Thursday, April 16, 2020

1:00 – 3:00 EDT

Estimating Long-Term Growth Rates
in Times of Economic Uncertainty

Analysts estimate long-term growth (LTG) rates in terms of economic uncertainty. During the current COVID-19 pandemic, we are experiencing more economic uncertainty than usual. Robert Reilly and co-presenter Kyle Wishing will offer practical guidance for developing relevant, reasonable, and replicable LTG rate estimates.

Most analysts are familiar with this basic finance principle that considers expected long-term growth (LTG):

Discount Rate – LTG Rate = Capitalization Rate

• We apply that principle in just about every valuation analysis, damages analysis, and transfer price analysis.
• In business and intangible asset valuation, we apply that principle in every income approach analysis.
• We apply a discount rate (and a short-term growth rate) in every discounted cash flow (DCF) analysis.
• We also apply the discount rate and the LTG rate in the DCF analysis terminal value calculation.
• We apply the capitalization rate in every direct capitalization method analysis.
• In the business valuation market approach, we consider relative LTG rates as an adjustment factor in selecting/applying GPTC pricing multiples.

In particular, this webinar will consider documentation and reporting procedures to make the analyst’s LTG rate estimate supportable, transparent, and credible.

Presenters:

Robert F. Reilly, CPA/ABV, ASA, CFA, CVA

Managing Director, Willamette Management Associates

• Practice includes valuation services, damages measurements, and transfer price analyses
• Performs analyses for transaction pricing and structuring, taxation planning and compliance, and controversy resolution and testifying expert purposes
• Member of multiple appraisal, financial, and accounting associations
• Co-author with Robert Schweihs of the recently published text Best Practices – Thought Leadership in Valuation, Damages, and Transfer Price Analysis

Kyle J. Wishing, CFA

Manager, Willamette Management Associates

• Works primarily on ESOP-related valuation engagements
• Practice includes valuation and economic analyses for taxation planning and compliance, financial reporting, forensic analysis and dispute resolution, marital dissolution, and strategic information and corporate planning purposes
• Serves as a vice president of the New South chapter of the ESOP Association
• Member of the CFA Institute, the Atlanta Society of Finance and Investment Professionals (ASFIP), and the National Center for Employee Ownership (NCEO)

Learning Objectives:

The participant will:

• Understand that the LTG rate means “long-term” growth rate
• Consider incorporating the short-term economic uncertainty into other valuation variables—and not into the LTG rate
• Incorporate the implications of the LTG rate selection in the income approach—and the market approach and the asset-based approach—analysis
• Document and report the LTG rate development and selection process
• Present a clear, convincing, and cogent explanation of the LTG rate in a litigation (or other contrarian) environment

Webinar Outline:

• Selecting an LTG rate consistent with the level of income (including the level of taxation) to be capitalized
• Converting between pre-tax and after-tax discount/capitalization rates
• Developing LTG rates based on benchmark comparisons
  • Subject company history
  • Management projections
  • GPTC history
  • GPTC analyst forecasts
  • Industry data sources
  • Economic data sources (GNP growth plus inflation rate)
• Testing LTG rate consistency with income projections
  • Capital expenditures
  • Depreciation expense
  • Working capital investments
  • SG&A expense
  • R&D expense
  • Other
• Selecting a short-term growth (STG) rate versus an LTG rate
  • Discrete projection period versus terminal period
  • STG rate data sources versus LTG rate data sources
• Considering the application of a two-stage growth rate model
• Bridging from an STG rate to an LTG rate
• Considering other valuation analysis adjustments for economic uncertainty
  • DLOM/discount for illiquidity
  • Exposure/marketing time
  • CSRP considerations
  • Measuring cash equivalency value
• Adjusting market approach GPTC pricing multiples for relative LTG rate
• Adjusting asset-based approach customer-based intangible asset and goodwill valuations for LTG rate

Handouts:

Participants will be able to download the following:

• VPS webinar PowerPoint slides
• Related articles

Following the webinar, attendees will receive an interactive video of the webinar showing the audio synced to the slide presentation in real time