Fee pressures, methodology challenges to continue, say BV experts

BVWireIssue #149-1
February 4, 2015

In prior issues of BVWire, we presented thoughts from some members of the editorial advisory board of BVR’s Business Valuation Update. Here are a few more comments on the past year and the rest of 2015.

Fees and services: “As a maturing industry, valuation services have become increasingly commoditized,” observes Kevin Yeanoplos (Brueggeman and Johnson Yeanoplos PC). “As more people have considered the profession as a career choice, there has been continued downward pressure on fees. At times I’ve wondered if we will ultimately be paying the clients for the chance to do the work.”

Rod Burkert (Burkert Valuation Advisors LLC) weighs in on the fee issue: “I believe fee compression will continue to be a concern, especially for practitioners who don't differentiate themselves by specializing in a niche and whose deliverable is ‘just’ a report.” BVWire notes that Burkert is a co-developer of the Practice Builder Academy, which is designed to help BV practitioners attract more work.

Other developments affecting fees are changes in GAAP for private companies that have also changed the need for fair value work, according to Yeanoplos. “As a result, the pool of companies requiring valuation of intangibles has diminished, putting the brakes on this area somewhat as an area of practice growth.” He also points out that, because of fundamental economic changes over the past six years, “more divorce attorneys are attempting to settle their cases without having a formal valuation done, thereby reducing overall fees.” He points out that valuation experts “have been forced to consider innovative ways to provide value to clients, such as strategic planning.”

Another way BV experts can provide value to clients is to help business owners understand value and help them see how they can tap into that value. “Interest in the BV arena has been keen on this topic, since it provides a different way of talking to business owners and a means of enhancing the relevance of what we do in the private wealth planning process,” says Z. Christopher Mercer (Mercer Capital). Mercer is the author of a new book, Unlocking Private Company Wealth, which is designed to help you help business owners manage the wealth they create in their private business and understand how to talk to them in this regard.

Methodologies: “From the perspective of someone who primarily values smaller businesses, I don't think a lot happened in 2014 in that regard,” says Burkert. However, BVWire points out that Burkert is a co-developer of the new implied private company pricing line/model (IPCPL/IPCPM), which is designed to be a more reliable way of estimating the cost of capital of small private firms. Yeanoplos says IPCPL is a “step in the right direction” with regard to the profession’s “seemingly fruitless search for the ‘holy grail,’ that is, the elusive method to precisely quantify the company specific risk premium. It strikes me as the ‘illusion of precision.’” Despite advances, “there are still so many leaps of faith that I’m not sure we’re better off than we were,” he says.

Burkert sees a continued questioning of standard practices and conventional wisdom. “For example, does the size premium still exist? And assuming it does, does it overlap with the discount for lack of marketability?”

Aging of the profession: The business valuation profession is aging. Mercer points out that statistics from the American Society of Appraisers indicate that the average age of appraisers is rising each year. This phenomenon indicates transitions are going on in many individual careers as well as at many firms. “The aging of this group should create substantial opportunity for younger appraisers who take the time and make the effort to build their careers,” notes Mercer.

However, there’s trouble finding people to fill the void, observes Yeanoplos. “The profession's thought leaders are struggling to hand off to the next generation,” he says. “I have some real concerns about the direction of the profession."

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