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Business Appraisal: Frequently Asked Questions

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Please ask for a copy of the firm's services sheet. You will see the list of factors considered in setting a valuation or other analysis facts.

Q1. Can you show me an example of a business valuation method?

You`ll discover that there is often more than one appropriate valuation method to apply when given your desired use for an accurate valuation report. This is why professional help is required to build a persuasive report. The methods that are appropriate depend on the company`s buyer/seller peer group. The individual businesses in a buyer/seller group have similar characteristics such as: annual revenues; the prospective buyer`s industry experience, financing abilities; personal ownership goals; and the company`s earning capacity. These groups also have similar analysis and valuation tactics.

Q.2 What kinds of situations require a business valuation?

Here are a few. We have a list of over 50 ways to benefit from a valuation.
Buying or Selling a Business, the first step is to know what it`s worth
Divorce Negotiations, Litigation, & Alternative Dispute Resolution, ADR
Shareholder or Partner: Dispute Negotiations & Fairness Opinions
Buy/Sell Agreements to Help in Family, Interest-holder, & Employee Controversies
Estate Tax and Succession Planning
ESOP Feasibility and Cost to Benefit Estimate
Insurance Valuations, Reminder: Proof of Loss in on the Business Owner
Convincing a Banker or Attracting Investors to Provide Financing
Going Public, "Initial Public Offering, IPO" Evaluation
Satisfying an IRS Mandate for Estate Planning

Q.3 What are some of the industries you have worked with?

A sample list with the over 100 industries or business areas is available upon request. I have completed most assignments in Ohio, Indiana, and Kentucky. You`ll find high tech, low tech and even no tech. Examples from manufacturing to retail to strictly service or professional services and business to business. Also, it`s important to note that some of the companies on the list were franchises, chains, or had multiple locations, used catalogs and/or a website in operations, or do international business.

Q.4 What are the steps taken in the valuation process?

1. Describe the valuation`s purpose in as measurable terms as possible
2. Determine the definition of value to be the standard and premise of measurement
3. Gather & corroborate relevant quantitative and qualitative data from multiple sources
4. Systematically and scientifically organize, analyze, and compare the facts and data
5. Independently apply the purpose, definitions & data to generally accepted valuation methods
6. Test and reconcile evidence for the selected and rejected methods to set the entity level value
7. Adjust the entity level value for cash value, ownership, marketability and/or control

Q.5 What do you need to know to value a company?

Seldom will you find two businesses operating in the same way and in the same market with the same allocations of time and resources. The data gathering process will depend on the characteristics that drive value in the subject company`s industry. This is where having access to specialized information sources proves valuable.

A questionnaire is customized for each valuation to help gather enough of the right data to prepare a persuasive report. The questions cover a financial, operating, and documentation history for up to the last 3 to 5 years. The level of detail depends on the valuation`s purpose. Tax returns including line item detail, depreciation, all other worksheets, yearend payroll reports and a brief company history are a good starting place.

If the data gathered is not complete or in my opinion not appropriate to draw a conclusion, then the opinion of value may be based on the limited data with the limitations noted in the report, or a "no opinion of value" may be offered. The valuator reserves the right to change their opinion on any point or conclusion at any time.

Q.6 What are some examples of analysis completed?

Site tour of all facilities and locations, when possible and appropriate for the report
Industry history and outlook; and a company history with a current profile
Historical and Fair Market Value, FMV balance sheet for the last 3-5 years
Income statement for the last 3-5 years with "economic variances"
Financial ratio analysis of adjusted income statements
Past company interest sales, transfers and offers to buy
Valuation methods commonly used by similar company buyers and sellers
Risk v. Return analysis using a benchmarking method or actual market data
These examples also give you a better feel for the amount and types of data that must be gathered.
How much does a business valuation cost? The minimum fee is $1,500.00 when you need a bare-bones calculation help and ranges up from there when you need a lot of valuation analysis help for litigation or sale negotiations certified report..7 Which valuation approach is considered to be the most appropriate?

No single method is always the best. Every method has positive and negative elements. The best method is the one that does not over or under value the company. Some inexperienced appraisers choose an unrealistic high or low value. They think they are doing the client a favor, but the cost is often lost or weakened creditability in negotiations or added tax costs.

All methods should be considered until specific reasoning rejects an approach. However, it's unrealistic for a valuator to exhaust every available resource or uncover every risk. A single missed factor will rarely cause a change in a valuation result. This is why the seven step process outlined above is critical to building a creditable and convincing report.

Q.8 What does a business valuation cost?

There are four levels of valuation and value calculation services, and consulting. The cost depends on the size and complexity of the company and how the report will be used. The cost can range from a few hundred dollars for a price to sell a small business to a few thousand dollars and up to prepare a valuation that must face the pressures of IRS scrutiny or the tough review and unpleasantness of court. The amount of data gathering detail and the scope of the report can be customized to meet the client`s valuation purpose and budget needs. An "Over the Net Valuation" under Other Resources on the left may be an option for some to control costs.

In the cases where the retention of ownership or the survival of the company is a stake, or there`s risk of a large tax bill, the valuation fee can be considered an investment in personal wealth protection. The fee for the valuation is set and paid before starting the project. This is done to control the challenges to the valuator`s objectivity. In your initial interview you`ll appreciate that we carefully work with you to determine a prudent and practical investment in the valuation report and provide you with the firm's service agreement for additional details.

Q.9 How can you measure the benefits of using a valuation professional?

