Mike Bigrigg, CPA/ABV explains the inner workings of a business valuation:

 

 

I was recently giving a presentation at a local continuing education conference when I received an interesting comment in front of an audience of 200-plus attendees.  I had just finished a presentation on a few recent business valuation case studies and left the floor open for questions.  One attendee raised his hand and basically told me that business valuation was voodoo and that valuation experts just make up numbers.

At first, I was taken aback because there wasn’t really a question to be answered.  As a valuation expert who has spent my entire career conducting business valuations, I felt the need to defend the profession.  While I do not agree with the attendee’s statement (there is a great deal of work that goes into a proper business valuation), I will concede that there can be a fair amount of subjectivity in a business valuation.  This is why business valuation is partially an art and partially a science.

Business valuation is a forward looking concept.  As a business valuator, I am attempting to predict the future benefits that would be available to a hypothetical investor at a given point in time.  While this may seem like voodoo to some, we put a great deal of thought and research into this aspect of a business valuation:

• We utilize industry resources to benchmark the subject company’s historical and future financial performance.
• We analyze current economic conditions and outlook to determine if projections are reasonable.
• We thoroughly interview management to gain an understanding of risks and opportunities for the subject company.
• We use databases to pull information on publicly-traded and privately-held companies in the same industry as the subject company.

While some assumptions have to be made in any business valuation, the aforementioned data points and techniques help valuators determine those assumptions with a reasonable degree of certainty.  It is much more than voodoo.

A recent trend in the valuation world is the use of online business valuation calculators.  These online calculators allow business owners to input limited financial information from tax returns or financial statements and spit out a value.  There are many problems with this approach.  In a nutshell, these calculators are missing the art of valuation.  They are missing the professional judgment that comes with assessing the risks and opportunities of the subject company.  This can have severe consequences to business owners who may be using the values produced by these calculators to make important business decisions.

If you are a business owner who needs to understand the value of his or her business to make important company decisions, please reach out to a professional at Corrigan Krause today to make sure all of the appropriate considerations are assessed when your business is valued.