The Current State of the Business Valuation Industry … Industry in the 2016 report by revising all...

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Table of Contents

IBISWorld* DOWNGRADES Business Valuation Industry .........................................................................2

A Personal Note from the Co-Authors: ........................................................................................................3

The True Story Behind Why We Wrote this Report ..................................................................................4

PART ONE - Understanding the Challenge: Why is the Valuation Industry Undervalued? ..............5

PART TWO - Finding the Solution: What is the “Real” Market for Business Valuation Services? . 11

PART THREE - Taking Action in the New Valuation World: How to Re-invent Your Practice by

Creating and Capturing New High-Value Client Opportunities. ............................................... 13

Summary and Conclusion ........................................................................................................................... 15

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CATACLYSMIC CHANGES AHEAD…

IBISWorld* DOWNGRADES Business Valuation Industry

Timely Opportunity or Inevitable Disaster?

* The largest provider of industry information in the U.S.

Dear Business Valuation Colleague,

This 3-part special report on state of the business valuation profession today is designed to focus your attention on the truth about what’s happening in our profession right now, and to motivate you to take advantage of the new client opportunities created by a rapidly changing marketplace, where traditional valuation services are fast falling out of favor.

In this report, you’ll find special “insider” industry knowledge and surprising insights that we hope will show you how to increase your income level – your personal income, and also the value of your own practice.

You’ll find the report in 3 parts:

PART ONE - Understanding the Challenge: Why is the Valuation Industry Undervalued?

The first part of this report provides some alarming independent information and recent research from IBISWorld about the declining economic state of our profession and the business valuation industry. But is it really true?

PART TWO - Finding the Solution: What is the Real Market for Business Valuation Services?

The second part of our report provides a much different perspective. Part 2 is an interpretative insight into what is really going on in the Business Valuation Industry. This part of the report presents contrarian evidence and research that challenges the status quo, conventional wisdom and the IBISWorld view about the current state of the valuation profession and its future. It will provide you with a clear understanding of new market forces that are reshaping our profession.

PART THREE - Taking Action in the New Valuation World: How to Re-invent Your Practice by Creating and Capturing New High-Value Client Opportunities.

The third part of our report will empower you with a deeper analysis and understanding of how you can immediately harness the momentum of these new market forces and client opportunities in your own practice. Most importantly, it will provide you with a course of action to immediately re-shape your view of the valuation world to help you ultimately monetize these new market trends and client opportunities, far beyond the economic capacity of your current practice.



A Personal Note from the Co-Authors:

My name is Ron Everett and I am the co-founder and Managing Partner of Business Valuation Center (BVC), LLC (www.BusinessValuationCenter.com) headquartered in the Washington, DC area since 1999. I have been on the front lines of the valuation profession since 1986 and have successfully built four valuation practices - two of which I personally founded and two that I created for nationally recognized firms – namely, Ernst & Young (New England region) and CBIZ Valuation Group LLC (National Technology Practice), a subsidiary of CBIZ Inc., a publicly-held professional services company. I am a Certified Business Appraiser (CBA) and Certified Valuation Analyst (CVA) and a member of the Institute of Business Appraisers and the National Association of Certified Valuation Analysts (NACVA).

Raymond Ghelardi, my business partner, is co-founder of BVC and Managing Partner of our New York City Office. Prior to joining BVC, he held positions as Managing Director at Ceteris and Managing Director at BDO. He was also one of three members of the National Leadership Committee for BDO’s National Valuation practice. Prior to joining BDO Valuation Advisors, Raymond was a Senior Vice President with Management Planning, Inc. in Princeton, NJ. His valuation and financial advisory experience also includes Valuation Counselors Group where he was a major shareholder and Chairman. During his tenure as Chairman, the company became a national leader in the healthcare industry. Mr. Ghelardi was instrumental in selling the firm to CBIZ. He is an Accredited Senior Appraiser (ASA) and a member of the American Society of Appraisers and the Royal Institution of Chartered Surveyors (MRICS).

In summary, we have witnessed and personally experienced many facets of the business valuation industry based on our direct involvement in large publicly-owned valuation firms and Big 4 valuation practices, as well as smaller local, regional and specialty, niche-based firms.

We thought we had seen it all – until we hadn’t.



The True Story Behind Why We Wrote this Report

To be candid, we had never intended our own internal research on the Business Valuation Industry to end up as a “flash” report distributed to over 5,000 of our business valuation colleagues. It happened only because we simply couldn’t believe the IBISWorld Reports on the Business Valuation Industry for 2015 and 2016 - and we were even more perplexed when IBISWorld confirmed their accuracy.

