MARCH/APRIL 2025IN THIS ISSUE... Value Creation Strategies: Improving Product or Service Value Propositions Before Selling a Business By Kipp A. Krukowski, PhD, ASA, CVA Business advisors have a unique opportunity to counsel business owners, gaining exposure to the many situations businesses face. In addition, these advisors gain competitive insights into effective business model strategies used to gain and maintain traction. Business models are generally built on four main foundational pillars: the offering, infrastructure, customers, and financial viability. The offering is at the core, and the value proposition resides within it. To gain further insight into specific value creation opportunities related to the value proposition, the author conducted a study of experienced business advisors and intermediaries who specialize in small business mergers and acquisitions. COLUMNS & DEPARTMENTS Academic Review Academic Research Briefs By Peter L. Lohrey, PhD, CVA, CDBV This column provides readers with summaries of contemporary research in valuation and forensic accounting. In this issue, the author examines “Mini-Madoff? Anatomy of a Recent Ponzi Scheme,” by John Robert Sparger. Sparger analyzed information from the M. Burton Marshall Ponzi scheme and bankruptcy. He applied forensic accounting methods to gauge the prospective losses for victims in this matter. ON THE COVER Déjà Vu: Revisiting the Restricted Stock and Pre- IPO Studies (Part V of V) By Z. Christopher Mercer, FASA, CFA, ABAR In this series of articles, Chris Mercer revisits the restricted stock and pre-IPO studies that are frequently used to quantify discounts for lack of marketability. More than 25 years ago, Mr. Mercer concluded that these studies are not valid “methods” for developing marketability discounts, and he continues to hold that view today. This installment explains how valuation theory is the same for businesses and business interests. It also addresses an issue that is rarely mentioned in the context of the studies examined in this series: the impact of dividends on restricted stock discounts. ON THE COVER 24 18 4 The Value Examiner2SUBMISSION DATES Issue Submission Date Publish Date Sep./Oct. Jun. 18 Oct. 1, 2025 Nov./Dec. Aug. 18 Dec. 1, 2025 Jan./Feb. Oct. 20 Feb. 2, 2026 SUBMISSION STANDARDS The Value Examiner is devoted to current, articulate, concise, and practical articles on business valuation, litigation consulting, fraud deterrence, matrimonial litigation support, mergers and acquisitions, practice management, exit planning, and building enterprise value. Articles submitted for publication should range from 1,500 to 6,000 words. Manuscripts should be submitted via the Scholastica professional journal management platform. For more information, or to submit an article, please visit: https:// www.nacva.com/tveauthors. By clicking on the “Submit via Scholastica” button, you can view detailed editorial and submission guidelines. If you have questions, please contact Dan Shiffrin, Editor, at DanS1@NACVA.com, or Lynne Johnson, Associate Editor, at LynneJ1@NACVA.com. REPRINTS Material in The Value Examiner may not be reproduced without express written permission. Article reprints are available; call NACVA at (800) 677-2009 and/or visit the website: www.NACVA.com. © 2025 NACVA. All rights reserved. NACVA members (except Affiliate members) are automatically provided a subscription to The Value Examiner with membership. If you do not want to receive this publication, upon request, we will reduce your annual dues by $25. EDITORIAL STAFF CEO & Publisher: Parnell Black, MBA, CPA, CVA Editor: Daniel Shiffrin, JD Associate Editor: Lynne Johnson EDITORIAL BOARD Chair: Michael D. Pakter, CPA, CFF, CGMA, CFE, CVA, MAFF, CA, CIRA, CDBV Past Chair: Lari B. Masten, MSA, CPA, ABV, CFF, CVA, ABAR, MAFF Ashok Abbott, MBA, PhD John E. Barrett Jr., MBA, CPA, ABV, CVA, CBA Gary W. Baum, MBA, CPA, CVA Neil J. Beaton, CPA, ABV, CFF, CFA, ASA Rod P. Burkert Lorenzo Carver, MS, MBA Wolfgang Essler (Germany) Michael Goldman, MBA, CPA, CVA, CFE, CFF Dorothy Haraminac, MBA, CFE, MAFF, CCI, PI Hubert Klein, CPA, ABV, CVA, CFE, CFF Andrew M. Malec, PhD Z. Christopher Mercer, FASA, CFA, ABAR Michael J. Molder, JD, CPA, CFE, CVA, MAFF Judith H. O’Dell, CPA, CVA Danny A. Pannese, MST, CPA, ABV, CVA, CSEP Kevin A. Papa, CPA, CVA, ABV, CVGA Donald Price, CVA, ASA Angela Sadang, MBA, CFA, ASA, ABV Keith Sellers, DBA, CPA, ABV Todd Zigrang, MBA, MHA, FACHE, CVA, ASA, ABV The Value Examiner ® is a publication of: National Association of Certified Valuators and Analysts® (NACVA®) 1218 East 7800 South, Suite 301 | Sandy, UT 84094 Tel: (801) 486-0600, Fax: (801) 486-7500 E-mail: NACVA1@NACVA.com Production and Design: Chris Peterson, Creative Director, Digital Paint Booth, DigitalPaintBooth.com Inquiries concerning advertising should be directed to NACVA1@NACVA.com Financial Forensics Cryptocurrency in Litigation Practice: Tips and Pitfalls for the Financial Forensics Practitioner By Dorothy Haraminac, MBA, CFE, MAFF, CCI, PI This column discusses blockchain forensics, cryptocurrency valuation, and other cryptocurrency issues in litigation. The author provides financial forensics practitioners with tips and practice tools, and alerts them to the many potential pitfalls in these cases. The subject of this installment is “Computer Goes Brrr: Economic Analysis for Cryptocurrency Mining.” Legal Insights Courtside View: Valuation and Financial Forensics Perspectives from the Bench By Michael J. Molder, JD, CPA, CFE, CVA, MAFF Courtside View highlights recent decisions by federal and state courts addressing significant valuation, financial forensics, and expert witnessing issues. In this issue, the author reviews two cases dealing with the extent to which a plaintiff’s expert is responsible for attributing damages to various defendants: International Brotherhood of Electrical Workers Local 98 Pension Fund v. Deloitte & Touche LLP (D.S.C. November 12, 2024) and Globus Medical, Inc. v. Jamison (E.D. Va. November 7, 2024). 