< PreviousA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 20 MAY | JUNE 2019 t h e v a l u e e x a m i n e r ACADEMIC INSIGHTS Academic Review Guest Editor: Matthew D. Crane, DBA, ASA, CPA /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// The purpose of this column is to provide the readers of The Value Examiner summaries of contempo- rary research in business valuation and forensic accounting. The manuscripts covered are selected from numerous academic research outlets that include relevant topical coverage of valuation and related forensic ac- counting issues. The objective is to illustrate the core of this novel research while increasing awareness among the commu- nity of the subject matter. For this issue, The Value Examiner welcomes guest editor, Matthew D. Crane, DBA, ASA, CPA. As this column evolves, The Value Examiner encourages the readership to forward relevant manuscripts or working papers for consideration to Peter Lohrey, PhD, CVA, CDBV, this column's regular editor. Please send links and/or files to Academic Research Briefs in the subject line. INTRODUCTION/OVERVIEW Guidance on valuation for financial reporting continues to evolve, particularly in the area of business combinations and the valuation of intangibles. Authoritative guidance in the U.S. issued by the Financial Accounting Standards Board (FASB), the Security and Exchange Commission (SEC), and the Public Accounting Oversight Board (PCAOB) often does not directly address much of the methodologies and procedures to be used by valuation specialists for performing purchase price allocation or impairment testing engagements. Consequently, several groups have actively pursued issuing non-authoritative guidance, which auditors then interpret as “best practices.” In addition to guidance issued by the American Institute of Certified Public Accountants and other valuation provider organizations, working groups facilitated by the Appraisal Foundation issue valuation advisories on financial reporting. Currently, this free non-authoritative guidance includes four documents focused on financial reporting valuation issues: 1. Identification of Contributory Assets and Calculation of Economic Rents 2. The Valuation of Customer-Related Assets 3. The Measurement and Application of Market Participant Premiums 4. Valuation of Contingent Consideration Although this guidance is non-authoritative, to better serve clients on audit related issues, valuation specialists are advised to be aware of this guidance and how the financial theory developed. Below is the link to this free guidance: Guidance/TAF/Valuation_Advisories.aspx?hkey=d74f24ae- 8dcb-412e-947f-6df153626ae2 The following are summaries of these documents and discussion of the methodologies and key findings within the guidance. THE IDENTIFICATION OF BEST PRACTICES CONTRIBUTORY ASSETS AND ECONOMIC RENTS Authors: Working Group on Contributory Assets Charges: May 2010. Source: Appraisal Foundation. Washington, D.C. Summary This paper introduces the concept of estimating economic rents for each class of asset in the business enterprise, including working capital, tangible and intangible assets. The methodology proposed, introduced in this paper, is an Income Approach known as the multi-period excess earnings method (MPEEM). MPEEM considers the present-value of net cash flows after the deduction of economic rents as if the individual classes of assets are leased and the residual amount of cash—after considering any tax benefits—is the value of the primary income generating asset. The guidance is a monogram that discusses and explains examples of how the value of assets are allocated in a purchase allocation process. The sample assets include: A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 21 working capital, fixed assets, assembled workforce, customer relationship, trade name and intellectual property, and details how each value is developed and how contributory charges as economic rents are deducted from the cash flows of the primary income generating asset. In general, the guidance suggests that the MPEEM approach be used for the primary income generating asset, whether it be customers, technology, or other. After developing values, a test of reasonableness on the weighted average return on assets (WARA) is performed by comparison to other rates of returns such as the internal rate of return (IRR) and the weighted average cost of capital (WACC). Methodologies and Key Findings Although applicable for financial reporting, the MPEEM methodology has its roots in tax guidance issued by the Treasury Department. Accounting Research Memorandum “ARM 34” was issued by the Treasury to determine the amount of intangible value that brewers and distillers of alcohol products lost from prohibition. Later, the Treasury issued Revenue 68-609, to address more specifics of the “formula method” and to state the method should only be used “if there is no better basis available for making the determination.” Due to the scarcity of market data on intangibles, this Treasury method continues to be relevant, and the MPEEM guidance is an adaptation of the Treasury’s earlier work. This guidance does not contain any analysis of data to determine the significance of the variables used as