You undoubtedly understand how to run your business or practice, but do you know how to place a value on it? How do valuation experts determine what’s relevant when appraising an asset and ensure all bases are covered? Asking the right questions and obtaining clarification up front can help you get the most from your valuator’s expertise — and avoid costly mistakes.
What are your credentials?
It’s critical that you assess your valuation professional’s qualifications to determine whether he or she is credentialed and independent. Does your business valuation expert belong to one or more business valuation professional organizations and possess business valuation credentials? What percentage of your valuator’s time is spent valuing businesses and how many years of experience does he or she possess?
You may also want to know whether your business valuation expert has had experience valuing companies in the same industry as the subject company. And be sure to ask how many valuation reports he or she has prepared.
How do you define value?
Most appraisals call for “fair market value,” which is the price at which property would change hands in a hypothetical transaction involving informed buyers and sellers not under duress to buy or sell. But some assignments call for a different standard of value. A company that’s considering acquiring a competitor might be more interested in “strategic value,” which is the value to a particular investor.
Is your business valuation expert able to clearly define and explain the appropriate standard of value? Keep in mind that, in court, a judge may disregard an expert opinion that measures an inappropriate standard of value.
Two levels of value — controlling and minority — typically apply to private business interests. Ask whether your valuator has considered the levels of value when selecting valuation methodology and applying valuation discounts.
Do you understand the appraisal’s purpose?
Valuations are valid as of a specific date and for a specific purpose. Never reuse a valuation prepared for, say, gift tax purposes, later — unless your valuator specifically approves it. An appraisal purpose dictates which valuation techniques are used. For example, a divorce case might require the valuator to separately value professional and entity goodwill for equitable distribution of the marital estate.
In addition, your valuator needs to be familiar with these eight factors when valuing a business under Revenue Ruling 59-60:
Experienced valuators should have no trouble listing these characteristics and explaining them in detail.
What format will it take?
Check to make sure your valuator has defined the valuation parameters as well as other services that might be required. For instance, an oral presentation may suffice in some situations, such as preliminary settlement talks or merger consulting. But most assignments call for greater formality and a full written report. The appropriate format is a function of your preferences, the valuation purpose and the users of the valuation.
Your valuator should summarize the project’s details in an engagement letter. One of the main purposes of the engagement letter is to achieve an understanding between you and your valuator. Therefore, it should discuss your valuator’s duties, scope and responsibilities, as well as the proposed appraisal costs, retainers and late fees, if applicable. If the assignment’s scope or the definition of value changes, ask your valuator to draw up a revised engagement letter or an addendum to the original contract.
Is everyone on the same page?
Nothing’s more frustrating than sitting down for a consultation with a valuation professional and finding that you don’t fully understand the process. Ask the right questions to ensure your business valuator will help you obtain a winning result.
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. In addition, any discounts are used for illustrative purposes and do not purport to be specific recommendations.