The 5 Biggest Mistakes Made When Getting A Business Appraised Copyright 2005 David Coffman
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.
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David E. Coffman is a Certified Public Accountant (CPA) who
is Accredited in Business Valuation (ABV) and a Certified Valuation Analyst (CVA). He is the author of the "Guide to Selecting the Right Professional to Value Your Business". The Guide provides detailed instructions on how to find, and a comprehensive checklist to evaluate business valuation professionals. The Guide can be downloaded for FREE at his firm's (Business Valuations & Strategies)
website => http://www.bus-val-strat.com
