Date posted: 3/08/2018 4 min read

A global perspective on business valuation

US business valuation expert, Chris Mellen offers a global perspective on the profession.

In Brief

  • The business valuation profession has reached a mature stage in the US but is still early in its growth stage in Australia.
  • A robust economic environment creates optimum valuation opportunities, but even a downturn creates demand for business valuers.
  • AI will impact, but is not expected to dramatically affect the business valuation profession in the near term.

Tremendous variety is part of Chris Mellen's definition of a career in business valuation. After 29 years as a business valuer he continues to love what he does and his greatest challenge is trying not to work too many hours. He is currently Managing Director with Valuation Research Corporation (VRC), leading its Boston office, and his career has spanned working for KPMG and for a boutique firm, as well as founding Delphi Valuation Advisors, which he sold to VRC after running it for 15 years. He's been involved in over 3,000 valuation engagements since 1989, published over 40 articles, co-authored a book, led over 100 seminars, and provided expert testimony in court.

All countries are at different stages in their business valuation growth cycle and the profession is new and evolving in Australia. Likewise, Saudi Arabia is relatively new and experiencing high growth, Malaysia has seen growth in the last three years and Indonesia is new and growing. Similarly, Mellen observed tremendous growth in business valuation in China between his two visits in 2012 and 2014.

By comparison in the US, the profession was in its infancy the 1980s and underwent its biggest growth in the 1990s and 2000s, peaking, in Mellen's view, in 2014. It's now in a mature stage due in part to the high growth in practitioners, coupled with changes in estate tax law and financial reporting requirements for private companies which have decreased demand, says Mellen.

So, what can Australian business valuers learn from Mellen's global perspective? Chris Mellen will share his perspective as keynote speaker at the Business Valuation and Forensic Accounting Conference on 13-15 August in Sydney.

Positive trends in business valuation

Mellen says everything in valuation has to be understood in the context of the purpose for the valuation engagement. Compliance is the most common reason a business valuer is engaged, followed by litigation and advisory. He identified the following positive trends which have created demand for business valuers in the US:

1. Mergers and acquisitions - Business valuers play an instrumental role in the process for buying and selling. Before a transaction, business valuers can provide valuation-based strategic planning, exit and succession planning, buy-side advisory, and sell-side advisory valuation services. After a transaction there are financial reporting requirements, which are applicable worldwide including in Australia, most commonly in connection with purchase price allocations (IFRS 3) and goodwill impairment (IAS 36).

2. Baby boomers selling up and retiring - This is applicable to both the Australian and US markets and is increasing demand for valuation services. In the US, for example, the number of people over 65 is expected to increase by 3.2% annually over the next five years.

3. Corporate growth - Mellen notes that corporate profits in the US are expected to increase by 2.2% annually over the next five years and access to credit is expected to increase by 2.5%.

4. IPOs - Even though there has been a downturn recently in the number of IPOs in the US, they are expected to increase at an annual rate of 3.1% over the next five years.

A robust environment creates optimum valuation opportunities. But, Mellen says, even a downturn creates demand for business valuers' services in financial reporting (impairment in compliance with IAS 36), bankruptcy and litigation.

Negative trends impacting valuation

In addition to unfavourable tax and financial reporting legislation in recent years, he identifies the following negative trends as having impacted the profession in the US, contributing towards it reaching a mature stage in its cycle.

1. Increasing commoditisation- Fee sensitivity through increased commoditisation is being experienced in the area of compliance, especially in valuations for stock-based compensation. Fees in this area have dropped by two thirds as compared to 12 years ago, says Mellen.

2. Use of valuation software - Clients increasingly buy valuation software instead of consulting a specialist, contributing to fee pressures.

3. Devaluing of the profession - Mellen has observed that some accountants and investment bankers don't always appreciate how involved a valuation is or may use it as a "loss leader" to break in and gain experience or win clients for other purposes, and thus quote low fees.

Benefits of being a business valuer

The length of Mellen's career and the magnitude of his achievements pay testament to the benefits, opportunities and breadth of experiences being part of the industry brings.

Despite the long hours and competitive nature, Mellen believes the attitude of business valuers is, 'the rising tide lifts all boats'. He says the profession is very collaborative and that its benefits are far reaching for business, society and the economy.

A key benefit of being a business valuer is the opportunity to develop and apply a variety of skillsets, says Mellen. Most business valuers come from an accounting, finance or economics background. However, "in the long-term, you need to develop and apply many other skillsets including marketing, networking, negotiating, speaking and teaching. It involves non-stop learning and personal development," he says.

Exposure to seeing and evaluating the inner workings of different businesses, Mellen says, is critical to a business valuer's success, and is also one of the greatest benefits of being an appraiser. He also stresses the increasing importance of, once the core business valuation skillsets are attained, specialising in a core industry or group of industries.

Tips for business valuers

From his extensive experience in business valuation Mellen's advice to appraisers to maintain their competitive edge, and protect themselves against disruption in a changing landscape, is to:

1. Keep abreast of economic trends
2. Follow the advice you give to your clients
3. Develop and apply a variety of skillsets to what you do
4. Differentiate yourself in part by picking an area and industry to specialise in
5. Keep an eye on AI and its potential impact on the industry (though Mellen believes this will not be significant in the foreseeable future because the profession is small and requires extensive human judgement)

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