Value Blog

It may seem like a cop-out for me to answer most valuation questions “it depends”.  The reality is it really does depend.  It depends upon the facts and circumstances surrounding the particular question.  Each businesses is different.  They are different because they have different organizational structures, they do different things and they have different people (with different skills) running them.

Those are not the only differences that I must consider as business appraiser.  I have to start out with the basics of valuation – what type of value is necessary for the purpose of the valuation.  Then I have consider the interest being valued – is it a controlling interested or a non-controlling (minority) interest?  All of these factors impact my conclusion of value.

You are a potential client and you call and ask, “Can I use a 1 times revenue to value my business, since that is the industry rule of thumb?” In order to begin considering my answer I need to find out what type of value you are trying to establish, the purpose of the valuation, the interest being valued and information about your company to determine if it is average for the industry.  Then you tell me,  “I only need a rough estimate.” For your protection and the integrity of the business appraisal industry, I can’t give an rough guess based on a few facts.

An opinion is an opinion,  I must develop it in accordance with generally accepted appraisal standards.  These standards provide that I need to understand your both your business and the industry that you operate in reaching an opinion of value.

While I would love to be able to give quick short answers, I usually can’t.  I am not trying to be difficult.  Think of it this way, would you want your doctor to give you a clean bill of health without every doing a physical examination or running any tests?  Probably not.

©2010 Florida Business Valuation Group

I constantly get requests and questions about “informal” valuations or rough estimates of value.  In some cases, individuals are deciding whether to buy a business and they want a sanity check that they are not overpaying for the business.  In other cases, most often divorce, the parties are trying to settle a case at mediation, so they do not have the same requirements that they would to prove value if they went to trial.

Regardless of the purpose, an appraiser who follows standards of any of the generally accepted organizations will have to perform a valuation in compliance with those standards if they are determining value.  In other words, there are no shortcuts if the client wants a number from the appraiser.

The definition of a valuation is very broad.  It includes the use of valuation approaches and methodology as well as the application of the appraiser’s judgment.  The standards all indicate how the appraiser develops the value.  A number of the appraisal organizations refer to the section of the standards dealing with this as developmental standards.

So while a client looking to purchase a business may not see the “number” that he requests as being a valuation, it most likely is.

In situations of litigation, there is often confusion about the applicability of standards.  This arises because of a reporting exception in some of the standards.  The reporting exception provides that appraisers do not have to present his or her findings in compliance with the reporting standards.  The thought behind this is that in a litigation or controversy matter, the opposing party or trier of fact will adequately question the appraiser so that the relevant elements are disclosed, making the format of the report less important.

If you think about it, the reason to hire an appraiser to provide you with a value is for you to have something that you can rely upon.  If you do not need the number to rely upon, then you do not need the appraiser.  When you are relying on a value provided by an appraiser, it should be developed in accordance with applicable standards.  To perform a valuation requires a minimum amount of time, and that time translates to money.  While some situations may not seem to warrant the cost, if an independent appraisal is necessary, there is no other option.

© 2009 Florida Business Valuation Group