The 5 Biggest Mistakes Made When
Getting A Business Appraised
By David E. Coffman CPA/ABV, CVA
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.
© 2005 David E.
Coffman |
