#87 Valuation across borders: What carries well between the US and the UK, and what does not.

Host: Graham Stephen, CEO and co-founder, bizval

Guest: Theresa Zeidler, ASA, Practice Director, Valuations, KNAV

[00:00:01] Intro: Welcome to the bizval podcast. At bizval, we are passionate about empowering entrepreneurs the world over to understand and unlock the value in their business. We work with advisers and entrepreneurs to demystify the value creation process when building a business. At bizval, we know how tough it is to grow and run a business, which is exactly why we’ve made valuation simple to understand, accurate and affordable. Our unique blend of tech and touch ensures that you always receive the best service, authentic human engagement and data insights to ensure that you build a business that provides you with freedom and choice. In the bizval podcast, we showcase stories of real entrepreneurs and advisers, sharing lessons and inspiration from their journeys to make your journey just that little bit easier.

[00:00:53] Graham Stephen: Today’s guest runs valuation practices on both sides of the Atlantic, which makes her exactly the right person to answer something that I run into constantly. We work across the EMEA region, the UK and the United States, and the question I keep coming back to is how much of what we do actually survives a trip across a border, or across the ocean in this case. So, Theresa Zeidler, welcome to the show.

[00:01:19] Theresa Zeidler: Hey, thank you, Graham. It’s a pleasure to speak with you.

[00:01:22] Graham Stephen: Fantastic. So for anyone who doesn’t know you yet, give us the quick elevator version. Who’s Theresa, and what is your role at KNAV?

[00:01:34] Theresa Zeidler: Sure. I am a business valuation professional. I direct the US and UK valuation practices for KNAV, a global accounting and advisory firm. I’ve been with the firm since October of 2023. I joined to step into this role, which has been a lovely ride. I also hold the Accredited Senior Appraiser designation from the American Society of Appraisers, and I sit on the board of governors, specifically on the executive committee, of the ASA. I’m also an expert member of the Business Valuation Institute of the UK. And I’m based 50% of the time in Milwaukee, Wisconsin, in the US, and [unclear] in the UK.

[00:02:21] Graham Stephen: Exactly. I can’t even say you’re chasing the summers, because they’re both in the northern hemisphere, but both are beautiful places, right?

[00:02:28] Theresa Zeidler: They’re both beautiful.

[00:02:31] Graham Stephen: Fantastic. Well, Theresa, let’s start at the beginning. Most people don’t grow up wanting to become a business valuer. I certainly didn’t. I didn’t even know what that was, I think, growing up. But you’ve got an interesting, let’s call it, founder story in terms of how you got into valuations. Why don’t we rewind a bit and share a little bit of the story of how you ended up where you are?

[00:02:55] Theresa Zeidler: Yeah, I probably have the most interesting how-I-got-into-valuation story of anyone you’ve met. I’m from the tail end of a cohort that did a lot of very different things before getting into valuation. I actually started my career teaching ballroom dance. So I’m sure that’s something no one else can say. And from there, once I realized that ballroom dance is a great way to…

[00:03:19] Graham Stephen: You might have just met your… I actually met my wife, and we did ballroom dancing. So, probably not a professional like you, but that’s another thing we have in common.

[00:03:33] Theresa Zeidler: Okay, I will eat my words. [laughter] Ballroom dance is a lot of fun. It is not a sustainable long-term career if you actually like to not be dead broke. So from there I went into regulatory research. I worked in an equity research department at a stockbroker. At some point I decided I needed a little bit of a shift, and I actually went back to school, fully intending to become an actuary. So I went back and studied economics and statistics. I left school having accepted a job, and mind you, I was 30 when I went back to school, so it was an uphill road. I had taken a job doing statistical analysis for a large consumer products manufacturer. And this was back in the days when everyone was naive and unaware of the risks of having all of their personal data uploaded on the internet. I had my résumé sitting on one of those job board sites. I got a call from a firm that did something I’d never heard of before, which was valuation. Intuitively I knew it existed, right? I just didn’t realize the extent to which private company valuation was an industry.

So I took the call from them, and I said, I’m happy to come talk to you, but I’m starting a job on Monday. This was on a Tuesday. I had less than a week before I started the statistics job. I walked in that Tuesday, had a great conversation with three different people in the firm, and had a job offer the same day. I have never looked back. The rest is history. I think a lot of people get into valuation because they were accountants and they come across it. Back when I was coming up through the ranks, there were a lot of engineers who somehow stumbled onto valuation. The first person I worked for was a mechanical engineer by trade. It’s a very different road these days, where valuation is taught in schools, at least in the US, and there are whole programs developing valuation professionals.

[00:05:52] Graham Stephen: Absolutely. But it’s an interesting backstory, because a lot of people assume that business valuation is just about the past repeating itself, and your story just proves that. Business valuation is about the future. What do you expect a business to do in the future? So often, while the past is a good predictor of that, it’s not always true. I mean, who would think a professional ballroom dancer would become a valuer? You have to obviously go a lot deeper than just surface-level optics, let’s call it that.

