Mike Crain, Managing Director
Financial Valuation Group
Ft. Lauderdale, FL

Change is coming to the BV industry, just as it does in all industries.  Practitioners who expect to prosper have to be focused on what’s coming over the horizon.  Though crystal balls can be notoriously fuzzy, Mike Crain, Chair of the AICPA Business Valuation Committee, recently shared his thoughts in a newsletter to the members of the BV/FLS Section of AICPA.  Mike, who also credits other practitioners with contributions to this piece, gave us permission to reprint it.  We think it reflects as good a view of the future as we’ve read.

Fair value measurement for financial reporting purposes will be prominent.

The reporting of certain assets and liabilities at their fair values and related disclosures will expand under GAAP as capital market participants and FASB demand more relevant financial reporting.  Part of this push comes from the increasing weight that intangible assets comprise in the market values of public companies.  Accountants will rely more on professionals with valuation training (1) in the preparation of management’s financial statements and (2) as part of the audit team.  This trend will eventually embrace the financial reporting of nonpublic companies as more fair value disclosures are required under GAAP.  Auditors will rely on valuation specialists just as they do on IT and forensic specialists now.  Valuation professionals who are CPAs will have a competitive advantage over non-CPAs because of their education in GAAP.  However, these valuation specialists will need to keep current their knowledge of GAAP.

The valuation profession will face more scrutiny as our work product becomes more visible.

At the risk of oversimplifying, accounting looks back and valuation looks forward.  History is certain.  The future is not.  We also know that investors are risk-averse.  We should expect increasing criticism from certain groups about our inability to be absolutely certain about our conclusions.  One such group will be the judiciary.  A Delaware Chancery Court recently said “All too often in appraisal actions, the Court is presented with two competing experts espousing ‘wildly divergent’ interpretations of the circumstances confronting the corporation.”  (Lane v. Cancer Treatment Centers of America, Inc., 2004 Del. Ch. LEXIS 108 [July 30, 2004])  Regulators such as the SEC will require more oversight of fair value measurement and reporting.  We should also expect to be increasingly on the receiving end of litigation when companies fail or public company stock prices fall due to fair value issues.

The marketplace, judiciary, and regulatory bodies will expect professionals to follow valuation standards.

The SEC (fair value) and the courts (Daubert) will expect valuation professionals to follow a set of professional standards and generally accepted body of valuation knowledge.  The marketplace will embrace these standards and practices.

The valuation profession will see consolidation in the traditional valuation segment.  New valuation segments will see expansion.

As valuation professionals, we study and understand the life cycle of industries.  Our profession is an industry, and it has a life cycle.  Revenue growth from traditional valuation services (e.g., litigation, tax, M&A) will slow.  New valuation areas will emerge and have strong revenue growth.  The traditional valuation segment will reach a maturing phase in its evolution.  As with all mature industries with fragmented structures, consolidation will result, both among firms and among membership organizations.  Many weak players will leave the valuation space altogether.  Stronger players will acquire attractive practices or firms to obtain talent, to reap the benefits of economies of scale, or to take advantage of strategic opportunities.

New areas will evolve and rejuvenate the profession as more sophisticated valuation services will be needed.  Areas that will expand significantly include fair value measurement for financial reporting and intellectual property valuation.  Some firms will adapt and grow into the new areas while many will not.

Because of independence requirements, the large valuation firms of the future will not be CPA firms.  Nor will the demands for independence fall only on accounting firms.  Many expect the same for valuation service providers previously exempt, including investment bankers.

There will still be plenty of room for small competitors to be successful in the marketplace.  They will occupy niches defined by specific technical or industry expertise.  Any price competition in these niches will briefly wreck them, but such competition is unsustainable due to malpractice risk and quality expectations from clients.

Valuation professionals will tend to operate in one of two groups: full-time specialists or part-time generalists.

The buyers of valuation services will evolve into two segments.  One will require full-time, credentialed valuation professionals.  The other will accept part-time practitioners who may or may not have a valuation credential.

Largely due to the information explosion, the supply of practitioners with valuation training, and the increasing sophistication of the buyers of our services, specialization will become common.  A search on Amazon.com for “business valuation” results in hundreds of hits.  The number of transaction databases grows.  Periodicals and conferences keep us busy.  Many practitioners will not be able to stay abreast of all the information.  The quantity of information will result in many valuation practitioners specializing in certain areas and, for some, affiliating with firms with multiple valuation specialties.  The large supply of practitioners with the capacity for additional work will result in many generalists who will compete on price.  This will result in lower margins for those practitioners.  Specialists will draw larger, more complex assignments and be able to earn higher margins.

The costs of operating a valuation practice will increase.

It will be more expensive for firms to operate a valuation practice than it is today.  A shortage of competent, experienced staff will drive up compensation costs.  More sources of information will result in higher costs for a firm.  More information means increased complexity, which requires more employee training to keep current.  Firms will find that experienced valuation staff will leave unless employers can keep their employees motivated and provide opportunities for personal growth.

Accounting programs at universities will include valuation courses.

Valuation education in accounting programs at the university level will become common as changes in GAAP require increased fair value reporting.  This will happen in earnest when accounting textbooks include sections on valuation.  Initially, there will be a shortage of qualified instructors (outside of traditional corporate finance).  The CPA exam will eventually test fair value.

A major change in the estate tax law will eliminate most estate and gift tax valuations.

If the federal government either eliminates the estate tax, or raises the applicable exclusion amount to say, $8 million, or significantly lowers the estate tax rates, most valuation work related to estate and gift taxes will no longer be required.  Firms with valuation practices focused on tax should look for other areas in the market.

These are Valuation Megatrends.  Some of these points will take years to emerge.  Some trends will be influenced by unforeseeable regulations, laws and other factors that could alter their course.  These points are significant to firms, membership organizations, clients, suppliers, and educators.  These groups should strategically evaluate how trends in our profession will affect their organizations.”

We invite you to respond with your own views about the future of the BV industry.