ERPs as well historical ERPs are included in the BVR Cost of Capital Professional platform (his data are used with his permission; he has no formal role or connection with BVR).

Hitchner’s ‘myth busters’ tackle two more issues

Jim Hitchner (Financial Valuation Advisors) and his team of fellow AICPA BV Hall of Fame alumni have taken on two more BV myths in his December issue of Hardball With Hitchner. Myth No. 6 on their list is this: “There are supportable methods for determining the optimal capital structure of a business.” He goes through some common methods for doing this, such as taking an average of the capital structures of guideline public companies, and concludes that these methods “are not always valid or supportable.”

Can be done: BVWire points out that, while it is true that there is no way to calculate the capital structure precisely that will maximize firm value, firms routinely determine a target capital structure by looking at a variety of factors (too many to discuss here). Once they determine the approximate proportion of debt and equity that is best given their circumstances, investment decisions are made accordingly, i.e., investments are financed in roughly the same proportion. Using these same factors (Hitchner discusses a few of them), the analyst can provide some level of support for an estimate of an optimal capital structure.

On to Myth No. 7, which is this: “The Hamada formula is the correct method to unlever and relever betas to account for differences in capital structures.” The formula is commonly used when valuing a company using public-company betas, which must be adjusted to the capital structure of the subject company. He cites several sources and texts in busting this myth, but he points out that it “can still be used in many instances.”

The other members of the myth-busting group are: Harold Martin (Keiter), Ron Seigneur (Seigneur Gustafson LLP), Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC), Ed Dupke (Dupke Consulting LLC), and Jim Alerding (Alerding Consulting LLC).

Hardball With Hitchner is a monthly publication. For subscription information, click here.

Kroll conducts survey of cost of capital inputs

In the last issue, we presented results of several surveys on the various resources practitioners use for estimating cost of capital. Another perspective comes from Kroll, which recently had a webinar during which it polled the audience of 706 participants on several topics (15% of the audience consisted of Kroll employees). One question was: “Which methods/data sources do you use as the equity (market) risk premium (ERP) input in your cost of equity estimates?” Here are the results (respondents could select all that applied):

Kroll U.S. Recommended ERP	58.5%
Long-term historical average, published by Kroll	35.7%
Professor Damodaran’s implied ERP	23.7%
Supply-side ERP, published by Kroll	22.0%
Other historical or implied ERP sources (e.g., Market-Risk-Premia.com)	14.7%
Other/not applicable	13.5%
BVR Cost of Capital Professional	9.0%
Professor Pablo Fernandez’s survey of ERPs	4.1%

Poll results on other topics include:

• The percentage of survey participants who conducted valuations primarily based in North America was 78.4%;
• The percentage of survey participants who anticipate a recession will occur in 2024 in their home country was 43.3%;
• Thirty-eight percent of respondents are planning to start considering ESG factors in their valuations; and
• More than half (50.8%) of the respondents incorporate country risk adjustments directly in their discount rate estimates.

For more details, Kroll put together a survey report of the findings, and it is available if you click here. The webinar was conducted by Carla Nunes, managing director of valuation advisory services, and Jim Harrington, director of valuation services, both with Kroll. A replay is available if you click here.

The 2024 Pepperdine private cost of capital survey is now open

It’s that time again! Each year, Pepperdine University conducts an annual survey of expected rates of return with respect to private companies. This year’s survey is now open, and input is sought from anyone involved in the funding of private businesses, including funding providers, recipients, investors, intermediaries, and advisors. The information you provide is confidential. For a direct link to the survey, click here. The results are used to produce the annual Private Capital Markets Report, which is free if you fill out the survey—plus, you’ll get it a week early. Reports from prior years are available if you click here.

Do you use a portal to collect client data?

We’d like to know—and so would your peers. Please take a two-minute survey about this topic, and we’ll present the results here when we get a good response rate. To take the survey, click here. This survey—and others we’re planning—will augment BVR’s Business Valuation Firm Benchmarking Guide, which examines many practice management issues and allows firms to see what works for their peers. Our thanks to all of you who already participated!

DealStats Hall of Fame members for 2023

Business brokers and other intermediaries generously contribute data to DealStats, making it the leading database of private-company and public-company M&A transactions. Individuals who send in the most transactions are inducted into the DealStats Hall of Fame, and the inductees for 2023 are:

• Jim DeShayes, Colorado Business Exchange (Fort Collins, Colo.)
• George Lanza, Plethora Businesses (Orange, Calif.);
• Neil Gerritsen, Alberta Business Sales Inc. (Edmonton, Alberta, Canada);
• Lance Schmidt, National Business Appraisers and Brokers (Mission Viejo, Calif.); and

• Teija Heikkila, National Kennel Sales & Appraisals (Grand Junction, Colo.).

