Mercer Capital | Business Valuation Profession by the Numbers & Outlook | 2012

The Business Valuation Profession
The Numbers and the Outlook

Timothy R. Lee, ASA
MERCER CAPITAL
leet@mercercapital.com » 901.685.2120
www.mercercapital.com

Presentation 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 1

Timothy R. Lee, ASA
Timothy 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,
Timothy R. Lee, ASA
tax matters, corporate litigation, and shareholder conflicts.
Leader, Corporate Valuation Group
MERCER CAPITAL
901.685.2120
Tim is co-author of the book, A Reviewer’s Handbook to Business Valuation with L.
leet@mercercapital.com Paul Hood, Jr., JD, LLM, published in 2011 by John Wiley & Sons, Inc.
www.MercerCapital.com

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


From Concepts to Action Knowledge

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


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

617,000


≫ 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)


≫ 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



Pepperdine Private Capital Markets Project Survey Report IV – Winter 2011



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



Assessment of
business conditions
over last six months




Assessment of
business conditions
for next 12 months



The Ownership Transfer Matrix
Partial Sale / Transfer Total Sale / Transfer

ESOP Sale of Business

Outside Investor(s) Stock Exchange w/ Public Co.
Things You
Sales to Insiders/Relatives Stock Cash Sale to Public Co.
Make Happen
Combination Merger/Cash Out Installment Sale

Going Public ESOP/Management

Death Death

Things That Divorce Divorce
Happen to You Forced Restructuring Forced Restructuring

Shareholder Disputes Bankruptcy


The Ownership Timeline
25 to 35 35 to 55 55 to 65+

Business and
Buy-In Strategic Cycles Sell-Out
Gift-In Divorce Gift-Out

Shareholders BSA

Neighbors


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 Capital
Mercer 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 » Litigation Support Services
 Succession & Shareholder Planning  Statutory Fair Value
 Valuations for Corporate Tax Planning  Business Damages & Lost Profits
 Valuations for Gift & Estate Tax Planning  Valuation, Labor & Contract Disputes
 Fairness Opinions  Family Law & Divorce
 ESOP & ERISA Advisory Services  Tax Related Controversies
 Litigation Related Expert Witness Opinions  Corporate Restructuring & Dissolution
 Bankruptcy Related Valuation Services  Initial Consultation & Analysis
 Valuations for Buy-Sell Agreements  Testimony & Trial Support

» Transaction Advisory Services » Financial Reporting Valuation Services
 M&A and investment banking services
 Purchase Price Allocation Services
 Fairness Opinions
 Impairment Testing Services
 Buy-sell agreements & private company
 Portfolio Valuation Services
transactions
 Equity-Based Compensation Valuation Services
 Strategic Assessments

Mercer Capital | 901.685.2120 | www.mercercapital.com


Omissions & Commissions
Don’t miss this Errors, Challenges & Solutions in Business Appraisal Reports

informative The only tangible result of the valuation process, appraisal reports are
frequently subject to scrutiny and attack, not all of which are accurately
webinar! 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.
Sponsored by BV Resources
Through a consideration of both questionable omissions and inclusions,
Date: Thursday, August 9, 2012 Hood and Lee will reveal what courts – and appellate courts – have said
Time: Noon – 1:15pm (Central) about appraisal reports and the both questionable and common errors
they contain.
Qualifies for 1.5 CPE credits

REGISTER HERE Presenters
Timothy R. Lee, ASA L. Paul Hood, Jr., JD, LLM
Leader, Corporate Valuation Consultant, Speaker,
Group Author
MERCER CAPITAL 504.452.7574 (c)
901.685.2120 paulhood@acadiacom.net
leet@mercercapital.com Paul’s LinkedIn Profile
www.MercerCapital.com


Get your copy of …

A Reviewer’s Handbook to Business Valuation
Practical Guidance to the Use and Abuse of Business Appraisal Reports
By L. Paul Hood, Jr., JD, LLM & Timothy R. Lee, ASA

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


For more information
or to book Tim as a

Timothy R. Lee, ASA speaker for your next
meeting, contact
leet@mercercapital.com | 901.685.2120 Barbara Walters Price
at 901.685.210 or
email her here.

Mercer Capital
www.mercercapital.com


Mercer Capital | Business Valuation Profession by the Numbers & Outlook | 2012

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Mercer Capital | Business Valuation Profession by the Numbers & Outlook | 2012