[00:06:23] Theresa Zeidler: Yeah. And let’s be honest here. I was a mediocre professional at best. Modern.

[00:06:32] Graham Stephen: Claim it, Theresa.

[00:06:34] Theresa Zeidler: I am much better suited to valuation.

[00:06:41] Graham Stephen: So let’s talk a little bit. You ran your own valuation shop, and you founded Zeidler Valuation and were in that consulting space. What did that teach you? You’ve been in the shoes of a business owner as well as being a valuer. What did that teach you that a big firm might not have taught you?

[00:07:03] Theresa Zeidler: You know, Graham, it’s not so much that it taught me something the big firms don’t teach. It’s that it really drove home some lessons, probably the primary of which is learning to say no. Not every client is a client you want to win. Some work is just economically unattractive. Some has disproportionate risk. Sometimes there are competence concerns. And sometimes you have a client who has a number in mind, and they want that number, and it’s just completely incompatible with an objective valuation. So client selection matters almost as much as the technical engagements that you take. That’s probably the biggest lesson. Valuation is really only part of the business of valuation. These judgment calls on clients and engagements are very important.

[00:08:00] Graham Stephen: Yeah. And I guess when you’re in a big firm, often you just get what lands on your desk and is in the queue. Whereas when you’re building your own firm, you’re assessing that every single time, right?

[00:08:09] Theresa Zeidler: Yeah. Or in a big firm, you have revenue targets, and the revenue target is the goal. Risk is managed by somebody else, right? When you’re running your own business, you are risk management. You are collections, you are internal finance, you are the tax person, on top of being the valuation person and the salesperson. It really helps you see the big picture much more when you’re running your own business.

[00:08:39] Graham Stephen: Absolutely. Before we get into the meat of the discussion, and I want to ask you up front, for somebody who’s just getting into the profession, maybe a year or two or three into the valuation profession, what do you think separates, let’s call it, a competent valuer from a genuinely good one? I think you maybe touched on some of that in your intro, but for you, what are the big differences between, let’s quote Jim Collins, good to great, so to speak?

[00:09:08] Theresa Zeidler: Sure. A lot of people would probably take the easy way out and say experience and judgment. I’m not going to tell you that. I think what separates a competent valuer from a genuinely good one is understanding when methodology is answering the wrong question, right? Anyone can plug numbers into a model and get an answer that’s spit out. Does that answer intuitively make sense? Are you answering the right question? Have you picked the right model? What are the economics underneath the model? What drives cash flow? What risks threaten that cash flow? Who would buy this asset? We’re often tasked with estimating a market value. If no one would buy this asset, the market value is zero, right? There’s no market value for an asset with no market. So what alternatives does the buyer have? You have to develop professional skepticism without becoming cynical.

Something particularly important for very early-career valuers is, are you able to separate management’s representations from your own judgment, right? Management will have very strong opinions about the business, and our job is to understand the business as well as management knows it, in a very compressed amount of time. Which means we’re asking: of course the business can grow at 100% a year into perpetuity? I mean, why not?

[00:10:48] Graham Stephen: Of course. So basically my takeaway on this is you have to be able to explain why something is reasonable, rather than saying that’s what the model produced.

[00:10:57] Theresa Zeidler: Right. And you also have to be able to communicate a complicated analysis without oversimplifying it. But you need to be able to…

[00:11:06] Graham Stephen: Absolutely. Let’s talk a little about, and I’ll get it right this time, KNAV. Let’s fill the picture in on KNAV. Who are they? Where does valuation sit within that practice? You’re also operating across borders, so give us a little bit of background around that, and what your role is within the business.

[00:11:30] Theresa Zeidler: Sure. Well, it’s KNAV, and people do say it different ways, so you weren’t completely out of line. It’s the initials of our founders.

[00:11:42] Graham Stephen: It’s like Theresa, Teresa, depending on whether you’re in England or in the States, right? [laughter]

[00:11:48] Theresa Zeidler: Yep, exactly. So within KNAV we’ve got an advisory practice, and valuation sits within the advisory practice. Our advisory practice encompasses not just valuation. We have a due diligence practice, an accounting advisory practice and a tax advisory practice, so outside of preparing tax returns or doing assurance work, we provide smaller pieces of work. We’ll write a technical accounting memo for clients, things like that, or do due diligence. The valuation practice sits largely within that advisory practice, and we have some overlap with accounting advisory and the due diligence practice, largely around financial reporting and transaction support valuations. It’s a fairly unified advisory practice, and spoiler alert, going forward you’ll start to see it go to market more as an advisory practice and not a standalone valuation practice. It’s just something our clients are looking for, that big-picture advice.

