During a recent webinar on measuring contingent consideration, an audience member asked: “What about a contingency based on going public in the future?” An interesting question, agreed Jonathan Tang (Empire Valuation). “It is exposed to market risk and is (mostly) a diversifiable event,” he said. “Going public is a single event, which is a diversifiable risk. However, you can argue that, when markets are getting better, there is a higher probability of (an IPO) happening. That is sort of related to the market risk. But my way of looking at it is that you can build that probability into your actual model itself. The going-public portion is not completely dependent on any of the financial metrics or any of the other metrics that are directly exposed to market risk. You can actually quantify some sort of probability by looking at the probability of doing an IPO in any particular year and by looking at the estimation of how well the economy and overall market will do.”

Tang has been involved with the working group developing The Appraisal Foundation’s contingent consideration guide. He notes, though, that his opinions are his alone and do not necessarily reflect those of The Appraisal Foundation, the working group, or the firm he is with, Empire Valuation. A replay of the webinar, A Practical Guide to Valuing Contingent Considerations, which was held January 23, is available if you click here.