Traditionally, the common choice of a professional to evaluate a business’s worth was an accountant, an accounting firm, or other financial professionals. It seems reasonable to use an accountant because they are experienced in evaluating financial reporting, categorizing values, and reporting financial standings. In fact, at one time when there was no such thing as Business Valuation Firms, accountants were probably the best choice for the job of having a business valuation performed. Bank officers who issue a credit to businesses might also seem like a reasonable choice for generating a Business Valuation report because they are experienced in calculating the collateral value, business plan viability and risk factors. Investment Bankers might seem like another good choice because their profession rests on their daily efforts to make educated and calculated estimates about the current business worth and future returns and growth potential of a range of businesses. However, as with most things, there are now more types of specialized financial and business professionals to choose from, and more factors for each type of professional to know about, so it can be very advantageous to select the right professional for the job. As businesses and wealth strategies have become more varied and more complex, there have emerged several growing financial specializations—the most relevant of which are Business Valuation Firms, Business Valuation Professionals, Merger and Acquisition Companies and Advisers, Consulting Firms and Investment Bankers.
Much Value for the Price
An accurate and defensible Business Valuation report is a crucial document, but commissioning one from an accounting firm is likely to cost more money than necessary in more ways than one. Accountants charge for their financial, accounting and tax expertise, as well as general overhead costs to develop a valuation. However, accountants are typically not experienced in using the Uniform Standards of Professional Appraisal Practice authorized by the U.S. Congress as the source of appraisal standards and appraiser qualifications. Their strengths in financials are often not sufficient to make up for their lack of experience with standard appraisal practices. It is not uncommon for businesses to be either grossly overvalued or undervalued. The world of M&A is replete with horror stories of firms changing hands only for a former owner to learn that they could have received much more for their business had they hired a firm experienced in producing Business Valuations. This type of story is often heard in buyouts, divorce, estate planning and on and on. A Business Valuation created by someone who is not an expert in Business Valuations can be a painfully expensive one.
Business Valuation Firms, Business Valuation Professionals, and M&A Companies on the other hand, don’t need to be educated on the financial statements. Since Business Valuation Firms and M&A Companies are instead thoroughly knowledgeable on the uniform appraisal practices, Business Valuation Services are part of their daily activities, and they are experienced in understanding all the factors which play into the value of a business, as a result they are able to create a more reliable and accurate Business Valuation for a lower fee than many accountants could do. Additionally, an M&A Company experienced in researching, financial reporting, presenting, and closing deals can apply these real market experiences to produce more accurate and defensible Business Valuation reports.
Another reason not to rely on your own accountant or other familiar professional is that for a Business Valuation to be perceived as reliable, it needs to be objective. A good M&A Company that is well versed in the details and the strategies of business Exit Planning, Business Valuation, and business sale issues, will be able to look at the entirety of your business very knowledgeable but without the influence and bias to your company.
The value of the shares of a corporation can be affected by many factors, including whether the business is closely held, owned by a large group of shareholders, or is publicly traded. It’s important to understand that when evaluating a portion of a business, there are at least three levels of potential value for any given amount of stock:
1. The value of the entire company is directly relevant to stock that has Controlling Interest because the holders thereof can do as they wish with the company.
2. Market trends affect shares that represent Marketable Minority Interest because they can be freely bought and sold among investors.
3. The only monetary value to Non marketable Minority Interest Stock is their potential for dividend pay off, or for sale back to the company at some point.
Business Valuation is not an exact science. Opinions play into it. Don’t expect an exact Valuation figure just by using one valuation method. To obtain a more precise and correct value for any given business; the evaluator will utilize at least three different valuation methods and will utilize a weighted average of all methods to arrive with a more reliable indication of business value. As compared with an accountant or other professional who only performs a few Business Valuations occasionally, a business valuation firms specialize in Business Valuation Services and routinely performs them, will have a better feel for how the market in general as well as specific buyers will pay for certain expected rates of returns in a open market.
Qualified Business Valuation Firms can provide a sound business value to hold up to more than just the scrutiny of potential buyers but also their advisers. Buyers will put more stock in the opinion of an experienced evaluator whose previous valuations proved out to be fairly accurate in the long run. But even more important can be how well a business valuation will hold up if ever challenged in court, should there arise a dispute over the true value for tax purposes or concerning a buyer was fraudulently mislead.
Be sure to consider the credibility of the person or company who generated, or will generate, the Business Valuation report from a list of top valuation firms. Here are some of the types of relevant credentials, along with a summary of the requirements to obtain them:
• Accredited Senior Appraiser (ASA), granted by the American Society of Appraisers (ASA). An important note: ASA members may be appraisers in any of numerous fields, not just business valuation. Requirements:
o Five years of full-time appraisal experience,
o Four-year college degree,
o Successfully pass four “Principles of Valuation” courses,
o Pass an ethics exam,
o Submit an appraisal report for evaluation.
o Have a valid state-issued CPA license,
o Pass an ABV Examination,
o Attest to having completed a minimum of either six business valuation engagements OR obtained 150 hours of business valuation experience,
o Complete 75 hours of valuation-related continuing professional education.
o Four-year college degree,
o IBA membership,
o Successfully complete Business Valuation & Certification Training Center,
o Pass a five-hour exam,
o Successfully complete an IBA workshop,
o Submit two demonstration reports.
• Certified Valuation Analyst (CVA), granted by the National Association of Certified Valuation Analysts (NACVA). Requirements:
o Be a Practitioner member in good standing with NACVA,
o Submit a sample Case Study or an actual sanitized Fair Market Value (FMV) report,
o Pass a comprehensive five-hour multiple-choice proctored examination,
o Either hold a state-issued CPA license or hold a business degree from an accredited college and be able to demonstrate “substantial experience” in business valuation.
• Chartered Financial Analyst (CFA), granted by the CFA Institute. Requirement:
o Pledge to adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct,
o Complete the CFA Program,
o Have four years of qualified investment work experience,
o Become a regular member of CFA Institute and apply for membership in a local CFA member society.
Another service which can be performed by business valuation firms specializing in Valuations is producing a Fairness Opinion, which is a definitive “yes or no” finding on whether a particular business sale, purchase, or merger transaction is either fair or unfair from a financial point of view. Obtaining a Fairness Opinion can guide Boards of Directors as well as be used as legal evidence helping to protect them from stockholders who might otherwise charge Directors with negligence. It can also protect against hard feelings if the business transfer is between friends or family. To avoid conflict of interest problems, you would want one firm to provide your Fairness Opinion and a different firm to handle the actual preparation and sale of the business. However, a single Company could properly provide all of the following services without conflict of interest: a good and defensible Business Valuation, Exit Planning Advice, financial reporting, financial research and presentation preparation, and representation in the sale or merger, deal structuring and closure process.
In order to get the most experienced Business Valuation Firms in combination with the best fee rate, choose a firm who typically handles businesses of the size in question. If the firm typically works on deals larger than yours, you might be paying top dollar for work done by a junior employee; if the firm is not used to valuing deals as large as yours, they may not be knowledgeable enough to give an accurate and reliable valuation opinion.
Remember, that while Business Valuation Firms are usually more informed and experienced in producing reliable valuation reports than accountants and other financial specialists, there are even greater potential advantages to choosing an M&A Company which is able to offer a complete array of services including Advisory, Exit Planning and Business Valuation. An M&A Company who chooses to become expert in all of those areas, and who performs them on a regular basis, has a broader range of experience and expertise to apply to the job of putting all the right pieces together into a reasonably accurate, reliable, and defensible report at the best possible price.