There are a number of questions that I have encountered and explained to both clients and attorneys related to whether a business valuation is an art or science.  I will have a broad discussion of this today and in future topics will address other issues that are in the minds of both the client and attorney.

Which One is It, an Art or Science?

Business valuations are based both on finance and accounting principles.  A business valuation is part art and part science. The business valuation expert should have a command of both the art and science aspects of the business valuation.

What are some of the Art Aspects?

The art aspects have no foundation in science.  Some of the art aspects are:

  1. Understanding and being able to forecast future cash flows based on the knowledge of the company,
  2. Being able to interpret regression analysis if used in the forecast,
  3. Interpreting the financial statements to assist in selecting the appropriate valuation method,
  4. Determining comparability using the market methods,
  5. Understanding how to utilize market multiples,
  6. Being able to interpret economic conditions,
  7. Understanding the quality of management,
  8. Understanding the state of the industry,
  9. Must be able to mix the art and science to determine the value of a company.
  10. Final value is the individual’s professional judgment.

What are some of the Science aspects?

  1. Be able to mix theoretical concepts and data from empirical studies,
  2. Determining future cash flows and when they will stabilize,
  3. Determining the discount and capitalization rates. This covers the time value of money and risk of the type of company,
  4. Quantifying discounts,
  5. Analysis of sales transactions.

The importance of these aspects, both the art and science, highlights the need for trained and experienced business valuation professionals.

Summary

Preparing a business valuation report is very complex and time consuming.  Understanding how to implement both the art and science takes years of experience and is critical for the business valuator and the reader of the report.

Comment

I provide a more thorough analysis in a report so it will withstand scrutiny.

I provide calculations imbedded in the report for most analysis instead of just stating a result.

I have earned the most difficult business valuation designations for valuations of closely held companies.

I have earned a Master’s Degree in Business Valuations and apply those skills to my everyday business valuations.

Richard Claywell has been valuing closely held companies since 1985.  He has earned two of the highest designations in the business valuation field , the Certified Business Appraiser (“CBA”) and Accredited Senior Appraiser (“ASA”),  Richard is a Certified Public Accountant, has a Master’s in Business Valuation (MBV)  and holds the ASA, CBA, ABV, ICVS, CVA, MAFF, CFD, CVGA, ICVS-A credentials.

I welcome and encourage comments and feedback. If you are benefiting from this series, please recommend to your friends and colleagues and suggest that they sign up to receive posts regularly.

I welcome and encourage comments and feedback. If you are benefiting from this series, please recommend to your friends and colleagues and suggest that they sign up to receive posts regularly.