Copyright 2005 David Coffman
http://www.bus-val-strat.com
Most business owners will, at some point, want
or need to know how much their business is worth. They will be
faced with the task of finding someone to perform a business appraisal
or valuation. Since this is unfamiliar territory, the owners often
make some big mistakes.
Mistake #1 – Automatically Hiring Your Existing
CPA Firm
Business owners often assume that all CPAs are
competent in business valuation. In fact, many CPAs have very
little or no business valuation experience or training. Don’t
expect your CPA firm to tell you if they are not proficient in
this area. Firms are often reluctant to; turn down additional
revenue, admit their lack of expertise, and refer you to a competitor.
Ask your CPA firm if they have any staff that
are credentialed and experienced in business valuation. Then get
an anonymous list of their prior business valuations by business
size and type. Don’t be too concerned if they have not valued
a company in your same industry. Regular and recent business valuation
experience is much more important. If they don’t have adequate
business valuation experience, ask if they would recommend a firm
that does.
Mistake #2 – Automatically Hiring a Referred
Professional
Referrals mean different things to different
people, so you must ask on what basis it is being given. If it
based on a brief meeting at a networking event, then don’t
give it much weight. Referrals based on reputation alone are only
slightly better. Seek referrals based on first-hand dealings with
the referred professional. All referrals, even high quality ones,
need to be evaluated further to determine their business valuation
competence.
Mistake #3 – Using Rule of Thumb Formulas
Many business owners believe there is some secret
formula that can be used to accurately value their business. There
are many rules of thumb and they are not a secret. Rules of thumb
can be useful to get a “quick and dirty” estimate, but
they have some serious flaws. No one really knows the quality
and the quantity of the data on which they are based. The formulas
typically use multiples that are expressed in ranges (like 1 to
2 times annual sales) that result in widely varying values. The
formulas provide no guidance on how to select an appropriate number
within that range. Most importantly, these formulas do not account
for the unique characteristics and factors that affect the value
of a specific business. If a business valuation will be given
to third parties or subject to dispute, rule of thumb formulas
just won’t stand up to the scrutiny.
Mistake #4 – Paying Too Little
Business valuations typically cost thousands
of dollars. In an attempt to save money business owners often
look to get one on the cheap. There are a number of sources on
the Internet that will value a business for substantially less
cost. The old adage – you get what you pay for – applies
here. These services use various formulas, proprietary data, checklists,
and etc. to arrive at an estimate. Some even come with rather
impressive looking reports. In general, these services are just
high-priced, dressed-up rule of thumb formulas.
Mistake # 5 – Paying Too Much
Business valuation firms often set minimum fees
and limit the levels of service without regard to the cost restraints
of smaller companies. By omitting some valuation procedures that
typically aren’t relevant to smaller businesses and preparing
summary-style reports, firms can legitimately and significantly
reduce the cost of a business valuation. A high cost, full scope
business valuation is often overkill for a small businesses. Look
for a firm that can match your needs more closely to save money.
Fees can vary greatly so it pays to shop around. Seek the best
professional for the best price, not necessarily the lowest price.
By taking the time to do some basic research
business owners can avoid these mistakes, hire a competent business
valuation professional, and get the most value for their money.