inputs. There is limited data on return rates for intangible assets. So, reliance for the methodology is placed upon the reconciliation of WARA as a return for total assets to the return rate for the overall business enterprise, which is WACC. IRR is also compared to both return rates to determine whether the implied return rate for the deal is evidence of a market participant return rate. The goal or key finding is to ensure that these rates are within a reasonable range to support the overall value conclusions. Conclusion The guidance provides a useful how-to guide with examples that practitioners can use as a template for their work involving purchase price allocations, and is a good resource for comparing any existing models practitioners may be using, particularly when considering the use of the MPEEM method. It is particularly helpful in understanding the specifics of deducting the contributory assets charges. THE VALUATION OF CUSTOMER- RELATED ASSETS Authors: Working Group on Customer-Related Assets: June 2016. Source: Appraisal Foundation. Washington, D.C. Summary The second of the Appraisal Foundation guidance focuses on the specifics of customer-related assets, and details the different types of assets and further methodologies that can be applied to value customer assets in purchase price engagements, as well as impairment testing. In addition to the MPEEM methodology discussed in the first document, the Identification of Best Practices Contributory Assets and Economic Rents, this second document expands the discussion of customer-related assets to include different categories, including: customer lists, order backlog, and contractual versus non-contractual relationships. The guidance suggests that valuation of customer intangibles should also consider several factors, including: industry, business, product/service characteristics, and customer characteristics. Based upon these characteristics, specific methodologies can be selected, which include the MPEEM, distributor, with and without, and cost savings methods. Examples of each of the methods is provided within the document. Methodologies and Key Findings As indicated in the document, the three basic approaches are the Income, Market, and Cost Methods. As intangibles are unique and market transactions are relatively uncommon, the guidance focuses on the Income and Cost Methods that remain. The MPEEM, distributor, and with and without methods are variations of the discounted cash flow method (DCF). There are minor differences between the MPEEM and distributor methods. The difference being that the distributor method relies upon “market-based distributor data or other appropriate market inputs,” while the MPEEM uses prospective financial information (PFI) for the entire entity as the starting point. The with and without method A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 22 MAY | JUNE 2019 t h e v a l u e e x a m i n e r is also a variant of the DCF method that uses the difference in value between two DCF scenarios; one where additional cost is incurred to acquire and maintain customers, and a second where costs are not incurred. The difference in the two scenarios is the value of the customer intangible. The Cost Method uses replacement costs to determine the present value of costs avoided. The Cost Approach can use current estimates of direct and indirect costs and developer’s profit to arrive at value. Although the Cost Approach is considered a distinct approach, it also can use market and income data, which makes it somewhat a hybrid. The origins of the DCF and the Cost Method is traced back to Irving Fisher and other economists who developed present value mathematics in the 1930s. The key item in this document is the discussion on customer attrition and the manner in which the lifespan of the customers developed, either through observation of actual attrition from a sample, development of an attrition rate, or potentially a survivor curve based upon Weibull distribution, a statistical method originally developed to determine the useful life of structural tangible assets. Examples of each of the methods is detailed within the document. Conclusion The guidance provides a useful how-to guide with examples that practitioners can use as a template for their work involving purchase price allocations and impairment testing, and is a good resource for considering the useful lives of customer relationships. THE MARKET PARTICIPANT ACQUISITION PREMIUM Authors: Working Group on The Measurement and Application of Market Participant Acquisition Premiums: September 2017. Source: Appraisal Foundation. Washington, D.C. Summary Impairment testing of goodwill can be an area of controversy in audits. Valuations for a controlling versus minority interests remains an area of controversy. This third document issued by the Appraisal Foundation focuses on the methodology to be used as well as the factors to be considered when performing an analysis of what is formerly referred to as a control premium, renamed to the market participant acquisition premium (MPAP). Control premiums add value to the subject company, reducing the risk of impairment. Given this is a subjective exercise, it must be scrutinized by auditors. Methodologies and