Simply put- because it can make a difference between your business properly valued, and it NOT being properly valued.
So I have a client who is on the outs with his business partner, and they are looking to divest themselves of each other. The practical application of that objective is for my client’s former partner to pay him an amount equivalent to his share of the business; in order to do this, there is obviously a need to know what the business is worth.
My client’s former partner also had a valuation done, and… well, suffice it to say that there is a VAST difference between what his opinion of the business value is and what my calculation of the business value is.
Put another way, mathematically speaking, my valuation is 13 x the value of his; or his is 0.075 the value of mine!
Obviously, in this situation, the motivation is on the person doing the valuation for the opposition to provide a low number- a low appraisal means less $ for my client. And of course, it can be argued that the motivation is exactly opposite for me.
But come on- let’s be reasonable here. If there is a valuation that is so much vastly different from another, it underscores the fact that business valuations are a very subjective activity; it also underscores the point that you HAVE to have trust in the person performing the valuation that s/he is providing as objective a service as possible, under the circumstances.
How do you know that the professional is competent, has the requisite skill, and most importantly, is able to provide an accurate, impartial value of your business? A few pointers:
- Ask the person performing the valuation about his/her methodology. Even if you do not understand all of the terms being used, make sure that the discussion makes sense to you, and you have confidence about the method/s being considered. Speaking of methods,
- Make sure that more than one kind is applied. The VAST MAJORITY of properly done business valuations have several methods that are applied, along with an attempt made to reconcile any potential differences. Also,
- Make sure that the method being considered makes sense for the type of business. The valuation that I referenced earlier was done using an asset-based methodology (determining the value of the business by looking at its hard assets). This is acceptable if the business is exceptionally asset-rich; but for a service-based company, which is what my client’s is, this methodology makes no sense (hence the huge disparity in value referenced earlier).
- Beware of quick multiple calculations. Anyone who says that you can determine the value of a company by applying a quick multiple to some business metric (eg 2 x Revenues, 5 x Net Income, 3 x Inventory, etc) is not going deep enough. The valuation process involves much investigation into the way that a particular company does business; you cannot get the depth of knowledge needed by simply applying a “rule of thumb”. And finally,
- Give it the smell test. When all else fails, ask yourself if a reasonable person would feel good about the valuation project as you understand it. If you cannot answer that question in the affirmative, you’ll probably want to obtain a second opinion on that valuation project.
Unlike CPAs and attorneys, business valuation professionals do not have to undergo an official licensing or certification process. Anyone reading this document can have business cards printed tomorrow, and call themselves business valuation experts. So it is CRITICAL that, if you are ever in the situation where you need to have a valuation done, you take the time necessary to convince yourself that the person you are considering using is reputable, professional, and knows what s/he is doing.
(Shameless pulg alert)
And if you want me to recommend such a person, well, I know a very good one…