An Observation on Fees
"It is unwise to pay too much, but it is worse to pay too little.
When you pay too little you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do.
The common law of business balance prohibits paying too little and getting a lot - it cannot be done.
If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that, you will have enough to pay for something better."
John Ruskin (1819-1900) British Author, Artist, Essayist and Critic

One Example: Many savvy business buyers know that their investment money is made when they buy the business, not when they sell. Consider a business that has an asking price of $500,000 If we assume a 15% margin for price negotiations and that most owners add 5% for negotiations give and take, you have $50,000 (15%-5% x $500,000)to debate. Assume you and I take 40 hours and the valuation consulting fee is $5,000. The result is that your business valuation provides you with just a couple of persuasive points that help you to settle on a price of $450,000. You get an additional $25,000 off the price. Question: How much did you make per hour? Consider: $25,000-$5,000(Fee)= $20,000 then dividing by 40 hours is $500 per hour. Your $500 per hour return is the value added by the firm's services. You should note that the financial risk can be much higher in disputes. You`ll benefit from access to actual market data and the knowledge of how to use it. This is how the firm's experience helps clients save and make money.

Things to look for in a valuation firm and valuator are independence, integrity, experience, and the persuasiveness and defensibility of the report.

Q.10 What gives creditability to the value or price you set?

Formal training and experience as a Certified Financial Planner, CFP that is also a Registered Business Consultant, RBC and a Board Certified in Business Appraisal with valuation experience since 1979 are the main reasons for confidence in CBA's valuation services. You can request my Curriculum Vitae and Professional Background sheets for greater detail.

You`ll see that your valuation service goals are first directed at building a report that will cost-effectively and convincingly bring the reader to the presented conclusion while working to prevent transaction and other valuation problems and challenges.

Next you`ll find that the firm's valuation experience with multiple valuations and transactions, working on both the buyer`s and seller`s sides, (and in divorce and dispute cases for owners and non-owners) will come into play. Most individual`s careers do not have them valuing a business on a regular basis, if ever. As with every skill, the more you do it, the better and more convincing your work becomes. You are more likely to prevent costly trial and error learning by working with a valuator with at least 10 or more years of experience. This is where my valuation experience since 1979 is valuable. Also, financial and valuation analysis have been the firm`s focus since 1988.

Q.11 What makes your valuation report persuasive?

A valuation report should be concise, straightforward, and present a convincing and consistent argument for the specified value. The diligent pursuit of the facts should be evident in the valuator`s systematic approach to the valuation process. The report should be true to a dependable philosophy, professional standards, and backed up by a researched step by step procedure checklist. Professional standards require certain minimums for report research and methodology use. Case law and regulation citations should be made when appropriate. The business value drivers should be grounded in fact and solid research. There should be documented creditable evidence for value.

The scientific elements of "good estimating practices" outlined in the seven valuation steps must be used in the report`s preparation. They seek to maximize the use of objective information and minimize the subjective interpretation of the data gathered. The report is then reviewed for conflicts, inconsistencies, and contradictions. ---Did the report follow the seven report steps and cover the appropriate points of IRS Revenue Ruling 59-60?

Some owners feel that they, or their accountant, know what their company is worth. When you compare the firm's process to others, you'll discover some of the critical differences. Examples:

Inexperienced Preparer Risks?___________Professionally Prepared Benefits

Bias of Opinion or Conflict of Interest?___Objective & Independent Opinion

Incomplete or Extraneous Data?__________Matched to Valuation Purpose

Little or No Valuation Training?___________ Formal Academic Education

Few Reports Prepared?____________________Hundreds Prepared & Presented

Which person would you want defending your report results in front of a judge or a tough opposing negotiating team?

A valuation report should not be overly "sophisticated" or "intellectual." It should not demand excessive scrutiny to be useful to the intended audience. The valuation report user is looking to enjoy the comfort found in showing that a valuation result makes good business sense, while at the same time it is compatible with the facts and financial evaluation processes. The report works to offer the reader convincing, creditable, and consistent evidence to substantiate the chosen value. The report strives to present logical data and analysis, without boiler plate, so that a prudent report user could replicate the process. The valuation report reader should be persuasively brought to the presented conclusion.

Q.12 How long does the valuation process take?

Your report may only take three to ten days to complete once the needed data has been gathered. However, the time for the data gathering task will depend on the reason for the valuation, the availability of documentation, and company management.

Assuming you are the business owner, your part of the data gathering may take from 6 to 15 hours with a few hours with the company`s accountant and attorney to over 40 hours with more involvement of the company`s accountant and attorney. Certain professions, multiple entities involved, limited industry data, and unique business characteristics may add significant amounts of research and report writing time.

More time may be required when certain information or documents have to be created from scratch. Forensic valuation research may be needed for a divorce, a dispute, or when the valuation is prepared for a non-business owner. A valuation values only the business interest and does not quantify the owner's known (or hidden) income or assets. This is why we take the time to carefully go over the process as it applies to your personal situation before starting the project. You`ll profit from an organized approach of customized questionnaires and interviews which go a long way in speeding up the process.

More time may be required when certain information or documents have to be created from scratch. Forensic valuation research may be needed for a divorce, a dispute, or when the valuation is prepared for a non-business owner. A valuation values only the business interest and does not quantify the owner's known (or hidden) income or assets. This is why we take the time to carefully go over the process as it applies to your personal situation before starting the project. You`ll profit from an organized approach of customized questionnaires and interviews which go a long way in speeding up the process.

How do we find out more information?

You can call 513-266-3226for an initial consultation or e-mail questions by clicking on the "CONTACT" button at the upper right corner of the page or the "information request" under "Other Resources" at the left.

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