Key Findings In practice, control premiums were based upon event studies and Mergerstat-published data. The premium generally considered trading prices of publicly traded entities prior and post announcement date. The percentage change from pre-announcement to closing is then used to determine a percentage increase or premium, which infers a premium for control. This third document addresses the use of the Mergerstat data directly and concludes that the use of Mergerstat data is not valid, and proposes that a more reliable method is to identify the benefits of control based upon the following factors: •Enhanced cash flows due to superior revenue growth, increased operating margins, working capital or capital expenditures efficiencies •Reduced discount rate due to optimized capital structure, company size, or reduced operating risk The methodology the guidance then proposes is the with and without method, a variant of the DCF method that considers two scenarios: one with the economic benefits present and one without. An interesting key finding is that this test is performed not at the equity value, but at the invested capital value, which considers both debt and equity. The finding is a marked change from what practitioners generally have done in the past. Controversy exists in that the document does not provide any empirical data or treatises to support the use of invested capital and does not address the subjectivity issues involved in selecting adjustments to cash flows or discount rates. Also, practitioners seeking to perform assignments for impairment testing of private companies can easily side-step the guidance by performing valuations on a controlling interest basis, without reference to a minority value. In other words, the use of a DCF or acquisition market multiples that infer control avoids the need to apply any control premium. However, if the impairment testing is for a publicly traded company, and the traded price of the subject is relevant, the use of this MPAP guidance is applicable.A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 23 Conclusion The guidance provides a framework that practitioners can use for impairment testing. Practitioners should be aware that the methodology may pose additional audit questions, which can be avoided by simply choosing not to consider a MPAP in performing the analysis. Where assignments are performed for public companies, the guidance should be applied to conform to best practices. Unfortunately, this guidance only provides the intuition of the authors and does not provide the sources of the theories advocated. Also, disregard for the Mergerstat data, in many cases, may be un-warranted. THE VALUATION OF CONTINGENT CONSIDERATION Authors: Working Group on Contingent Consideration: February 2019. Source: Appraisal Foundation. Washington, D.C. Summary It is common in acquisitions that earnouts or other contingent considerations are part of the purchase price consideration. Payments to sellers are often based upon the outcome of future events, such as revenue targets, EBITDA levels, or other “metrics” post-acquisition to reduce the risk in the acquisition. Other agreements may also require a “clawback,” where consideration is returned to the buyer. Contingent consideration is defined by this guidance as “usually being an obligation of the acquirer to transfer additional assets or equity interests to the former owners of the acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. However, contingent consideration also may give the acquirer the right to claw back previously transferred consideration if specified conditions are met (a clawback).” Given the variety of deal structures and the extensive methodologies available, prophesizing these future events is extremely challenging. This guidance provides a detailed road map for the selection of methodologies and examples. Methodologies and Key Findings Two methods are identified in the guidance, which includes a scenario-based method (SBM) and an option pricing method (OPM). Both methodologies are Income Approaches that are adaptions of present value methods, probability, and option theories. The option theories are sourced from the work of Myron Scholes, Fisher Black, John Hull, Alan White, and others. Depending on how the deal is structured, payoffs may be considered “linear” or “non-linear.” Examples of each of these types of payoffs and the “metrics” are detailed and discussed within the document. A prime contribution within the document are the factors or issues to be addressed, which include consideration of: • Market participants and their assumptions •Probabilistic forecasts •Diversifiable of risks •Payoff structure •Leverage • Risk neutral valuation Each of these aspects are fully described within the document. The examples of how to define each of these factors includes examples of the use of monte-carlo simulations, binomial option models, and other methods to apply option methods used. The guide also provides a further discussion of methods to refine the WACC further, depending on if the rate of return should be adjusted for leverage, volatility, or other aspects. Conclusion This document is an excellent resource for practitioners performing valuations where contingent consideration