Measuring Public Companies

BY EVA M. LANG

  

PRACTICE DEVELOPMENT/BUSINESS VALUATION


Skills you need to value businesses.

Is Business Appraising
For You?

BY ELIZABETH DANZIGER

EXECUTIVE SUMMARY
  • BV IS A VERY CHALLENGING BUSINESS that requires an unusual set of skills.
  • CPAs SUCCESSFUL AT OFFERING BV tend to:
    — Function well under intense pressure.
    — Communicate well, both orally and in writing.
    — Integrate quantitative and subjective data coherently.
    — Be unfazed by ambiguity and uncertainty.
    — Improve their skills constantly.
    — Market themselves.
  • Public Speaking Skills Are Important, both for courtroom appearances and for networking within the professional community. Most business valuation referrals come from attorneys.
  • WRITING SKILLS ARE ALSO KEY. A business valuation engagement culminates in a very detailed report. A good BV professional can weave all the elements of the valuation into a coherent story.
  • CALCULATING MARKET VALUE INVOLVES INTANGIBLES such as market trends, goodwill and management skill.
  • PREPARING AND SITTING FOR A BV designation can cost CPAs several thousand dollars for course fees, travel expenses for education and resource materials.
  • BV THEORY AND PRACTICES are essential tools for industry accountants who are CFOs and CEOs and members of merger and acquisition teams.
ELIZABETH DANZIGER is the president of WorkTalk, a West Los Angeles–based company that offers writing training and consulting services to financial professionals. She is the author of three books and numerous magazine articles. She can be reached by e-mail at lizd@worktalk.com .

aluation is about setting the right price—a demanding service someone has to perform. So who are the CPAs making their living evaluating the fair market value of business entities? They are a mixed bag. For some, offering business valuation (BV) has been a natural outgrowth of estate planning. Others have started as expert witnesses for attorneys litigating a divorce, dissolution of partnership or other disputes. Many have found their way to performing valuation services from business and industry careers in finance, investment banking or corporate tax.

What brings such a diverse group of CPAs to share this professional path? Most say they love the niche. “Without a doubt, business valuation is the most exciting part of accounting,” says Cyril Mandelbaum, CPA, of Clifton Gunderson in West Des Moines, Iowa. Mandelbaum was in general litigation support services when a lawyer she worked with suggested she would make a great BV professional. Mandelbaum since has earned three BV designations (ABV, AM and CVA; for designations, see sidebar below) and is now regional director for business valuation at the firm.

Business valuation engagements are performed for a variety of reasons, including
  • Mergers and acquisitions.
  • Allocation of purchase price.
  • Estate and gift taxes.
  • Marital dissolution.
  • Employee stock ownership plans.
  • Liquidation or reorganization of a business.
  • Buy–sell agreements.
  • Stockholder disputes.
  • Financing.
  • Ad valorem taxes.
  • Incentive stock option considerations.
  • Initial public offerings.
  • Damages litigation.
  • Charitable contributions.
  • Eminent domain actions.

Barry Sziklay, CPA, ABV of Cipolla Sziklay Zak & Co., LLC, in West Orange, New Jersey, says his experience as an investment banker gave him the drive—and confidence—to pursue BV. Sziklay worked at an investment banking firm in Manhattan for ten years. Accounting, investment analysis and tax planning formed the backbone of his expertise in business valuation.

Both CPAs love the appraising business. They earn more now that they offer this service, and they feel good about the opportunity to spread their wings beyond the scope of traditional accounting. Sounds great, but is it an option for everyone? Sziklay says that BV is a highly challenging business requiring an unusual set of skills. “It is not for the faint of heart,” he says.

To learn if you have the right stuff to pursue a career in business valuation and how to get the training you’ll need to do it, read on.

WHAT IT IS

A CPA who performs a BV engagement must determine the value of a business, often a privately held business. “Clients may request a business valuation for a variety of reasons, including financing, income tax, estate tax, gift tax, buy–sell agreements among partners and S-to-C-corporation conversions,” says Sziklay. “Since such things are not bought and sold every day, you have to have a method of determining their value.”

Practitioners generally use several methods to calculate a business’s value; then they integrate the findings in a comprehensive report to the client. CPAs are well prepared to analyze the numbers, but Sziklay says that the quantitative aspect is based on theories of finance, not GAAP. In other words, being able to understand a financial statement does not mean a CPA automatically will grasp the true market value of the business.