So, here’s the underlying “background” story: a few weeks ago, Raymond Ghelardi and I began putting together our 2017 strategic plan for Business Valuation Center. In conducting our initial research, we decided to review the 2015 and 2016 IBISWorld research reports for the Business Valuation Industry. We wanted to get a more comprehensive understanding of where our industry was headed over the next 5 years. As we had done so many times for our valuation clients over the years, we decided (for the first time, can you believe?) to utilize the IBISWorld Report for our own industry and our own strategic business planning. We did so primarily because we had easy access to the information (the cobbler’s kids really do have shoes, they just don’t wear them).

Our first reaction to the IBISWorld data was confusion - and our second was disbelief …



PART ONE - Understanding the Challenge: Why is the Valuation Industry Undervalued?

We first reviewed the 2015 report, which showed business valuation services to be a very slow-growing, mature industry. Being in the Business Valuation Industry for over 30 years, we were not surprised with this perspective.

However, the 2016 IBIS report showed a much more alarming picture - an industry in severe decline with projected negative growth forecasted out to 2021 at -3.6% per year (CAGR).

At that continuous rate, we were fearful that before too long we could lose half the industry. Of course, the first thought that comes to mind is: which half are WE in and are we doomed now or later? Everything is going great today with a healthy 5.2% IBISWorld growth prediction for 2016, but is disaster just around the next DCF model?

By far, the most stunning revelation was that IBIS had severely “downgraded” the Business Valuation Industry in the 2016 report by revising all its data and models, both historically and prospectively - over a 15-year period. In fact, the revised industry revenue number for 2016 declined from $6.1 billion to $4.6 billion, almost a 25% decline. The 2016 numbers were so off the charts (in a very bad way) that we initially thought that IBISWorld had simply made a huge mistake.

It happens.

So, we sent IBIS the following email inquiry with our beautiful multi-chart analyses attached as presented below:

Hi Victoria,

Please forward the attached to your research department which compares the IBIS data from 2015 and 2016 Business Valuation Industry Reports.

I need to explain in my analysis report why the forecasts changed and declined so dramatically from 2015 report to 2016 report. Thanks very much Ron



And attached to that email, these charts:

The Current State of the Business Valuation Industry, At a Glance, According to IBISWorld:

Key Statistics for the Business Valuation Industry

From IBISWorld Industry Reports 2015* 2016* Change %Change

Number of Valuation Firms 85,122 81,981 (3,141) (3.7%)

Valuation Industry Revenue $6,100,000,000 $4,600,000,000 ($1,500,000,000) (24.6%) s

Annual Growth (Next 5 Years) 1.1% (3.6%) (4.7%) (427.3%)

Profit $535,800,000 $470,900,000 ($64,900,000) (12.1%)

Wages $2,500,000,000 $1,800,000,000 ($700,000,000) (28.0%)

IBISWORLD Revenue Growth Statistics for the Business Valuation Industry

From IBISWorld Industry Reports

IBISWorld 2015 Report

YOY Annual % Change


YOY Annual % Change

Change between IBISWorld 2015

and 2016 Reports

% Change

Year Revenue Revenue

2015 $6,088,700,000 0.6% $4,386,700,000 1.7% ($1,702,000,000) (28.0%)

2016 $6,088,700,000 0.0% $4,616,300,000 5.2% ($1,472,400,000) (24.2%)

2017 $6,204,000,000 1.9% $4,361,100,000 (5.5%) ($1,842,900,000) (29.7%)

2018 $6,286,800,000 1.3% $4,310,100,000 (1.2%) ($1,976,700,000) (31.4%)

2019 $6,342,700,000 0.9% $4,151,100,000 (3.7%) ($2,191,600,000) (34.6%)

2020 $6,434,100,000 1.4% $3,989,400,000 (3.9%) ($2,444,700,000) (38.0%)

2021 N/A N/A $3,840,500,000 (3.7%) N/A N/A

$6,088 $6,088 $6,204 $6,286 $6,342 $6,434

$4,386 $4,616 $4,361 $4,310 $4,151 $3,989

0.6% 0.0% 1.9%

1.3%

0.9%

1.4%1.7%

5.2%

(5.5%)

(1.2%)

(3.7%) (3.9%)

(8.0%)

(5.0%)

(2.0%)

1.0%

4.0%

7.0%

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2015 2016 2017 2018 2019 2020

(YO

Y Cha

nge)

(U.S

. Dol

lars

in M

illio

ns)

