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Comments on TAF’s Valuation of Contingent Consideration First Exposure Draft

Comments on TAF’s Valuation of Contingent Consideration First Exposure Draft

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On February 28, 2017, The Appraisal Foundation’s Working Group 4 released an exposure draft on the valuation of contingent consideration. Valuing earn-outs and other contingent liabilities are the subject of fierce debate in the valuation community, which the Working Group sought to address.

The thought processes Buyers and Sellers go through to calculate how much the contingent consideration is “worth” in real dollars is likely much different than how valuation specialists would estimate the liability’s Fair Value. As a result, and in extreme circumstances, the Fair Value of the contingent liability may be significantly more or less than that total contemplated transaction consideration estimated by management.

Our response to the Exposure Draft will cover some of the following issues noted from the exposure draft, including:

  • The desire to leverage existing nomenclature from the AICPA’s colloquially termed, “Cheap Stock Guide” so as to limit adding additional terms to the valuation lexicon;
  • Clarification on procedures to value contingent consideration when it’s an Asset as opposed to a Liability;
  • Addressing what considerations should be made based on the relative size, industry and stage of the two entities involved in the transaction; and
  • Normalizing bias in Management outcome probability estimates similar to the recommended treatment of Management’s forecast.

For the full version of our response to the Exposure Draft please view the attached PDF.

The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.

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