We are in quite a few countries. We’re in the US, we’re in Canada, we’re in England, the Netherlands, Singapore, India and the UAE, and we’re growing. We have a fairly comprehensive footprint. There are two places where we don’t have anyone. We don’t have anyone in South America, so we rely on professional relationships there. We don’t have anyone in Africa, so we rely on professional relationships there.

[00:13:31] Graham Stephen: Yeah. I think it’s an interesting space. It’s obviously not the topic of today’s chat, but if you just look at what’s going on with the rolling up and the reorganization of, let’s call it, accounting and advisory firms at the moment, it’s an interesting space to be in. Let’s talk a little bit about your role. What does a typical week look like? Obviously you’ve got a practice that spans not just two countries but multiple countries. You spend half your time in England, half your time in the United States. So what does a typical week look like for you, and what kind of work typically lands on your desk on any given day?

[00:14:12] Theresa Zeidler: Yeah, there’s no such thing as a typical week. We’ll start with that. My role is really several jobs simultaneously. There’s technical valuation leadership, quality control, training staff, and practice leadership, making sure that the practices function as needed and that people are adequately utilized and not overutilized. There’s also commercial leadership. [unclear] What’s important and critical can change week to week. On the tactical side, it ranges from actually working on [unclear] to reviewing and making judgment calls on reports, and quality control. Practice leadership revolves around things like training, methodology consistency, and developing the next generation of reviewers and signatories of reports, right? As they grow, there’s no way one person can do it all. Commercial leadership is also very important, and my relationships [unclear]. It’s a lot of adult supervision in the room. I’m joking. [laughter]

[00:15:28] Graham Stephen: Yeah. Who’s supervising me is my question.

[00:15:38] Theresa Zeidler: So the US and UK leadership adds another component to it. Methodology might travel, but the regulatory environment, the terminology [unclear] is making sure that you have the right scaffolding around the knowledge of…

[00:15:53] Graham Stephen: Yeah, absolutely. Let’s move on a little bit. Both bizval and KNAV are different businesses, but actually we’re solving a version of the same problem. I think both businesses decided that being in one country wasn’t enough. And obviously building across borders is not easy. So what have been, for you, some of the challenges in terms of building across different territories? We’ll get into the specifics of what travels well and what doesn’t, but just in terms of building the practice, what have been some of the difficult things?

[00:16:43] Theresa Zeidler: Yeah, that’s a really good question. In terms of building your practice, our UK practice is quite a bit younger than our US practice, and one of the challenges is that a young practice [unclear]. When you are very accustomed to one market and you move into another market, everyone’s tendency is to revert to what they already know when they’re under a time crunch. It could be during an engagement where the client has a reporting deadline, and maybe they have to have a PPA done for the audited financials to meet their lending covenants. There could be a multitude of reasons. We all know it in the valuation profession. The tendency is to revert back to what you’ve already done, what you already know, because it’s easy and there’s no executive function involved. The real challenge is always stopping and making sure that you’ve considered what the right environment is, what the terminology is, what regulations apply, and what conditions I should be reflecting in my report, because I’ve got a different environment. All of those pieces are things you shouldn’t really have to think about right before the report goes out. You should think about them before you start the engagement, actually. But they’re all challenges. At KNAV this is something that we’re well experienced doing.

A little background on the firm. The firm was actually founded in Mumbai about 25 years ago, 26 years ago, in India. A few years after it was founded, a couple of the founders said, “You’ve got a lot of clients that want to enter the US. Maybe you should have a location in the US to help our existing clients move into the US.” And, long story short, that turned into us now being headquartered in Atlanta, Georgia, not in Mumbai, although we do still have a significant office in Mumbai. That experience of moving our own company has helped us frame the processes that need to be done for moving into a new market. It’s kind of in our origin story. I don’t want to say it’s in our DNA, but it’s in our origin.

[00:19:22] Graham Stephen: I absolutely love that. You’ve kind of lived what a lot of your clients are experiencing, and some of the softer issues, right, when you go across borders. So to have that sort of perspective really helps. But something interesting I find about our profession, technically we compete. We do the same stuff in many instances, but consistently I’ve found that actually a lot of the time it’s more about collaboration than guarding turf. So you’re on the ASA board of governors, an expert member of BVI UK. Theresa, what’s your perspective on that, and how the ecosystem works together? Why do you think this notion of collaboration is so important? And do you think we do enough of it?

[00:20:17] Theresa Zeidler: Well, Graham, I’m going to answer your last question first. No, we don’t do enough of it. No individual firm owns the profession’s standards, education, ethics and public confidence. Those come from the structure of the valuation profession as a whole, and the firms that compete share an interest in valuation being regarded as credible, right? So that’s one thing. We want to have a credible profession. We want people to be able to say, “I trust that person, I trust that firm. What they do is credible and reasonable, and there’s no reason for me to second-guess what I’ve hired them to do.” The other thing here, and this is really important for both quality and personal growth, is that professional organizations expose you to viewpoints outside of your firm’s methodology. It forces you to confront things like what competence should look like, and bigger-picture questions like how AI should be engaged, where the future standards are, and what you need to prepare for. Probably a really big one right now is how we attract people into valuation. There’s also, I think, an obligation, as senior professionals, to leave the profession stronger, which I think motivates, to some degree, my involvement in things like the ASA board.