Business Valuation IndustryRevenue Growth

2015 Revenue 2016 Revenue2015 YOY Change 2016 YOY Change



IBISWORLD Number of Valuation Firms Statistics for the Business Valuation Industry

From IBISWorld Industry Reports


YOY Annual % Change


YOY Annual % Change

Change between IBISWorld 2015

and 2016 Reports

% Change

Year # of Valuation

Firms

# of Valuation Firms

2015 85,122 (2.1%) 82,403 1.2% (2,719) (3.2%)

2016 84,319 (0.9%) 81,981 (0.5%) (2,338) (2.8%)

2017 83,014 (1.5%) 80,828 (1.4%) (2,186) (2.6%)

2018 82,674 (0.4%) 78,904 (2.4%) (3,770) (4.6%)

2019 81,235 (1.7%) 78,157 (0.9%) (3,078) (3.8%)

2020 81,004 (0.3%) 75,229 (3.7%) (5,775) (7.1%)

2021 N/A N/A 74,313 (1.2%) N/A N/A

IBISWorld immediately responded to our written inquiry. Their first response is on the next page.

$85,122 $84,319

$83,014 $82,674 $81,235 $81,004

$82,403 $81,981 $80,828 $78,904 $78,157 $75,229

(2.1%)

(0.9%)

(1.5%)

(0.4%)

(1.7%)

(0.3%)

1.2%

(0.5%)

(1.4%)

(2.4%)

(0.9%)

(3.7%)

(5.0%)

(3.0%)

(1.0%)

1.0%

$60,000

$65,000

$70,000

$75,000

$80,000

$85,000

2015 2016 2017 2018 2019 2020

(YO

Y Cha

nge)

(Num

ber o

f Val

uatio

n Fi

rms)

Business Valuation IndustryNumber of Valuation Firms

2015 Number of Valuation Firms 2016 Number of Valuation Firms2015 YOY Change 2016 YOY Change



And Victoria’s second email is on the next page:

From: Victoria Barankin To: Ron Everett' <[email protected]> Subject: IBISWorld Business Valuation Report '15-'16 Analyst Answers

Ron,

I just received a note from the analyst team stating that while discussing this issue, rather than providing separate responses, they’re going to completely republish the report so that there is more explanation for the forecast. They will not be changing the data, but “will update the text to better account for the changing direction of the industry.”

Unfortunately, there won’t be time to do so this late in the month but it has been added to the analyst’s schedule so it is expected to be completed by the end of next week.

Upon the completion of the republished report, I will send it to you, completely complimentary.

I hope this helps and thank you for your patience!

Sincerely,

Victoria Barankin │ Business Development Manager │ Industry Research

IBISWorld, Inc. │ Where Knowledge is Power


mailto:[email protected]


From: Victoria Barankin To: Ron Everett' <[email protected]> Subject: IBISWorld Business Valuation Report '15-'16 Analyst Answers

Ron,

Please see the answers the analyst team provided me with in regards to your questions on the “Business Valuation Firms in the US” report. As they are still assessing certain parts of your questions, I will be sure to forward the other answers as they come in. I have also submitted an inquiry as to what resource they used to obtain the 2015 data.

• “New data was released on the industry as part of the 2012 Economic Census that showed revenue was lower than we previously estimated. We benchmark our reports to Census data, and consequently revised our estimates to reflect the latest information. Changes to the forecast are the result of both the revision in historical revenue as well as changes in the outlook for the industry's key external drivers.”

• “To respond to the attached report, the changes between the 2015 and 2016 reports are primarily the result of revisions to historical data. In other words, the 2015 report was based on assumptions and estimates that were corrected in 2016 based on more accurate and more recent data. In addition to being based on different historical data series, the economic data and projections used to make forecasts in 2015 was all revised by 2016 based on several new data releases. Finally, all monetary figures are expressed in current dollars. For these reasons, I strongly recommend against combining the two sets of data to draw any conclusions about the industry. “

Again, I’ll be sure to forward along the additional information the analyst team provides me with.

Sincerely,

Victoria Barankin │ Business Development Manager │ Industry Research

IBISWorld, Inc. │ Where Knowledge is Power


mailto:[email protected]


Now, please don’t get us wrong. We are very appreciative of the immediate and thoughtful response from IBISWorld and we commend them for their candid explanation and willingness to revise their 2016 report. (Thank you to Victoria Barankin and her truly professional team at IBISWorld).

But getting back to the point, where does that leave us?

Something still didn’t feel right.

Our business valuation practice had been booming for the past 5 years and we were optimistically expecting more growth over the next 5. In fact, we had just opened 3 more offices in the USA and our first overseas office in London. Naturally, we were quite concerned that the IBISWorld view of the Business Valuation Industry was so alarmingly negative in all respects – even after they had re-checked all their facts and figures!

