Many business owners have at minimum a vague idea of what their company is worth, or at least know how much they would like to fetch as a purchase price when they eventually sell. Anyone can do a quick Google search on how to value their company. So why involve a certified valuator in the process? How can a certified professional help you get beyond the basic “4 to 6 times EBITDA?” In this blog we will highlight some of the main reasons for discussing the value of your business with a professional and the benefits of involving a credentialed valuator, especially one with a CPA background.
Many business owners may be apprehensive to seek outside help in valuing their company because they think an outsider will never be able to help them understand the value of their business better than they already know. They may think this because the valuator isn’t involved with the day-to-day operations and doesn’t have the insight that an insider might have. Valuators often offer alternative viewpoints of the operational aspects of the business that a current owner may overlook. Additionally, engaging a valuator does not forego the involvement of the company’s owner(s). On the contrary, valuators rely heavily on the knowledge of existing owners to provide detailed information about the company about items the valuator may otherwise never have known. In fact, there are specific items that a valuator should be sure to discuss with the owners of the company during the course of the engagement, or the valuation may potentially be deficient.
Licensed professionals are not just experts in numbers; they also have a deep understanding of market dynamics and industry trends. This knowledge is vital for a business valuation as it ensures that all external factors influencing the business’s value are taken into consideration. This can include market conditions, competitor analysis, and industry-specific risks. Valuators also have access to a wealth of resources on a variety of industries, specifically: industry financial benchmarking, trends, economic outlook, and market comparables. Comparing objective market information to the internal expectations of management can help lend credibility to a valuation by comparing management’s expectations of the company’s future to industry trends.
A credentialed valuator will also be held to a high professional standard. There are multiple sets of standards for performing valuations, and they loosely align with each other and often overlap. Adherence to these standards will help to ensure that the quality of your valuation is upheld, and that the valuator remains an objective valuator. Unlike internal staff or stakeholders, a licensed valuator is an independent third party who can provide an unbiased view of the business’s value. This objectivity is crucial, especially in situations where the valuation might be contested or used in negotiations. A credentialed valuator will issue a report that is more likely to withstand the scrutiny of the IRS, a potential buyer or seller, and management themselves. It helps to alleviate the perception of bias in the report and will give comfort to users of the report as to the results.
Along with appearing objective and independent as to the client, being truthful in research, performance and delivery of the valuation is of utmost importance and is the mark of a good valuator. This means always striving to deliver consistent application of valuation principles and arriving at the best opinion of value in light of the circumstances, regardless of outside influences. Coincidentally, this also means sometimes delivering a value or result to a client with which they may not necessarily agree. Delivering predetermined results is a pitfall of professional service and compromises the valuator’s standards and reputation.
In some cases, the outcome of a business valuation can lead to legal disputes. Having the valuation done by a licensed professional can provide a level of legal protection in certain circumstances. Their expertise and adherence to professional standards can be pivotal in defending the valuation in a legal context. Often times, the standard of value weighs heavily on the engagement. Sometimes it is fair market value, but for litigation, it could be fair value. These terms sound interchangeable, but they are not, and confusing them during the engagement could lead to a less than desirable outcome for the client.
Sometimes, the use of a credentialed valuator is required, either through legal process or because the governing documents of an entity require it. The involvement of a certified appraiser is often prescribed in a company’s agreement among its owners, and it may even specify the exact credentials the appraiser should have. This is typically done to facilitate an amicable transaction among business owners. Many business owners may begin the process of a buy out or sale without first looking at their company agreement and realizing they even needed to hire an appraiser in the first place. Additionally, when it comes to valuations that are being performed as part of an estate or gift tax return, a formal appraisal by a qualified appraiser is required by the IRS to meet the requirements of adequate disclosure.
In conclusion, using a licensed professional for business valuation is crucial due to their expertise, objectivity, and compliance with regulatory standards. Their involvement helps to ensure your valuation is as accurate, credible, and defensible as possible, which is essential for various financial, legal, and strategic purposes. If you are on the fence and you’re unsure whether you need a valuation, or if you would like to discuss your particular situation in general to see what path may look best for you, call our office for a consultation.