Do you use Firefox? It’s been the third most popular web browser (down from second after Google’s Chrome passed it last year). But now it may become an object lesson for any company that is dependent on a single major customer.
It turns out that the Mozilla Foundation which maintains Firefox is fairly substantial–it reports about $125 million in revenues for each of the last fiscal years. Pretty impressive for an open source software creator.
But, rumor has it that Mozilla is about to become a $25 million enterprise, which will likely knock it out of browser competition very quickly. Why? Well, 84% of it’s revenues come from one advertiser and supporter. Who?
Google–the creators of Chrome. And there are reports in the last few days that Google is not renewing their contract with Mozilla for 2012.
Concentrated customer lists are a huge business risk, and they reduce the value of any enterprise. Hopefully not as dramatically as this! You won’t be able to use Firefox to do research on the answer to these questions, perhaps.
CAn companies avoid hiring outside experts for first-stage impairment testing under the new FASB rules? That was a hot topic of discussion at the third annual Fair Value Summit sponsored by the ASA San Francisco earlier this month. “We’re hearing that a great number of clients are electing to ‘go it alone’ this year,” commented Glen Kernick (Duff and Phelps), who moderated a panel on the FASB’s Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350), Testing for Impairment (Sept. 2011). In fact, according to a recent survey of FEI members by Duff and Phelps, the vast majority (81%) indicated they would perform the qualitative assessment used to bypass step one of the traditional goodwill impairment on their own, without enlisting a third-party valuation firm or analyst. That will certainly save costs for public as well as private companies—which was the “driving force” behind the ASU, Kernick said. But the risks of not using an independent valuator may also carry high costs, particularly given the current volatility of global markets. Plus, any companies on the “borderline” will most likely have to submit their assessments to audit or regulatory review (SEC, PCAOB), and the amount of work this will require “is not a whole lot different” than what an independent valuation would entail, since the latter has many of the factors involved in the qualitative assessment already “baked in,” Kernick said, and “the cost savings would not be great.”
Additional highlights of the D&P/FEI survey:
- Nearly half (48%) of private companies perform their annual impairment testing in December, compared to only 15% of public companies, which perform the testing earlier—most commonly in November (17%), October (21%), or July (11%).
- Entity-specific operating changes prompt most public companies (43%) as well as private (53%) to perform an interim goodwill impairment test.
- In performing step one of the traditional goodwill impairment test, the majority (71%) of private companies compare fair value of the enterprise to their respective carrying amounts, compared to 53% of public companies.
- If control premiums enter into the analysis, 71% of public companies used general-market based studies compared to 53% of private companies.
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Here’s a surprise: The current market for raising private capital is still tight. “About half of [business] owners can’t get financing,” says Rob Slee (MidasNation), who partnered with Pepperdine University and Dr. John Paglia to survey private capital markets beginning four years ago and updated every six months since. “Only about a third of the owners [surveyed] are able to attract bank financing,” Slee adds, as the chart below reveals. The percentages add to more than 100, because many owners obtain more than one source of capital.
The good news: The success rate for those who do secure financing are much higher than Slee expected: 78% to 89% for owners who sought funds from family/friends; 26% to 39% for angel financing; and 23% to 54% for private equity. “It takes a few knocks on the door to get money,” said Slee, who published the survey excerpts in the most recent MIdasNotes. What do the data tell us? “First, even though there’s generally a lack of capital for private businesses, some owners are getting funded,” Slee says. “Second, owners will do what they have to do to get funded, regardless of cost of capital. . . . The world of capital is an uncertain place, and there’s every reason to think that will continue for small businesses.”
Free Pepperdine fall report: Pepperdine has just made its Fall 2011 Business Financing Report available as a free download. “I would also encourage you to stay in contact with the project by joining our LinkedIn Group, Pepperdine Private Capital Markets Project,” says Dr. Paglia. To join, click Join Group.
New from the Pepperdine Private Capital Markets Project Fall ’11 Survey: During the past year, the bank loan success rate was 44% for businesses with less than $5 million in revenues; 72% for businesses with $5 to $25 million in revenues; and 90% for businesses with greater than $25 million in revenues.
That’s just one data point, provided by John K. Paglia, associate professor of finance at Pepperdine University, who will present more from the survey at next week’s AICPA National BV Conference in Las Vegas. BusinessValuation.com will be there, covering multiple sessions, news, and updates. Stay tuned . . .
Bankers might have laughed at you if you suggested your intellectual property and other intangibles could be the basis for loans or financing in the past. Lindsay Moore, CEO of KLM (consulting) reminds us it wasn’t that long ago that “there was only one class of assets to leverage in enterprise strategy – the traditional tangible and financial assets of plant, property, equipment and cash.”