30 36 March | April 20253Déjà vu: A feeling that one has seen or heard something before —Merriam-Webster Editor’s note: In this series of articles, Chris Mercer revisits the restricted stock and pre-IPO studies that are frequently used to quantify discounts for lack of marketability (DLOMs). More than 25 years ago, Mr. Mercer concluded that these studies are not valid “methods” for developing marketability discounts, and he continues to hold that view today. This article series is an update to a series of posts that appeared in Mr. Mercer’s blog in 2022. Part V begins by explaining how valuation theory is the same for businesses and business interests. Next, it addresses an issue that is rarely mentioned in the context of the studies examined in this series: the impact of dividends on restricted stock discounts. Déjà Vu: Revisiting the Restricted Stock and Pre-IPO Studies (Part V of V) By Z. Christopher Mercer, FASA, CFA, ABAR 4The Value Examiner ValuationValuation Theory is the Same for Businesses and Business Interests Business valuators routinely use the discounted cash flow (DCF) model to value entire businesses. While a growing number of valuators use a DCF model to value illiquid minority interests in businesses (22 percent, according to a recent Business Valuation Resources Survey 1 ). Nevertheless, the majority of valuators continue to rely on restricted stock studies and pre- IPO studies in their marketability discount determinations. 1 See Z. Christopher Mercer, “Analyzing the BV Resources 2021 DLOM Survey: What Does it Mean for Appraisers Today?,” Chris Mercer’s blog, September 7, 2021, https://chrismercer.net/ analyzing-the-bv-resources-2021-dlom-survey/#more-11250. This Déjà Vu series has attempted to illustrate and prove that these often dated and noncomparable studies cannot be used to develop credible discounts for lack of marketability (DLOMs). This last article in the series begins by looking at the DCF model for businesses and showing how the DCF model can and should be applied to illiquid minority interests in businesses. The same valuation theory applies to both. I fail to understand why so many business valuators do not recognize this simple truth. 5March | April 2025 A Professional Development Journal for the Consulting DisciplinesThe DCF Model for Businesses The value of a business is defined by its expected cash flows and their growth, forecasted into perpetuity, and discounted to the present at a discount rate reflective of the risks associated with achieving those cash flows. In practice, valuation analysts routinely use a two-stage discounted cash flow model to develop value indications for businesses. First, they forecast cash flows for a finite period, say five years, or until the cash flow forecast stabilizes. Then, they capture the value of all remaining cash flows after the finite forecast period, including their growth, in the terminal value. The terminal value is normally developed through capitalization of an appropriate measure of cash flow at the end of the forecast period. These cash flows, including the terminal value, are discounted to the present at an appropriate discount rate and equity value (or enterprise value if cash flow to all providers of capital is developed) is determined. For simplicity, I will focus on the DCF model as applied to equity cash flows. The two-stage DCF model can be summarized in the following equation: 2 The left-side expression is the sum of present values of the expected cash flows during a finite forecast period. These cash flows are discounted to the present at the equity discount rate appropriate for the business. The right-side expression develops the terminal value in the numerator while the denominator reduces that future value in year f to the present. Table 1 describes the enterprise DCF model. 2 Z. Christopher Mercer and Travis W. Harms, Business Valuation: An Integrated Theory, 3rd ed. (John Wiley & Sons, 2021), Exhibit 9.2. Table 1: DCF Model Applied to a Business The discussion should not be controversial to this point. However, I now look at the DCF model as applied to minority interests in businesses. I do so in the same manner as with the business DCF model. The DCF Model for Interests in Businesses The value of a minority interest in a business is the present value of the expected cash flows to the interest over a reasonable expected holding period, including the realization of the terminal value at market value at the end of the expected holding period. The discount rate to reduce cash Valuation of a Business Discounted Cash Flow of Business Cash Flows 1. Determine finite forecast period (three, five, 10 years? more?) until cash flows stabilize 2. Estimate interim cash flows over finite forecast period 2a. Estimate growth in revenues, expenses, and resulting margins (net of working capital and capital expenditure needs) 2b. Resulting expected growth in cash flows over finite forecast period 2c. Timing of expected cash flows (end of year, mid-year) 3. Develop terminal value at the end of finite forecast period (all remaining cash flows into perpetuity) 4. Determine appropriate discount rate (equity discount rate or R) (reflective of risks of achieving forecasted cash flows) 5. Discount cash flows for finite forecast period and terminal value to present value at determined discount rate Result: Financial Control/Marketable Minority Value (V eq(mm) ) In practice, valuation analysts routinely use a two-stage discounted cash flow model to develop value indications for businesses. 