mercer capital | business valuation profession by the numbers & outlook | 2012

1Presentation given by Timothy R. Lee, ASA, Mercer Capital, to Memphis Tax Watch Group. May 2, 2012. © Mercer Capital, 2012. Reproduction is prohibited without prior consent of Mercer Capital. | 901.685.2120 | www.mercercapital.com

The Business Valuation ProfessionThe Numbers and the Outlook

Timothy R. Lee, ASAMERCER [email protected] » 901.685.2120www.mercercapital.com

http://www.mercercapital.com/

mailto:[email protected]



Timothy R. Lee, ASATimothy R. Lee, ASA is a senior vice president and board director at Mercer Capital and leads the firm’s corporate valuation group.

Tim’s practice encompasses valuation and financial advisory services for purposes including transactions, employee stock ownership plans, estate and gift tax planning and compliance, management and ownership succession, buy-sell agreement planning and execution, and corporate planning and reorganizations. Additionally, Tim provides consulting expertise in a variety of litigation and controversy matters involving dissenting shareholder rights, marital dissolution, tax matters, corporate litigation, and shareholder conflicts.

Tim is co-author of the book, A Reviewer’s Handbook to Business Valuation with L. Paul Hood, Jr., JD, LLM, published in 2011 by John Wiley & Sons, Inc.

For more information about Tim’s practice and to view his complete CV, visit www.mercercapital.com.

Timothy R. Lee, ASALeader, Corporate Valuation Group

MERCER CAPITAL901.685.2120

[email protected]


http://bvreviewershandbook.com/




http://www.MercerCapital.com/


Knowledge

Recognition

Relevance

Communication

Mercer Capital’s mission is to leverage our expertise in a meaningful work environment by identifying, attracting, and developing extraordinary colleagues and appreciative clients and to provide specialized financial advisory services with integrity and professional excellence

Execution

From Concepts to

Action



The Business of BV» From a Mercer Capital perspective

(not for everyone but it’s worked for us!)

MC basics (staff, project flow, rate structures, management, equity)

Evolution: from generalists to multi-specialty (creating expertise)

Operating leverage, training, and hiring practices (internal v. external)

Budget management v. utilization and rate focus (billable v. non-billable yield)

Internal organization (service lines & industry groups, leverage & delegation)

Business development, social media, publishing

» Institutional (indirect) versus relationship model (direct)

» Leveraging your clients and their affiliations



Current Challenges for BVers» It’s hard out there being a business appraiser!

Cyclicality and volatility, weird data (valuation is hard work these days)

Proliferating methodologies (DLOM, equity premiums, S corps, etc.)

IRS and the tax court (S corps, discounts, etc.)

Fee constraints and service delivery (MC response and approach)

Proliferation of appraisers and specialty credentials (competition, perceived expertise)

Threat of increasing regulation and backlash (SEC, DOL, IRS, FINRA, Tax Court)

Increased audit risk (IRS scrutiny and capacity, DLOM Job Aid, etc.)

Desperate clients and referral sources (don’t make their problems your problem!)

Professional exit planning and succession



Current Opportunities Which events in the ownership transfer matrix are you capable of

servicing?

Specialization by industry or other niche

Financial reporting requirements (FASB ASCs)

Gift and estate tax work (re-emergence of tax planning)

Deferred planning activities during financial bust and tax uncertainty

Deferred deal activity from weak economics and financing constraints

Evolution of private equity as an exit strategy for larger businesses

Growing use of valuation as a private wealth and management assessment tool

Controversy services (litigation, ADR)

Buy-Sell Agreements (for you and your referral)



The Market – A Few Numbers≫ SBA definitions for small business (private, not dominant in market share)

Manufacturing: Maximum number of employees may range from 500 to 1500, depending on the type of product manufactured;

Wholesaling: Maximum number of employees may range from 100 to 500 depending on the particular product being provided;

Services: Annual receipts may not exceed $2.5 to $21.5 million, depending on the particular service being provided;

Retailing: Annual receipts may not exceed $5.0 to $21.0 million, depending on the particular product being provided;

General and Heavy Construction: General construction annual receipts may not exceed $13.5 to $17 million, depending on the type of construction;

Special Trade Construction: Annual receipts may not exceed $7 million;

Agriculture: Annual receipts may not exceed $0.5 to $9.0 million, depending on the agricultural product.



