The theme of “change” in the business valuation profession was predominant at the 2019 Annual Consultants’ Conference June 5-7 in Salt Lake City presented by the National Association of Certified Valuators and Analysts (NACVA) and the Consultants’ Training Institute. Change has also come to the NACVA organization itself, as Jonathan Jackson was welcomed as the new executive director, replacing Pam Bailey, who retired after 15 years in that post. In front of an adoring crowd, Brien Jones, NACVA’s COO, presented Bailey with a plaque for her years of dedicated service.

As for changes in the BV world, here’s some food for thought from a few of the sessions:

• Technology: A proliferation of software tools has triggered concerns about black boxes and what’s behind the numbers. The comment was also made that too many analysts are overly immersed in these tools at the expense of having a solid understanding of the operations of the subject company. The expert who understands the business the best will likely prevail.
• Cost of capital: The process to estimate the cost of capital has evolved from a relatively simple exercise into an exceedingly complex procedure. During one panel discussion, audience members had difficulty grasping some of the concepts such as the use of regression equations for the size premium and levering, unlevering—and then relevering—the cost of capital. At one point, cries of “enough is enough!” could be heard with one attendee asking the panel why we need all of these options and complexity. It’s a more complex world today, the panel explained, and better to consider many options instead of just one. But some wonder if all of this has gotten out of control and it is just an illusion of precision. Indeed, another session urged attendees to spend more time on the numerator (projections) of the valuation equation rather than the denominator (cost of capital).
• Growth rates: A change in some fundamental notions about growth may be in the wings, according to new research being done by Roger Grabowski (Duff & Phelps) and Professor Ashok Abbott (West Virginia University). The most common error seen with growth rates is using one rate for the discrete period of a two-stage DCF and then a much lower rate for the terminal value. But businesses don’t operate that way in real life—there’s a transition between the two rates. Therefore, a three-stage DCF should be used with an interim period of adjustment. This adjustment period (the second stage) is basically five years, according to their research, which looks at other aspects of growth and will be coming out within the year.
• Storytelling: The keynote presentation and a separate triple session were devoted to the art of storytelling, which has become more important than ever and will require a change in mindset. No longer is it enough merely to follow the numbers—a clear and convincing narrative must also be presented that ties to the numbers. Pretend you are telling a story to a child and focus on crafting a good beginning and ending—the middle will pretty much take care of itself.

Other areas of change discussed at the conference included the impact of the new tax laws, a rethinking of calculation engagements, greater scrutiny on management projections, a challenge to the Gordon growth model, a new approach to reconciling the outcomes of the various valuation approaches, and more. We’ll have full coverage of the conference in the August issue of Business Valuation Update.