6The Value Examiner Valuation Go to:hingemarketing.com/NACVAand enter coupon codeVAL10 How will you prepare for tomorrow’s looming uncertainty? Join Hinge University, where NACVA members can learn the strategies and skills to rebuild your marketing program, making it more reliable and resilient. And it’s designed for busy professionals like you! • your firm •How to implement a powerful referral marketing program •How to conduct a webinar or start blogging •How to start a successful content marketing program • How to promote your business on LinkedIn •And over 100 other self-paced, easy-to-learn skills and topics! *Renews at the regular $199 rate. Cancel anytime. WHATYOUCAN LEARN: AND NOW YOU—AND UP TO 3 COLLEAGUES—CANGET THE FIRST MONTH FORONLY $10. * TRYHINGE UNIVERSITY FORJUST$10! * Build your valuation practice. Inany economy.flows to the present is the equity discount rate (R) plus an increment of risk associated with the expected holding period for the interest that is not present in the business itself. The DCF “shareholder” model for interests in businesses is, like the model applied to businesses, a two-stage model, which can be illustrated by the following equation: 3 Unlike the business DCF model, which considers 100 percent of the equity cash flows of a business (or its enterprise cash flows), the shareholder model considers only those cash flows expected for the interest being valued, which includes a terminal value at the end of the expected holding period. The left-side expression forecasts expected cash flows to the interest (CF sh ) for the expected holding period (or over a reasonable range of expected holding periods). These cash flows are discounted to the present at the discount rate (R hp ), which is the sum of the equity discount rate (R) for the business and a premium for incremental holding period risks associated with the interest. The right-side expression develops the expected terminal value in the numerator. This is estimated based on the expected equity value of the business at the end of the expected holding period. 4 The denominator reduces that value to the present. The sum of the two expressions provides the value of the interest in the business, which is denoted as V sh : 5 The DLOM is determined by the relationship between the value of the interest and the value of the business; that is, a pro rata share of V eq ( mm ) , the marketable minority/financial control value. 3 Mercer and Harms, Business Valuation: An Integrated Theory, Exhibit 9.3. 4 Investors in minority interests in businesses base their pricing decisions on their expected returns from the interest, which include interim dividends or distributions and an expected terminal value. This terminal value is generally assumed to occur at the marketable minority/financial control level of value. The shareholder level DCF method requires an estimate of expected distributions to the interest over the expected holding period of the interest. It also requires an estimate of marketable minority/financial control value at the end of the expected holding period. The beginning point for this is a determination of the value of the business at the end of the expected holding period, which is based on the value of the business as of the valuation date. 5 Mercer and Harms, Business Valuation: An Integrated Theory, Exhibit 9.4. 6 The QMDM was initially published in Z. Christopher Mercer, Quantifying Marketability Discounts (Peabody Publishing, LLC, 1997). It can now be found in Mercer and Harms, Business Valuation: An Integrated Theory (see note 2 above). Table 2 describes the shareholder-level DCF model for a business interest in parallel with the business DCF model. Table 2: DCF Model Applied to an Interest in a Business In qualitative terms, we have just described the quantitative marketability discount model (QMDM), 6 which is a shareholder-level discounted cash flow model. Models like the QMDM have distinct advantages over most other Value of an Interest in a Business—Discounted Cash Flow of Interest Cash Flows Begins with (V eq(mm) ) 1. Estimate expected (finite) holding period for interest (or reasonable range) (three, five, 10 years? more?) until reasonable expectation of liquidity event 2. Estimate interim cash flows over expected holding period 2a. Estimate expected dividends/distributions to the interest over expected holding period (derivative of the expected cash flows of the business) 2b. Estimate expected growth in distributions over the expected holding period 2c. Timing of expected distributions (end of year, mid-year) 3. Develop terminal value at end of (finite) expected holding period (this is the terminal cash flow for the value of the interest) 3a. Estimate expected growth in value of business over the