Business valuation is a high stakes exercise. An error or an assumption change has the potential to change the value conclusion by a significant amount.
Whether transacting in the open market or valuing in the notional market, it pays to spend some time critically evaluating any business valuation prior to agreeing on the final value.
A good critique will focus on critical judgments, assumptions and high-risk areas.
Some key areas that one should consider examining when critically evaluating a business valuation include:
- Confusing credentials – check that the valuator possesses recognized business valuation credentials.
- Misapplied models – check the appropriateness, mechanics and integrity of the valuation model used.
- Favorable forecasts – be cautious of overly optimistic growth assumptions.
- Rogue relationships – to ensure the transferability of value, consider the continuation and transferability of key business relationships.
- Amazing adjustments – examine the rationale and supporting data for all adjustments made to the historical cash flows/earnings and valuation date balance sheet.
- Awesome assumptions – review the reasonability and support regarding key valuation assumptions.
- Suspect source data – check the accuracy of the quantitative and qualitative data and ensure it links back to a reputable source.
- Dubious discount rates – ensure there is adequate support for the discount or capitalization rate used.
- Tricky taxes – be wary that taxes have been accurately calculated and consistently applied using the tax rates existing at the time of the valuation.
- Devilish discounts – there are many potential value discounts (e.g., minority, marketability, key man, blockage, risks, contingencies, etc.). Consider the rationale and support for any discounts applied, and consider the possibility of any appropriate discounts that may be missing.
- Suspect synergies – consider what discounts may be applicable to any merger synergies, as they are inherently risky and may not be realized.
- Specific standard of value – ensure the valuation report is prepared in accordance with the appropriate value standard (i.e., fair market value, fair value, etc.).
- Rueful rules of thumb – be wary of rules of thumb. They may not be specific to the individual business.
- Latent liabilities – examine the notes on the financial statements, corporate ledgers and any other sources for potential unrecorded liabilities.
- Revealing related party transactions – ensure that any related party transactions are adjusted to arm's length amounts.
Business valuation is a complex process. As such, there is the potential for significant errors and changes in value due to differing value assumptions and professional judgments. The length of this article, does not allow us the opportunity to adequately cover all the pertinent valuation issues one should consider. We have only provided a sample of some key areas to be examined.
If significant amounts are involved, due to the complex nature of business valuation, it is generally prudent to consult an experienced accredited valuation professional when attempting to determine the value of a business.
Should you have any questions or require more information, we invite you to contact members of our Business Valuations Group who will be able to assist you.
The above noted list is not intended to be comprehensive and is not intended to be relied upon in the place of obtaining the services of an accredited business valuation professional.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
