Editorial Type:
Article Category: Research Article
 | 
Online Publication Date: 13 Sept 2022

Double Backsolve Remains Unsupported

ASA,
CPA/ABV, and
CVA
Page Range: 48 – 52
DOI: 10.5791/BVR-D-22-00003
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This article initially examines the mechanics of the established option pricing method (OPM) backsolve (OBS). It then quickly moves to a critical analysis of the more recently developed double backsolve (DBS) method, which certain practitioners have proposed as an alternative to OBS. We review the literature cited to support DBS and find it does not, in fact, support its use. In addition, we note some inconsistencies in the current use of DBS. We conclude that until better arguments are proffered or superior methods are developed, practitioners should continue to use OBS, and reviewers should continue to reject valuations relying on DBS.

Copyright: © 2022, American Society of Appraisers
Figure 1
Figure 1

Lognormal Distribution (μ = 0)

Figure 2
Figure 2

Metrick and Yasuda (2011) Implied Distribution of Exit Returns (First-Round Investments)

Figure 3
Figure 3

Walling and Moore (2010) Implied Distribution of Exit Returns (Software Industry 2001–2008)

Figure 4
Figure 4

DBS Implied Distribution Versus Walling and Moore (2010) Implied Distribution of Exit Returns (Software Industry 2001–2008)

Figure 5
Figure 5

Metrick and Yasuda (2011) Implied Distribution of Exit Returns (Third-Round Investments)

Contributor Notes

Eric Sundheim, ASA, is a Principal at Mercovus Valuations. Ben Towne, CPA/ABV, is a Principal at Towne Advisory Services. Jeff Faust, CVA, is the Principal of Valuation Services at Abbott, Stringham & Lynch. Combined, the authors have more than 50 years of valuation and review experience.

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