The Growing Need for Accurate Business Valuations From An Accountant Firm
July 10, 2014

The Growing Need for Accurate Business Valuations From An Accountant Firm

accountant firm

As positive economic indicators emerge, many businesses are focused on establishing long-term, sustainable growth. To successfully achieve these growth aspirations, while also safeguarding the buyers and sellers who are involved, requires detailed and complete business valuations by an accountant firm that will examine all the significant elements relevant to the target interest.

Current market conditions provide an attractive finance model that permits attention to shift from risk aversion to strategic opportunity. While interest rates remain at an all time low, corporations work to overcome hard economic circumstances and baby boomers begin planning for retirement. As a result of these occurrences, an increase in mergers and acquisitions is likely.

The quickest and most inexpensive approach to determining value often includes a non-qualified evaluator providing an “off-the-cuff” estimate through the use of a standard EBITA (earnings before interest, taxes, depreciation and amortization) multiple. This approach, however, is not the most beneficial in attaining an accurate market value. Detailed analysis by a certified business valuator is a more precise method. Additional considerations are outlined as follows:

Beware of Do-It-Yourself Values

Many business owners are unclear of what their businesses are presently worth. Relying on gut instinct or industry rules to set an asking price can be dangerous in terms of outdated quick-and-dirty pricing formulas, ambiguity and the failure of taking into account the sole characteristics of a specific business.

  • The term “earnings” could refer to net income, net operating cash flow, pre-tax earnings, EBITDA or net free cash flow.
  • The formula fails to identify what assets and liabilities are included in selling price, along with the presumed sales terms.
  • Rules of thumb regarding industry rules fail to consider the company’s financial performance.

All in all, it’s important that you research the details of actual comparable sales transactions.

Use a More Scientific Approach

More objective, transaction-based techniques of estimating your business’s market value include:

  • The Cost Approach: The balance sheet is a logical starting point for estimating value. However, many items may be stated at historic cost and need to be adjusted to market value along with other items that may not appear on the balance sheet.
  • The Market Approach: Realistic sales of comparable businesses within a significant time span can provide objective insight into what a business is worth, if comparable statistics are available. Private businesses do not need to publish transaction details, but their proprietary private transaction databases are available to view for a fee or subscription. Larger private companies also consider prices of comparable public stocks when approximating value.
  • The Income Approach: A company’s historic financial performance only provides valuation insight that predicts future performance. It derives value from a company’s expected risk (measured by discount or capitalization rates) and return (measured by future cash income). Companies with higher returns and lower risk typically sell for more.

Employing these valuation approaches is beyond the scope of most in-house accounting personnel. An outside financial professional with business valuation knowledge can help modify balance sheets, research comparable statistics and discount future earnings to estimate the market value of a private business.

Business owners contemplating a sale should meet with their attorneys and call Verdeja, De Armas & Trujillo, LLC. Our professionals have experience closing deals and can assist with business and asset appraisals, brokers and commercial lenders to help with financing issues. A team of experienced financial professionals can help owners procure the most from their private business interests.