BVR wishes to thank these individuals and all of the others for their outstanding contributions. If you or someone you know would like to join the DealStats Contributor Network, please click here.

Global BV News

The Winter 2023 edition of EVBM is now available

The European Association of Certified Valuators and Analysts (EACVA) and the International Valuation Standards Council (IVSC) have released the latest edition of the European Business Valuation Magazine (EBVM). The publication is free of charge and is intended to be a European platform to discuss practice issues in business valuation. The Winter 2023 issue features these articles:

• “Analytics on the Structuring and Pricing of Preferred Shares” (Dr. Christoph Engel, CFA, CVA);

• “Spanish Valuation Practice in a Nutshell” (Jesús Valero and Fernando Rojas);

• “Industry Betas and Multiples (for Eurozone Companies)” (Martin H. Schmidt and Andreas Tschöpel);

• “Transaction Multiples (Eastern Europe)” (Stefan O. Grbenic);

• News from IVSC;

• News from EACVA; and

• Interview: Christian Luft (chair, IVSC Europe Committee).

You can download the issue and sign up for future issues if you click here.

Save the date: June 20-21 for CBV Connect 2024

CBV Connect 2024, hosted by the CBV Institute, Canada’s valuation professional organization (VPO) and standard-setter, will be held at The Bonaventure in Montreal. This is always an excellent event, and BVWire attended last year—you can see some of our coverage here and here. Details on registration and the agenda will be forthcoming.

What’s in the February 2024 issue of Business Valuation Update

Here’s what you’ll see:

• “AI Concerns, Experiments Highlight NACVA Confab” (BVR Editor). This is a recap of several interesting sessions at the December NACVA Business Valuation & Financial Litigation Super Conference in Fort Lauderdale, Fla. The sessions discussed ethics issues and presented some demonstrations of how to leverage AI in a valuation practice.

• “What Valuers Should Do While SCOTUS Mulls Connelly” (BVR Editor). Regardless of how the U.S. Supreme Court rules in the Connelly case, there are some steps valuers can take to better help their client business owners, many of whom could be sitting on ticking time bombs. The issue before SCOTUS is how does corporate-owned life insurance designed to fund the redemption of a deceased shareholder’s stock impact the fair market value of the subject company and the value of the decedent’s gross estate.

• “Two Ways to Treat the Vanishing Bonus Depreciation Tax Break” (BVR Editor). Michelle Gallagher and Nathan Olberding (both with Adamy Valuation) present a nice example of how to consider the sunsetting of the bonus depreciation rules in a valuation. The rules were enacted by the Tax Cuts and Jobs Act (TCJA).

• “Quality Control Is Now the No. 1 Concern of BV Firms” (BVR Editor). What keeps business valuation firm managers up at night? Mostly, they worry about maintaining control over the quality of the work product, according to the Business Valuation Firm Benchmarking Guide. This article presents the other top concerns.

• “‘Very Useful’ MPF Will Be Reissued in Revamped Form” (BVR Editor). Even if you do not practice in the area of fair value for financial reporting, valuers should take notice of a document that will be going out for public comment from the AICPA. The document is a revised version of the Mandatory Performance Framework, which was issued in connection with the Certified in Entity and Intangible Valuations (CEIV) credential, which was discontinued last year.

• “A Wealth of Rules of Thumb in the 2024 Business Reference Guide” (BVR Editor). At a recent conference, an audience member asked top valuation thought leader Gary Trugman (Trugman Valuation): “Do you use rules of thumb in your valuations?” He replied: “Absolutely! But only as a sanity check.” A good source of rules of thumb is the Business Reference Guide, which has been updated for its 2024 edition.

The issue also includes:

• A full section of “BV News and Trends/Global BV News and Trends”;

• Regular features: “Ask the Experts” and “Tip of the Month”;

• BV data spotlight: “DealStats MVIC/EBITDA Trends,” “FactSet/BVR Control Premium Study,” “Economic Outlook for the Month,” and the “Cost of Capital Center”; and

• BVLaw Case Update: The latest court cases that involve business valuation issues with one case featured in a detailed analysis.