Buyer Beware: you need more than just the valuation number.

When a business valuation matters, supporting details matter.

The need for a business valuation is triggered by important situations: selling a business, gifting shares of a business, valuation of assets as part of a divorce settlement, tax matters, and settling disputes. No matter the trigger, the valuation is important. And the supporting details matter.

Beware of an Emerging Trend – ‘Skinnied Down’ Business Valuation Reports

There is an emerging trend to offer ‘skinnied-down’ valuation reports. The end report is typically briefer, often in the form of a PowerPoint presentation and does not meet the standards of a USPAP compliant business Appraisal Report (mine are typically 100-150 pages).

Firms, including national and larger regional firms, that prepare business valuations are looking for ways to be more efficient; to take less time preparing business valuations.

The format of the final deliverable matters because the supporting details matter. A business valuation report must present a clear and replicable explanation of how and why the business valuation number was determined. The written explanation supported by charts and graphs is essential to a business valuation report meeting the highest standards for business valuation reporting defined by the IBA (Institute of Business Appraisers).

If you need a business valuation, ask the valuation professionals you speak with about the format of the final deliverable to help you assess if you are getting a thorough report that will stand up to scrutiny.

Lack of Support = Lack of Credibility

Standards were established by USPAP for the business valuation industry to garner public trust in the work being done.

When a business valuation is needed, the interested parties need to be able to understand the valuation determined and be able to understand and trust how and why the valuation was determined. This is precisely where these skinnied-down PowerPoint valuations are lacking support and therefore lacking credibility.

The risk for you as an interested party is that the lacking valuation report may create unrealistic expectations, making the situation worse and contributing to trust among the interested parties breaking down further. A valuation report needs to stand up to rigorous scrutiny: that may be another interested party in the matter, the IRS, or a judge. A report lacking supporting details will not meet that standard.

Cutting corners rarely if ever works out. With Merrimack Business Appraisers, you can be assured our valuation reports will adhere to the highest reporting standards with the valuation presented in an objective and detailed way to present what the valuation is and how and why it was determined. Just like a residential real estate valuation, reasonable comparisons will be included.

An Unnecessary Re-Do

I recently completed a business valuation for a divorce settlement. Unfortunately for the two parties, they had jointly hired a business valuation professional and what they received as a PowerPoint deliverable was expensive and lacking in supporting detail. Neither understood the valuation report nor had any confidence in its contents. So, they hired me and received what they needed. Learn more here.

Avoid losing time and wasting money on brief and insufficient valuations. Get the details you need to ensure the valuation is understandable. With a detailed and thorough business valuation that answers why and how, the reason for the valuation will be solved and the situation that triggered the need will be resolved. Do not risk adding to the problem. At Merrimack Business Appraisers, our valuations solve the matter at hand and our clients move on with confidence in the valuation.

When Values Matter. Supporting Details Matter.

Contact us.

Need a business appraisal? Ask about the process.

Do you need an appraisal of a business? Whether for gifting shares of a business, settling a divorce, or buying/selling a business, it is important to evaluate the business valuation professional. That may be difficult to do as this may be your first time needing to hire a business appraiser.

No matter what is triggering your need for an appraisal, it is important to understand the process that the professional follows in developing the valuation.

Why does process matter?

Process matters because it is important that the valuation is thorough and complete. A well-documented opinion of business value is defensible and will stand up to rigorous scrutiny.

We have developed a proven process comprised of a series of logical steps that make our company valuations defensible. Our reports document what was done, why it was done, how it was done, and the conclusions drawn and why those conclusions are reasonable and credible.

To date, when a business valuation has required expert testimony to present clearly and logically how the valuation was prepared and determined, the ruling authority has always ruled in favor of Certified Business Appraiser and President, Lou Pereira.

A Summary of Our Valuation Process

Our valuation reports are developed to conform to the highest and most inclusive of all the applicable standards. Our complete and thorough process is summarized in the below 6 steps:

  1. A careful and thorough qualitative and quantitative analysis of the business, including the history, products, markets, customers, management and employees, facilities, capital structure, and competitors. This step includes a site visit, which may be virtual, to tour the operation and interview management.
  2. Review important documents including shareholder agreements and by-laws, key customer contracts, and leases.
  3. Complete detailed financial analysis of the past 5-7 years of income statements and balance sheets, common-size and industry peer group analysis to identify trends and anomalies.
  4. Construct a forecast of expected future operations.
  5. Apply the three generally accepted business appraisal approaches:
    • Income Approach – earnings relative to public market returns.
    • Market Approach – research transactions of similar businesses, and develop price to revenue and earnings multiples, which are applied to this business.
    • Asset Approach – analyze the underlying assets and consider value in liquidation.
    • Reconcile the indications of value from the three approaches into a conclusion.
  6. Document all the relevant research, information collected, analysis, observations, and conclusions in a detailed written Appraisal Report, compliant with USPAP.  The company valuation reports are typically 100 – 150 pages or more depending on the specific facts and circumstances of the case, with all the information needed to understand and agree with the conclusion of value.

