Hello
Welcome to the latest issue of Valuation and Litigation Insights!
We keep you informed on key ideas and trends in business valuation -- so you and your clients are equipped to make decisions that get better results.
I am passionate about the environment. Thankfully, a very hot topic in the global financial world is ESG (Environment, Social, and Governance) due diligence. Investors are increasingly making sustainability and ESG considerations a priority in the dealmaking process.
There are of course challenges - in identifying and measuring ESG factors that matter to value, in the ESG scoring process, and in demonstrating that companies with high ESG ratings actually perform better than their peers.
But information is improving, and progress is being made on all fronts. With any luck, the result will simply be a better world.
On to this issue!
Valuation and Litigation Insights
News and Trends
Global ESG Due Diligence Study 2024
Do "good" companies make better investments?
According to a recent KPMG survey, ESG (Environmental, Social, and Governance) due diligence is increasingly important for investors.
But there are challenges. These include: a) scoping - that is, figuring out what ESG factors are most important and relevant, and b) receiving quality data from target companies - that is, meaningful ESG metrics.
This KPMG survey indicates that improvements are being made. Investors have figured out to focus on the ESG factors that drive value - that is, they are looking at value, not values. And businesses and professionals are getting better at quantifying ESG due diligence metrics and integrating this process alongside traditional financial and operational analyses.
The KPMG survey identified two primary motivations for conducting ESG due diligence:
- The (proactive) value of identifying ESG risks and opportunities early (58% of respondence agreed); and
- The (reactive) ability to better respond to regulatory requirements (44% of respondents agreed).
Other key findings:
- 4 out of 5 dealmakers worldwide stated ESG considerations were on their M&A list.
- 45% of surveyed investors found a major deal issue resulting from a material ESG due diligence finding, with more than half of these experiencing a ‘deal stopper.'
- 55% of survey respondents were willing to pay a premium of up to 10% for assets with high "ESG maturity."
Still, the "market" for ESG due diligence analysis is still developing. Challenges include disparate and not-always-comparable ESG metrics, and still-shaky causation between good ESG factors and superior investment performance.
But the data seems to be improving. ESG does not seem to be going anywhere. And don't we all want to invest in a better world?
kpmg.com
Things to Know
Reducing Bias in Business Valuation Engagements
Business valuation specialists are supposed to be an unbiased lot.
But bias is everywhere. Humans are wired for bias. Biases have been described as "unconscious and automatic processes designed to make decision-making quicker and more efficient." For the valuation specialist, it's in the (past and projected) financial information provided. It's in the narratives and qualitative points of view provided to the valuator. And of course, it can creep into the valuation specialist's actual analysis -- information gathering, method selection, projections, discounting, valuation multiples, valuation reconciliation, discount selection, and so on.
Rather than ignore it or hope it does not exist, an appraiser would be better served to be mindful of the potential for bias and to take steps to minimize its impact on the valuation process and its resultant conclusion.
This article provides an overview of the types of cognitive bias and how they can affect business valuations, and also examines best practices that can help reduce bias while enhancing the credibility of opinions under scrutiny.
Where do you most often encounter bias in appraisals? How have you dealt with it?
quickreadbuzz.com
Discount Rates for Lost Profits
Lost profits are often projected into the future. Which means they must be discounted to present value for the purpose of damage assessment.
If you think discount rates used to value businesses can vary, then hold onto your hat. According to an informal survey conducted by the author of the article below, courts have accepted lost profits discount rates ranging from 1.24% to 36%. That's quite a spread.
This variance might suggest a level of precision similar to throwing darts in a pub after several lagers. But as noted in the article below, the selection of discount rate is heavily influenced by the level of uncertainty embedded in the calculations. Generally, if the lost profits (numerator) have already been adjusted for risks related to achieving the expected results, then a lower discount rate is usually warranted. The opposite is true if the projected lost profits contain a significant aspirational or uncertain element.
What is the highest (or lowest) discount rate you have seen applied in a lost profits calculation?
quickreadbuzz.com
The 5 Traits of a "Dangerous" Expert Witness
I'm not thrilled with the word "dangerous" when describing an expert witness.
To me, "dangerous" implies a loose cannon, or an unpredictable personality.
I suppose all valuation specialists would like to be thought of as striking fear in the hearts of opposing counsel. Yet I also think most of us would be happy to be perceived as credible and as providing reliable opinions and information that help the trier(s) of fact reach a valid conclusion.
Semantics aside, this article summarizes some attributes of great expert witnesses:
- prevention (of some avoidable pitfalls before they can arise)
- preparation (knowing the relevant facts and issues)
- persuasiveness (conciseness and speaking during direct testimony in terms that can be understood by regular people)
- performance during cross-examination (recognizing and correcting when statements are for example taken out of context)
- ability to turn the tables on opposing counsel (finding and capitalizing on an opening to reinforce direct testimony opinions)
What is your experience with valuation experts? What qualities have you seen that have contributed to success or failure?
seak.com
Tools and Tips
Before Selling A Middle Market Business: Five Lessons for Owners
If your client is looking to sell their middle market business, they are not alone.
There are an estimated 200,000 middle market businesses in the U.S, comprising about a third of private sector GDP and close to 50 million jobs.
And of these businesses, more than three quarters have experienced an ownership transition in the past five years or expect one in the next five years.
Unsurprisingly, sellers usually benefit from having a team of professional advisors early in the process. Unfortunately, this preparation does not always occur. This can leave a business owner unprepared for the many complex operational, financial, and emotional decisions that need to be made during the deal.
The article below shares, from the perspective of a legal advisor to many middle market M&A deals, five key points owners need to know to ensure a successful transaction that aligns with their goals. These are:
1. Know Your Objectives. Owners should be clear on this beforehand. Do they want to stay involved in the business? Do they want maximize sale value? Or maintain a legacy?
2. Assemble the Right Team. It makes a huge difference to both process and outcome if a great team is assembled that is both competent and compatible on a personal basis.
3. Put the Business on a Sound Footing. Prior to sale, it would make a lot of sense to clean up those financials, put handshake agreements into writing, clean up ownership of assets, and so on, so an acquirer will feel more comfortable with the investment.
4. Evaluate Strategic vs. Financial Buyers. The strategic versus financial buyer decision will depend on the types of interested buyers, how involved the sellers want to be with the business post-sale, and a host of other factors.
5. Consider Both Values and Value. For most middle-market business owners, their company is much more than a way to make money. It reflects the owner's values, a culture cultivated over years, and a special way of treating stakeholders such as employees, customers, the suppliers, and others. For many, a transaction will be as much about culture as negotiating a favorable deal price.
What has made the biggest difference in the deals that you have seen?
farrellfritz.com
In Closing
That's it for now. If you found this issue of Valuation and Litigation Insights useful, please forward it to a friend or colleague.
And if you have a valuation or damages-related issue you would like to discuss, let me know! Our team at at Grobstein Teeple, LLP are here to help.
You can reach me one of the ways below.
Talk to you soon!
Will
William W. Thomsen
Director of Valuation and Litigation Services
Grobstein Teeple, LLP
www.gtllp.com
Call me at 818-502-4950
Valuation and Litigation Insights