You need to value a business.  It may be for an acquisition, buyout of a partner, divorce, or business litigation.  How do you select a valuation expert and how do you specify what the valuation report should include?

Business valuations come in a number of different forms, and unfortunately, you get what you pay for.  Some professionals will use standard rules of thumb to perform a business valuation.  While these rules of thumb can provide a reasonable indication of value and can certainly be a good starting point for initial discussions concerning a business sale or an acquisition, the final decision should be based on a thorough analysis of the business, the economy, and comparable sales data.

How do you know that you have received a valuation that thoroughly looks at all aspects of the business, the market, and the economy?  The best way to be certain you will receive a thorough business valuation is to insist that the valuation be performed in accordance with AICPA Statement of Standards for Valuation Services and prepared by a CPA experienced in business valuations.  When properly prepared, this method of business valuation will also meet the requirements of Rule 26(a)(2)(b) of the Federal Rules of Civil Procedures.  Consequently, the report can be used in litigation and for other business purposes.

The final report prepared to AICPA standards should include the following:

•  A cover letter that describes the purpose of the valuation, by whom it should be used, and an estimate of value or range of values.  I personally prefer to provide my clients with a range of values.
• A one-page executive summary of the valuation.
• Definitions of terms used in the valuation.  This is normally provided as an appendix to the report.
• The Standard of Value being used.  Fair Market Value is the most commonly used, but it could also be Investment Value, Intrinsic Value, or Fair Value, which unlike Fair Market Value is a defined legal term.
• The Premise of Value.  This is usually Going Concern, but can be Orderly Liquidation Value, Forced Liquidation Value, or Assembled Group of Assets. 
• A summary of the ownership interest and whether the valuation is for a 100% ownership interest or a minority interest.
• A discussion of the market characteristics for the company. This could be publicly traded and very liquid to a privately held non-liquid entity.  Appropriate discounts are applied for non-liquid companies and for minority interests.
• A  summary of the valuation approaches considered should include the following:
  
    Asset based approach
       Income approach
       Market approach
  
  
• A list of assumptions used in the preparation of the valuation.
• A list of any scope limitations that may result in a different valuation if the limitations did not exist.
• An analysis of the company's history and nature of business.
• An analysis of the type of operating assets and ownership of those assets.
• A discussion of the current capital structure.
• A discussion of the qualification, experience and tenure of management.
• An analysis of current and expected future operating results.
• A summary of current economic conditions nationally, regionally and locally and how each impacts the subject company's current and expected future performance.
• Historical financial information and common size financial statements compared to industry results such as Robert Morris and Associates.
• Prospective financial information for at least three years into the future.
• Normalization adjustments for excess owner compensation, non-recurring income and non-recurring expense items.
• Adjustments from an accrual basis of accounting to cash flow.
• Discussion of valuation methodologies considered or rejected.
• Detail of comparable public and private company transactions and adjustments that may be appropriate in the determination of value.
• A summary and weighting of the various valuation methods considered that develop into a conclusion of value.

In addition to the above, to comply with Rule 26(a)(2)(b) of the Federal Rules of Civil Procedures the report must also contain the following:

• A complete statement of all opinions to be expressed and the bases and reasons for them.
• A list of all data and other information considered.
• All exhibits prepared in summary or support of the opinions.
• Witness qualifications.
• Witness compensation.
• A list of other cases in which the witness has testified.
• A signature of the expert, not the firm.

It is easy to understand from the above list that a thorough valuation analysis is complex and time consuming.  While a rule of thumb valuation can be performed quickly and with minimal cost, a valuation that complies with AICPA standards can easily cost in excess of $10,000.

While this may on the surface appear expensive, it is a small price to pay to avoid making a significant mistake when negotiating an acquisition.  On the legal side, a properly prepared valuation can be an integral part of any litigation proceedings and can often result in a settlement of a business issue prior to going to court.

Next time you need to look at the value of a business for any purpose, insist that the valuation be performed by a qualified CPA to AICPA Statement of Standards for Valuation Services.  If your valuation report will be used in litigation, be sure to specify that it should also be prepared to comply with Rule 26(a)(2)(b) of the Federal Rules of Civil Procedures.

Nperspective would be pleased to discuss your business valuation needs with you. Contact any of our CFO partners for additional information.

Please contact Janet Watson at 813.317.3460 or jwatson@npcfo.com.  

• Assures that the financial statements accurately represent the operations of the business - enhances value