Good Mentors Not Only Catch Errors, but Speed Professional Development, Provide Perspective, and Help Build Your Company Brand
The mentoring process is invaluable, explains Baria Jaroudi. That’s not simply because it provides a proofread and detail check, or even because it strengthens professional development and solicits team expertise and new perspectives. Perhaps most importantly, strong mentoring helps firms deliver the sort of work that builds a company’s brand, attracts new business, and defends the value of the analyst work in a world of increasing automation.
Some months ago I published an article here that making the case valuators can benefit from working with mentors. This piece reiterates the same message.
In reviewing another expert’s valuation report, we’ve found a number of errors. I’ll list them below. Look at the list and consider the work in your own firm. Are you confident you’re not making any of these errors? If so, we offer you our congratulations! You probably have a strong review process, remarkably conscientious analysts, and are running a strong firm-because we’ve found these sorts of errors to be remarkably common.
The list of errors may provide a helpful initial checklist to think about. The larger point I hope to make here, though, is that it’s almost always helpful to use a mentor-particularly if you’re in the first three years of work as an analyst.
The mentoring process is invaluable. On a basic level, it gives analysts a proofread and detail check. On a professional development level, it provides analysts an important peer-review that not only solicits new perspectives and builds individual expertise, but leverages the experience in your firm or in our larger Association community. But perhaps more importantly, it helps your firm deliver top quality work – and that, in turn, builds your firm’s brand, attracts new business, and builds the defensible value of your work!
Before getting to the checklist, a bit of background: I have been in this field now for almost three years. My scope of work in the office at J. Richard Claywell, CPA, is exclusively focused on business valuation. I worked on estate and gifts, sales, and divorce engagements. Our work covers various industries: a car dealership, industrial liquid management, transporting and disposing non-hazardous waste, the adhesives industry, and plastic manufacturing just to name a few. My work starts from the very beginning of the engagement through the writing and wrapping up the report. After that point, it is reviewed by Richard Claywell, CPA, ABV, ASA, CBA, CVA, CM&AA, CFFA, CFD.
On to the list. Part of what we do in the office is reviewing other experts’ valuation reports. We recently have reviewed another experts analysis who is a CPA and an ABV. However, we were surprised to see the kinds of mistakes in the analysis that were overlooked even after being reviewed by his supervisor.
Here is a quick list of the mistakes in that analysis:
- Didn’t follow SSVS#1 – the expert claims he did, but apparently did not and it does not show this in his analysis
- Has done no analysis to support the industry benchmarking
- Did not address Michael Porter’s Forces of Industry
- Called earnings before interest and taxes (EBIT) a free cash flow: however, missed the changes in working capital, capital expenditures, and depreciation. How could this be a free cash flow if you omit or exclude these items?
- Used public companies that have losses as comparables to the subject company that has profit
- Ignored the order or magnitude in the market approach and ignored any tests of comparability.
- Math error in discount rate. The expert said he used 20 percent, but the math proved he actually used a 22 percent
- Did not include company specific risk. In a revision of the analysis, there was a company specific risk
This is a list of what you could miss as well. Just because you have a designation does not make you an expert. If someone has a doubt about what they are doing, they need to have an experienced mentor that can help and guide them along the way to prevent these kinds of mistakes.
When selecting a mentor, here are some questions you could ask them to determine their level of experience:
- What percentage of their time do they spend doing business valuations?
- How many years have they been doing business valuations?
- How many valuation reports have they been responsible for completing?
- How many classes have they taught that relate to business valuation?
- Have you published any articles or books on business valuations?
- Can I see a copy of a sample report?
- Review recent cases that would give you an idea of what is acceptable and what is not: (Gallagher, Furman,…)
- For instance, if someone uses EBIT as free cash flow, one could be excluded in a Daubert challenge that would be the end one’s valuation career.
Warren Miller, ASA, CFA, says: “When it comes to business valuation, there are similarities, but each is unique. That is why facts and circumstances are so important in our craft. That is why one-size-fits-all doesn’t fit at all.”
Those who fail to follow the standards and the theory for not being experienced enough could pay a very high price for learning what is acceptable in the business valuation community in court. So, invest in your designation and acquire the necessary tools that would allow you in producing a credible report.