is an issue in purchase price allocations. The guidance does not directly dismiss the use of any method but provides useful reference with sources and further reading. It is also an excellent resource on option theory and the calculation of WACC, which can be applied to many different areas of valuation outside of financial reporting. The document is very comprehensive and informative. Matthew Crane, DBA, ASA, CPA, is a managing director at MSG Accountants Consultants & Business Valuators of New York City. Mr. Crane has been active in business valuation for over twenty years and has performed valuation engagements for employee stock ownership plans, fairness opinions, financial reporting, tax, litigation, purchase price allocations, and solvency opinions, and is a member of the Appraisal Issues Task Force, a sub-group of the Appraisal Foundation. This article expresses only the author’s views. E-mail: VEA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES /////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// 24 MAY | JUNE 2019 t h e v a l u e e x a m i n e r LEGAL INSIGHTS Research is an essential component of business valuation (BV), and the Internet has made it less problematic to find the data needed to support your value conclusion. It may be easy and inexpensive to find comps from Yahoo! Finance, off-the- shelf industry reports, and compensation data from a free government source, but can you rely just on this data? Daubert challenges of business appraisals are prevalent, and valuators should approach their reports as if they would face a court challenge. Some BV cases involving Daubert challenges have specifically targeted insufficient or incorrect sources or research. In In re Texans CUSO Insurance Group (2010 WL 743291), the experts did not know of a particular industry best practices study. In Multimatic, Inc. v. Faurecia Interior Systems, the first damages expert cited Chrysler’s future production rates; the second did not, and the court noticed. In R&R International v. Manzen, LLC (2010 WL 3605234 (S.D. Fla.), the expert acknowledged having consulted Wikipedia in the forming of his opinions, and it was not enough. The R&R International case is particularly interesting because it mentions the use of Wikipedia and reports the source cites. Wikipedia often provides useful information, but is it passable? Rod Burkert of Burkert Valuation Advisors told me: “I often consult Wikipedia as a starting point, but I would not cite/rely on it for something critical. I have no problem citing Wikipedia for general background information.” I think a good way to approach Wikipedia is to think of it as a bibliography from which to link to other sources. The case also addresses a situation I often encounter while researching an industry: finding a reference to a report, but not the report itself. I always try to find the source documents of the studies I cite. If the original report is too expensive for your budget, I let my client know and document it in my notes. In discussion of the unreliability of the expert’s research methods, the court wrote:1 While Reynolds purported to support his analysis by relying upon research he found on the Internet website, Wikipedia, including the “Zenith International” report, “Beverage World” publications, and “Goldman Sachs” and “Mintel” reports, Reynolds engaged in no efforts to check the reliability of the reports upon which he relied and failed to take into account the peculiarities of the specific alleged geographical markets of R&R’s distribution. From the onset, Reynolds confessed that the reliability of the website, Wikipedia, for scientific sources of information was “mixed,” and thus, acknowledged the potential unreliability of relying upon this website as a source for his report. Further, Reynolds stated that although he based his determination of the energy drink market on data from a “Zenith International” report, he did not engage in any efforts to check the reliability of the report. These referenced cases alert us to the need to perform thorough research to the best of our abilities. Research can be overwhelming, and budget and time constraints may hinder you from purchasing important information. It is often difficult to know where to look for the data you need, and the lack of time can prohibit you from performing a comprehensive search. 1. DO NOT RELY ON ONE SOURCE OF DATA Whether it is for guideline public company searches, comparable acquisition searches, owner/executive 1 By Jan Davis, President, Blue Sage Research Will Your BV Research Hold up in Court? Six Tips for Better BV Research ///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 25 compensation, or industry and economy research, it is important to use more than one source of data for any particular search. Not all company databases contain the same data or are organized in the same way. For example, comparable public company databases, such as Mergent or Pitchbook, classify companies in the same way. Mergent may tag a public company with one SIC code and Pitchbook with another. Merger and acquisition databases are also different from each other; DealStats provides private company acquisition data that CapIQ and Pitchbook may not have, and vice versa. Do not worry, you may not need to subscribe to all of these databases, but you do need to know about them. As a former librarian, people used to say to me, “wow, you must know a lot of information.” I would respond, “no, I just know where to look for that information.” You do not need to subscribe to every database; you should at least know it exists. Google is a fantastic search engine, but it is most useful when you know how to use it. That said, in this article, I present five tips that will help you deal with these constraints and feel more confident that your research will stand up in court. 