Asking the Right Questions about Business Valuations

How To Judge a Business Valuation? By the Questions Asked During the Process

By Mike Blake

A business valuation report can be a confusing document. The reports can be lengthy, with lots of dense text that covers complex economics and finance concepts and even Greek letters. In many cases, there’s no report issued at all, leaving you with only copies of spreadsheets and footnotes to guide you through the work product. Also, a well-written report contains a lot of information and may well read more like a textbook than a business book. If you struggle with reading and understanding your report, you shouldn’t feel bad — business valuation is a complex field that can be highly technical.

How To Judge a Business Valuation? By the Questions Asked During the Process

Gathering Information

Developing a competent business valuation requires processing a good deal of information. Our initial data requests include dozens of information items before the engagement can even begin. The questions we ask cover topics ranging from historical accounting records and tax returns to financial forecasts, to key markets and risks, to biographies of key managers, and many other types of information. And then, there are follow-up questions, at least one interview with management, and possibly a site visit. Sometimes, the client wonders who is working for whom; such is the effort required to collect the information that we seek.

Other Conditions for Business Valuations

There is also the research that we perform that the client doesn’t see — at least not directly. We (and most business valuation professionals) research economic conditions, industry conditions and outlook, comparable transactions, public companies, and so forth for every business valuation assignment. That research is documented in footnotes throughout the report, as well as near the front of the report that lists the information considered.

Whether the information incorporated into a financial analysis was internally or externally obtained, the garbage-in, garbage-out rule applies. Even if you can’t follow all the gobbledygook in the valuation report itself, you are likely equipped to evaluate the quality of the information that was relied upon in preparing the report.

10 Questions to Ask

Here is a checklist to help you ascertain whether the correct information was incorporated into the valuation.

  1. Were the questions asking for information relevant to the valuation?
  2. Is it evident that most of the information requested was factored into the valuation result?
  3. Are key inputs in the valuation transparently documented?
  4. Are there any factual errors in the report?
  5. Did at least some of the questions relate to your company specifically and demonstrate knowledge of your industry and markets?
  6. Were questions asked about “other” accounts in your financial statements, such as “other revenue,” “other expenses,” or “other assets/liabilities?”
  7. Were there any assumptions in the valuation that could have been replaced by known facts?
  8. Were questions asked about “crooked numbers” in your financial statements – meaning figures that were radically different from prior history?
  9. Did any of the questions asked make you pause and think about the response?
  10. Were there questions that should have been asked but weren’t?

Understanding Your Valuation Report

If you’re struggling to understand your valuation report and to assess its contents, analyzing the information that was requested and considered in developing the conclusion will provide insight as to whether the appraiser truly understands the business. Accordingly, you can determine whether the appraiser has considered all relevant facts pertaining to the valuation and avoided (or at least minimized) bias in developing their conclusion of value. Of course, it’s important to understand the technical facets of the report, and we are always glad to explain those to you and answer any questions you may have. But, in order to get a gut feel as to the valuation’s reliability, analyzing the information considered is a great place to start.

Mark Dayman is a partner with BW Arpeggio and has provided valuation, litigation support and forensic services for over 40 years. His team includes leaders in litigation support and has unique experience in franchising, real estate, hotels and resorts, food and beverage, automotive, and healthcare and medical devices. Mark is a qualified expert in state and Federal courts. He is located in Atlanta but works on cases throughout the US.

Mark A. Dayman, CPA/ABV/CFF, ABAR, CVA

mdayman@bradyware.com

678.350.9502
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