When to Engage with a Valuation Services Provider
Valuation services never go out of style. No matter what's going on in an industry, or even the economy as a whole, there will always be a demand for valuations. But those demands can change over time so, like the accounting and finance worlds themselves, valuation services are perpetually evolving.
To throw another wrench into the works, the term alone – valuation services – is too often used as a catchall, sometimes muddling what these essential services actually mean. So to clear matters up, we're taking a few minutes to discuss what valuation services are in today's world and, more importantly, when companies should engage with valuation service providers.
What Are Valuation Services?
Valuation services are an evergreen need in the marketplace. In good times and bad, through peaks and valleys, businesses often need to know the value of a particular asset on a particular date, sometimes for hypothetical purposes, but other times for actual transactions.
However, companies use valuations for various needs, they still don't fall within typical daily operations, at least for the most part. Therefore, businesses usually don't have the in-house experience needed for valuations, even in a team chock-full of corporate finance gurus.
That, in a nutshell, is what valuation advisory services bring to the table – specialized expertise organizations can count on during a merger or acquisition, disposition, tax planning, financial reporting, bankruptcy, or the many other business needs requiring valuation. And all without having to expand their team or tackle something patently out of their purview. But let's put a pin in that for now since we'll dive a bit deeper into specific valuation needs in just a bit.
When to Hire Valuation Advisory Services
To put it bluntly, the sooner you hire a valuation specialist, the better. Granted, that's more of an ideal since most companies still wait until after a triggering event occurs to engage an outside valuation expert. Still, in a perfect world, the valuation work would start before the actual measurement data – even without a firm date or purchase price locked in – since engaging valuation professionals early can prevent tax and financial reporting surprises later
Given the recent state of the economy and some pretty wonky market dynamics, a scarcity of professionals means fewer qualified valuation providers than actual valuation work. Sure, as valuation professionals ourselves, many firms are re-examining their historical providers for ones that fit their needs better.
Long story short, our advice is to bake valuation services into project timelines since providers are stretched pretty thin these days. So whether the need stems from M&A, restructuring, private equity, or something else, you don't want a valuation to be a bottleneck in the process.
Further, don't forget that external auditors are often involved when you engage with valuation service providers. In fact, if your valuation results are material, senior leadership, your board, and your external auditors must all approve that opinion, and that process takes a fair amount of time.
Also, besides giving yourself enough wiggle room on the calendar, life is just much easier when conversations between a valuation provider and your external auditor can start early in the process. This way, you can discuss your specific needs and objectives with these two outside parties, making you better prepared for the accounting event when it actually happens.
Likewise, such collaboration between your internal stakeholders, external auditor, and valuation provider can also help smooth out your post-event timeline and tasks. Don't forget, after a complex M&A transaction, for example, you're going to have enough on your hands just trying to effectively combine the various business units without worrying about your valuation or audit.
Tax and Financial Reporting Events
Tax planning and tax-related valuation events are also evergreen needs for businesses. And while companies have a bit more leeway than individuals on the tax reporting front – with taxable events falling into the following year's corporate tax filing – time can still be a formidable foe.
Like it or not, memories fade, data goes stale, people leave your organization, and your team gets preoccupied with the countless other responsibilities on their respective plates. Obviously, these can all be significant hurdles an outside valuation specialist must clear, providing yet another reason why engaging a provider as early as possible is in everyone's best interests.
Further, tax events often trigger financial reporting events – including your 10-K, 10-Q, amongst others – so we recommend tackling your tax and reporting needs simultaneously. And while book/tax differences are common , they still require adequate explanation which, once again, requires some time.
Additionally, as a slight aside, cash flow implications come part and parcel with tax valuations. However, you can potentially take advantage of certain safe harbor provisions associated with using a valuation specialist.
Other Valuation Needs and Best Practices
As we said up top, no matter what industry you're in or what stage of the business lifecycle you're traversing, there's a fair chance evaluation needs will arise at some point in the future. However, due to the sheer volume of those needs, we'll just list them for now and take a deeper dive into the most common ones at some point down the road.
- Portfolio company quarterly marks
- Tangible property, plant, and Equipment
- Asset-based lending
- Restructuring, liquidation, and worthless stock
- Purchase price allocation
- Impairment testing
- Land and construction-in-progress
- Securities and financial instruments
- Formation of a joint venture (JV)
- Incentive units compensation
Oh, and don't forget about:
- Estate planning and gift tax
- Debts valuations and debt derivative bifurcation
- Furniture and fixtures
- Leasehold improvements
- Trademarks and patents
- License and permits
Pretty lengthy lists, huh? And a varied one at that, including everything from real estate and intangible asset valuations to intellectual property and litigation support. Even more foreboding, we only covered the higher-level needs, meaning those lists could have been much longer.
Of course, each of those needs comes from some corner of US GAAP, including:
- ASC 805: Business Combinations
- ASC 820: Fair Value Measurement
- ASC 350: Intangibles, Goodwill and Others
- ASC 360: Property, Plant, and Equipment
- ASC 718: Compensation-Stock Compensation
The bottom line – given how important a valuation can be to your organization, you want to be sure to pair your specific need with specific expertise.
Put another way, if you need an 805 or stock option valuation, then you should find a professional with experience in those areas, not a group specializing in office furniture, antiques, or dump trucks. Because as important as that furniture valuation might be in a specific scenario, a valuation expert in that area isn’t going to be very helpful when you're staring a hefty amount of critical buy- or sell-side M&A due diligence in the face..
Therefore, our advice is to be careful in who you engage with, making sure they have sufficient experience with your particular need and, ideally, your industry, whether that’s oil and gas or cutting-edge technology. To use Embark as an example, our team consists of professionals from the Big 4 and other national firms with a wide range of experience across industries, geographies, and valuation specialties. So, chances are, we’ll knock it out of the park for whatever you need. But if it’s out of our area of expertise, we’ll tell you.
Ultimately, when you choose the right business valuation specialists, you not only get to leverage their expertise but, almost as importantly, keep disagreements, disruptions, and annoyances from destroying your workflow. Thankfully, that's exactly what Embark's valuation team brings to the fold – cost-conscious expertise and extensive experience that will blend into your culture without a hitch. And that type of service is hard to put a price on.