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IN THIS ISSUEThe Management Interview: Why It’s anImportant Piece of the Valuation Processand What You Should ExpectArticl...
Mercer Capital’s Value MattersTMIssue No. 2, 2013© 2013 Mercer Capital // www.mercercapital.comBusiness Valuation & Financ...
Mercer Capital’s Value MattersTMIssue No. 2, 2013© 2013 Mercer Capital // www.mercercapital.comBusiness Valuation & Financ...
Mercer Capital’s Value MattersTMIssue No. 2, 2013© 2013 Mercer Capital // www.mercercapital.comBusiness Valuation & Financ...
Mercer Capital’s Value MattersTMIssue No. 2, 2013© 2013 Mercer Capital // www.mercercapital.comBusiness Valuation & Financ...
Mercer Capital’s ability to understand and determine the valueof a company has been the cornerstone of the firm’s services...
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Mercer Capital's Value Matters (tm) | Issue 2 2013 | The Management Interview: Why It's An Important Piece of the Valuation Process and What You Should Expect

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Mercer Capital's VALUE MATTERS(TM), published 6 times per year, addresses gift & estate tax, ESOP, buy-sell agreement, and transaction advisory topics of interest to estate planners and other professional advisors to business.

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Transcript of "Mercer Capital's Value Matters (tm) | Issue 2 2013 | The Management Interview: Why It's An Important Piece of the Valuation Process and What You Should Expect"

  1. 1. IN THIS ISSUEThe Management Interview: Why It’s anImportant Piece of the Valuation Processand What You Should ExpectArticles of Interest from Around the WebMercer Capital’s Industry CoverageAbout Mercer CapitalValueMattersTMIssue No. 2, 2013Business Valuation & Financial Advisory Services
  2. 2. Mercer Capital’s Value MattersTMIssue No. 2, 2013© 2013 Mercer Capital // www.mercercapital.comBusiness Valuation & Financial Advisory Services2The Management InterviewWhy It’s an Important Piece of theValuation Process and What You Should ExpectOne critical part of the valuation process is the managementinterview or, as it is sometimes called, the due diligence visit.The management interview provides the business appraiser withan opportunity to integrate many sources of information about abusiness into a logical and consistent whole. The interview alsohelps to complete an overall understanding of how a particularbusiness operates. The process of preparing for and conductinga management interview requires the appraiser to developa command of the facts and circumstances of this particularvaluation case.The Objectives of theManagement InterviewThe specific objectives of the management interview include:1. Reviewing details of documents previously provided bymanagement in order to ensure that all necessary financialand operational disclosure has been obtained and isreasonably understood.2. Forming an impression of the local economy based uponobservation (to help challenge or verify economic statisticsor management’s overview of the economic situation).3. Identifying those factors or trends that can reasonably beexpected to influence the future performance of the business.4. Formulating an overall opinion of management’s ability toachieve anticipated operating results.The management interview, if properly conducted, will enable theappraiser gain a more complete perspective of a business than ispossible from reviewing documents alone.Ultimately appraisers have the task of understanding the riskprofile of the business as a whole and the facets that composeit and of assessing the opportunity profile of business. Risk andgrowth assessment are both over arching (the forest) as well asthe core (the trees) of the appraiser’s valuation development andreporting processes.Appraisers are often asked why they need to pose certainquestions or to collect certain data (sometimes owners andmanagers chafe at questions in the why and what-if categories).In fact, a good management interview likely involves a few tensemoments. Einstein may have said it best when he commented,“not everything that can be counted counts, and not everythingthat counts can be counted.”Face-to-Face vs.Phone InterviewMost valuation firms make it policy that first-time engagementswith a client company require an on-site interview. Subsequentvaluations of the same business enterprise need not require a visitunless there has been a material change in the key personnel,facilities, financial performance, an extended time since the priorvisit, or some other factor that, in the determination of the appraiserand/or the client, suggests something more than a teleconferenceand exchange of information. Special circumstances limiting theneed and/or relevance of on-site visitation might include thevaluation of investment vehicle entities, such as family limitedpartnerships or other entities that hold and manage assets thatcan be thoroughly studied from afar.There are additional factors that influence the nature of thedue diligence process. These may include the client’s need toaddress questions about the engagement, the client’s concernfor engagement timing and expense, the nature of the valuationopinion, and the involvement and needs of other advisors,particularly fiduciaries.
