Greg Huff, Managing Principal, Evergreen Advisors
The fifteenth anniversary of Evergreen Advisors got me thinking about some of the events which have occurred since 2000 and their impact on the business valuation profession.
Remember Y2K? By the beginning of the millennium, programmers had overcome the “Y2K problem,” but the country was quickly confronted with overheated IPO and technology sectors, followed by the collapse of the telecom industry in 2001.
9/11 – the Terrorist Attack on America – This event fueled extraordinary growth in national security spending and infrastructure. The availability of vast amounts of our personal and confidential data on the internet also created opportunities for theft and disruption. Cyber security became one of the fastest growing sectors in the economy, funded by government and private sources, and continues to be an economic driver in the Greater Baltimore Washington area.
Great Recession – Poor underwriting and syndication of non-credit worthy home mortgage loans precipitated an economic recession beginning in 2007, resulting in the collapse of Lehman Brothers, large mortgage lenders, and the loss of millions of American jobs. The consequential increase in banking industry regulatory oversight immediately impacted the cost and availability of capital.
Requirements and Disclosures – The advent of increased government regulation and higher compliance costs have made “going public” via IPO less attractive than achieving liquidity through private equity funding or sale to strategic or financial buyers. Increased public scrutiny over allegations of excessive executive compensation involving stock options and the backdating of option grants were addressed by new valuation requirements and financial disclosures.
Impact on Business Valuation
For the business valuation community, traditional pricing metrics such as asset value, revenue, income and cash flow changed. Market pricing may now be based on subscribers and other non-financial measures for emerging-growth technology companies.
In response to a growing emphasis on transparency and disclosure, new accounting and reporting standards were developed to provide a more precise portrayal of a firm’s financial condition and performance. “Fair Value” has become the new standard for financial reporting. Greater emphasis was placed on quantitative data and the judiciary became increasingly sophisticated on business valuation topics.
In 2000, there were approximately 4,000 business valuation practitioners, credentialed by the three main professional groups: the American Society of Appraisers, the American Institute of CPAs and the National Association of Certified Valuation Analysts. By 2010, the number of valuation credentials issued by these organizations had reached 16,000.
What’s in store for the next 15 years? Best guesses include:
- Increased regulation of reporting companies and new certification standards for business valuation professionals.
- As private equity companies grow in size and consequence, independent valuation review of the portfolios is likely to occur.
- Barriers to access capital will erode as new providers offer micro-loans and equity through “crowdfunding.”
- The world economy should continue to evolve, tied together by an internet susceptible to disruption, and geopolitical disturbances. This environment will present a challenge to the next generation of business valuation professionals as they attempt to assess risk-rated returns in an increasingly complex global economy.
The last decade and a half has been characterized by increased private equity firm activity, as the firms have become important investors and buyers in corporate acquisitions. Private and public investors have increasingly supported these firms in an effort to achieve higher returns in a low-interest rate environment, as well as the promise of higher returns from innovative new technology and applications.