There are a number of questions that I have encountered and explained to both clients and attorneys related to why a business valuation report is restricted to a certain use. 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.
Unusual Characteristics within Industries
When a business valuation is performed, there are professional standards that must be followed. Within different industries there are peculiarities that must be addressed and there are sometimes specific techniques designed for the particular industry. These specific techniques have evolved to be generally accepted valuation practices. The business valuation professional is expected to follow these various techniques in order to have a high quality report.
For example, a automobile dealership has specific accounting and reporting requirements to a car manufacturer. A medical practice has government regulations that do not apply to car dealerships. By restricting the use of a report, this helps to insure that your report will not be rejected by someone lacking the depth of knowledge to understand the report.
Purposes of a Business Valuation
An individual that may not be familiar with a particular industry probably will not understand the nuances and mistake the report for a bad report instead of a quality report. This may have serious repercussions on the business valuators professional reputation.
The business valuation professional will be aware of multitude of various particularities for different business valuations. Most individuals not working in this arena will probably not be aware of the varying reasons for performing a business valuation. There is an infinite number of reasons to have a business valuation prepared. Each industry may have peculiarities that should be addressed and included in the business valuation report. A sample of some of the reasons to perform a business valuation is as follows:
- Estate of a deceased individual
- Making gifts to family members or charities
- Stock options
- Minority shareholder disputes
- Litigation support
- Leveraged buyout
- Employee Stock Ownership Plans (“ESOP”)
- Adding or acquiring a shareholders interest
- Business spin-off’s
- Business loans
- Buyout of a partner
- Bankruptcy
- Exit planning
- Partnership dissolution
- Preparation for sale
- Divorce
- Lost business value
Each of these will have their own characteristics that may not apply to the others. Providing a report to someone that does not understand the nuances of the report will only create confusion for the readers.
Summary
Preparing a business valuation report is very complex and time consuming. Understanding the nuances is critical for the business valuator and the reader of the report. If a second tier reader does not understand what is being conveyed, it will create confusion in the marketplace.
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