  3. 3. Mercer Capital’s Value MattersTMIssue No. 2, 2013© 2013 Mercer Capital // www.mercercapital.comBusiness Valuation & Financial Advisory Services3The Preparation You ShouldExpect From Your AppraiserGood interviewing, whether on-site or by other means, startswith thorough preparation. Assuming information collection islargely complete; the materials should be reviewed and organizedin a fashion that facilitates productive inquiry by the appraiserand responsiveness from the interviewee. Historical financialinformation should be recast in a manner that allows for theexamination of trend over time (say, five years) and that promotesthe ability of client and appraiser to highlight potential financialadjustments.Also, the appraiser should have reviewed documentsrelated to the business’s history, ownership, and currentorganizational structure.Economic data for thecity, county, and regionshould be obtained fromindependent sources, aswell as from the business,when available andreviewed.Also, the subjectcompany’s marketing andweb-based materials canprovide a useful contextfor assessing the successof the report in presentingthe company as it exists inthe eyes of those who ownand operate it. Industryvocabulary and news itemscan also prove helpful in assessing the company’s position withinits industry and among its competitors.Most valuation practitioners use some form of questionnaireor checklist that is structured in such a fashion as to promotecoverage of the subject matter that could be reasonably expectedto influence the valuation. A well-crafted valuation report willprovide the reader with a thorough narrative description of thesubject business enterprise and the ownership interests therein.Who Should Be Interviewed?Identifying who should be interviewed and where interviewsshould be conducted is important to gaining appropriateperspective about the subject company. The nature, size, andcomplexity of the business enterprise generally guide theappraiser’s design of the interview process. Small businesseswith concentrated operations usually do not require the appraiserto meet with more than a few select individuals or at more thana single location. Large diverse businesses with complicatedoperations and highly delineated senior job responsibilities mayrequire the appraiser to meet with numerous individuals and atdiffering locations.The valuation of most small, closely held businesses generallyinvolves the interviewing of a senior, big-picture executive(president, CEO, COO) and a financial officer. In many casesadditional interviews or follow-up might be conducted with anexternal accountant or legal advisor.Agenda of a TypicalManagement InterviewThe following bullet points provide an outline of a typicalmanagement interview. For perspective, assume the subjectcompany is a manufacturing business with $50 million in annualrevenue and a single facility harboring both production andadministrative departments. The budgeted time is approximatelyfive hours, effectively a day-long interview session when coupledwith the travel burden normal to most due diligence.» The appraiser will request a suitably private andcomfortable space in which to spread out and assemble allparticipating parties.» A tour of the facility with the appropriate managementpersonnel to understand the physical and human resourcesrequired to conduct operations will be on the agenda. Tourscan be quite brief or very involved. A good tour provides thebest opportunity for the appraiser to understand capacity,safety, functional flow, technology, critical stages and otherattributes of the physical side of the business. The degree ofphysical asset intensity provides a preview of balance sheetcomposition and financing needs of the business. It oftenmakes sense to follow the path of the product as it evolvesfrom supplied inputs to finished product (dock to dock).Facility tours provide important perspective for understandingthe financial representation of assets on the balance sheetand the operational results and margins captured by theincome statement.Most valuationpractitionersuse some formof questionnaireor checklist thatis structured topromote coverageof the subjectmatter that could bereasonably expectedto influence thevaluation.
