Publicly traded companies have a lot of options to choose from when selecting a professional to assist with fair value measurements. However, because they may not deal with these issues every day, many CFOs don’t know what they should expect from the professionals they engage, and as a result often don’t evaluate the level of service they’re receiving. This results in working arrangements with professionals who don’t have adequate fair value expertise.
While there’s no right or wrong answer when it comes to selecting a valuation professional to assist with fair value estimates, there are things to look for that can improve a company’s chances of developing and reporting reasonable, consistent, and reliable results.
Below are five key characteristics CFOs should expect from a valuation professional who’s conducting a fair value measurement for their company.
Adherence to Fair Value Standards
Fair value standards are part of US Generally Accepted Accounting Principles (GAAP), which are continuously revised in an attempt to remain relevant to the speed of business. Under GAAP, in 2017, the Financial Accounting Standards Board revised accounting standards for revenue recognition, lease accounting, and financial instruments—affecting virtually all companies in the United States, no matter their size or whether they’re public or private.
Valuation professionals must be vigilant in maintaining a strong working knowledge of GAAP and the standards that directly affect fair value estimates to be able to provide a reasonable and supportable fair value estimate.
Active Participation in Standard-Setting Organizations
Companies stand to benefit from working with professionals who are leaders and participants in standard-setting organizations, such as the American Institute of CPAs (AICPA), which sets ethical and auditing standards for the accounting profession and develops the CPA exam, or the Appraisal Issues Task Force (AITF), which provides expertise for regulators to use in the development of new standards.
The newest guidelines set by the AICPA and regulators inevitably require interpretation. As such, working with a valuation professional who’s involved with these professional organizations makes it more likely a company will receive a fair value estimate that complies to current standards—making it both reviewable by an audit firm and repeatable.
Strong Referral Source
CFOs often select their top choice in accounting firms to provide audit services, but independence requirements prohibit an auditor from conducting the following services:
- Enterprise resource planning system selection
- Internal audit
- Sarbanes-Oxley Act, also known as SOX, compliance
Although independence concerns prevent an auditor from conducting fair value measurements for their clients, an auditor can often refer a valuation professional whose work they’ve successfully reviewed—and who may come from a competing firm—knowing he or she will provide a high level of service and expertise. Because a referral from an auditor puts his or her firm’s reputation in play, a company can usually expect good work from a referred source.
Independent valuation professionals can find it challenging to stay current on evolving GAAP standards as they relate to fair value. As such, CFOs stand to benefit from obtaining feedback from their auditor about the auditor’s past experiences with firms that provide fair value work.
More Partner Attention
Companies should expect a partner to invest in their relationship and not immediately pass a fair value assignment to a junior analyst. Unfortunately, after committing to this type of work, sometimes the partner, director, or senior manager who began the relationship may disappear and assign it to someone more junior, someone whose time isn’t perceived to be as valuable, or someone who’s simply less busy.
A fair value estimate project may require staff assistance depending on the size and structure of a business, but it’s also reasonable to expect an appropriate amount of partner involvement. A high staff-to-partner ratio may be an indication that a partner will, of necessity, spend most of his or her time reviewing the work of others instead of impacting and influencing report conclusions personally.
A fair value measurement can often only be considered acceptable and hold up under scrutiny if the valuation professional understands your industry.
Differences in the above chart can drive significant differences in value conclusion, which makes it imperative that a professional be familiar with the industry in which he or she is working.
For example, Restaurant A is an upscale, urban, steak house. Its wait and kitchen staff are typically paid at levels above the minimum wage, mitigating any immediate impact that a change in state or local laws could have.
Restaurant A rents its facility, which drives a systematic difference between the two restaurants in terms of EBITDA. This is because its rent is above the line and depreciation resulting from ownership is added back. Restaurant A is also not required to pay a franchise or coop marketing fee in addition to local advertising.
Restaurant B owns its property, making it in part a real estate company with returns allocated to the business asset and real-property investment. Given the price points and day-parts served, each restaurant is impacted differently by an up- or down-turn in discretionary spending levels.
In short, if an advisor doesn’t understand his or her client’s business in addition to the rules that apply to the valuation work itself, the chances of him or her providing a reasonable and reliable estimate of fair value are diminished.
We’re Here to Help
Understanding and applying the unique requirements related to fair value estimates requires a dedicated team that understands not only valuation, but your business and objectives, and can work with your team to determine your most critical issues to ultimately achieve your end goal. For more information on choosing the right valuation professional for your company, contact your Moss Adams professional.