[00:21:57] Graham Stephen: Yeah. I guess there are also practical things, like independence. If you’re in an advisory situation, on the one hand you’re representing a seller or a buyer, and sometimes you do need to refer work out to a competitor, in inverted commas. Or you might have a specific focus or niche in terms of certain sector expertise and what have you. I think the mistake a lot of people make is, you said it right up front, you need to learn when to say no. If you don’t have the competency, you’re selling trust ultimately. So if you take something on that you’re actually not competent in, you’re better off referring it to somebody who can do that. I think that’s the mindset that certainly we work with. And I guess we’ve partnered with you guys on a number of things in the past. I think shared values are really important, and it’s, I guess, about finding that tribe. You will always get people who think, hey, we want to do it our own way, we’ll be the lone wolves, but I think in this profession it doesn’t really work that way.

[00:23:04] Theresa Zeidler: It really doesn’t. And from a US credentialing perspective, and this is very specific to the US and to ASA, USPAP applies to our professional practice, and there is a very well-defined rule that says you must have the skills to take on a valuation engagement, and if you don’t, you must disclose that to the client and tell them specifically how you’re going to remedy it if they engage you, whether that is going out to get more education or hiring specialists to do part of the work. So within the US there is this requirement, at least for ASAs, that is good practice worldwide. As you’ve alluded to, if you don’t have the skills, you’re better off referring it or hiring a subcontractor or something along those lines, right? And practically, from a practice management perspective, if you agree to take on a project that you don’t have the skills to do, and you do a terrible job, it’s your practice brand that is affected, right? So why would you ruin your own reputation by being aggressive [unclear]?

[00:24:30] Graham Stephen: Absolutely. I mean, those are wise words. So let’s move on to the core of the discussion. It’s a fascinating backstory and where you’re at, but valuation across borders, and let’s start with the positive. If you strip out jurisdiction entirely, what are the things that are genuinely universal in valuation? Doesn’t matter whether you’re in Mumbai, Singapore, London, Tokyo or Milwaukee for that matter. What are those?

[00:25:06] Theresa Zeidler: Yeah. My answer to that is more fundamental than simply the three approaches to value. It’s true that the income approach, the market approach and the asset or cost approach exist everywhere. But the things that are universal are the questions you have to answer to do a valuation. What exactly are we valuing? As of what date? For what purpose? What basis or standard of value? Who are the relevant [unclear]? What information is known? What economic benefits does the asset or business generate? What are the risks attached to those benefits? What information would an actual participant have? Questions like: are our assumptions internally consistent? Are we making one assumption that contradicts another assumption? That applies no matter where in the world you are. And maybe crucially, if another competent professional were to get our report, could they understand how we got to the conclusion from the evidence we presented? Those are all true no matter where you are, no matter what regulatory framework you’re working within. Those are universal.

[00:26:29] Graham Stephen: Yeah, I think it’s important, because you’ve got to know what is core. That part around curiosity, the right questions. In a past life I used to head up a team of actuaries and analysts, and I always said to the teams, it’s not about the answer actually, it’s about the questions you’re asking. I think that’s an important core from a valuation perspective. I want to drill down a little bit. This kind of leads to professional judgment, and everyone in our profession says the words, and often they’re said quite loosely. But at this point, what does professional judgment actually mean to you? And at what point does the model actually stop helping you?

[00:27:09] Theresa Zeidler: Yeah. The point at which the model actually stops helping you, that’s a really good question. I would frame it as something along the lines of a disciplined process of choosing among reasonable alternatives where you have evidence, but the evidence doesn’t suggest a single answer. So it’s not intuition without evidence. Intuition is important, but it’s not “I’ve done it this way for 25 years” or “I’ve been doing variations of this for 25 years,” right? It has to be informed, objective, explainable, internally consistent, and capable of being challenged. So it could be the weight you place on your choosing of comparable companies. There’s a whole universe of comparable companies, and judgment with all those characteristics goes into deciding which are most comparable to the subject company, and whether a transaction is genuinely comparable, things like that. Really, the key here, and I want to make this very clear, is that it’s not just having the judgment and using it. It’s also documenting why you exercised the judgment that you did.

[00:28:30] Graham Stephen: Yeah. I think that’s fundamental. A lot of people, it’s not just about getting the right answer. I remember going back to school days, you could have the right answer, but if you didn’t show your workings, you would get one out of 10, not 10 out of 10, so to speak. I want to touch on a… Yeah, go for it, Theresa.

