Many interesting topics were discussed at the 2019 Annual Consultants’ Conference this past June in Salt Lake City presented by the National Association of Certified Valuators and Analysts (NACVA) and the Consultants’ Training Institute. We’ve identified some of the notable takeaways for those of you who could not attend.
1. The importance of storytelling is sinking in.
The keynote presentation and a separate triple session were devoted to the art of storytelling in valuation reports, which has become more important than ever and will require a change in mindset. For valuations, no longer is it enough merely to follow the numbers, a point made very explicitly in the recent Kress case, said P. Dermot O’Neill (P. Dermot O’Neill, CPA, PC) in his session on the reasonableness of valuation estimates. Too much emphasis on numbers can result in a valuation becoming simply a mathematical exercise. A clear and convincing narrative must also be presented that ties to the numbers, he advised.
In her keynote, Kindra Hall, president and chief storytelling officer at Steller Collective, talked about crafting stories not only for a valuation report, but also for improving communications with clients in terms of building a practice. For example, instead of telling a prospect, “I’ve been in valuation for 20 years and have had hundreds of engagements” (which everybody says), she advises that you tell a story about how you helped a client solve a problem. Ideally, it should be the same type of problem the client has, so that he or she can relate more to it.
2. The terminal value is being dissected and re-examined.
In a valuation, the terminal value represents a huge portion of the end result, but not enough attention has been spent on understanding its components. For example, a change in some fundamental notions about growth may be in the wings, according to new research Roger Grabowski (Duff & Phelps) and Professor Ashok Abbott (West Virginia University) are doing. In their session, they noted that 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.
3. The use of calculation reports continues to stir debate.
Some valuation experts feel that there are dangers to calculation engagements, namely that they are being offered in contexts for which they were never intended, are prone to bias, and confuse users who don’t know the difference between a calculation and a full valuation. This was discussed in several sessions, and the consensus was that, while there are dangers to them, calculation engagements have their place, except in a litigation setting.
Outside the sessions, a question was asked: “Should you walk away from a calculation engagement?” Several attendees noted that this is hard to do in practice, especially if you do it to an attorney who has been a source of referrals in the past.
4. The growing complexity of cost of capital is causing angst.
One of the top thought leaders in business valuation once said it took him seven years to understand the cost of capital. That was years ago when it was a simpler process than it is now, so imagine the trouble that expert would have now!
The process to estimate the cost of capital has evolved from a relatively straightforward exercise into an exceedingly complex procedure. During one panel discussion, audience members were scratching their heads over 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 whether all of this has gotten out of control and it is just an illusion of precision.
5. Understanding the impact of the TCJA continues to evolve.
Much is still unsettled about the Tax Cuts and Jobs Act (TCJA) and its impact on valuation, according to Jeff Urbach (Urbach & Avraham, CPAs, LLP), who did a session on divorce taxation and the new tax law. As the issues become clearer, a great opportunity for appraisers will be to explain the impacts on valuation to attorneys. He also pointed out that divorce matters are shifting away from fighting it out in court to much more collaborative efforts, such as mediation. This should be welcome news to appraisers who shun marital dissolution engagements because of possibly having to appear in court.
6. Technology has its dangers.
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. This means that valuation experts should make sure that they are maintaining the traditional skills that have always been used in the profession and not think that technological solutions will completely replace the need for those skills. While it is a good thing to have more technology tools and data to support conclusions, the art and professional judgment still play significant roles in valuation, and that will never change.
7. Forecasts and management projections need more scrutiny.
With all of the complexity in other inputs to a valuation, appraisers may be inadvertently reducing their focus on earnings forecasts. In his session, Jim Alerding (Alerding Consulting LLC) urged attendees to spend more time on the numerator (projections) of the valuation equation rather than the denominator (cost of capital). While a few percentage points in the cost of capital can affect your value conclusion, cash-flow predictions are equally important. Some appraisers may get so involved in formulas that it’s easy to forget the basics involved in projections.
8. A new approach to reconciling valuation outcomes deserves a look.
Roy Salter (FTI Consulting Inc.) discussed the findings of a survey he conducted (and supported by NACVA) for his dissertation for his doctorate at Grenoble Ecole de Management in France, which he is finalizing. The survey was designed to collect information from valuation practitioners on practice mechanisms that can be used to reconcile materially different going-concern business valuation indications derived from multiple valuation methods. There were over 400 respondents to the survey. Salter said that his alternative practice mechanism is comprised of procedural, theoretic, and mathematical elements that augment and organize prevailing going-concern business valuation theories and methods and approaches to addressing these issues. Salter will be doing a series of articles based on his findings.
9. Judges can smell trouble with experts.
Appraisers need to be cautious about their dealings with attorneys who can become overzealous and want to steer the valuation. Attorneys will hire experts they feel they can “shape,” but judges can spot that, according to Judge Steven I. Platt, who is retired as a full-time circuit court judge in Maryland. Judges also have a “jaundiced” view of experts who appear over and over again taking the same side and having the same opinion, he said during a session with other judges. Judge Christopher Yates (Circuit Court; Kent County, Mich.) and Judge Elizabeth Gonzalez, the presiding judge of the Civil Division of District Court in Nevada, were also in the session. They all agreed that experts will appear biased if they “blast” the opposing expert too severely.
10. Tools can help automate online marketing.
In his session on online marketing, Colin Brown (Syncnet Inc.) pointed out some tools to help automate your online marketing to prospective clients.
- Canva provides free software to create LinkedIn headers;
- Slideshare is a free hosting service for professional content, such as presentations, infographics, documents, PPTs, and videos; and
- Camtasia is a paid software suite for creating video tutorials and presentations directly via screencast or via a direct recording plug-in to Microsoft PowerPoint.
For more conference coverage, be sure to check out Business Valuation Update, our monthly newsletter (in print and online) where we’ll expand on some of these—and other—topics in future issues.