  4. 4. Mercer Capital’s Value MattersTMIssue No. 2, 2013© 2013 Mercer Capital // www.mercercapital.comBusiness Valuation & Financial Advisory Services4» The interview will start by focusing on “the big picture.”Senior management will be interviewed to gain a properunderstanding of key industry and economic drivers for thebusiness.The supply and demand features of the product, theinfluence of regulation, commodity pricing, labor availability,evolution of the industry and its adjacent sectors, and manyother areas of investigation can be important to gaining abase of understanding for the company’s real-time and long-term challenges and opportunities.» Key internal and external elements of the business willthen be addressed. Appropriate members of managementwill be interviewed to gain an understanding and descriptionof key internal and external elements of the business. At thisstage of the management interview process, the appraiserhas a big-picture grasp of the economic and industry attributesof the business as well as grounding in the brick and mortarand mechanical intensity of the business. Now it’s time todelve deeper into the functional and descriptive specifics ofthe company, which are used to complete the appraiser’sunderstanding and promote proper narrative documentationof the business in the valuation report. Descriptions and listsof the products, key suppliers, key customers, personnel,management organization, trend analysis, competition, andother relevant data should be reasonably disclosed andassessed for its relevance to the valuation.» Clarifying information is obtained or requested. Initialinformation requests rarely provide all the data required tocomplete a valuation analysis. Optimally, the appraiser isaccumulating information items during the interview andis able to exit the process with materials in hand. If theinformation is not readily available, it is obtained shortlyfollowing the interview. The nature of follow-up informationis often more specific to the adjustments and documentationfor the appraisal.» The interview is ended and the timing of the next stageof the engagement is communicated. In most mediumto larger valuation practices, there is usually some follow-up for details. Often, a senior analyst or executive may haveconducted the interview. Accordingly, follow-up may comefrom a supporting valuation analyst who is assisting in thecompilation of work documentation and appraisal modeling.Experience has taught us that the overriding goal for interviewingand face-to-face meetings is to get the big picture in the wordsof and from the perspective of company managers and ownersthat know more about their industry and their operation than theappraiser ever will.Mercer Capital NewsNew Kindle Book ReleasedBuy-Sell Agreements for Baby Boomer Business OwnersThis new Kindle book shares essential information from the printbook, Buy-Sell Agreements for Closely Held and Family BusinessOwners, but is shorter and focused on the concerns of baby boomers.It focuses on valuation and improving the valuation mechanisms ofnew and existing buy-sell agreements and addresses the fact thatmost of us boomers can’t afford (time or money) for our agreementsnot to work. It also encourages baby boomer business owners towork with their team of professional advisers to make sure that theiragreements will work when triggered.Available at Amazon for only $2.99 for a short time.Jay D. Wilson, Jr. ReceivesASA DesignationJay D. Wilson, Jr., vice president, has earned the right to use theAccredited Senior Appraiser (ASA) designation in the businessvaluation discipline from the American Society of Appraisers.Earning the designation requires a minimum of five years or 2,000hours of business appraisal experience, completion of writtenexaminations, peer review of a business valuation report, and otherqualifying criteria demanded by the Society’s International Board ofExaminers.Jay, a senior member of Mercer Capital’s Financial Institutions Group,also holds the Chartered Financial Analyst (CFA) designation from theCFA Institute and the Certified Business Appraiser (CBA) designationfrom the Institute of Business Appraisers.
