Merger and Acquisition Activity Expected to Rise in 2012 – Good News for Business Valuation

Eddy Parker, CPA
AICPA Technical Manager, Forensic and Valuation Services

Although merger and acquisition (M&A) activity declined during the last half of 2011 (but rose overall by 7.6 percent for the year), it is expected to be on the rise again in 2012.  This will mean a corresponding increase in demand for business valuation experts and firms which offer this service.  According to an article in the Wall Street Journal dated Jan. 2, 2012 and titled “On Wall Street, Renewed Optimism for Deal-Making,” a survey by Ernst & Young anticipates that “36 percent of companies plan to pursue an acquisition this year.”  Additionally, the article states that since companies have ready access to cheap financing and large amounts of cash, companies will need to make acquisitions in order to drive growth in the face of a tepid economy.  

Is your firm positioned to take advantage of this opportunity? Mergers and acquisitions are just one of the opportunities within the valuation profession. Valuing a business due to transfer of ownership, divorce settlement, gift and estate tax determination, fair value accounting, ESOP valuations, economic damage calculations and expert witness or litigation support round out the list. In Accounting Today’s 2011 Top 100 Firms Magazine issue, more than 75 percent of the firms represented in the survey offering business valuation services reported significant growth within this area, making it the fastest-growing professional service niche.

Adding a specialization like business valuation to your firm can help with client retention and acquisition, driving overall revenue growth. Here are several considerations in establishing a valuation practice:

Begin with your current client base. When advising clients on tax planning or estate planning issues, you will see instances where a business valuation is needed. Good first-time valuation projects could be for small family limited partnerships or small businesses.

Plan on spending a lot of time on your first valuations. Preparing checklists, learning how to comply with standards and setting up models will be time-consuming. Use caution with software valuation packages as some have been found to have significant errors in their models and report-writing modules. It is important to understand the models used to develop your valuations as you should always assume you are preparing a valuation that will be defended in court.

Offer valuation services to local firms that don’t have the ability to do valuations for their clients. Many small firms don’t have the staff or ability to do valuation work for their clients, so this is a good source of revenue once you establish yourself as someone who can do quality valuation work. Your network of peers and your reputation with them will be very important if you decide to pursue this route.

Ensure that engagements are performed in accordance with any applicable guidance. The AICPA issued Statement on Standards for Valuation Services no. 1 (SSVS1) in June 2007, effective for all engagements entered into after Jan. 1, 2008. All AICPA members are required to comply with SSVS1. For CPAs, this standard has been adopted by most state accountancy boards, so check with your state licensing agency to see which standards must be followed.

 

Get a seasoned valuation expert to review your first reports. The report is often the end product that is seen by clients, and a well-written report can leave a lasting impression on clients and counsel. The report review, if done properly, will take several hours to perform, so plan on engaging a valuation specialist to do this work with the knowledge that you will have to pay for this review.

 

Get a valuation credential. The American Society of Appraisers (ASA) and the National Association of Certified Valuation Analysts (NACVA) offer credentials available to CPAs and non-CPAs. The Accredited in Business Valuation (ABV) credential is available only to CPAs with an active license and is supported by the AICPA (visit aicpa.org/ABV for details). All of these credentials require an exam. The AICPA and ASA credentials also require actual experience performing valuations and minimum education requirements. A credential will be a valuable marketing tool to hold you out as meeting minimum requirements for knowledge and competency in performing valuation work. A credential can also identify you as an expert in litigation proceedings.

 

Market your valuation practice. In marketing your firm for valuation engagements, the end-user often is not the person who will hire the firm. Quite often it is the lawyer or other accounting firm that identifies the valuation specialists and engages them to do the valuation. Consider making presentations to local bar associations and bankers associations to explain what valuation is and why they should hire an expert. Networking with other local accounting firms can lead to valuable referrals for new work.

Copyright © 2012 American Institute of CPAs