Middle market deal volume and valuations held steady from the third quarter to the fourth quarter of 2008

Contrary to expectations, middle market deal volume and valuations held steady from the third quarter to the fourth quarter of 2008. However, the economic crisis severely affected debt levels, which declined dramatically, according to GF Data Resources’ Middle Market M&A Valuation Report for the fourth quarter of 2008. GF is a proprietary database that collects detailed data on private-equity transactions valued between $10 million and $250 million. “Fourth quarter valuations remained in line with quarterly averages dating back to mid-2007, when the mortgage lending crisis first affected public equity markets,” Andrew Greenberg, GF Data Resources’ CEO said, adding, “debt levels fell sharply, a result of the tightening credit markets and the lack of available cash needed to finance these deals.”

“This is comparable to deal volume both before and after the financial industry meltdown came into full effect in the fall,” Greenberg explained. “While the data suggests a continuation of activity in the lower middle market [deals valued below $100 million] it also provides evidence of a freeze occurring among larger deals where the pullback in credit has been more severe. Firms contributing to the report completed 13 deals in the $100 million to $250 million range in 2007, but only five in the same range this past year.”

The primary valuation metric—Total Enterprise Value as a multiple of adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA)—averaged 5.9x for the fourth quarter, down from 6.3x in the third quarter of 2008 but up slightly from 5.8x in the second half of 2007. “Total debt and senior debt declined dramatically, falling to 2.4x Adjusted EBITDA and 1.9x, respectively,” Greenberg noted. “Those number were 3.4x and 2.6x, respectively, in the third quarter, and averaged 3.4x and 2.5x respectively for the first half of 2008. As a result of declining debt levels, average equity contributions soared to 59.9 percent, up almost 20 percentage points from the third quarter of 2007.” Individuals and companies interested in subscribing to the Middle Market M&A Valuation Report can contact GF Data Resources by visiting their Website.

How has the recession affected BV firm recruitment and retention?

Obviously, there are many large BV firms. However, data from the 2009 Business Valuation Firm Economics & Best Practices Survey from Business Valuation Resources (BVR), show that the business valuation profession is dominated by independent practitioners, whether full-time business appraisers or CPAs who also do valuations. According to our Survey, the median size practice providing BV services employs a partner and two employees—a total staff of three. In addition, a BV practice with total staff (including partners) of nine would rank in the top 14% of the largest BV firms in North America. Yet when it comes to hiring freezes and layoffs, small and midsize BV firms are perhaps more susceptible to the current economic crisis than their larger peers. Or are they? To find out, and offer information that readers can use to assess their firm’s current condition, we have put together a survey that should offer important information to experts in organizations of all sizes. You can take the survey online and look for insights gleaned from the poll in an upcoming issue of the BVWire™. And remember, as always, all responses are strictly confidential.

BV experts can now get an insider’s perspective on the Pension Protection Act of 2006

The Pension Protection Act (PPA) of 2006 presented new guidelines by which business appraisers and CPAs operate, most notably increasing the penalties these professionals can suffer. Since its passage three year ago, new guidelines and regulations have clarified appraiser penalties, while altering the rules by which they operate. Clearly, though, there is a trade off between an increase in business and what is required of appraisers. A depth of knowledge and perspective, therefore, can mean the difference between penalty and prosperity.

IRS New Rules: Pension Protection Act and Beyond, a 100-minute BVR teleconference, will feature an all-star panel—tax attorney William Forsberg, Internal Revenue Service territory director Michael Gregory, the Institute of Business Appraisers’ executive director Howard Lewis, and business appraisal expert and moderator Robert Cimasi, president of St. Louis, Missouri’s Health Capital Consultants. The panel’s diverse viewpoints will give the guidance all BV practitioners need. This teleconference will take place on Thursday, March 18 from 10:00am-11:40am PST/1:00pm-2:40pm EST. Attendees can receive 2 CPE and/or 1.5 CLE credits. To find out more or to register, click here.

