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Accounting Survey Identifies Niche Services Poised for Growth
In the midst of a less robust economy, public accounting firms continue to experience strong growth in niche services. The four top niche service areas, as identified by Accounting Today's 2002 Top 100 Firms report, are business valuation, estate planning, litigation support, and mergers and acquisitions. Topping the list is business valuation, with 78% of surveyed firms' reporting it as a key growth area. Further, business valuation can be an integral part of estate planning, litigation support, and mergers and acquisitions.
Business valuation - part science and part art - can be defined as the act or process of determining the value of a business enterprise or ownership interest therein. Determining the value of 100 shares of a publicly traded stock is a relatively simple matter. Millions of shares may be traded on a daily basis. There are countless buyers and sellers entering and exiting the market of a given stock in a seemingly endless succession. However, it is much more problematic to determine the value of a company that does not have an active market for its stock.
There are many quantitative methodologies that can be employed in valuing a business whose stock is closely-held, i.e. not actively traded. However, those various methodologies are encompassed by three generally accepted valuation approaches; the Income Approach, Market Approach, and Asset Based Approach. The Income Approach centers on converting future anticipated economic benefits into a single present value amount. The Market Approach is based upon comparable transactions of similar companies in the marketplace. The Asset Based Approach seeks to identify and value the company's tangible and intangible assets, net of its liabilities. Depending upon the facts and circumstances in a specific case, multiple methodologies within the three basic approaches may be employed in the valuation. Additionally, discounts and/or premiums to the derived value may be appropriate, again depending on the facts and circumstances.
Equally, if not more important, are the non-quantitative issues surrounding a business valuation. Such aspects include a thorough review of the company's strengths, weaknesses, opportunities, threats and other qualitative aspects of the business and the environment in which it operates.
In estate and gift planning, business valuations are commonly used to support the value of closely-held stock transfers. The Internal Revenue Service has specific criteria regarding disclosure requirements of estate and gift tax valuations. Additionally, the Internal Revenue Service recently published its own business valuation standards, which are intended to help guide their internal staff on business valuation issues and report writing. Further, there are significant theoretical business valuation issues at the forefront of recent tax court cases. Given the Internal Revenue Service's keen interest in estate and gift tax valuations, a well researched and documented valuation report can be a wise investment.
Business valuations are commonly prepared for contemplated transactions. Owners of privately-held companies often require a business valuation when they want to add an equity investor to the business or, alternatively, buy-out an existing shareholder or partner. Perhaps, they may even want to acquire an entire company or divest a product line. Whatever the case may be, a fully documented business valuation can help to minimize transaction problems and set the stage for a smooth transaction.
Business valuation reports are also utilized in support of litigation. Such cases may involve shareholder dissent suits, lost profits, or equitable distribution in divorce cases, among others. Additional litigation case specifics may require analysis regarding discretionary expenses, unreported income, or allegations of fraud. In instances such as these, it is essential for the valuation expert to be well versed in forensics and fraud investigation, as well as having effective court room presentation skills. The category of forensics/fraud ranked number seven in projected growth in top niche services list in Accounting Today's 2002 Top 100 Firms report.
There are many other instances in which business valuation reports are required. Clearly, valuation reports and valuation related services are and will continue to be a strong niche service of public accounting firms. The combined expertise of accountants in the fields of tax, auditing, investments, economics and financial planning helps to prepare them for the valuation arena. Accountants seeking to become proficient in business valuation may seek additional education, training, and certification through organizations such as the American Institute of Certified Public Accountants, the American Society of Appraisers, the Institute of Business Appraisers, and the National Association of Certified Valuation Analysts.
From a client's perspective, it is critical to gain a thorough understanding regarding the collective experience and qualifications of the accounting firm's valuation department as they relate to the client's business and valuation requirements.
By James K. Gullihur, CPA, AM jgullihur@alpern.com and Ann Bianchi, AIBA abianchi@alpern.com.
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