[00:28:50] Theresa Zeidler: I was just going to say, I was laughing. I was a serial offender on that front when I was younger. [laughter]

[00:28:58] Graham Stephen: Oh, come on. So let’s talk about trust and independence. You also alluded to the questions. In our business these are effectively the whole product. I tell my team sometimes, we’re not actually selling valuations. We’re selling trust and we’re selling independence. That’s actually the product. You can build a wonderful model, but if the reader doesn’t believe you’re independent, it’s worth nothing. So I want to ask a specific question. How do you protect that within a full-service firm? You’re doing tax, assurance, and I don’t know if I can use the word, [unclear] walls, there are walls between divisions, all those sorts of separations, but how do you really protect it in a full-service practice like you guys have?

[00:29:47] Theresa Zeidler: Sure. Well, obviously our audit practice must attain independence. So we don’t do any valuation work for audit clients anywhere in the world. Even in places where it’s legally allowed, where you can have a different team working on valuation than the audit team and they may allow you to have valuation clients who are also audit clients, we, as a matter of risk management worldwide, don’t. So audit clients are off limits everywhere. Other than that, the independence analysis happens before accepting the engagement. It’s not just starting your independence analysis. It’s your ability to make an unbiased, impartial judgment when you’re writing a report, and it starts well before you begin the analysis. So we do conflict checks. We do risk checks on our clients. You look for what conflicts may exist. In every engagement letter we put a clear engagement scope, defining very clearly what it is we’re valuing and what the deliverable will be.

I did mention that we don’t do work for audit clients, but we do have the advisory practice, between, say, accounting advisory, due diligence and valuation. In those cases, if a team is doing one engagement, like a due diligence engagement, we won’t have them working on the valuation work. This also comes down to understanding what services have already been provided to the client by the firm. That becomes really important, right? If you’ve got someone giving them tax advice and saying, “In order to minimize your taxes, your value needs to be below X, Y or Z,” that maybe isn’t a great client for us to do valuation work on, because you’ve already had someone giving them [unclear]. We have an internal risk management practice and we escalate things to them occasionally. But I think probably the most important thing is you have to have a corporate culture in which you are genuinely willing to decline work, right? You have to be able to say, we’re not going to do that, we can’t do that independently, we can’t maintain impartiality. And [unclear] is also crucial, and I touched on this before when I was talking about the early stage: you really have to distinguish consulting from advocacy. It is really important that you’re not advocating a position, and that you’re giving them a valuation conclusion or a valuation report that fulfills the need they have for that report. Versus: my client says I want a value of 350 million, so I’m going to give them that value. There’s a not-so-polite term for that that I will not use on this podcast, but that’s not something you ever want to be doing.

[00:33:11] Graham Stephen: Yeah. We have a saying in our business, we always tell the client what they need to hear, not what they want to hear. But I just want to touch on that point you made as well. Just because you happen to be doing other work for the client doesn’t automatically exclude you from doing valuation work. It’s about those deeper questions. If you’re, for instance, advising them on exit readiness, and doing the valuation as a strategic planning tool, there’s no conflict of interest there. So it’s about actually going deeper, and just signing a thing that says we don’t have a conflict is not what it’s about. It’s about going that level further. It’s the same mindset you apply when you’re doing valuation. Let’s get to the real substance of the matter, not just the optics and the superficial stuff around it.

[00:33:58] Theresa Zeidler: I also want to add something to that. You’re right, it’s not about the conflict. But there’s also a concern that your credibility really depends on the users’ ability to understand what your role is, which goes back to those optics, right? Optics [unclear] what you actually do and how well you communicate that to your clients as well. It’s not just about what we know. It’s about what we communicate to our clients as well.

[00:34:30] Graham Stephen: Absolutely. [unclear] Yeah. Theresa, I want to move on. So we spoke about some of the stuff that carries, the principles, the approach, all of those things. But I want to break it into two parts. Where does it stop travelling across oceans or across continents? So maybe let’s start with even why people commission valuations. My sense, and this is just an observation, is that often in the US there’s far more statutory, and maybe it’s even changing, but there are often more statutory or regulatory triggers than the UK has. Is that a fair comment? And the other one perhaps you can talk about is the question of multiples. We work across the UK and the US, and we find in the US, particularly in the lower, let’s call it the main street market, as opposed to the mid-market, people default to multiples as opposed to the more corporate finance discounted cash flow analysis. So maybe just dive into where you see some things that differ.

[00:35:38] Theresa Zeidler: Sure. Taking the regulatory triggers question first, I wouldn’t necessarily say the US has more regulatory triggers, but it is certainly a very different system. The US has a more mature infrastructure around valuation. [unclear] requirements, as any CPA will know, [unclear], and then things like financial reporting requirements, which are true in England and the US, but the UK has its own recurring [unclear] transaction and financial reporting requirements. It is different from the US. [unclear] The UK is a bit more, in my experience, integrated around tax and [unclear] advice, so you see a little bit less of tax as an absolute trigger, although you do see it. There’s a little bit more integration there, but there really is considerable overlap.

