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  • Jim Lisi

Who Should Not Value Your Business

Updated: 3 days ago


Exiting a business is a high stakes endeavor to monetize what is likely a family’s largest asset.  Many options for valuation exist, but note that valuation of a company for potential sale is dramatically simpler than valuing the equity in a company or the value of company shares.  More options are available to value a business, than the business’ securities.

 

"Beware of agents and business brokers that have a vested interest in listing your business with them, as this is how they make their money. Since they get paid primarily upon sale, any sale is better than no sale."  - Attributed to Forbes Magazine

 

Accountant or CPA

Accountant-produced valuation reports are often simply calculations because calculating taxes from historical facts is their day job. 


Compared to a full valuation, a simple calculation may be useful but unlikely to be accurate.  While the math in a CPA generated business appraisal is almost certainly correct, the models selected may not be best, the data used are unlikely to match the actual M&A market, and the report is likely to be backward-looking when a forward look is the correct perspective.

 

Business Brokers and M&A Specialists

The basic issue is whether the agent and owner interests are aligned to maximize value. 


Business brokers may undervalue your business in order to obtain inquiries.   An M&A specialist may be searching for acquisitions on behalf of a client.  If they can deliver multiple bids, then this underpricing is not much of an issue.  The competitive bidding process maximizes value.  However, a broker estimate is not a sound way to understand value for exit planning and estate planning purposes. 

 

​Online Valuations and Industry Peer Data​

Applying an EBITDA or DE multiple to earnings is going to be the method used to sell a business, and it is a good indicator of value. 


One issue that causes error for the DIYer are getting adjusted EBITDA or DE correct.  Then the question is whether the market multiple is correct for the size of the business, current market conditions and whether non-operating assets are in the multiple or not. 


Online tools won’t disclose how they calculate value, and it is almost certain the data used by the program is not being adjusted for irregularities.  Mismatching on these elements may result in a number that is off by 50% or more.

 

Valuation Specialists

Unfortunately, even valuation specialist may not produce good reports.  A good valuation follows scientific principles and many practitioners simply do not have a deep understanding of fundamentals, or use scientific methods.  Instead they may be imitating without understanding or relying upon tribal industry knowledge. 


So, a referral or review of a sample report helps separate the good appraisers from the bad ones.  A simple calculation report that is done well is more likely to be useful than any report that has cash flow mistakes, uses poor modeling or applies irrelevant data.


Speak with a Valuation Specialist

Ready to receive a reliable valuation of your business? SB Valuations uses a proven, scientific method that is so dependable that it withstands challenges of the IRS, litigation and negotiations. Speak with a specialist today.

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