Now, business leaders may be able to take new approaches. As an alternative to IP licensing, Lindsay suggests securitization finance, “a type of asset-backed leverage that pools income streams from licensing arrangements to form a financial instrument that can be sold in the capital markets.”
The main benefit to securitization is that title to IP rights is not transferred, while the IP is generating an income stream. Read a more complete analysis here.
Many of the failed business acquisitions recently have run aground because of issues related to poor due diligence of intellectual property–particularly patents. David Wannetick commented yesterday on how patents create value on the Axial Markets blog. He writes: “Savvy licensing professionals will conduct intensive due diligence to understand the dynamics of their potential licensing partners in order to seize the incremental advantages associated with deconstructing their business models.
A particular patent acquires value because of the:
- Ability to commercialize.
- Stature of the inventor.
- Value of depriving competitors of key technologies.
- Acquirer’s or Licensee’s portfolio concentration.
- Capital raising implications.
- Economic impact of licensing agreement.
- The profitability of the industry and the importance of acquiring such patents.
Wanetick is managing director at IncreMental Advantage, a strategic advisory firm.
Just last week, the board of trustees of the Financial Accounting Foundation (FAF) issued a request for public comment on a new plan intended to improve the standard-setting process for private companies, according to a recent release:
The plan proposes the establishment of a new Private Company Standards Improvement Council (PCSIC). Working jointly with the Financial Accounting Standards Board (FASB), the PCSIC would develop criteria for determining whether and when exceptions or modifications to US GAAP are warranted for private companies. Based on those criteria, the PCSIC would conduct a review of existing US GAAP and identify standards that require reconsideration and vote on possible exceptions or modifications for private companies. Any proposed changes to existing US GAAP would be subject to ratification by the FASB and undergo thorough due process, including public comment.
The FAF board of trustees would oversee the PCSIC, replacing the Private Company Financial Reporting Committee (PCFRC), a FASB advisory-only body formed in 2006. At least one financial organization has endorsed the proposal. George W. Beckwith, chairman of FEI’s Committee on Private Co. Standards, says he is pleased with the exposure draft and believes that “the basic theme of the FAF’s proposal” is a “big step” and shows that the “FAF has been listening to the concerns of its private company constituents.”
The complete FAF plan and press release are now available. “We encourage you to visit the FAF web site to review and offer comments on the plan,” says the FAF. Public comments are due by Jan. 14, 2012.
Recent cases concerning the viability of taxpayers’ transfers to family limited partnerships (FLPs) as “bona fide” for legitimate, non-tax business purposes have been fairly successful in the Tax Court—even when the transfers have involved assets that don’t require active management. Estate of Black, for instance, upheld an FLP in which the partners held the critical “swing” votes on a large block of stock. Similarly, Estate of Mirowski upheld the transfer of patent royalties and related investments, and Estate of Kimball upheld working oil and gas interests. In Estate of Schutt, the court preserved the FLP in large part because it perpetuated the founder’s specific “buy and hold” investment philosophy, even though the assets were marketable securities.
A phrase your tax lawyers should not use in their engagement letters. In its latest look at an FLP, however, the Tax Court found no such legitimate, non-tax business purpose when the transferred assets consisted primarily of bank company stock and the founder had no specific investment philosophy—and in fact, wanted his grown children to learn about financial management through the FLP. Moreover, the Tax Court didn’t believe the taxpayer’s disavowal of any testamentary intent when his attorney stated in a letter that getting an appraisal was a “key” element of establishing and valuing the FLP “for tax planning purposes.”
“The mergers and acquisitions (M&A) market generally rebounded with more transactions and a higher median purchase price than in 2009,” says the latest (10th annual) Purchase Price Allocation Study by Houlihan Lokey (HL), the first time the study has analyzed earnouts, or contingent consideration (CC), as a component of purchase consideration (PC) under the requirements of ASC 805 and generally accepted accounting principles. “The turnaround was driven by stronger corporate and investor confidence, and aided by greater availability of debt financing with attractive terms,” says the report authors. “Companies also accumulated a record level of cash since the height of the financial crisis (2008-2009).”
In particular, the number of completed transactions increased by 54% from 2009 to 2010—as did the number of transactions (from 328 to 506) with sufficiently detailed disclosures regarding purchase consideration, including identifiable intangible asset fair values and goodwill. Approximately 19% of the studied transactions included earnouts, at a median fair value of $3.2 million and a mean of $18.7 million. Earnouts also represented 14% and 18% of purchase consideration when measured on the median and mean, respectively. In line with the study’s overall results, 10 of the 13 analyzed industries saw the number of completed transactions rise, with telecom, energy, aerospace & defense, and industrial posting the largest increases. Healthcare recorded the smallest percentage increase while the real estate and transportation sectors reported declines.