≫ SBA segmentation of firms (2008 data; nonfarm; $000s)

Headcount Firms Establishments Employment Payroll

The Market – A Few Numbers

617,000



The Market – A Few Numbers≫ U.S. wealth segmentation (anecdotal figures from Occupy WS article)

Wealthiest 1% of the households own 34.6% of private wealth and 42.7% of financial wealth

U.S. has greater wealth concentration than India and China; on par with Mexico and Iran; higher than 94 of the 34 countries measured (CIA)

On one hand, increasing wealth concentration reduces opportunity for valuation volume; on the other, this class of business owner may look more to valuation as a multi-faceted tool

≫ ESOPs

About 11,500 in the U.S.; 7,000 ESOPs considered significant to sponsor

Perhaps 10-20% are externally entrusted

≫ Taxable estates under current laws

About one-tenth the numbers of taxable estates under current law ($5mm) than prior law (9,300v.82,800 estimated filers and 3,900v. 39,800 taxable; Tax Foundation)



The Market – A Few Numbers≫ Credentialed Professionals (ballpark figures, no one really knows!)

• CBA 600 +/-• ASA 1,500 +/-• ABV 3,000 +/-• CVA / AVA 7,000 +/-• CFA 4,000 +/-

• Total active professionals is perhaps 13,000 to 16,000 (say 14,500)

• Non-credentialed practitioners, industry crowd, academia, etc.

• Review appraisers in larger audit firms

• Non-credentialed paraprofessional support

• Using estimates based on 65% utilization, $150/hour rates – Is BV a $3.0 billion profession? (Average billings per professional of $200,000 annually and 20 assignments? Total annual project flow of 350,000 assignments)



Business Appraisers Survey Information» In Winter 2011 Pepperdine Private

Capital Markets Project Survey, there were 252 business appraiser respondents

Geographically dispersed through country. Largest concentrations in West (22%), Great Lakes (14.5%), and the North Atlantic (13.0%)

Respondents value broad range of companies with majority between $2 million and $50 million



Business Appraisers Survey Information

Pepperdine Private Capital Markets Project Survey Report IV – Winter 2011


http://bschool.pepperdine.edu/appliedresearch/research/pcmsurvey/content/PPCMP_winter2011FIN.pdf




Assessment of business conditions over last six months








Assessment of business conditions for next 12 months






Investment Banker Survey Information» In Winter 2011 Pepperdine Private Capital

Markets Project Survey, there were 245 investment banker respondents

» Key findings:

Approximately 38% of respondents indicated that strategic buyers pay between 10-20% more in transactions than financial buyers

Roughly 20% expect to close 3 transactions over next 12 months. Nearly 41% reported transactions took 6 – 9 months to close

Variety of reasons for businesses not transacting. Approximately 19% reported the business being over-priced while nearly 15% indicated a general lack of capital to finance



Investment Banker Survey Information









Assessment of business conditions over last six months








Assessment of business conditions for next 12 months






The Ownership Transfer Matrix

ESOP

Outside Investor(s)

Sales to Insiders/Relatives

Combination Merger/Cash Out

Going Public

Death

Divorce

Forced Restructuring

Shareholder Disputes

Sale of Business

Stock Exchange w/ Public Co.

Stock Cash Sale to Public Co.

Installment Sale

ESOP/Management

Death

Divorce

Forced Restructuring

Bankruptcy

Things That Happen to You

Things YouMake Happen

Partial Sale / Transfer Total Sale / Transfer



Buy-In

Gift-In

Business and Strategic Cycles

Divorce

Shareholders

Neighbors

Sell-Out

Gift-Out

BSA

The Ownership Timeline

25 to 35 35 to 55 55 to 65+



The Ownership Timeline» Where are your clients on the ownership timeline?

» Where are you on the professional timeline and how does that compare to the needs of your firm, your clients and your personal goals and needs?

» What are the external factors that might influence the demand for valuation services?