If you need a business valuation, be sure to assess the track record of the business valuation professional who will do the work and be comfortable with his/her track record and adherence to a complete and thorough process. Learn more about Lou Pereira.

When Values Matter. Process Matters.

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How Important is Industry Specialization for Business Valuations?

For some professional services, industry specialization matters. A professional’s focus and in-depth knowledge of a particular industry can offer tremendous value to the client. I am regularly asked about industry experience and if I specialize in select industries to prepare business valuations.

Do you have experience in my sector?

It is not unreasonable that many people seeking a business valuation want assurance that the business appraiser understands their industry. While understandable, it should not be a focus when evaluating a business appraiser.

There are much more important aspects of a quality business valuation than if the business appraisal has developed valuations in the specific sector. Of paramount concern should be objectivity and impartiality.

Given my years of experience, I have developed business valuations for all major industries and sectors including, but not limited to, retail, food service, wholesale, manufacturing, technical services, professional services, healthcare, and real estate holding companies. For a list of industries for which business valuations have been prepared, click here.

Is industry specialization an important factor in choosing a business appraiser?

Given that industry experience is not a top qualifier, it is certainly not recommended that you seek a business appraiser who specializes in select industries. Our experience has shown that industry specialization does not translate into better results. On several occasions, our work has prevailed over the opposing so-called industry specialists.

What is more important than experience in the specific industry is the process, including a careful and thorough qualitative and quantitative analysis of the company and the environment in which it operates.  The business appraiser must consider the history, products, markets, customers, management and employees, facilities, capital structure, competitors, industry, economy, financial performance, and future earning capacity.

Instead of industry, focus on the following to evaluate a business appraiser:

  1. Credentials – what certifications does this professional have? Has this professional achieved the training and industry designations available for this field?
  2. Track record – do they have a proven track record for their business valuations holding up to the strictest scrutiny?
  3. Process – do they have and adhere to a thorough, detailed process documenting what was done, why it was done, how it was done, and the conclusions drawn as well as supporting documentation of why such conclusions were drawn?
  4. Focus – is this a full time focus of the appraiser? How much of the work does the individual you are speaking with do as opposed to handing off the work to a junior person?
  5. Methodology – we have long embraced and leveraged the Discounted Cash Flow method, a method many have more recently adopted. Ask the business appraisal professional to explain their preferred method and why.

Choosing a business appraisal professional based solely on industry specialization is not recommended. There are far more important criteria, and our experience has shown that the end result or relying on that single factor can be sub-optimal.

When Values Matter: If you or someone you know needs a business valuation for taxes, divorce, selling a business, or resolving a shareholder dispute, contact us to obtain a thorough business valuation that will stand up to rigorous scrutiny.

When Values Matter – Choose Your Business Appraiser Carefully

Welcome to the first edition of When Values Matter. We hope you will find this blog informative and educational as we explore various topics related to business valuation for small and mid-sized private companies, including closely-held family businesses.

With today’s hectic business pace, many professionals may not fully realize that all valuations are not alike. No more than all family law attorneys are alike, nor all CPAs are alike, there can be vast differences in the quality of professional advice.  Similarly, a business valuation is not a commodity.

There are many different reasons to value a business including tax matters (estate settlement, gifting, and employment related), divorce settlement, shareholder dispute resolution, or sale of a business. Consequences can be dire if the wrong value is used, or if a value intended for one purpose is used for another.

So how do you select a business appraiser?

When a business valuation is needed, look for the following:

  • Track Record.
    While most cases settle outside of court, when Merrimack Business Appraisers’ valuations have been presented in court by Mr. Pereira, the triers of fact have ruled in favor of the opinion of value 100% of the time.
  • Ethics.
    When business values matter, professional values matter too including objectivity and ethics.
  • Certifications.
    Louis Pereira has completed the most intensive training in the country and earned the highest designations available in the field of business valuations. There are fewer than 200 Certified Business Appraisers in the country, and Lou is one of them. In New England, he is one of only a dozen having earned the rigorous designation of Certified Business Appraiser.

At Merrimack Business Appraisers, we are here to help when values matter to you.