Business Valuation: What's At Stake and What Does It Cost?

By Matt Stelzman, CVA, MAFF

In this day and age, cost is always a factor when it comes to professional services. A business owner has to be aware of the costs associated with any project or services he/she takes on. However, when it comes to business valuation services, cost should only be one factor, among many, that a business owner considers when choosing an appraiser.

Getting To The Heart Of The Matter

When choosing a heart surgeon, the price the surgeon charges for the service is rarely considered by the patient. The patient is mainly concerned with the doctor ability to properly perform the procedure as effectively and accurately as possible. The same should hold true for the valuation analyst who is tasked with deriving an accurate value for the company you have spent a lifetime building. Not only does this analyst bear the weight of properly valuing your business, but many times he/she is also tasked with relaying the results in a courtroom setting. This is where the rubber meets the road and experience is essential. However, as we are all aware, experience comes at a price and an attempt at cutting costs in this area can end with disastrous results.

Business valuation is a highly specialized field which requires an in- depth knowledge of many professions from accounting, finance & economics to business management, human resources & law. Each valuation professional goes through rigorous training to obtain a certification in business valuation and must also maintain a certain level of continuing education to maintain the certification. In addition to the classroom hours, each analyst must complete and maintain a certain level of professional experience to adhere to the guidelines put in place by their specific certifying agency. However, these are only the minimum requirements for a business valuation professional.

Weighing Your Risks Against Your Costs

Risk is one area in valuation that is grossly undervalued. Each and every day, we all make thousands of decisions, typically unaware of the risks that are associated with those decisions. If I were to ask you how much $500,000 was worth to you, whether that be in the form of a reduction in business value for marital dissolution purposes or an increase in value for sales negotiation purpose, I would assume that you would say $500,000. What if I were to tell you that the majority of individuals who shop for valuation services indirectly tell us that the risk of achieving this $500,000 savings is only worth a couple thousand dollars to them? Yes, it is true and widely practiced in the valuation profession through the process of shopping for the low cost provider. So how can one avoid the trap that so many fall into when having a business valuation performed?

• Step 1: Research your options, No two valuation professionals are the same, nor should they be viewed that way. A true business valuation is a very labor intensive process, typically requiring a site visit, access to company information including financial data, management interviews and much more. A great deal of research should be performed on the front end to make sure the valuation professional selected is not only capable of performing such a task but is also compatible with you as a business owner. One source for such information is your local attorney or certified public accounting firm.

• Step 2: Focus less on today and more on tomorrow, Many business owners have a tendency to focus on the price of the valuation being performed, ignoring all other factors, in an effort to save a couple thousand dollars. The reality is the risk associated with this mindset is much higher than anticipated. An experienced valuation professional understands the inner-workings of your specific business, how it relates to the industry and how that risk translates into value. Depending on the operations of the subject company, a small change in the level of company related risk can result in dramatic changes in company value that far exceed the additional cost associated with hiring the more experienced valuation professional.

• Step 3: Transparency is key, If you want to obtain the most accurate value of your company you can't leave anything to chance. During the interview and data gathering process, discuss all aspects of your company with the valuation professional. No one knows your company better than you do, so when it comes to placing a value on your company, it is better to leave no stone unturned.

So What The Damage?

If you are like most, after seeing the title of this article, you scrolled down to find the price summary to see how things measure up. The reality is you will probably be disappointed with what you find because, as with most things associated with business valuation, it depends. In the world of valuation, no two companies are the same and therefore no two prices are the same. Pricing will vary based on various factors such as experience, level of service, geographic location, purpose, as well as many others.

Preliminary (Off-the-Cuff) Analysis

A preliminary analysis is one of the most popular yet least effective estimates of value available. Typically based on a loose analysis of the subject company and rules-of-thumb, this analysis is well-suited for business owners to identify value drivers within their company. In combination with other consulting services, it allows business owners who have a desire to maximize the value of their company for sales purpose to have an idea of where their company currently stands in terms of value. Typically, if this service is offered by a valuation analyst, it carries the lowest price point.

Real Property Limited Partnership Appraisals (Discount Study)

A real property limited partnership appraisal, usually known as a family limited partnership (FLP), is typically created to protect real property from estate taxes. In many cases, the value of the entity is based on the fair market value of the assets held within the FLP, as provided by real estate or machinery & equipment appraisers. Where the valuation professional comes into play is estimating the value of minority limited partnership interests in the entity, including discounts for marketability and minority interests, if applicable. In most cases, these appraisals result in a summary report.

Conclusion of Value & Summary Report

The most common valuation assignment, the summary report is structured to provide an abridged version of the information that would be provided in a detailed report with certain minimum requirements. This type of report not only is recommended to most business owners in order to gain a full understanding of how the value of their company was derived, but it also meets the requirements for most kinds of litigation, including business torts, family law, partnership disputes, etc. During the litigation process, the price-point of valuation services typically increases due to the level of analysis and reporting that must be performed to withstand rigorous cross-examination of opposing counsel.

In Summary

If you find yourself in need of a business valuation, take heed, there is hope. With a little research, some patience and an active role in the valuation process, it can be an enjoyable experience. After all, you created the company, shouldn't you know its true value?