Business Valuation Review Volume 33: Issue 4

Hello Everyone,

Happy New Year!

This Winter Issue has an interesting group of articles: Andre Loeffler's article, “Why Total Beta Produces Arbitrary Valuations: A Violation of the ‘No Arbitrage’ Principle,” should stir some in our community. Michael Emaleh's article, “A Compensation-Based Method of Valuing Small, Closely Held Businesses” should be of interest to those valuing small businesses. Gil Matthews' article, “Capital Expenditures, Depreciation and Amortization in the Gordon Growth Model,” is near and dear to my heart, having written a couple articles published in the Business Valuation Review over the years. Dwight Grant's article, “Thoughts on Calculating DLOMs,”

In this article, we describe another method for calculating different discounts for lack of marketability (DLOMs) for each security in the capital structure based on its unique volatility. The primary merit of this method is that it requires a minimal change in appraiser practice. We also provide support for the use of incremental DLOMs when valuing securities based on a transaction in a non-marketable security.

This article discusses two common errors when calculating terminal value using the Gordon growth model—overstating depreciation in relation to capital expenditures and overlooking amortization's time limits. For a growing company, normalized capital expenditures must be materially higher than depreciation. Amortization of intangible assets is worth the present value of the future tax benefits and should be excluded from the base on which terminal value is calculated. Instead, the present value of the benefits should be added to enterprise value. Similar adjustments should be made for tax-loss carryforwards, limited-life royalties, and other limited-life income and expenses.

Often, individuals invest in small, closely held businesses to provide themselves with a higher-paying job than they could receive if they remained an employee. None of the currently accepted valuation methods, income, market, or asset, takes this fundamental motivation for higher compensation into consideration. The purpose of this paper is to describe those conditions in which owner compensation can create intangible value in a small, closely held business and suggest a practical valuation method when those conditions are present.

Report from the 2014 IVSC Meetings

October 20–29, 2014, was “Valuation Lollapalooza” at the Westin Harbour Castle in Toronto. First, the International Valuation Standards Council (IVSC) held several meetings, and then the American Society of Appraisers (ASA) and Canadian Institute of Chartered Business Valuators (CICBV) presented the 2014 Joint Business Valuation Conference. Not so coincidentally, a major topic of discussion during both was the globalization and convergence of valuation standards, practices, and credentials.

Following are some highlights of the IVSC meetings:

ASA Signs Memorandum of Understanding with the IVSC

The ASA and eighteen other international valuation professional organizations (VPOs) signed

Editor's Column

Letter to the Editor: Key Takeaways from and Updates to the Three Papers

Key Takeaways from Part I

Thoughts on Calculating DLOMs

Capital Expenditures, Depreciation, and Amortization in the Gordon Growth Model

A Compensation-Based Method of Valuing Small, Closely Held Businesses

Why Total Beta Produces Arbitrary Valuations: A Violation of the “No-Arbitrage” Principle

Book Review

Overview

From the Chair

Report from the 2014 IVSC Meetings

ASA Signs Memorandum of Understanding with the IVSC

Course Schedule

Volume 33, No. 4 — Complete Issue

From the Editor

Customer Concentration: Good, Bad, or Ugly?

From the Chair

Delaware Valuation Decisions, 2021 to 2024

Volume 44, No. 1 — Complete Issue