Moving on to your question about multiples, I do recognize, as you said, that the multiples phenomenon exists, particularly in the lower market, the lower middle market. I don’t think it’s particularly universal. The US has a pretty rigorous private company transaction database ecosystem. You’ve got these database ecosystems, you’ve got intermediaries, you’ve got trade activity that is authored and reported in terms of multiples, and the large M&A ecosystem makes multiples very visible. So people who aren’t really well versed in the M&A market probably have more visibility to people talking about multiples, and a little knowledge is a dangerous thing, right? Multiples are also intuitively better understood than things like weighted average cost of capital. You can generalize a multiple. You can look at things people have day-to-day experience with. If I’m going to buy a house in my neighborhood, a house with a certain number of bedrooms and bathrooms sells for whatever amount, and you look at the price per bedroom, right? People have experience doing that, looking at things they actually transact in, which makes the multiple approach a little bit more intuitive, because everyone can picture it.

But in reality, a multiple is really the conclusion of a compressed valuation model. It’s the same thing. It considers growth. It considers margins. It considers capital intensity. It considers risk, expected returns, marketability, control. All of the things that you would put into doing a full valuation, that information has somehow been baked into any multiple that you observe, which gets to a really important point. Two companies with identical EBITDA don’t necessarily deserve identical multiples, right? So you need to be very, very aware of what’s in a multiple.

[00:39:20] Graham Stephen: Yeah, the multiple is not the problem. It’s applying that multiple blindly. Just because you happen to be six foot three and 200 pounds doesn’t mean you’re going to play offense for your local football team, or I’ll use an England example, rugby team. [laughter]

[00:39:39] Theresa Zeidler: Exactly, yes. It’s a question of comparability. It’s always a question of comparability.

[00:39:48] Graham Stephen: But I actually like that point you make. In many ways the US market is a lot more mature or developed. Because you’ve got a lot more niches, the application of valuation is often very specific, as you say, it’s around SBA, it’s around [unclear], and each little subsegment will have its own approach which is agreed as a standard. There’s also a lot more maturity, as you say, about data. So even though they’re private companies, it’s almost more akin to a public company, because you’ve got so much data available. So multiples make more sense, whereas perhaps in the UK and other parts of the world it’s more generalist, if you want to call it that. So it becomes more and more dangerous in a generalist market to apply those rules of thumb, because you’re looking broader as opposed to narrow. And maybe that’s actually the key principle behind that. In many instances those approaches travel, but where you’re dealing with niche versus generalist is often where they break down.

[00:40:48] Theresa Zeidler: Yeah. Deep pockets create data, and data makes [unclear] possible. It’s kind of a never-ending loop, because people applying shortcuts like multiples increases the demand for more data, and it creates a kind of formulaic language around [unclear], but it really is still [unclear].

[00:41:10] Graham Stephen: Yeah. One thing I want to touch on is that often, particularly on the sales side of businesses, the US tends to have a lot more liquidity for private businesses, and that also drives a lot of things in terms of how you think about valuation. But I want to move on to a point around tax and legal definitions. It’s something I often see people get badly caught out with. As you say, you start with why you’re doing the valuation, then what is the basis of valuation? Is it fair market value? Is it market value? I’ve seen terms in shareholder agreements which don’t even have any legal standing. Is the value “true and fair”? So let’s talk a little bit about the standards of value. Do they carry across markets, and why or why not?

[00:42:01] Theresa Zeidler: Yeah, that’s a really good question. I’m going to go back to even terminology within a single country. I’ll give you an example of fair value within the US. You have financial reporting fair value, which has one definition. But if you’re doing litigation support, about half of the states out there define a value that should be used for any litigation as fair value, and it is not the same as financial reporting fair value. It may be very, very different. It’s more akin to fair market value in some cases, right? So value definitions will catch you up even within the same geography.

But do they translate? Do they transfer? Well, in some broad general sense, yeah, a market value is a market value. It relies on a hypothetical market condition, right? You look at what willing buyers and willing sellers [unclear] similar assets, and in those senses market values all have a similar [unclear]. So you can apply the same skill set to that. Valuation always begins with the question, value to whom, right? Who is this value for? And that’s really where the value definitions come in. The value definition tells you value to whom, is really what it does. So it’s crucial to understand what you’re looking at. Are you looking at market value? In the US, what’s the phrase, fair market value and market value, they’re not a full [unclear], but you do need to understand [unclear]. Yes, absolutely. Things like fair value for financial reporting. In the US, fair value is an exit value. If you have an asset, what could you sell it for? Fair market value is an entrance value. If you have an asset, what can you buy it for? That may or may not make any practical difference in most cases. But let me give you an example. Say you have a painting at an auction. It’s a great painting. Somebody buys it for 10 million, and the next highest bid is 9. Your fair market value is 10 million. Your fair value is 9 million, right? That’s a really extreme example, but value definition does that.