  5. 5. Mercer Capital’s Value MattersTMIssue No. 2, 2013© 2013 Mercer Capital // www.mercercapital.comBusiness Valuation & Financial Advisory Services5Concluding ThoughtsThe management interview is an important part of the valuationprocess. Users of valuation reports should inquire into the levelof due diligence used by an appraiser to ensure that confidencein the results is warranted. Some appraisers do not visit thebusiness in the normal course of preparing appraisals. In manycases, these appraisers provide fee quotes that are considerablyless expensive than other appraisers who follow due diligenceprocedures similar to those outlined in this article. In the case ofvaluations, however, as in many other areas of life, cheaper is notalways better. Caveat emptor.Mercer Capital is a national business valuation and financialadvisory firm. We bring analytical resources and over 30 years ofexperience working with private and public operating companies,financial institutions, asset holding companies, high-net worthfamilies, and private equity/hedge funds. Contact us to discuss avaluation issue in confidence.Timothy R. Lee, ASAleet@mercercapital.com901.685.2120Since 1982, Mercer Capital has performed thousands ofengagements across a wide array of industries. This broadbase of experience has resulted in the development ofspecialized expertise in various industry sectors.We have formalized certain industry-specific efforts to providea regular, detailed overview of pertinent issues and relevantcurrent events in a selection of sectors. The informationgathered through these efforts is published in complimentaryindustry newsletters.Each industry sector is led by senior professionals whomonitor industry trends and have years of experience inassisting clients with their valuation and transaction advisoryneeds.To subscribe to these newsletters, visit our website atwww.mercercapital.com.Industries currently covered:• Asset Management including traditional asset managers,mutual fund companies, alternative asset managers, andtrust companies• Business Development Companies• Community Banks• Insurance including independent insurance brokers andagents, property and casualty underwriters, life insuranceunderwriters, and health insurance underwriters• Medical Device Manufacturers including orthopedics,cardiovascular, spinal, dental, biologics, and generalsurgery• ConstructionIndustry Whitepapers Recently ReleasedMercer Capital’sIndustry CoverageUnderstand the Value ofYour Insurance BrokerageUnderstand the Value ofYour Trust CompanyDownload whitepapers & subscribe to the industryquarterlies at www.mercercapital.comArticle adapted from A Reviewer’s Handbook to Business Valuation:Practical Guidance to the Use and Abuse of a Business Appraisal byTimothy R. Lee and L. Paul Hood (John Wiley & Sons, 2011)2014 Fiscal Year Estate Tax Proposals:About Fairness IndeedMiles C. Padgett & Donald D. KozuskoWealthManagement.comA Look at the Estate Tax Provisions in thePresident’s FY 2014 Budget ProposalEileen Reichenberg SherrThe Journal of AccountancyArticles of interest fromaround the web
  6. 6. Mercer Capital’s ability to understand and determine the valueof a company has been the cornerstone of the firm’s servicesand its core expertise since its founding.Mercer Capital is a national business valuation and financial advisory firm founded in 1982. Weoffer a broad range of valuation services, including corporate valuation, gift, estate, and incometax valuation, buy-sell agreement valuation, financial reporting valuation, ESOP and ERISAvaluation services, and litigation and expert testimony consulting. In addition, Mercer Capitalassists with transaction-related needs, including M&A advisory, fairness opinions, and strategicalternatives assessment.We have provided thousands of valuation opinions for corporations of all sizes in a variety ofindustries. Our valuation opinions are well-reasoned and thoroughly documented, providingcritical support for any potential engagement. Our work has been reviewed and accepted by themajor agencies of the federal government charged with regulating business transactions, aswell as the largest accounting and law firms in the nation on behalf of their clients.Contact a Mercer Capital professional to discuss your needs in confidence.MercerCapitalTimothy R. Lee, ASA901.322.9740leet@mercercapital.comNicholas J. Heinz, ASA901.685.2120heinzn@mercercapital.comMatthew R. Crow, CFA, ASA901.685.2120crowm@mercercapital.comZ. Christopher Mercer, CFA, ASA, ABAR901.685.2120mercerc@mercercapital.comMercer Capital5100 Poplar Avenue, Suite 2600Memphis, Tennessee 38137901.685.2120 (P)www.mercercapital.comContact UsCopyright © 2013 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’spermission. Media quotations with source attribution are encouraged. Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120.Mercer Capital’s Value MattersTMis published six times per year and does not constitute legal or financial consulting advice. It is offered as an information service to our clients and friends.Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add yourname to our mailing list to receive this complimentary publication, visit our web site at www.mercercapital.com.VALUE MATTERSTM. This newsletter, published 6 times per year, addresses gift & estate tax, ESOP, buy-sell agreement, and transaction advisory topics of interest to estate planners andother professional advisors to business. For other newsletters published by Mercer Capital, visit www.mercercapital.com.

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