Business valuations come in varying shapes and sizes, are prepared for numerous different reasons, and cost anywhere from $1,000 to $100,000 plus. However, a common question we get asked is how do you differentiate between the good, the bad, and the ugly?
Before answering that question it is important to determine the purpose of the valuation.
Some of the reasons for obtaining a business valuation include financing or refinancing, family law matters, for sale purposes and when the business is the subject of a dispute.
Knowing the purpose of the valuation is the key to ensuring your clients get what they need. For example, when there is no concern over the accuracy of the financial information supplied – there is little merit in paying to have the data verified. Conversely, if the data is questionable then a valuation founded on unverifiable financial information may very well be useless. Recently, we conducted a valuation as part of an expert witness report with the aim to quantify losses. One of the key issues in this case was the claim that the financial information was incorrect. Therefore, we verified the data as part of the valuation thus removing any doubt about the veracity of the financials. This case settled at mediation and the mediator found that the key to resolving the dispute was that the valuation was based on verified data.
It is routine practice for lawyers, and to a lesser extent accountants, to request two or three quotes for a business valuation. This exercise often produces quotes that vary significantly and on the surface it is unclear why. Assuming each party received the same initial instructions, the answer will often be found in the scope section of the quote. This section should identify the scope of the work to be performed and the nature of the valuation report to be provided. For example the valuation could be a limited scope valuation, or a full valuation, and may be based on verified or unverifiable data. It is essential that you are comparing apples with apples when deciding on which quote to accept. You may also want to consider the skill and reputation of the person and or firm providing the valuation.
When it comes to business valuations the old saying; ‘you get what you pay for’ very rarely rings true. At Worrells we suggest a two stage approach:
1. Preparation of an indicative or limited scope valuation
2. Dependent on the outcome of the limited scope valuation and review of the needs of the users, a second stage full valuation and or expert witness report is prepared.
This approach allows parties to utilize the information contained in the limited scope valuation to gauge the merit of pursuing a full valuation and or expert witness report. In another recent case we prepared a limited scope valuation to be used at an initial mediation. The result was an agreed settlement, at a reasonable cost, and a happy client.
Whilst the scope of the work, and the cost to the clients in the examples provided was considerably different, both clients achieved a commercial result. Too often we see parties engaged in a dispute spending unnecessary money on valuations, only to find the business is not worth much more than the cost of a high priced valuation and a commercial result is unlikely. Or even worse the quality of the work is not suitable to be used in court and a second valuation needs to be obtained.