Business valuations are a critical tool in any business owners’ arsenal, and should be considered from the day the business concept originates through the life cycle of the business. Many business owners only consider a valuation when they are thinking about selling, and this is a mistake that owners can be deluded into believing.
“Business owners are visionaries — and have in mind from day one an idea of where they want to take the business and their goals for an exit strategy. Having a valuation in place a few years before that goal end date is something every savvy business owner should do,” says Kevin Strain, audit partner at Sensiba San Filippo, a San Francisco Bay area CPA and Business Consulting firm.
Kevin Strain discusses the importance of business valuations as well as best practices and critical decision factors in selecting the right adviser to support your business.
How can doing a valuation not at the time of a sale, but years before, benefit a business?
According to the AICPA, merger and acquisition activity is expected to rise in 2012. In addition, in Accounting Today’s Top 100 Firms of 2011 issue, more than 75 percent of the firms represented in the survey offering business valuation services reported significant growth within this area, making it the fastest-growing professional service niche.
A business valuation can have many uses and should be considered in the early stages of a business’s lifecycle —not just when you are thinking of selling. Having an accurate and timely valuation of your business three to four years prior to a forecasted exit plan date is one of the many tools a savvy business owner should have in their tool belt. This proactive strategy can benefit a business in many ways, including gaining an evaluation of the strengths and weaknesses of the business and, in certain scenarios, providing a ‘roadmap’ for increasing the value of the firm.
If you think you can improve the value of the company by driving revenue, that may not always be the case. You may need to look at different aspects of the business to drive that selling price. Having that long-term strategy helps you assess the different roles and aspects of the business and can help define what will add the greatest value, whether that is based on human capital, whether it’s product related, or something else.
How can an adviser help you through the valuation process?
Having a trusted adviser to work with you through the valuation, who can provide guidance on factors that will impact the valuation and the valuation techniques that are used through the process, is priceless. I work with many clients as they are proceeding through a valuation process, and serve as a trusted adviser with whom the business owner can rely on for open and honest guidance.
As business owners are considering having a valuation performed, they should ensure they have a business adviser — that may be their audit firm or an independent adviser — work alongside them through the process.
The role of an independent adviser is to work with clients and clearly explain the valuation process, including the time and the techniques that will be used to determine the value of the business. There are many different circumstances that must be taken into consideration when having a valuation done, and the adviser should help clients to maneuver through what can often be a highly detailed and, at times, technical process.
Once the valuation process has been completed an adviser will review the draft document, and may make edits to the document. Once reviewed, the final draft is sent back to the valuations firm to finalize and present the final document to the business owner.
What questions should a company ask to identify the right valuation firm for its needs?
A part of my role while working with my clients, is to help guide them through this process. This is one of the key differentiators of how both I and Sensiba San Filippo serve our clients. We will guide our clients through this process, provide insight and explanation and also review the valuations reports with the client for accuracy. Because valuations are so subjective, the most important factor is to select someone who is deeply familiar with your industry. When the valuation firm attempts to value a business in an area it is not familiar with, if it isn’t aware of seasonal trends or what impact the economy is having on that industry, it can be a problem, because all of those things are factors that go into how you value a company.
Next, look at credentials. What is their history? How many valuations have they done? That experience can be critical to an accurate valuation.
Asking the right questions and working with experienced professionals will ensure that your valuation is on target and may help you identify areas going forward in which you can improve business value.
Kevin Strain is an audit partner at Sensiba San Filippo LLP. Reach him at firstname.lastname@example.org.