[00:44:36] Graham Stephen: Yeah. And I think the key point is you can’t just apply it blindly. It’s the same as the accounting standards. If you’re applying UK GAAP or you’re applying US GAAP, it’s always about going deeper and asking the question: context, reason and sector. And also why, because doing something for FRS versus HMRC, they might have definitions within those tax environments which are actually specified or defined, and you have to then go a level deeper and understand what those are.

[00:45:08] Theresa Zeidler: Sure. HMRC defines market value as the price assets might reasonably be expected to fetch in an open market sale, which sounds a lot like fair market value. But you’ve always got to look at the definition. What are the applicable rules you’re expected to follow? Because if you say, is it HMRC or HMRC, depending on where you’re sitting…

[00:45:30] Graham Stephen: It depends on where in the UK you’re from. If you’re from down south.

[00:45:38] Theresa Zeidler: Exactly.

[00:45:41] Graham Stephen: So yeah, I want to just drill down into one. We could spend days chatting about this, but the one I do want to talk about quickly. We’ve touched on niching, we haven’t really touched on litigation, which is maybe a topic all on its own, but I do want to talk about the part around credentials. In the US you’ve got ASA, ABV, CVA, CFA, USPAP, all the letters of the alphabet basically. And the UK picture, for that matter, is a lot less codified. You’ve got chartered accountants, but there’s no… you’ve now got BVI UK trying to bring some of this together. But let’s talk about how much the letters after the name actually matter in the US versus the UK. Is there a difference there?

[00:46:34] Theresa Zeidler: Yeah, sure. Obviously, as a board member of ASA, I strongly believe in the credential process, but I want to be really clear: credentials are signals, not a substitute, right? A serious credential like the ASA or CFA or CBA, or the AICPA ones, tells the market that somebody has met education, experience, examination and other ethical requirements, which is something you could determine without a credential, as a pure valuation professional [unclear]. A credential alone doesn’t establish relevant experience, or communication skills, or experience with a particular asset or assignment. So I do think they’re important, as a signal of credibility. But we’ve all met somebody who, Lord only knows how, managed to achieve a credential and has produced, you know, we see them on the opposite side of litigation engagements where you think, where did that report come from, and did you actually pay attention in the credentialing process? Obviously I’m not mentioning names here in any way, shape or form. This is quite genuine. You do run across those from people who are credentialed.

In the US there really is a more visible credential ecosystem around business valuation. There are quite a number of credentials in the US. The UK practice is a bit more fragmented, for a professional discipline and for shares [unclear]. Even though there’s share valuation, what’s the difference between valuing shares in a private company and valuing the business with actual interests [unclear]? I do think the market in the UK is moving much more strongly toward credentials. I think the reason the market is moving more strongly toward credentials is largely because the people who are purchasing valuation services are becoming more sophisticated, and they want that signal. A credential is an easy signal that somebody understands what it takes to do the service that they’re requesting. I do favor strong competency standards, though. The US alphabet soup model has its challenges. That may not be the right approach. Obviously I have really strong preferences about which credential is the right one, but we’ll leave it at that.

[00:49:19] Graham Stephen: That’s probably an hour conversation on its own, right?

[00:49:24] Theresa Zeidler: It probably is. I think a better question, or an additional follow-on question, a complementary question, and one you should also be asking beyond what letters do you have, is how many [unclear].

[00:49:41] Graham Stephen: Yeah, absolutely. So, Theresa, we’ve got about five minutes left. I’m going to ask you two more questions and then a couple of rapid-fire questions. The first one, just to bring it together: somebody’s been listening. Let’s say you’re a business owner and you’ve got a group with entities in two or three countries, or you’re considering selling to an overseas buyer. Do you think it matters that you’re working with a valuer who’s generally worked across borders rather than just within a country?

[00:50:11] Theresa Zeidler: Oh yes, absolutely. You need to have somebody who understands the different regulatory environments, the different reporting, and the different way that valuations are seen in each country. And equally, what is [unclear] in one country doesn’t necessarily make it [unclear] for any other country, right? [unclear] You have issues where, for example, integration is probably really important, because you have to understand what [unclear]. You have to know what assumptions travel and what assumptions don’t, and how currencies and capital markets interact. That’s probably a pretty big one. How does a conclusion in the US compare to a conclusion in South Africa, or in the UK, or a conclusion in [unclear]? That can be really important, particularly when you’ve got a valuation, and this will happen a lot with transactions, that is scrutinized by auditors, tax authorities, regulators, courts and investors. Investors in different countries will have different [unclear].