WHAT TO KNOW

“Anyone wishing to go into business valuation must obtain core competency in the profession,” says Butch Williams, CPA, ABV, CVA, CBA, of Williams, Taylor & Associates. “A solid understanding of business valuation theory is essential, as well as an understanding of areas where definitive guidance is not provided.” There are a number of organizations that offer BV education, including

American Society of Appraisers (ASA)
555 Herndon Parkway Suite 125
Herndon, VA 20170
Phone 703-478-2228; fax 703-742-8471
The American Society of Appraisers offers membership and two levels of accreditation, based on the experience of the applicant; accredited member (AM) and accredited senior appraiser (ASA).

Institute of Business Appraisers (IBV)
P.O. Box 1447
Boynton Beach, FL 33425
Phone 561-732-3202; fax 561-732-4304
The Institute of Business Appraisers offers the certified business appraiser (CBA) designation and has approximately 2,500 members.

National Association of Certified Valuation Analysts (NACVA)
1245 E. Brickyard Road, Suite 110
Salt Lake City, UT 84106
Phone 801-486-0600; fax: 801-486-7500
The National Association of Certified Valuation Analysts is one of the newest organizations to accredit business appraisers. Members of NACVA must be CPAs in good standing. NACVA members can earn the certified valuation analyst (CVA) designation.

Association for Investment Management and Research
5 Boar’s Head Lane, P.O. Box 3668
Charlottesville, VA 22903
Phone 804-977-6600
The Association for Investment Management and Research is not an appraisal organization; however, it grants the chartered financial analyst (CFA) designation after an applicant passes three extensive annual examinations.

American Institute of CPAs (AICPA)
1211 Avenue of the Americas
New York, NY 10036-8775
Phone 212-596-6200; fax 212-596-6213
The AICPA offers the accredited in business valuation (ABV) designation, which CPAs earn, in part, after passing an eight-hour exam.

The Appraisal Foundation
1029 Vermont Avenue, NW, Suite 900
Washington, DC 20005
Phone 202-347-7722
The Appraisal Foundation is not an appraisal organization. The foundation promulgated a set of standards relative to appraisals known as the Uniform Standards of Professional Appraisal Practice (USPAP).

WHAT THE BEST HAVE IN COMMON

Regardless of how they come to the business valuation field, successful BV practitioners share many traits. Although quantitative skills are essential, “soft” skills matter just as much. CPAs who have been successful offering BV tend to

  • Function well under intense pressure.
  • Communicate well, both orally and in writing.
  • Integrate quantitative and subjective data.
  • Be unfazed by ambiguity and uncertainty.
  • Improve their skills constantly through ongoing professional education.
  • Market themselves continuously.

DEALING WITH PRESSURE

You might think of business valuation as “extreme accounting.” By its nature, the process pits a CPA’s ethical objectivity against a client’s agenda. BV clients have a specific goal, such as setting the value of a partnership dissolution, divorce or tax issue. They also have a clear idea whether a high or low valuation will benefit them most. However, a business valuation professional must never succumb to the influence of being pressured by a client to reach a particular value. William Kennedy of Reilly Consulting in Boston says, “The one thing you have to do in that environment is maintain objectivity. You can’t generate a reputation of being a hired gun.”

It takes strength, assertiveness and grace under fire to fend off subtle—and not so subtle—efforts to steer a valuation toward an outcome. Litigation cases generate the greatest pressure for the BV professional. Clients and attorneys care intensely about a business’s assigned value, and they are not afraid to push the evaluator to justify his or her results. A good business valuation professional must be able to push back.

Eva M. Lang, CPA, ASA, of the Financial Consulting Group in Memphis, Tennessee, says, “Not everyone is suited to being cross-examined by and taking abuse from attorneys. We joke about living on Tagamet, but the pressure can be enormous.”

In addition to the pressure that comes from being an expert witness in a litigation procedure and undergoing hours of depositions, appraisers are often required to determine a value very quickly. As Frank Percuoco, of Reilly Consulting, says, “By and large our BV clients are litigators. If tomorrow is the filing deadline on a discovery motion, we’re liable to get a call at 5 p.m., when they get out of court. They need to know that the required documents will be faxed to them by sunrise the next day.” If you love the adrenaline rush that comes from meeting a tight deadline, you will love BV.

The Value Manager: CPAs In Business and Industry

C PAs who work for public and private companies often are called upon to understand the computation and management of value, whether they are controllers, CFOs or merger and acquisition team members. They also are responsible for tracking shareholder value and the four critical factors that affect it: risk, cost of capital, future exceptions and cash flow. CPAs who can value businesses in this way should be considered “value managers” because they must have a strong background in financial theory to focus on risk and return and, ultimately, return on investment.

The CPA/value manager also must be able to distinguish between strong and weak investment opportunities. The CPA must have forecasting skills so he or she can identify and quantify the relative strengths and weaknesses that exist in an industry and a company. This includes the ability to perform a competitive analysis to identify specific qualitative factors that contribute to success or failure. In BV, such risk drivers—key determinants of valuation—are discovered through analysis of the underlying industry, the company and the context of its competitors, customers and suppliers.