2. MAKE SURE YOU HAVE ACCESS TO THE BASICS OF A GOOD BV LIBRARY Every BV firm should have subscriptions to one of the following valuation data aggregators: ValuSource’s BVDataWorld, NACVA’s KeyValueData, and/or Business Valuation Resources. These companies focus on data and information valuators need to perform their valuations. Spend some time and peruse each site to learn of their offerings, such as: cost of capital, merger and acquisition databases, industry surveys, BV-related court cases, discount surveys, etc. While some overlap exists between what the companies provide, each company provides unique data that the other does not. ValuationResources.com provides links to many essential sources for your BV research. The site’s developer, Jerry Peters, divides the site in the following categories: TABLE 1: VALUATIONRESOURCES.COM RESEARCH CATEGORIES BV Books and Publications Industry Resources Cost of Equity CapitalIndustry Analysis Public Company Market Data Financial Ratios M&A Transaction DataSalary Surveys Valuation MultiplesEconomic Data and Forecasts Legal and Tax ResourcesRoyalty Rates and License Fees Bond Yields and Interest Rates Cost of Living, CPI, and InflationA PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 26 MAY | JUNE 2019 t h e v a l u e e x a m i n e r 3: KNOW YOUR LOCAL PUBLIC LIBRARY AND UNIVERSITY LIBRARY RESOURCES Libraries often provide remote access to business and finance databases if you have a library card. These resources can save you from subscription costs. Table 2 lists the typical databases found in public and university libraries. TABLE 2: TYPICAL BUSINESS AND FINANCE DATABASES FOUND IN LOCAL LIBRARIES Name of Database Database Contents ABI/INFORM Trade journals, business and academic journals, industry, and economic reports. Associations Unlimited Directory of trade associations. Business Insights: Essentials Company news, corporate histories and profiles, industry developments, financials, rankings, market share, and associations. Business Insights: Global Business, including company profiles, financial reports, brand information, company histories, and full text business articles. Tools to compare and rank companies. Gale Business Collection Business, management, industry, economics, politics, and investments. Includes articles from trade publications, journals, magazines, company profiles, full-text of Investext investment reports, and recent newswire releases, etc. Business Source Premier Articles on companies worldwide from top business journals, trade publications, books, newspapers, and magazines. Gale Directory Library Ward’s Business Directory of U.S. Private and Public Companies and Directories in Print. Wall Street Journal/New York Times Global, national, and local news. Mergent Intellect Worldwide business information that enables companies to generate insightful business intelligence. Combines with D&B’s private company database and First Research reports to provide private and public U.S. and international business data, industry news, facts and figures, executive contact information, and industry profiles. Mergent Online Public U.S. and international company financial data, as well as company history, executive biographies, and recent news updates. Mergent ArchivesIndexed collection of corporate and industry related documents. The database contains hundreds of thousands of reports covering over 100 countries and industries. Morningstar Investment Research Center Data and information for thousands of mutual funds and stocks. S&P Global NetAdvantage Investment information and analysis on industries and companies. Stock, bond, and mutual fund guides and reports; earnings and dividends reports; industry surveys; and directories of companies, executives, and security dealers. Value Line Resource Center Financial data on more than 7,500 publicly traded companies, along with the Mutual Fund Survey, Daily Options Survey, and a Special Situations service.A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 27 One or more of the following databases are typically available at well-funded business school libraries. TABLE 3: TYPICAL BUSINESS AND FINANCE DATABASES FOUND IN LOCAL BUSINESS SCHOOL/ UNIVERSITY LIBRARIES Name of DatabaseDatabase Contents BloombergCurrent and historical financial information on individual equities, stock market indices, fixed-income securities, currencies, commodities, and futures. Capital IQ Data on public and private companies, investment firms, transactions, and people. FactSetData on public and private companies, investment firms, transactions, industries, and people. D&B Global Business Browser Company profiles, news, business