Throughout the series, Andrew has been asking you for your questions so that he may answer them offline. Below is a breakdown of the questions we received during each recording, alongside Andrew’s answer.

• Watch the webinar

There is no specific technique that SAV employs to do this. This depends upon the context and the circumstances in which the intangible was transferred or licensed. We are often provided with projections of future cash flows in relation to the intangible – we will look at the source of these projections and we will adjust the discount rate to reflect how realistic these are in relation to the potential use of the asset. The riskiness of an intangible asset can be reflected in the financial projections or discount rate [6.173] and we will consider each on its own merits. We may also consider the Weighted Average Return on Assets to reconcile the relative riskiness of the individual assets of a business.

We consider TAB in valuations on a fair value basis, as this is a corporate standard for valuing. We also consider TAB in ALP, if appropriate, using the relevant tax rates because it is specifically referenced in the Transfer Pricing Guidelines. At the moment it is HMRC’s position to not include it when valuing under a market value standard as the purchaser is hypothetical and may not be a corporate that is entitled to a corporate tax benefit.

A key difference as per 6.155 of the TPG is that valuations prepared for a PPA may reflect conservative assumptions, which can lead to definitions that are too narrow for transfer pricing purposes and valuation approaches that are not necessarily consistent with the arm’s length principle. While we may well end up with the same value for the intangibles, in practice, there are different motivations for the valuation of intangibles in the PPA and for Transfer Pricing purposes. Caution should therefore be expressed about the underlying assumptions driving the valuation. Further, assets may be identified differently for Accounting vs Transfer Pricing – Example 23 in the annex to chapter VI addresses this.

We use RoyaltyStat, as well as considering a company’s external comparable uncontrolled prices and transactions. We acknowledge that there are other databases, such as Royalty Range, KT Mine, which tend to source data from SEC filings.

Apologies if this was not clear from the presentation but we are not necessarily advocating this as the best method for valuing a primary intangible asset – however an Excess Earnings method should only be used for valuing the primary intangible asset, ie, other methods can be used for valuing the primary intangible asset, as identified within the presentation. However, it is our view that an Excess Earnings method should not be used for valuing a secondary intangible asset.

All of the countries within the G20 and the OECD member states, including the USA, sign up to the Transfer Pricing Guidelines as being those guidelines, which are the basis for analysing international transactions. The USA was involved in the drafting of these Guidelines and has signed up to the BEPS programme. While we may interpret the guidelines differently, we are both working from the same guidelines.

• Watch the webinar

This is a very broad question (if it is a question). The answer is that the broad valuation skills needed will be acquired by listening to the espresso webinars right the way to the end. The valuation of smaller companies is the most difficult of all due to the difficulty of identifying guideline companies, transactions or discount rates.

Early stage businesses are notoriously difficult to value, both those that are pre-revenue and those that are receiving revenues but are not making maintainable profits. Valuations by investors will often be instinctive, based on concepts such as the quality and track record of the management team. International Private Equity and Venture Capital Guidelines (IPEV) suggest the procedure of calibration to earlier transactions, and this is explained well in IPEV. In brief, whatever relevant multiples are derived from a previous funding round are used to inform a later valuation. There can be a long gap in time, provided that the relevant multiple is adjusted for subsequent events. As an example, an EBITDA multiple of 5x in a prior transaction might be increased or reduced depending on the progress made with the measurables in the business plan.

I am sorry if the Tesco example was confusing: the first stage was to use the analysts’ expectations of growth of the two companies – +5% for Tesco and -1% for Sainsbury. This resulted in a discount rate (cost of equity) of 9.8% and 8.1% for Tesco and Sainsbury respectively, by reference to the inverted p/e ratios and growth expectations. Clearly there are many other factors other than just growth which account for differences in valuation.

Funding is indeed tax deductible. However, funding should not make a difference to valuation, as it is a variable at the choice of the owner (or prospective owner). As an example, company A has no borrowings and an EBIT and profit before tax of 100 and profit after tax of 75. The multiple is 6x pre-tax and 8x post-tax, giving an equity value of 600. Company B has debt of 400. It has an EBIT of 100, interest of 24, profit before tax of 76 and profit after tax of 57. Modern valuation theory states that the enterprise value (equity and debt together) is 600 in both cases. For company B the equity value is 600 less the debt of 400 to give an equity value of 200. If the pre-tax multiple of 6x and post-tax multiple of 8x is used, the valuation of company B is 456 (76 x 6 and 57 x 8). They cannot both be right. The right answer is to value the enterprise as above and then to determine the optimum debt and equity structure – that is the structure assumed by market participants. The EV is a constant, the equity value varies according to the capital structure considered optimum. This is the justification for using EBIT and EBITDA multiples.

• Watch the webinar

Andrew did not receive any questions during this recording but if you wish to ask Andrew something then please email communities@icaew.com and we will get back to you as soon as possible.

The Valuation Community advisory group are happy to announce that the annual conference will be returning for 2024 and will be held on Thursday 19 September. Members are encouraged to save the date and look out for incoming communications regarding the event. Members who wish to do so can sign up for notifications by visiting the booking page:

• Book your place at the Valuation Conference 2024