Was IBISWorld missing something - or were we?

We weren’t sure what it was until we did some more research on several other significant industry categories that both “compete” and “collaborate” with the Business Valuation Industry. In Part Two of this report, we have distilled our research, presented our findings - and further explain the dramatic changes in the Business Valuation Industry.



PART TWO - Finding the Solution: What is the “Real” Market for Business Valuation Services?

After valuing thousands of companies over the past 30 years, in hundreds of industries, we certainly never thought our own industry was close to collapsing.

Over the past few years, we regularly read surveys from BV professionals that did indicate some minor challenges in areas such as hiring qualified people, keeping up with regulations and new valuation techniques, generating new business, etc. For the most part, they all looked very similar to the following excerpted results from a comprehensive AICPA survey:

“The respondents were very enthusiastic about the opportunities for forensic and valuation services. A total of 76% of forensic and 54% of valuation respondents are expecting growth with most anticipating between 10% and 50% growth in their practice over the next two to five years. Of the 76%, roughly 33% overall expected up to a 10% increase in demand for their services in the coming two to five years. Another 30% anticipated up to a 25% rise in demand, and about 13% were looking to a 50% or higher spike. Twenty percent foresaw no change, and about 4% expected a decline in demand.”

“Ten percent had a 25% increase in services during the last year, and 11% enjoyed a 10% rise. A total of 54% of respondents expected more demand for valuation services over the next two to five years.”

Most surprisingly, we didn’t notice any precursor of panic or doom as later implied by the IBISWorld industry Reports for 2015 and 2016 reflects. What were we missing?

Well, to truly confess an oversight of major proportion, we were missing almost 90% of the “real” valuation marketplace.

(We put “real” in quotes from this point forward because “real” is our own definition of the valuation marketplace and others reading this report may have their own definition of the marketplace - or simply disagree with us, and that’s ok. We’re sure you’ll still get our point.)

It finally hit us. Most of the info, like this AICPA survey, was generated from other industry categories not included in the IBIS Reports on the Business Valuation Industry, like accounting and consulting firms that saw their valuation worlds in a much different and more optimistic light (or as we call it, high-growth/high-margin).

We began realizing that the valuation industry wasn’t really dying or declining as indicated by the IBISWorld Reports, but that it is shifting quite rapidly from the traditional low-priced commodity service that we all know and love (and feel really comfortable producing) to a high-growth, high-



margin service, provided by other competing industries, who are re-purposing and re-packaging the basic knowledge and know-how that goes into a typical business valuation report into a higher-priced and higher-demand service.

And they are successfully selling a far more useful service to a far bigger and better set of clients willing to pay a premium price on a recurring or continuous basis.

In the two charts presented below, we have ranked and analyzed the competing industries that also provide valuation services, in comparison to the Business Valuation Industry. We have also provided some additional informative details on revenue, growth and profitability for all segments within the “real” business valuation marketplace.

The facts speak for themselves in the two charts below, but it’s most interesting to note that the Business Valuation Industry defined by IBISWorld represents only about 10.9% of the “real” business valuation marketplace.

IBIS Industry Category Business Valuation Ranking

Valuation Revenue

Valuation Profit

Valuation Market Share

Management Consulting Firms 1 $23,257,600,000 $2,281,600,000 55.0%

Investment Banking Firms 2 $9,144,000,000 $2,052,000,000 21.6% S

Accounting Services Firms 3 $4,865,000,000 $870,000,000 11.5%

Business Valuation Firms 4 $4,600,000,000 $470,900,000 10.9%

Business Brokerage Firms 5 $450,000,000 $35,775,000 1.1%

Total $42,316,600,000 $5,710,275,000 100%

Key Statistics by Competing Industries From IBISWorld Industry Reports for 2016

Key Competing Industry Statistics

Business Valuation

Competing Industries Total Valuation Industry

Business Brokerage

Investment Banking

Accounting Services

Management Consulting (see note 1)

Number of Firms 81.981 2,184 9,506 92,777 340,180 526,628

Industry Revenue $4,600,000,000 $1,000,000,000 $101,600,000,000 $97,300,000,000 $116,288,000,000 $320,788,000,000

Industry Life Cycle Decline Mature Mature Mature Mature N/A

Valuation Revenue % 100.0% 45.0% 9.0% 5.0% 20.0% 13.2%

Valuation Revenue $4,600,000,000 $450,000000 $9,144,000,000 $4,865,000,000 $23,257,600,000 $42,316,600,000

