Warning: Professional Business Valuations Add Credibility, So Don't Do It Yourself.
Use the credibility business valuations by expert business valuators can give you. And the value established will carry even more weight if the valuator specializes in businesses like yours.
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They come in many shapes and sizes. Many accountants hold themselves out as proficient in business valuations. In fact just about anyone can say he knows how to do this. But to use an example from the field of medicine, all Neurosurgeons are MDs, but not all MDs are Neurosurgeons. If you needed brain surgery, which would you choose and why? Not all accountants are business valuators.
Anybody can peruse your financial statements and give you a back of an envelope type business appraisal, and call it a business valuation. He can say that most businesses are worth four times cash flow. Since your cash flow in your last fiscal year was $X, your business is worth $4X. In fact, elsewhere on this website, I suggested that you do your own rough and ready valuation to estimate the current enterprise value. After that you were to examine your critical business processes for potential for improvement.
Once you have done the necessary work to improve the deficient systems and processes, and have proven them effective, only then do want a formal business appraisal. Then you engage one of the experts that have established their credibility in doing business valuations. He will do an appraisal of your business that should have the credibility to stand up in court as being expert. For that is where the work of business valuators frequently ends up. With them appearing as expert witnesses in divorce and various corporate civil litigation cases.
The backgrounds of these experts are somewhat diverse. Although most come from backgrounds requiring familiarity with the use of numbers. They may also be accountants, engineers, business school graduates, or actuaries. In the past 30 years they have become established as a separate profession, complete with rigorous entrance and course requirements, and examinations to pass. Their course work and examinations take them well beyond the simple cash flow multiple formula.
The cash flow multiple method is a simplistic representation of establishing the present value of a stream of future earnings or cash flow. Business valuators go beyond this simplistic model, although the model is based on some fairly advanced mathematics. The good ones in particular work to understand the level of confidence they can have in the predictions of future cash flow and earnings. That is where the business appraisal process goes beyond the underlying complex mathematics.
They may have outstanding experience and insight into the prospects within a particular industry. Part of that would be how those prospects will fit into overall regional, national, and international economic conditions. Good business valuators will not be driven by any kind of herd mentality. They will not find it necessary think in lock step with the popular opinions as distributed by the popular business press. They tend to think more like Warren Buffet than like Jim Cramer.
Your job is to find the best business valuators suited to your particular business situation. And then choose the one you like best. If you have a business that is international in scope, you don't want someone with experience in businesses with only regional scope.
Similarly, if your business manufactures shoes, you don't want to select one whose business valuations expertise is restricted to valuing computer software resellers. Despite the fact that everyone has to start somewhere, you don't want to start somewhere. You want someone with experience, and capable of providing references from satisfied clients to substantiate his experience.
You want to find someone you like. Someone you can easily spend time with, and get along with. First because the work will go more smoothly. That is important as you will need to spend time with your business valuator. The second reason that you should choose someone you like is payment. You will find it easier to pay his bill if you like him, than you would if you couldn't stand him. I don't know why, but it is somehow more difficult to pay someone you dislike, than someone you like.
Either way, you will probably not like the size of the bill. You will wonder how someone could in all conscience charge that much for so few hours work. Remember the words of the surgeon when asked how he could charge so much for less than one hour cutting. He replied that the cutting was only a small part of it, the rest was for the thousands of hours it took him to learn where to cut. Becoming an expert in business valuations takes considerable time.
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