Happy 2009 … I hope your new year is healthy and prosperous, and boy, am I glad that 2008 is over!
Here are two quick ideas to get your engine restarted after the holidays.
1. Continuing with my negative rave on the weighted cost of capital (WACC), anybody who tries to adjust capital structures to “industry normal” debt / equity ratios needs to have their head examined. Whatever was normal before the Crash of 2008 is certainly not normal now. I have no idea as to how one could justify a new industry normal level of debt to equity, given that we have no data.
2. If you are valuing a business that carries (bank) debt, be sure to inquire about covenants – conditions that must be met in order for the loan to continue. Typical covenants stipulate things like minimum current ratios, maximum dividend payouts, and such. You can easily incorporate these into an expanded ratio analysis. Of course, this means that you need to make complete financial forecasts (multi-year income statements, balance sheets, and cash flow statements), but you’ve read that here before.
On a completely different front, I recently took the plunge and upgraded to Windows Vista from the XP version. Despite all the negative comments about Vista, I have found it to be just as stable as XP. It does take up more space, but it also automates many maintenance and update features that have saved me a great deal of time.
I am cautiously optimistic that estate and gift tax work will increase this year. Values are down, which makes gifting more tax-efficient. The unified credit increased to %3.5 million on January 1, so there is more capacity to transfer assets. It’s a foregone conclusion that the new administration and Congress will extend estate taxation beyond its December 31 one-year sunset, probably with the same or similar unified credits and rates.
I also expect to do more FAS 123R / IRC 409A work on employee stock options, which continue to be attractive for many companies. FAS work is auditor driven, while 409A work is attorney driven, but they use the same methods (Black Scholes and lattice models) which I have written about earlier. Invest some CPE time to learn about these, and then market these services.
Because valuations are down, I do not expect many companies to form ESOPs this year. I do expect some turnover in who does the valuations, because some companies (ESOP trustees) are going to be unhappy that their appraisers conclude lower values this year and will try to shop for higher ones. I am going to be very careful about this, for the obvious reasons.