CPAs in industry who wish to perform successful valuations should educate themselves, both formally and informally. Start by reading some of the important books on value management, such as Competitive Analysis by Michael Porter; Valuation by Thomas Copeland; and The Balanced Scorecard by Robert Kaplan and David P. Norton; and Creating Shareholder Value by Alfred Rappaport.

EVA and M&A

Perhaps the two most common forms of BV in business and industry include the application of economic value added (EVA) performance measures and valuation for corporate mergers and acquisition (M&A). CPA/value managers must understand both EVA, made popular by Stern Stewart & Co., and other shareholder value measurement tools, such as ALCAR’s “Shareholder Valuation Analysis,” as well as valuation for M&A.

Those CPAs who value for EVA and ALCAR usually employ standard valuation theory in a discounted cash-flow format. Both value-management tasks are commonly used in the sale or merger of a company or business segment. CPAs who appraise companies for merger and acquisition (M&A) should have essentially the same personal qualifications described in detail in this article. In M&A, both buyers and sellers must compute fair market value; however, often the investment value—the value of the target company to a strategic buyer after all the synergies are identified—is more important. Therefore, CPA/value managers must understand how to quantify synergies, such as the elimination of duplicated divisions and staff.

OBJECTIVITY

Controllers, CFOs or M&A team members must recognize the constant need for objectivity in their analysis. The pressure to “do a deal” becomes almost overwhelming, particularly in a transaction that involves competitive bidding. While the ultimate buyer may appear to be the winner, this is frequently not the case. If the buyer’s financial team failed to accurately assess risk, quantify synergies or recognize the true costs involved to fully integrate an acquisition—on time and with acceptable quality control—the buyer probably paid too much and is at risk of destroying shareholder value.

Negotiating a deal is not for the fainthearted. The value manager must know the facts, have a natural nose to follow the cash, enjoy pressure and deadlines, and recognize that the “winner” walks away from the deal when the price or terms fail to make economic sense.

LEARN MORE

A great source for insight and valuation tips for M&A purposes is Business Valuation: The Practical Aspects. This three-day seminar is offered throughout the United States by the American Management Association ( www.amanet.org ). Another organization that provides excellent M&A networking is the Association for Corporate Growth ( www.acg.org ).

By Frank C. Evans, CPA/ABV, CBA, ASA, a principal in the Pittsburgh office of American Business Appraisers, a national network of business valuation firms. He serves as editor of Business Appraisal Practice, a journal published by The Institute of Business Appraisers. He is the assistant professor, business administration, Pennsylvania State University, and he is a member of the IBA's College of Fellows.

COMMUNICATING CLEARLY

“The best BV practitioners are effective communicators” of what they know, says Butch Williams, CPA, ABV, CVA, CBA, of Williams, Taylor & Associates in Birmingham, Alabama. “You must be able to convey your findings succinctly to a judge, jury or client.”

Good public speaking skills are important too, both for courtroom appearances and for networking within the professional community. “It’s important to create good relationships with attorneys’ groups and to keep up your contacts within the legal community,” says Lang. Most referrals come from attorneys, and being on good terms with businesspeople in your city can lead to many opportunities. That means being a good speaker and an even better listener.

Good writing skills are also key. According to Lang, the end product of a business valuation engagement is a detailed report outlining the value of a business. The report lays out the basis for the judgment. “The CPA must have excellent writing skills to be able to convey the rationale for his or her valuation. A good BV professional can weave all the elements of the valuation into a coherent story,” says Lang. To do this successfully, a CPA must be able to explain complex issues simply and clearly.

ABILITY TO MESH THE DATA

“The most difficult aspect of the work is being able to match actual numbers with intangibles and come to a reasonable value,” says Cyril Mandelbaum. “This business requires you to think, analyze, synthesize and be intuitive.”

Accountants—who are schooled in calculating book value—must focus on market value, which involves intangibles such as market trends, goodwill and management skill. At each step, BV experts must make judgments and support their conclusions, says Lang. They must always ask themselves “Why did I chose one growth rate over another? Why did I choose this discount rate instead of that one?” Practitioners usually apply several valuation approaches to the same business and then integrate the information.

THE COST OF CREDENTIALS

One does have to spend money to make money. In addition to the time needed to earn a BV designation, a CPA must be prepared to lay out several thousand dollars on course fees, travel expenses and resource materials. Lang estimates that a basic BV library costs about $5,000, although CPAs can reduce that amount by sharing resources with other practitioners and using resources available at public and university libraries. Factoring in course fees, travel expenses books and manuals, she estimates that it may cost about $10,000 out of pocket to get started in this field. Moreover, professional training in business valuation never really ends. Williams says, “Professionals in our organization typically spend about 40 hours per year on continuing education.”