[00:51:25] Graham Stephen: Absolutely. Having somebody with that experience is a bit like when you’re learning to drive a car. My son is going for his learner’s permit now. Until you’ve actually driven the car, until you’ve been across those different countries and experienced it, yes, you can learn it, but it’s not the same as dealing with somebody who’s actually had that experience.

[00:51:52] Theresa Zeidler: I like that. There’s translation risk. Go ahead.

[00:51:55] Graham Stephen: Yeah. Last question, and then we can bring it to a close. Every valuer I’ve spoken to has got at least one war story, and I’m going to ask you to be very brief. You’ve got about 60 seconds.

[00:52:07] Theresa Zeidler: Oh, right. I’ll make it brief. I’ll make it brief.

[00:52:10] Graham Stephen: But give us one of yours.

[00:52:12] Theresa Zeidler: Sure. So I was in a situation, and this was a number of years ago, and all names are completely excluded to protect the innocent and the guilty. I was in a situation where we were helping a small business owner who was looking to exit his business, and I had a valuation report. I’m sitting at a conference room table, in person, with the owner, with his legal adviser, with the potential buyer, with their legal adviser, and with a banker. And I said something to the effect of, “If you need anything of any kind, please give me a call.” The banker in this situation took that as, and I’m going to use polite terms here, [unclear] completely out of [unclear].

[00:53:00] Graham Stephen: Absolutely shocking to have something like that happen in a meeting, right?

[00:53:08] Theresa Zeidler: Yes. I was pretty lucky that everyone else in the room shut it down very quickly. There was just a moment of complete disbelief that it had really been said. But it’s strange what I took as the lesson from this. We as valuers are obsessive about defining terms. We just had a long conversation about the definition of value, right? We worry about what someone who misunderstands fair value, fair market value, market control or marketability might take from it. And I also learned that I needed to apply that discipline to how I ended meetings. So I’m very deliberate now about saying, “If you have any questions about the valuation, please reach out to me,” rather than “Do you need anything?”

[00:53:52] Graham Stephen: Yeah. That is a real war story, as I say, because it was taken completely out of context. And as you say, just a simple comment like that could have undermined your credibility, your independence, a whole bunch of things. So it extends, as you say, beyond [unclear], especially for somebody who’s very service-oriented, right, which is a good thing, but sometimes that is perceived in the wrong way. It’s a great lesson, I guess, for all of us.

[00:54:20] Theresa Zeidler: Words and assumptions matter, and you really cannot assume that someone interprets something the way you intended it. So you just never leave a phrase open-ended. That’s a really crucial lesson for writing engagement letters, and for dealing with [unclear]. I mean, this story aside, it’s kind of funny in retrospect. At the time I was just…

[00:54:36] Graham Stephen: You were mortified. [laughter]

[00:54:40] Theresa Zeidler: Yes, I was.

[00:54:43] Graham Stephen: So, Theresa, normally we have a bit of time for what we call our rapid-fire section. I’m going to ask you just two very, very quick questions. The first one: one question that every business owner, assuming it’s a business owner, should ask their valuer.

[00:55:01] Theresa Zeidler: I think the question I would come back with would be: what would have to be true for this valuation to be wrong?

[00:55:10] Graham Stephen: I love that. We have a similar question. We say, what do you need to believe for this valuation to be true? That’s actually a question we ask with a lot of startup valuations we do, because normally the startup owner thinks his business is going to be the next SpaceX, right? [laughter] And when you ask the question that way, sometimes it’s like, yeah, I guess growing at that rate might not be achievable, right?

[00:55:38] Graham Stephen: Last question. What’s the best city you’ve ever worked in? Nothing to do with valuations.

[00:55:45] Theresa Zeidler: Oh, I love most of the places I’ve ever been. Perhaps Chicago. Chicago has a really thriving valuation community and a really thriving business community. It is a great place to develop ideas and extend the [unclear].

[00:56:00] Graham Stephen: Yeah. I’m happy to be in Chicago for the first time ever in a few weeks’ time, so I’m looking forward to it, and good to hear that it’s a great city. So, Theresa, it’s been an absolute pleasure having you on the show. The insight, the conversation. In closing, where can people get hold of you and get hold of KNAV? We’ll show this on the link, but if you wouldn’t mind sharing that for our listeners.

[00:56:28] Theresa Zeidler: Sure. You can find the firm online at knavcpa.com. We’re also [unclear]. I’m on LinkedIn. You can find me on LinkedIn, and that’s totally the best way to get a hold of me. Or you can email me at [email address unclear].

[00:56:48] Graham Stephen: Fantastic. Well, Theresa, once again, thank you very much. That’s it for this episode of the bizval podcast. If you found it useful, follow the show, and share it with somebody in your network who needs to hear this message. Until next time, keep building, and we’ll see you soon. Thanks, Theresa.

[00:57:06] Theresa Zeidler: Take care, Graham. See you.