expected holding period (from the base financial control/marketable minority value already determined based on reasonable expectations for the business, net of distributions and agency costs) 4. Determine appropriate discount rate (required holding period return) (reflective of the risks of the business (R) and the risks of receiving the benefits to the interest) (incremental risks of the interest over R; called the expected holding period premium) 5. Discount interim cash flows and terminal value to present value at determined discount rate 5a. Determine nonmarketable minority value of interest (V sh ) 5b. Compare nonmarketable minority value with financial control/ marketable value (per share) (DLOM = 1 - V sh / V eq(mm) ) Result: Marketability Discount (DLOM) 8The Value Examiner Valuationmethods, because they focus on the interest being valued in relation to the business it is a part of. Several qualitative comments are appropriate: 1. Expected holding period. Every minority investment is made with the expectation of a finite holding period. The investment is made today, the expected benefits accrue over the holding period, and the investment is sold at (business) market value at the end of the expected holding period (or at a premium or discount to this expected value as the valuator believes appropriate). No one knows the future with certainty because, as Yogi Berra said, “It hasn’t happened yet.” But one must make reasonable assumptions about the expected holding period (or a range of expected holding periods)—whether short, intermediate, or long—based on known facts as of a valuation date. Valuators cannot punt on this assumption because of a lack of certainty. 2. Expected dividends/distributions. It should be obvious, but an interest that makes regular distributions is worth more than an otherwise identical interest that does not. Valuators cannot judge the difference in shareholder value in qualitative terms. Expected future dividends have present values and their present values must be calculated by developing an appropriate discount rate. Determining the present value of future distributions is not a qualitative exercise. 3. Expected growth in distributions. Consider two similar interests in businesses with identical expected dividends for the first year. For one business, there is no expectation for the dividend to grow. For the other, there is expected growth of 5 percent per year. The latter is clearly worth more than the former. The difference in value, however, cannot be judged qualitatively. 4. Timing of distributions. Consider two otherwise identical interests. The first has a dividend that is paid annually, at the end of each year. The second interest expects the same annual distribution as the first, but it will be paid quarterly. The difference in value based on timing of distributions is a quantitative question, not a qualitative one. 5. Growth in value of the business. Virtually every valuation of a business interest begins with a valuation of the business. That value represents the financial control/ marketable minority value, which is the base value from 7 Mercer and Harms, Business Valuation: An Integrated Theory, Exhibit 9.4. which any discounts are taken. To estimate the terminal value at the end of expected holding periods, valuators must make assumptions about the expected growth in value of the business over that time horizon. Factors such as expected return on equity, expected distributions, agency costs in the form of non-pro rata dividends, or suboptimal investments can inform these assumptions. 6. Required holding period return. Valuators develop equity discount rates when valuing businesses. They must also develop required returns for illiquid minority investments. There are a number of resources available to assist in estimating incremental risks associated with interests. But valuators cannot punt on this issue, because all the expected future cash flows to interests being valued must be brought to their present values. 7. Value to shareholder. The value to the shareholder, or the value of the interest, is the present value of the expected future benefits, both interim distributions and terminal value, discounted to the present at the required holding period return. The DLOM is determined based on the relationship between the value to the shareholder and the business value, as shown above. To repeat: 7 Thoughts on Valuing Interests in Businesses I reviewed all of the studies discussed in Quantifying Marketability Discounts, which was published in 1997, in this Déjà Vu series. That book introduced the QMDM as a quantitative method to address the shortcomings of the various studies. That was well over 25 years ago. I reviewed the FMV Stout Restricted Stock Database in 2005 in a second book on valuing shareholder cash flows. The QMDM was introduced as a shareholder-level DCF model to provide a reasonable method/model for estimating shareholder-level values and marketability discounts. The first edition of Business Valuation: An Integrated Theory was published in 2004. The second edition was published in 2008. The current, third edition was published in 2021. The theory for valuing businesses and business interests is the same. Value is a function of expected cash flows, their expected growth, and the risks associated with achieving those cash flows. 9March | April 2025 A Professional Development Journal for the Consulting DisciplinesNext >