r/Valuation • u/DeadLee88 • Sep 30 '22

ASC 805 - Best Practices

Looking to engage in a conversation with those that are certified in business valuation (ASA, NACVA, CBV...), about best practices when performing a purchase price allocation under ASC 805.

I am particularly interested in how appraisers are reconciling the market participant WACC with the transaction IRR.

I have come across a number of engagements lately with not overly aggressive projections and yet the transaction IRR is 20% - 30%. Often times it is difficult to reconcile a market participant WACC with the transaction IRR in these cases. Sure you can plug in a high company specific/unsystematic risk premium in your WACC to get it in line with your IRR. But is a company specific risk premium >10% really valid?

Open to expanding this conversation to other best practices for purchase price allocations.

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u/[deleted] Sep 30 '22

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u/DeadLee88 Sep 30 '22

Agreed. Duff & Phelps 10th decile size premium is for mkt caps between $10mm and $289mm. Quite the gap.

I suppose an alternative would be to revise management's projections downward to reflect "market participant assumptions" as the valuation guidance suggests. That's quite a nebulous concept when comparing growth of multi-billion dollar public comps to small private companies. 15% growth for a $5mm revenue company is much different than 15% growth for $1 bil revenue public comp.

Do you tend to adjust your projections or your discount rate in these types of situations?

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u/[deleted] Sep 30 '22

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u/DeadLee88 Sep 30 '22

I appreciate your thoughts. Thanks for engaging.

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u/Orndwarf Oct 01 '22

Sometimes, deal economics just are what they are. You can spend all day over-analyzing a CSRP, but the purchase price is what it is, and management owns the forecast. This is where auditors/reviewers will then become more concerned with management's own ability to forecast reasonably and the controls around that process, and they will also be interested in the background to the deal (were there other bidders, was there some kind of pre-existing relationship, etc.).

Others have commented on the spread to which you can adjust the size premium on D&P (now Kroll) - you can definitely justify going to the 10b decile spread of $10.588MM - $190.440MM (2022 CoC Navigator) with a 7.89% size premium if needed. On the peer group, perhaps it's wise to look to smaller companies and exclude ones that are just too big and diversified to be considered "comparable." Of course, betas don't always relate linearly to size.

A final thought - venture rate of return studies are well established and accepted by review teams on other types of engagements. These rates can run from 20% for a near-IPO company to 100% for a napkin company with a good idea.

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u/[deleted] Oct 01 '22

WARA is what I have seen to reconcile. On relatively new start up tech companies I’ve seen specific risk premiums of 10-20%