Weigh in on the Appraisal Standards Board’s (ASB) 3rd Exposure Draft of proposed changes to the 2010-11 USPAP

The ASB is soliciting comments to its 3rd Exposure Draft on revisions to the Uniform Standards of Professional Appraisal Practice (USPAP). Those interested in commenting before the Friday, March 27 deadline can do so via e-mail. Questions regarding the Exposure Draft and the topics covered—the definition of “assignment;” the definition of “signature;” the definition of “jurisdictional exception” and revisions to the jurisdictional exception rule; the ethics rule; the competency rule; and Standard 3, appraisal review, development, and reporting—should be directed to Carrie Composto.

More on Goodwill before—and after—Gaskins from BVResources

Last week’s coverage of Gaskill v. Robbins generated a few e-mails from readers looking for more on this important case. Interested readers will be happy to know that the full-text of the Kentucky court’s decision now joins the over 1,500 matrimonial cases posted to BVLaw™, the single-largest, BV-specific case law database available to financial experts, valuation analysts, and attorneys. More good news: We have updated our “Goodwill Hunting,” state-by-state summary to reflect the new ruling in Gaskill; the free download is available here.

Indeed, if you have not visited www.bvresources.com in recent weeks, now is the time to take a closer look. We are constantly updating the site to offer the information and insights that BV experts need to improve their practices. Much of it, in fact, is free for the taking. Case in point: The Free Downloads page includes a number of must-reads. Below is a quick list of the most downloaded files over the last several months:

  • Appraisals for Tax Purposes: Collateral Damage of the ‘Pomeroy Bill’
    Authored by Will Frazier, this is a Special Report from the Business Valuation Update™
  • Summary of FAS 157, Fair Value Measurements
    A summary that includes key points, new disclosure requirements and a discussion on the convergence with international valuation standards
  • Free Issue of the Economic Outlook Update™ 4Q 2008
    An economic summary of one of the worst quarterly economic results in history
  • Median Pricing Multiples from the Pratt's Stats® Database
    Valuation multiples haven’t dropped yet, but all the data for 2008 isn’t in yet
  • Reporting Standards Update: What All BV Analysts Must Know
    Authored by Donald P. Wisehart and David Anderson, this is a comparative analysis of the AICPA, ASA, NACVA, USPAP and IBA standards and includes a list of Permitted Engagements and Reports per organization

Another attack on fair value

The House Financial Services Committee’s recently announced March 12 hearing on mark to market accounting has the blogosphere abuzz with discussion of whether it will set the stage for the demise of this hotly-debated accounting rule. The Capital Markets Subcommittee, chaired by Rep. Paul Kanjorski (D-PA), will conduct the hearing. Kanjorski’s subcommittee, comes on the heels of a letter sent to Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers, in which representative Kanjorski writes: “We are in a time of severe market turmoil and this accounting rule is counterproductive and, frankly, making the economic situation worse. I have heard from businesses and banks in my district about this rule and how its application has forced them to write down mortgage-related securities and other assets, thus exacerbating the credit crisis. Additionally, I believe suspending mark-to-market will save taxpayer dollars by allowing banks to avoid booking losses on securities that may have value after this credit crisis subsides. We must do something to provide financial relief and I believe temporarily suspending these accounting rules is one important step we must take.”

The Public Company Accounting Oversight Board (PCAOB) votes to repropose for comment on auditing standard on Engagement Quality Review (EQR)

The Board first proposed a new standard on EQR on February 26, 2008. According to the announcement, “the proposal would supersede the Board’s quality control standard, SECPS Requirements of Membership, Section 1000.08(f) and apply to all audit engagements and engagements to review interim financial information conducted pursuant to the standards of the PCAOB. The proposed EQR standard also provides a framework for an engagement quality reviewer to evaluate the significant judgments made by the engagement team and conclusions reached in forming an overall conclusion on the engagement.” The Board is seeking comment on this proposed standard for a 45-day period.


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