and trade articles, research reports, executive profiles, industry intelligence, and financial data. PitchbookData on public and private companies, PE/VC investment firms and their deals, transactions, and people. Thomson OneMarket quotes, earnings estimates, financial fundamentals, press releases, transaction data, corporate filings, and ownership profiles. Investext Wall Street analyst reports. Do your local libraries come up short? Consider a subscription to the Mechanic’s Institute. Located in San Francisco, but available virtually, the Institute provides members with access to sources helpful to valuators: •Mergent Online, which incorporates Hoovers, Dun & Bradstreet, and First Research data • Morningstar Investment Research Center •Value Line Resource Center • Business Insights: Essentials, Gale Business Collection An annual membership for one adult is a mere $120. 4. DO NOT RELY SOLELY ON OFF-THE-SHELF INDUSTRY REPORTS Industry reports provided by IBISWorld, Inc., First Research, Plunkett Research, Mergent Online, Standard & Poor’s NetAdvantage, can be just what you need for some valuations. In other cases, however, the reports are too general and boilerplate. For example, I just researched the RFID chip technology industry, and the off-the-shelf reports on semiconductors did not even come close to providing the data I needed. There are many ways to supplement these off-the-shelf reports with information more specific to your subject company. For example, you can gather additional information on MarketResearch.com, an aggregator for market research reports from over 720 top publishers, without spending much money. These reports typically run from $800 to thousands of dollars. However, a report’s table of contents and description can provide useful information. The amount and depth of the sections depends on what the publisher is willing to share to convince you to buy the report. I search MarketResearch.com by keyword, browsing industry categories, or using the advanced search template. For example, when researching the resilient flooring industry, I found the Global Flooring Market by Freedonia Research. In an ideal world, it would be great to purchase the report at its listed $6,500, but the project budget could not justify it. So, I clicked on the report’s description and found the following: Global demand for floor coverings is forecast to rise 3.1 percent per year through 2020 to 18.7 billion square meters, valued at $295 billion. Increasing motor vehicle production in many areas will also boost overall demand for floor coverings. Unfortunately, the table of contents did not reveal any added nuggets, like key competitive issues or major industry players. So, I went to Freedonia’s website to see if they have more free information about the report. Bingo. By downloading the report brochure, I found additional paragraphs I could quote A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES 28 MAY | JUNE 2019 t h e v a l u e e x a m i n e r in my report. Plus, on the Freedonia website, I am able to purchase sections of the report, such as “Change in Flooring and Carpet Demand Between 2015 and 2020 by Region” for $178, a feature that was not available on MarketResearch. com. Another quick way to add to an off-the-shelf industry report is to check the 10Ks, conference calls, and investor presentations of the public companies in your industry. For example, while researching the ambulatory surgery centers industry, I looked for the earnings call transcripts for Envision Healthcare. During the call, the investment bank analysts ask the company’s CEO and CFO pertinent questions, and in many cases, the answers provide industry insight that cannot be found elsewhere. These transcripts can usually be found on the company’s website or from Seeking Alpha (search for company, then click on “earnings”, then “transcript”). The Morningstar database also provides access to call transcripts. Typically found in the “investors” section of a public company’s website, investor presentations often provide data gleaned from market research reports and industry publications. For example: Floor and Decor, a retailer of hard surface flooring, provided growth rates and industry tidbits from management and independent consultant estimates and the Catalina Floor Coverings Report. For this project, I also checked manufacturers’ websites because they also may help with targeting relevant statistics and the sources of those statistics. Armstrong Flooring provided growth forecasts from the U.S. Floor Report, and Mohawk Industries presented statistics and forecasts from Floor Covering Weekly (Catalina Research) and Floor Focus. I also check the report publisher’s website to glean more information. Public companies disclosure filings, such as 10Ks and S-1, can also be excellent sources of industry data. Access these filings on the company websites or the SEC’s Edgar database. 