How to Help Ensure a Credible Valuation Report

Every business owner who is thinking of selling a business wants to be assured that the valuation report he or she receives is credible.  It's very important that the business, typically a person's greatest asset, be appraised accurately and a credible and fair value be determined.

What steps can you as a business owner take to help ensure that the valuation report is credible?  Here are four tips which, if followed, can help you obtain a credible valuation of your business:

Tip 1 - Hire a reputable, accredited professional business appraiser.

The criteria the business owner should use in evaluating/selecting the appraiser are credentials, training, and experience, in that order.  Professional fees should not be the most important criteria in selecting a business appraiser as long as they are reasonable.  In a transaction involving hundreds of thousands or millions of dollars, an incorrect valuation could cost the business owner much more in lost opportunity costs than they could save in fees by hiring the wrong appraiser.

The business owner should seek out someone who has a senior credential in business valuation, either an Accredited Senior Appraiser (ASA) from the American Society of Appraisers or a Certified Business Appraiser (CBA) from the Institute of Business Appraisers.  The appraiser should also have completed ongoing training from these organizations.  It is helpful if the appraiser is also a Certified Public Accountant so that he/she understands the accounting and tax aspects of the proposed transition.

The business appraiser should perform business valuations on a regular basis and not just dabble in them.  Look for someone whose sole business is valuing businesses, not a CPA that prepares valuations when he/she doesn't have enough tax or accounting work to keep busy, or a business broker that prepares valuations in contemplation of selling a company. This way you avoid potential conflicts of interest.

Tip 2 - Educate the business appraiser.

At the start of the process, the business owner has extensive knowledge about his business while the business appraiser usually has limited knowledge.  The business appraiser will interview the business owner to obtain relevant information about the business that is critical to a credible business valuation.  The business owner should make full and honest disclosure of all relevant information to the business appraiser and shouldn't hold back data because he/she believes it will result in a higher (or lower) valuation.  The more forthright and open the business owner is about his/her business, the better able the business appraiser is to provide a credible business valuation.

Tip 3 - The business owner should be realistic in his/her forecasts.

Oftentimes, a business appraiser receives unrealistic forecasts from the business owner.  This is counterproductive to the valuation process.  The business owner should provide realistic forecasts to the business appraiser.  If forecasted operating results or financial position are expected to differ substantially from historical operating results or financial position, the business owner should have a rational basis for the differences.  The business appraiser will analyze the forecasts for reasonableness based on his understanding of the company, economic condition, and industry trends.

Forecasts that fully disclose the expectations of management are key to a credible business valuation.

Tip 4 - The business owner should provide adequate time for the valuation of the business.

A properly prepared business valuation takes time to complete (usually 30-45 days).  The business owner should plan accordingly and not rush the process.

Though every business valuation experience is different with its own unique set of circumstances, heeding the four tips listed above will go far towards ensuring that a business owner receives a credible valuation report.

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