Valuation Market Share % 10.9% 1.1% 21.6% 11.5% 55.0% 100.0%

Annual Growth (Last 5 Years) 1.3% 3.0% -3.5% 4.4% 5.6% N/A

Annual Growth (Next 5 Years -3.6% 1.9% 2.9% 3.2% 4.1% N/A

Profit % 10.2% 8.0% 22.4% 17.9% 9.8% 13.5%

Estimated Valuation Profits $470,900,000 $35,775,000 $2,052,000,000 $870,000,000 $2,281,600,000 $5,710,275,000

Note 1: The Management Consulting Industry category reflects only Corporate Strategy and Financial Advisory consulting activity from IBISWorld data.



PART THREE - Taking Action in the New Valuation World: How to Re-invent Your Practice by Creating and Capturing

New High-Value Client Opportunities.

From our own experience in the valuation services world over the past 30 years, we have summarized the major valuation service offerings below with an assessment for each tier of services in regards to key client characteristics, pricing, competition, profitability and risk.

Valuation Service Fee Matrix

Tier Service

Category Typical Engagements Fee Type

Client Interaction

Pricing Mode

Competition Intensity

Profitability Risk & Stress

Tier 1 Regulatory

IRS 409A One-Time/Fixed Once Commodity High Low High Estate & Gift Tax One-Time/Fixed Once Commodity High Low High FLPs One-Time/Fixed Once Commodity High Low High ESOPs Annual Annually Commodity High Low High

Tier 2 Reporting Purchase Price Allocations One-Time/Fixed Once Commodity High Low Medium Goodwill Impairment Annual Annually Commodity High Low Medium

Tier 3 Advocacy

Litigation/Expert Testimony One-Time/Variable Once Elastic High Above Ave. High IP Infringement One-Time/Variable Once Elastic High Above Ave. High Disputes/Divorces One-Time/Variable Once Elastic High Above Ave. High Bankruptcy One-Time/Variable Once Elastic High Above Ave. High

Tier 4 Transactional

Opinions

Fairness Opinions One-Time/Fixed Once Premium Medium Extreme High Solvency Opinions One-Time/Fixed Once Premium Medium Extreme High Financing Opinions One-Time/Fixed Once Premium Medium Extreme High

Tier 5 Consulting Corporate Strategy Recurring Continuous Premium Medium High Low Value Growth Recurring Continuous Premium Medium High Low M&A Planning Recurring Continuous Premium Medium High Low

Tier 6 Transactional

Services

M&A Fee + Commission Continuous Premium Medium Extreme High ESOP Planning/Financing Fee + Commission Continuous Premium Medium Extreme High Capital Raise Fee + Commission Continuous Premium Medium Extreme High

The short and bittersweet news is this:

If you, as a business valuation expert, are operating primarily in Tier 1, Tier 2 and Tier 3, you may not be headed for immediate extinction as the IBISWorld Reports would lead you to believe. But, your future business life will continue to be more challenging as competition increases, prices continue to fall, and commoditized online reporting services take over formerly lucrative parts of the valuation market.

It is quite clear from our research that Transactional Opinions, Consulting and Transactional Services is where you want to be in growing your practice and the reason is highlighted in yellow above.



The most obvious strategic solution is a simple four-step process that will dramatically enhance the economics of your practice and the quality of your business and personal life:

Many of our friends and colleagues in the valuation profession at first believed that it was either very difficult or impossible to successfully redirect their attention and expertise to these more productive and profitable client segments.

We’ve found that to be a very damaging myth.

We would like the opportunity to show you how you can successfully make the transition into providing the more fast growing, more profitable and more highly valued services reflected in Tiers 4, 5 and 6.



Summary and Conclusion

➢ The future growth of the business valuation industry - and our personal survival and prosperity as business valuation experts - depends on embracing a new approach to helping clients in the middle market.

➢ As this Report has uncovered, there are significant new opportunities in the marketplace for business valuation professionals to provide strategic valuation growth services, but very few of us that are pursuing them in any meaningful way.

➢ If we are to achieve a potential 2x-3x growth in compensation and the value of our consulting practices over the next several years, it is imperative to immediately redirect our expertise and resources to delivering these strategic services to business owners that are so desperately in need of our guidance.

➢ There is no doubt that we are the most qualified group of experts on the planet with the highest level of credibility to assist business owners in maximizing the value of their companies in an increasingly competitive marketplace. It’s time we started doing it.

➢ For additional insights into our research and a specific program on how YOU can do this for your clients and your firm, please visit us here:

www.BVCPartnership.com



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