Financial Data – What’s Needed?
As a general rule, the more financial data that is available, the better. If your accounting system is sophisticated enough to produce internal Balance Sheets and P&L Statements, they are certainly helpful. Of course the best information to use as a basis is the Federal Tax Return, since when these are submitted to the IRS, any and all final adjustments have been made. Also, three to five years of returns will give the valuation analyst a better and more consistent track record of the firm’s history. For further insight and/or questions, lean on the valuator for guidance. Typically, the most important source of necessary data is the owner or CEO (or the CFO if a firm is large enough to support that position), who usually is very familiar with the “financial goings-on”? and the specific applicable history.
Present Debt – A Factor?
In the context of placing a value on a business to be sold, while debt is certainly important, it generally is not something which has a direct influence on business value. Here’s why. When there is long term debt to be considered (any debt to be carried on the books for a period longer than one year), that debt is normally handled by the seller out of the proceeds of the sale. Should it work out as a part of the deal that a given amount of the owner’s long term debt will be assumed by the buyer, that arrangement is customarily a part of the buy-sell agreement as prepared by the attorneys and accountants on one or both sides.
What Should A Valuation Cost?
The fee or service charge for a business valuation/appraisal will vary, dependent on a number of factors. It can run from just a few hundred dollars for a simple “off the shelf”? software program, to in some cases tens of thousands of dollars . . . should the project involve a mid-size or larger firm ($10MIL or more in sales), and if ordered from one of the major accounting or valuation firms. But for most smaller firms, with sales from say $500m to $10MIL, and you are serviced by an experienced valuation professional who does nothing but process valuations, the service fee should fall somewhere in the range of $3,500 to $7,500, dependent upon the size of your firm and the amount of work to be authorized. (In some cases extras amount to the valuation of several different years, several different divisions of the same firm, 5 year averaging, valuation proformas, etc. A valuation proforma is a valuation based upon projections of expected results) When selected carefully, a focused, verified and veteran approach can produce worthwhile accurate valuations. Which brings us to our next central point. Selecting a valuation professional or specialist to do the work for this very, very important service.
How To Select A Valuation Service
A story comes to mind which occurred several years ago. When asked who would be doing the required valuation, the client replied “I have an excellent accountant who will be handling that for me.”? It was then suggested that the client check to learn how many firms the accountant typically values over the course of a year. I was learned later that the accountant referred to had valued one firm about 18 months ago. Needless to say, the client decided to go with another firm which had more significant and current valuation experience. And please don’t misconstrue my intent, as this is not a poke at accountants. Most of those with which we are familiar do a competent and professional job at accountancy and some even have respectable valuation experience and activity. This accountant just did not have substantive valuation experience. The following check list will help with the selection process.
Valuation Firm/Practitioner Check List
- Length of time the valuator’s “system”? to be used has been in place
- Printed literature and/or data sheets describing the process to be used
- Variety and size of firms valued in the past
- Frequency of valuation projects
- How final numbers can be verified
- Are comparables of other similar firms provided?
- Lists of prior clients as references
- Testimonial letters from prior valuation clients
- Articles published on business valuation/appraisal
- Ability to provide expert testimony in court if required
Please notice that the above list does not include certification as a selection criterion. Certification by one of the major business valuation associations is a fine badge to carry, but is no guarantee that the final numbers produced will be more accurate or realistic then those produced by a non-certified valuation professional. The key here is track record, track record, track record! Also, the price you pay for a valuation is no sure bet indicator of the accuracy of the results. A few years ago one of the major business magazines published an article featuring a valuation “expert”? which detailed the valuation assignment of a certain “service”? firm. As the article concluded, this valuation analyst quoted the client’s business to be worth 15 to 22 to 61 times earnings. Really. 61 times earnings? (A copy of the article is available upon request) And the lesson here? A big firm and a big fee doesn’t necessarily buy a bullet proof valuation.
In the words of a client who was gracious enough to send us a letter after the sale of her 25% ownership in a retail furniture store . . . . “I did sell my share of the business, which came to a figure resulting from your analysis and I am satisfied it was a fair price for the times.”? What more can be said! ***
Aids To Help Sellers
Two aids are available to help owners who are thinking of selling. The “Sellers Ten Commandments”? is a list of guidelines that will help an owner prepare his business for sale and at the best price possible. “Debt Service Work Sheet”? is an instruction sheet to learn how the mechanics down payment and finance balance interact when a seller plans to offer owner financing. Both are available free by writing Halas & Associates. (contact us)
Paul A. Halas, Jr., VA, CMC, has operated the firm of Halas & Associates in Charlotte, NC since 1978. The Halas Business Valuation System (HBVS) has been used to value thousands of businesses nationally and internationally since its introduction in 1985.