Cost is Only One Factor in Choosing Valuation Professionals
Cost has become a more significant factor when making decisions on professional services for an organization. As a business owner, you must be hyper-aware of the various costs associated with all projects or services you choose – however when having your business appraised, cost should only be one of many factors that a business owner considers when choosing an appraiser.
The Heart of the Matter
When choosing a heart surgeon, most patients rarely consider the price the surgeon charges for the service. Typically, the top priority for the patient is the doctor’s ability to properly perform the procedure as effectively and accurately as possible. The consequences of not prioritizing these considerations can have devastating consequences. Though not quite a matter of life and death, business owners should have this same mentality applied when tasked with deriving an accurate value for the companies they have built over the course of a lifetime. This means that business owners should put the same consideration into their selection of a business appraiser. An appraiser not only bears the weight of properly valuing your business but many times they are also tasked with relaying the results to a judge or jury in a courtroom setting, where their experience is truly tested and separates those who dabble in valuation from those who can explain in detail how it works. However, as with most things in life, experience comes at a price, but attempting to cut costs in the selection of your appraiser can potentially end in disaster.
Business valuation differs from other appraisal areas, such as real estate appraisal. It is a highly specialized field that requires an in-depth knowledge of many professions from accounting, finance and economics to business management, human resources and law. Valuation professionals undergo rigorous training to obtain certifications in business valuation and must also obtain a certain level of continuing education to maintain those certifications. 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 – what separates professionals in this field is experience. Many choose to specialize in certain types of valuation services because it is highly unlikely that anyone would have specialized knowledge in all industries. As a client, you should demand that a valuation professional has specialized knowledge and experience specific to your industry and area of business.
Your Risks vs. Your Costs
Risk is one area in valuation that is glossed over and grossly undervalued. Every day each one of us makes thousands of decisions, typically unaware of the risks that are associated with each of those decisions. If I were to ask you how much $1,000,000 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 transaction purposes, I would assume that you would say $1,000,000. What if I were to say that most individuals who shop valuation services indirectly tell us that the risk of achieving this $1,000,000 savings is only worth a couple of thousand dollars? Yes, it is true and widely practiced in the valuation profession through the process of shopping for the low-cost provider. This is mainly due to the buyer’s uninformed perception that all appraisers are the same and only differentiate themselves based upon price. I assure you this is not the case with the heart surgeon, and it is not the case in business valuation. Therefore, how can one avoid the trap that so many fall into when choosing a business valuation professional?
- Step 1: Research your options – A great place to start your research into a qualified appraiser to value your particular business is your local attorney or certified public accounting firm. No two valuation professionals are the same, nor should they be viewed that way. A business valuation is very labor-intensive, typically requiring access to company information including financial data, a management interview, site visit, and much more. Great consideration should be given on the front end to make sure the chosen valuation professional is not only capable of performing the work but is also compatible with you as a business owner.
- Step 2: Look to the future– The majority of business owners tend to focus on the cost of the valuation and ignore most other factors in an effort to save a couple of thousand dollars. However, the risk associated with this mindset is much higher than the business owner might have anticipated. An experienced valuation professional understands the inner workings of your specific business, trends of that particular industry, and how the risk of operations translates into value. Depending on how your company operates, a small change in the level of company-specific risk can result in dramatic changes in company value, which far exceed the additional cost associated with hiring the more experienced valuation professional.
- Step 3: The key is transparency – If your goal is to obtain your company’s most accurate value, you can’t leave anything to chance. During the interview and data gathering process, be certain to 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 value on your company, it is better to leave no stone unturned.
- Step 4: Seek a good storyteller – Albert Einstein once said, “If you can’t explain it simply, you don’t understand it well enough.” The longer I am in the profession, the more I understand this quote. I was once told by an attorney that court is just a play, the attorneys and the experts are actors, and the jury and judge are the audience. Numbers can be very complicated for those who don’t deal with them every day, so finding someone who can make them understandable to the average person is worth their weight in gold. Spend the extra time to not only understand the appraiser’s qualifications but also their temperament and ability to communicate. These qualities can mean success or failure.
Tell Me the Damage
If you are like most people, you scrolled down to the bottom of this article to find the price summary and discover how things measure up. Unfortunately, you may be disappointed with what you find because, as with most things in life, it depends. When it comes to performing valuations, no two companies are the same, and therefore, no two prices are the same, nor would you want them to be. Pricing will and should vary based on various factors such as level of service, experience, geographic location, purpose and many others.
Preliminary (Off-the-cuff) Analysis
A preliminary analysis is one of the most popular yet least effective estimates of value available. Notice that is not technically a valuation. Valuation professionals are regulated by standards, which include analysis and reporting. This type of analysis is just that – an analysis. They are typically based on a loose analysis of the subject company and the use of rules-of-thumb. In combination with other consulting services, it allows business owners who have a desire to maximize the value of their company for sales purposes to have a broad idea of what their company might be worth. 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 and equipment appraisers. Where the business 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 designed 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.
The business valuation process is not a service that should be decided upon on a whim. A poorly performed valuation can have quite a negative impact – from overvaluing your company for gifting or marital dissolution purposes to undervaluing your company for transaction purposes, the experience should be your driving force in the selection of an appraiser.
With a little research, some patience and an active role in the valuation process, it can actually be an enjoyable experience. After all, you created the company, so wouldn’t it be exciting to know its true value? At Windham Brannon, we thrive on helping business owners uncover the true value of the companies they have worked tirelessly to build. That’s why our team of valuation professionals is poised and ready to help you with your valuation needs. For more information, talk to your Windham Brannon advisor or contact Matt Stelzman.
