See the site for yourself
It’s critical to see a Houston, Texas business in person to value it, as well as businesses in other locations. Tax returns, financial statements, and marketing materials tell only part of the story. Especially in an adversarial situation, a written questionnaire doesn’t adequately bridge the gap. To get a comprehensive understanding of how a business runs, the expert usually needs to see it, and talk to management, firsthand. Here’s why site visits are critical when valuing a Houston business, particularly in divorces and shareholder disputes.
Reveal new information
If a valuation expert just relies on information shared by the controlling shareholder from afar, then some hidden assets and fraud may go undetected. A site visit may help uncover potential issues in some situations.
In this example, valuation expert “Pat,” who’s been hired to value a manufacturing company that’s buying out an unhappy minority shareholder — who’s also unhappy with the buyout offer. The controlling shareholders initially refused to allow Pat to conduct a site visit. So, the attorney (“Chris”) was forced to file a court order to allow Pat access to the company’s facility. While waiting in the company’s lobby, Pat gathers information from newspaper articles posted on the walls, which she subsequently reports to Chris. These facts include the grand opening of an affiliated company in a nearby town.
During the site visit, Pat notes that the employees seem nervous and avoid making eye contact. Further investigation reveals unrecorded loans to the affiliated company and a shift of several large customers’ income from the old to the new plant. What’s more, the old plant is paying exorbitant management fees to the new affiliate. These discoveries increased the company’s value by nearly three-quarters of a million dollars — and they would have gone undetected if not for Pat’s diligence during the court-ordered site visit.
Think beyond fraud
If there’s no risk that a controlling shareholder is skewing the financial results, is a site visit still needed? Even when a valuation isn’t prepared for litigation purposes, site visits provide insight into business operations,. They may shed light on information that’s not obvious by reviewing the financial statements.
For example, a valuation professional might notice nonoperating, idle, damaged or obsolete equipment or inventory while touring a facility, as well as inventory and fixed assets without physical asset controls. A production line or warehouse may appear disorganized or unsafe. Employees may even seem disgruntled or overly stressed, suggesting that the company is growing too quickly, human resource issues abound or labor union problems could be impending.
Meet with employees
If a valuation expert hasn’t previously toured your company’s Texas facilities, expect him or her to request a site visit soon after being hired. Many experts may send a written questionnaire in advance to help management prepare. And most likely they will perform a preliminary review of the company’s financial statements and other relevant documents to ensure efficiency and customize interview questions before showing up.
Depending on the size of the company and the engagement’s confidentiality requirements, the valuation expert will want to talk to several individuals. A side benefit of these face-to-face interviews is that the valuation expert will establish a positive working relationship with employees, which facilitates the valuation process.
Interviews typically cover a broad range of subjects, including but not limited to:
- Accounting methods,
- Condition of fixed assets,
- Hiring practices,
- Historical financial performance,
- Internal controls,
- Management quality and compensation,
- Marketing and sales programs,
- Methods of distribution,
- Operations history, and
Since valuations are driven by future cash flow projections, expect questions about the company’s future strategic plans during management interviews. Some business owners may be leery about providing this information, because they don’t want it to be leaked to competitors.
Conclude with a catchall question
In order to minimize the danger that management will withhold information or a valuation expert will overlook a key fact, many valuation professionals end their interviews with a broad question, such as, “In your opinion, is there anything else about the business we haven’t discussed that could potentially affect its value?”