Valuations

EFCG is the leading valuation appraiser to the A/E/C industry. We provide periodic appraisals for approximately 25 A/E/C firms, ranging from $5 million to $5 billion in gross revenue. In addition, we have performed ad hoc appraisals for another 300 A/E/C firms over the last 20 years. Roughly 1/3 of all our appraisals are for ESOPs.

APPROACH TO VALUATION:

Since most A/E/C firms are privately-held, their approach to internal valuation is critical to their corporate strategy. Too low a valuation may lead to a sale, and if the firm does not sell, retiring shareholders may receive far less than fair market value for their stock. In addition, too low a valuation makes acquisitions financially inefficient. On the other hand, too high a valuation makes it difficult for a firm to repurchase shares of retiring or departing employee shareholders. And too volatile a pricing strategy (e.g. using a formula that heavily weights a short period of earnings) can create a moral hazard, especially if shareholders retire during a difficult period.

VALUATION METHODOLOGY:

While many appraisers use a “black box”, which is difficult to understand, we have a clear and transparent valuation methodology, based upon the following:

M&A Comparables:  This analysis determines the equity value of a firm by utilizing 30-60 comparable M&A transactions of A/E/C firms, over the most recent 3-4 year period, to establish a range of earnings, revenue and book value multipliers, which are then applied to a firm’s financial results. Once the firm’s M&A value is established, a minority interest/illiquidity discount is applied, since we are valuing a single share of illiquid stock, rather than a controlling stake. Because the vast majority of A/E/C M&A metrics are private, no other appraiser has the database of metrics, covering over 250 transactions of all sizes, that we do. We have this information since we advised on over 140 completed M&A transactions, are involved indirectly with many others, and gain access on a confidential basis through our many client relationships.

Public Market Comparables: This analysis utilizes the valuation multiples of publicly traded A/E/C firms. For the past 20 years, we have published a detailed quarterly financial analysis of 20-40 publicly traded A/E/C firms, providing us with not only their current valuations, but a broader historical perspective.  For smaller firms, we tend not to use this approach, because the valuation metrics for public firms, which tend to be very large, are not that applicable. Other appraisers often rely heavily on the public comps when valuing small firms, because they don’t have the database of M&A comps that we do.

Discounted Cash Flow (“DCF”) Analysis: The DCF estimates the value of a firm by projecting its future cash flows (usually 5-10 years into the future) and applying an appropriate discount rate to determine its present value. We tend to rely least heavily on the DCF, given the difficulty of making accurate projections in our industry, or determining the appropriate cost of capital by which to discount the projections.

PRIMARY VALUATION SERVICES:

ESOP Valuation:  If your firm has an ESOP, or is considering an ESOP, you will need to have a periodic independent valuation. While any ESOP appraiser can technically provide a valuation, we believe that an A/E/C appraiser, such as EFCG, will provide a more accurate valuation than a ESOP specialist who may not understand this industry or have the data (e.g. comparable M&A valuation metrics).

Internal Ownership Transfer:  While there are many different approaches that firms can use to value their stock, including using a formula or an appraisal or a combination of the two, there is no one right approach. Indeed, almost every private A/E/C has a different approach to valuing their stock for internal ownership transition.  We find that the key is to have an approach which provides a consistent, transparent and fair valuation, while also helping a firm achieve its strategic objectives (e.g. higher valuation is better if a firm plans to make acquisitions, but lower valuation makes it more affordable and therefore more sustainable).

M&A:  We believe no appraiser can provide a more realistic assessment of the fair market value of your firm, and what you can do to increase the market value. We are the most experienced M&A advisor to the A/E/C industry, as we have advised on over 140 completed M&A transactions.

Fair-Market Value Assessment:  With our experience in mergers and acquisitions, our analysis of the public company A/E/C firms, and our unparalleled 25-year valuation experience in the A/E/C industry, we feel uniquely qualified to provide fair market value assessments to Boards, trustees and other fiduciaries.

ADDITIONAL VALUATION SERVICES:

Stock-Based Incentive Compensation: If you are currently using, or are thinking of using, stock or stock-derivatives (such as Phantom Stock, SARs, Stock Options, etc.) to incentivize management, you will likely need a third-party, periodic valuation.

Goodwill Impairment Testing:  Firms making acquisitions typically end up with Goodwill on their balance sheets, which must be tested periodically for impairment.

Arbitration / Mediation:   There are a number of situations where firms can end up in arbitration or mediation, including when they do not have a clearly established approach to valuation. We advise on these issues, and also provide expert witness testimony.

Estate Tax Appraisals: Third party valuations are frequently required, or can be helpful to substantiate tax valuations.

EFCG / 18 East 48th Street, 18th Floor, New York, NY 10017 / Tel.: 212-752-2203 / Fax: 212-752-3080 / efcg@efcg.com
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