The business valuation profession in the UK has evolved rapidly, though much of that has been the result of IASB and other regulatory change, mostly affecting the practices of the large audit firms. Still, most note that few business leaders fully understand business valuation and few younger professionals even know that the profession exists. This situation has not improved, though groups such as SSBV, the ICAEW, and RICS have made efforts.

BVWire—UK discussed this topic with a number of UK valuers recently, and we received a number of interesting perspectives:

• “Business valuation is very subjective and it’s difficult to manage a team because there is so much variation in approach. I think most small business valuation firms have a tough time leveraging junior talent.”

• “I think BV requires very strong writing skills, which is not emphasised by either ICAEW or CFA programs. And, I think BV requires a lot of common sense, which can be hit or miss in any profession.”

• “The fact that none of our professional organisations fully recognise business valuation as a profession, and do not offer a discrete certification, has held the profession back for many years.”

• “Many clients, particularly at the SME end where we do most of our work, are price sensitive. Therefore, there are fewer on-ramps to BV. The larger firms retain all of the complex deep-pocket engagements, pricing out everyone else.”

• “BV has been great for me because it is interesting, challenging, and allows me to be self-employed and work from home—even when working from home wasn’t cool.”

• Unlike most other professions, “ageism doesn’t appear to be a problem. I am 68 and have no plans to retire—unless the brain starts to atrophy (which could happen, let’s be realistic). I do realise that the profession needs to replenish itself as baby boomers sunset their careers.… The hardest part is the first job in BV.”

IFRS require a reconciliation between the corporate tax rates HMRC requires and the effective tax rates. The difference often includes adjustments for foreign earnings, if any, R&D tax credits, deferred tax adjustments, noncash factors, valuation allowances, and other factors.

For smaller enterprises, this reconciliation is not clear, but “stock-based compensation can have a significant impact on the effective tax rate,” argue the authors in “Effective Tax Rates and Stock-Based Compensation,” the newest analysis from The Footnotes Analyst. If you’re working on engagements with restricted stock, this new article offers welcome guidance that may be completely hidden in a target company’s financial statements or tax documents.

The article notes that tax affects post-tax profitability and values, particularly those:

[D]erived from applying multiples of post-tax profit such as EV/NOPAT and a P/E ratio. In DCF analysis effective tax is a component of free cash flow, usually incorporated by starting the derivation of FCF with post-tax operating profit (NOPAT). Even if your approach to valuation uses pre-tax metrics, such as in EV/EBITDA, effective tax rates still matter.

The Appraisal Foundation (TAF) is the leading US-based valuation standards organisation. Their Business Valuation Resource Panel released the first in a series of valuation briefs earlier this month. The new exposure draft is titled “Understanding the Differences: Conclusion of Value v. Value Calculations.”

Feedback wanted: The issue is relevant to UK valuers, whatever business valuation standards they follow. IVS and the RICS standards address this issue, but it’s expected that this TAF document will provide further clarification that harmonises with all global standards.

Comments on the exposure draft are welcome prior to 26 May here. (All written comments will be published for public viewing, exactly as submitted, on TAF’s website, but names may be redacted upon request.)

TAF comments that “[b]usiness valuation engagements can take many forms with requirements that are dependent on the purpose and intended use of the valuation results. These requirements can result in a varying amount of time needed to complete the assignment and in the report’s length. Both practitioners and their clients may struggle with selecting the form that will best serve their purpose, especially if there is a reason to believe the work product will be reviewed by a regulatory body or third party.”

As anticipated, the end of emergency government COVID-19 support schemes caused company insolvencies in England and Wales to rise to their highest (since 2012) level in the first quarter of 2022. A total of 4,896 companies became insolvent in the first quarter of this year, double the number a year earlier, the government reported last week.

Most experts predict that company insolvencies will likely rise further in coming months due to surging operating costs and the removal of the last pandemic-related court protections. The Financial Times, Reuters, and others have widely reported this.

Several commentators have noted that “voluntary” liquidations (where creditors and companies reach a deal outside court) hit the highest level since records began in 1960, but compulsory liquidations stayed below prepandemic levels.

First, the good news: Aswath Damodaran notes that April was the first month since our current inflationary cycle when overall inflation slowed. “Excluding the especially volatile food and energy categories, economists have forecast that so-called core prices jumped 6 per cent in the 12 months ending in April, down from 6.4 per cent in March,” the New York University professor notes in “In Search of a Steady State: Inflation, Interest Rates, and Value.”

“I wrote my first Musing on Markets post in 2008, and inflation merited barely a mention until 2020, though it is an integral component of investing and valuation,” he says. “Since 2020, though, inflation has become a key story line.” While he sees some optimism for April and beyond, he also highlights bad news in consumer expectations. “Consumer expectations of inflation reached 5.40% in March 2022, hitting levels not seen since the early 1980s. While the market-implied expected inflation rate has also climbed to a ten-year high of 2.85%, it is clearly lower than the consumer survey expectation.”

Consumers may be overadjusting, Damordaran argues, or, conversely, market pricing may still be underadjusting. He notes the average inflation rate in the 2011-to-2020 decade was the lowest of the seven decades, so now an entire generation of financial experts has never done a valuation analysis in an inflationary period.

The firm announced plans to add over 200 new lawyers in London by 2024, more than doubling its total UK legal staff. This merger of legal and audit is something of a game changer for the profession, though it challenges both the independence standards of the ICAEW and the client confidentiality standards the legal profession requires.

Globally, KPMG Law now employs 2,700 in 80 countries, according to their own press releases. The new hires will comprise 45 partners and directors and see the total number of practising solicitors increase to over 400.

If the firm achieves this plan, this would place KPMG Law, founded as part of KPMG in 2014, somewhere around 35th on The Lawyer list of top UK law firms by revenue. DLAPiper, Clifford Chance, Hogan Lovells, Allen & Overy, and Linklaters, which provide a broader range of specialisms, have long dominated this list.

Nick Roome, head of KPMG Law in the UK, says: “We’ve built an incredible team of real specialists and experts in their respective fields. We’re now focused on adding further depth and scale to our core offering and sector expertise, while also exploring new growth areas. We’re focused on growing with the right culture. For us, that means building a diverse team of commercial, entrepreneurial and gifted technicians.”

Earlier this year, the firm promoted four UK partners within its practice, including Kennedy Masterton-Smith and Tanvir Dhanoa in London, Paul Kelly in Manchester, and Ed Bartlett in Leeds.

24 May: 3rd Annual European Valuation Conference, Prague

2 June: IVSC’s Analysing Intangibles, virtual, 14:00-15:00 BST

7 June: IVSC’s Valuation of Digital Assets, virtual, 15:00-16:00 BST

8 June: IVSC’s Valuation, Inflation & Cost Control, virtual, 16:00-17:00 BST

15 June: Society of Shares & Business Valuers’ Minority Interest Discounts With Sandra Mossios, London, 17:30-19:00 BST

28 June-6 July: ICAEW Practical Business Valuation, virtual classroom

7 September: Society of Shares & Business Valuers’ The Absence of Size Effect With Clifford Ang, London and virtual, 17:30-19:00 BST

13-15 September: IVSC Annual General Meeting, Fort Lauderdale, Fla.

3-5 October: 12th Annual International Valuation Conference, Riyadh, Saudi Arabia

19 October: Society of Shares & Business Valuers How to Lose at the Tax Tribunal With David Bowes, London and virtual, 17:30-19:00 BST

7 December: Society of Shares & Business Valuers’ Causation and Financial Losses: Factors to Consider With Prem Lobo, London and virtual, 17:30-19:00 BST

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