About Mercer CapitalMercer Capital is a national business valuation and financial advisory firm.

We offer a broad range of services, including corporate valuation, financial institution valuation, financial reporting valuation, gift and estate tax valuation, M&A advisory, fairness opinions, ESOP and ERISA valuation services, and litigation and expert testimony consulting.

We have provided thousands of valuation opinions for corporations of all sizes in a wide variety of industries. Our valuation opinions are well-reasoned and thoroughly documented, providing critical support for any potential engagement.

Our work has been reviewed and accepted by the major agencies of the federal government charged with regulating business transactions, as well as the largest accounting and law firms in the nation in connection with engagements involving their clients.

For over thirty years, Mercer Capital has been bringing uncommon professionalism, intellectual rigor, technical expertise, and superior client service to a broad range of public and private companies and financial institutions located throughout the world. Feel confident in our experience and expertise.

Mercer Capital | 901.685.2120 | www.mercercapital.com




Mercer Capital’s Core Services» Valuation & Financial Opinions

Succession & Shareholder Planning Valuations for Corporate Tax Planning Valuations for Gift & Estate Tax Planning Fairness Opinions ESOP & ERISA Advisory Services Litigation Related Expert Witness Opinions Bankruptcy Related Valuation Services Valuations for Buy-Sell Agreements

» Transaction Advisory Services M&A and investment banking services Fairness Opinions Buy-sell agreements & private company

transactions Strategic Assessments

» Litigation Support Services Statutory Fair Value Business Damages & Lost Profits Valuation, Labor & Contract Disputes Family Law & Divorce Tax Related Controversies Corporate Restructuring & Dissolution Initial Consultation & Analysis Testimony & Trial Support

» Financial Reporting Valuation Services Purchase Price Allocation Services Impairment Testing Services Portfolio Valuation Services Equity-Based Compensation Valuation Services

Mercer Capital | 901.685.2120 | www.mercercapital.com




Omissions & CommissionsErrors, Challenges & Solutions in Business Appraisal Reports

The only tangible result of the valuation process, appraisal reports are frequently subject to scrutiny and attack, not all of which are accurately substantiated.

In this webinar BVR welcomes attorney Paul Hood and appraiser Tim Lee, co-authors of "A Reviewer's Handbook to Business Valuation," for a look at these controversial issues and how appraisers can best prepare themselves and their reports.

Through a consideration of both questionable omissions and inclusions, Hood and Lee will reveal what courts – and appellate courts – have said about appraisal reports and the both questionable and common errors they contain.

Don’t miss this informative

webinar!

Sponsored by BV Resources

Date: Thursday, August 9, 2012Time: Noon – 1:15pm (Central)

Qualifies for 1.5 CPE credits

REGISTER HERE PresentersTimothy R. Lee, ASALeader, Corporate Valuation GroupMERCER [email protected]

L. Paul Hood, Jr., JD, LLMConsultant, Speaker, Author504.452.7574 (c)[email protected]’s LinkedIn Profile


http://www.bvresources.com/defaulttextonly.asp?f=August9audioconference12



http://www.MercerCapital.com/


http://www.linkedin.com/pub/paul-hood/9/1a4/9b5


A Reviewer’s Handbook to Business ValuationPractical Guidance to the Use and Abuse of Business Appraisal Reports

Focused on the practical aspects of business valuation that arise in the context of a tax valuation, this book provides a detailed analysis of the business valuation process. Discussion is included of various cases outlining errors that appraisers have made in appraisal reports, as well as in-depth examination of current appraisal industry issues that impact tax valuations.

For more information and to order, visit:

www.BVReviewersHandbook.com

Get your copy of …

By L. Paul Hood, Jr., JD, LLM & Timothy R. Lee, ASA


http://www.BVReviewersHandbook.com/


Timothy R. Lee, [email protected] | 901.685.2120

Mercer Capitalwww.mercercapital.com

For more information or to book Tim as a

speaker for your next meeting, contact

Barbara Walters Price at 901.685.210 or

email her here.



http://www.www.mercercapital.com/


mercer capital | business valuation profession by the numbers & outlook | 2012

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