Measuring Public Companies

CPAs performing valuations for estate, tax and other matters often need information on publicly traded companies. The Internet offers myriad sources for financial data and industry comparisons.

EDGAR

The SEC’s EDGAR database provides information on more than 15,000 publicly traded companies. A number of sites—some free and some fee based—offer access to the EDGAR data. Many have additional features, such as an enhanced search capability and preformatted printing options.

FREE SITES

SEC www.sec.gov

FreeEdgar www.freeedgar.com

EdgarScan bamboo.tc.pw.com

EdgarOnline www.edgar-online.com

10K Wizard www.tenkwizard.com

FEE-BASED SITES

LIVEDGAR www.gsionline.com

Disclosure EDGAR Access edgar.disclosure.com/ea

OTHER RESOURCES

www.hoovers.com

This site provides extensive information on public companies in easy-to-use format. The database contains information on more than 12,000 companies. Access to company capsules is free, but profiles, in-depth financials and investor tools are available only to subscribers.

www.justquotes.com

JustQuotes is a financial data search engine. Enter a company name or stock symbol, and you will see quotes, financial data and links to related Web sites.

www.marketguide.com

This Web site offers its users comprehensive research on more than 10,000 publicly traded companies. The stock screening feature allows users to search through more than 75 different variables. It also contains earnings estimates, comparison ratios and brokerage reports.

—Compiled by Eva M. Lang, chief operating officer, Financial Consulting Group, Memphis, Tennessee. E-mail: lemay_lang@csi.com .

GETTING EXPERIENCE

After getting an initial designation, a CPA will still need hands-on practice before flying solo. Valuing a business accurately requires judgment, and good judgment is a product of experience. How do you get it? “Apprentice yourself to other firms that are doing business valuation,” suggests Lang. “Go to work for a firm that has a business valuation division.”

Even after a CPA has done a few projects as an apprentice, it’s wise to keep the projects small for a while. According to Kennedy, if a CPA is starting at ground zero it’s not the time to take on the big or complex stuff. “Enter into a joint venture with other firms. A small engagement would be valuing a fairly simple, single-line business that has revenue less than five million dollars,” says Kennedy. Whether a CPA apprentices, finds a joint venture or finds a mentor, he or she will have to work closely with a seasoned professional before stepping out alone.

MARKETING FOR BUSINESS

Once a CPA has gotten initial training and experience, there are several ways to bring clients in the door. Lawyers are important gatekeepers for BV engagements, so they are a target for marketing efforts. A CPA also can pursue a particular niche, such as valuing medical practices or automotive dealerships, and become known as a specialist. In addition, participating actively in professional organizations is always a good way to connect with business prospects.

“You’ve got to be able to market yourself,” says Percuoco. “In our firm, when we don’t see things moving along, we start pounding on the doors of the law firms. I have my secretary make lunch appointments at a fancy place so no one wants to turn us down. We go in there armed with all our materials and we shake their hands and ask for business. We tell them we feel we are among the best in the business.”

This direct approach has worked well for Reilly Consulting but different approaches work, too. Mandelbaum held a luncheon at her home for all the women attorneys at a firm that provides her with many referrals. “From that one event I generated an enormous amount of business,” says Mandelbaum. She also keeps a small display ad in the Iowa Bar Journal.

Fellow CPAs also are a potential source of referrals. Other accountants may be more likely to refer business valuation engagements if they are confident the CPA will not try to sell other accounting services to their clients. Kennedy says, “We’re very clear to any fellow CPA that refers work to us that we follow a nonencroachment policy. If we’re asked to do a valuation for another CPA firm’s client, we absolutely will not go back and try to sell that client other traditional services. That’s been a very important key to the referrals from other firms.”

Conferences, conventions and other meetings of professional associations provide other avenues for marketing. According to Mandelbaum, conferences offer outstanding programs as well as great networking opportunities. The ASA, NACVA and the AICPA hold conferences at which CPAs can learn, network and create alliances.

ARE YOU TOUGH ENOUGH?

Opportunities are growing for CPAs who have the strength and flexibility to succeed in the field. “The business valuation market is expanding rapidly, so chances are greater today than ever that a CPA will have a client with a business valuation need,” says Lang. Business valuation is definitely not for everyone. CPAs who get ulcers from deadlines and who hate to write are probably better off leaving business valuation to type-A colleagues. Those who might want to pursue it need to answer the following questions:

  • Do I have the personality for it?
  • Am I willing to get the training I will need?
  • Can I commit the time and money to pursue this goal?

A CPA who answers yes may want to put down this magazine, sign up for the next BV course and change careers.

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