5: REALLY KNOW HOW TO USE GOOGLE Because searching the web often feels like looking for a needle in a haystack, I suggest using Google’s advanced search template and its search operators. Also, just as I recommend using more than one database, I suggest trying various versions of a search. Here is an example of the search results I retrieved when looking for articles and reports on discount rates for disruptive technology: •Search 1: What are typical discount rates used for a disruptive technology? o Results: 61,600,000 hits •Search 2: average “discount rate” disruptive technology o Results: 607,000 hits • Search 3: “discount rate” “disruptive technology” o Results: 8,900 •Search 4: (average or typical) “discount rate” disruptive o Results: 8,300 After reviewing some of the search results, I rephrased my search, replacing “early stage” instead of “disruptive” and retrieved: •Search 5: average “discount rate” “early stage” o Results: 279,000 Google Advanced Search Template The Google advanced search template can be an effective way to target data on the web. I find that by completing the template helps me imagine the ideal document I wish to find. Here is an example: I want to find information on the RFID industry. I am asking that the document include any of the keywords “industry” “market” or “demand” to narrow my search for more relevant documents. I also try to narrow down my search results by telling Google to find only pdf documents because I have learned that firms and agencies provide their reports in pdf format. However, I also look for documents in all formats to retrieve magazine articles. Finally, I use the pull-down menu to select that only documents in the past year be included in the results. Go to MarketResearch.com to find reports on your industry. Dig into the details provided for free in the report descriptions and tables of contents. You can often glean information by going directly to the report publisher’s website. A PROFESSIONAL DEVELOPMENT JOURNAL for the CONSULTING DISCIPLINES t h e v a l u e e x a m i n e r MAY | JUNE 2019 29 Google Query Operators You can also use Google operators in the search box. The search I constructed in the advanced search template would read like this: RFID industry OR market OR demand filetype: pdf after 2018 There are many Google operators, such as “site” to limit by a particular URL. For example, if I thought PWC might have a report on the RFID industry, I could add the following operator to my search: site: finding a document with the phrase “RFID industry” in the title, I would add intitle: “RFID industry” to my search string. Learn about additional search operators at SearchEngineLand. com. Google vs. Google News For industry and regional economy research, I often perform the same search on Google and Google News because I come up with different results. For example, if the company you are valuing is a home construction firm in Tulsa, Oklahoma, you need to consider home builders in that region. For example, a Google search using the keywords “Tulsa” and “economy” and “2018” brought up useful items from TulsaPeople, GrowMetroTulsa, and the Kansas City Fed. The same search in Google News retrieved useful articles from the Oklahoman and Tulsa World, and radio transcripts from KMRG and Public Radio Tulsa. 6 KEEP TRACK OF YOUR RESEARCH Paul Hood and Tim Lee remarked in a BVR webinar that replicability should be the mantra of all business appraisers. Can you go back in six months or one year and duplicate what you did? This includes research. I suggest using a bookmarking tool, such as Diigo, or the one provided on your web browser. Create a folder for your topic, such as “RFID industry” and drag and drop every website you consult into that folder. I even make a subfolder “not used” for those articles I consulted but did not include in my research results. Is there a market research report that you cannot buy? Perhaps run it by your client or the attorney and bookmark it. CONCLUSION It is common to do the least amount of research necessary when performing a business valuation. However, what if your report ends up in court? Are you leaving holes in your research that will catch the eye of the opposing counsel and the judge? How do you decide how much research is necessary to back your value conclusion? Burkert believes there is a big dichotomy in the type of work and the amount at risk you need to consider. For high dollar projects—both dispute work and non-dispute work—he pulls out all the stops and obtains all the information and reports he can. “If the amount at risk is one million dollars, then what is a $10k research report in the scheme of things?” The client pays the bill for this kind of research, so it often is the client or attorney’s call as to whether to purchase a $3,000 market research report or spend $600 on a royalty rate study. For low dollar value work, especially gift/estate/fair value compliance work, naturally, valuators are a lot more cost- conscious. In this case, spending an extra hour on the tips presented in this article can make your research more defensible. Jan Davis, President of Blue Sage Research, provides business professionals with the data they need in a timely and cost effective manner. Her primary clientele consists of financial analysts, business appraisers, CPAs, business brokers and economists. Ms. Davis is the former library director at Willamette Management Associates and is an active member of the Association of Independent Information Professionals (AIIP). Blue Sage Research abides by AIIP’s Code of Ethical Practice. VENext >