Key factors when selecting a business valuation expert

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services: Business Valuation

Choosing the right business valuation expert can have far-reaching implications for your company. A quality valuation affects financial reporting, tax compliance, transactions and legal proceedings.

Here we explore key factors for selecting a valuation provider and red flags to avoid. By understanding these key factors, you’ll be better equipped to make an informed decision and further ensure that your business valuation serves its intended purpose effectively.

Importance of business valuations

Accurate and defensible valuations are more important than ever in today’s business climate. It can affect everything from your company’s financial standing to its strategic decisions and legal positions.

Key business contexts

Accurate, supportable business valuations are essential in various business contexts, including:

Stock compensation reporting under ASC 718.
Tax compliance and penalty avoidance.
Streamlining the financial audit review process.
Minimizing hurdles in critical liquidity scenarios.

Factors increasing valuation importance

The more successful your company is, the more critical a defensible business valuation becomes. The importance only becomes more highly levered if other key factors are in play. These include:

Critical estate planning or reporting.
Potential disputes over fairness.
Analysis of pending transactions.
Potential emergence towards public registration of shares (e.g., IPO or SPAC).

In other words, it is vitally important to get it right.

Role of a business valuation expert

Understanding the role of a business valuation expert is crucial when selecting one. These professionals play a vital part in determining your company’s worth. They bring specialized knowledge and skills to the valuation process. Let’s explore the key aspects of their role:

What does a business valuation expert do?

A business valuation expert develops a conclusion regarding the following:

Economic value of a company.
Business unit.
Elements of the capital stack of the subject company.

Valuation contexts

Valuations may be used in the context of:

Financial reporting
Tax reporting
Stock sales
Mergers and acquisitions
Business planning
Litigation/arbitration
Other situations

Valuation process

The business valuation expert generally assesses business value by doing the following:

Carefully analyzing historical and prospective financial statements, historical or prospective transactions, available reference data, market trends and economic conditions, among other key factors.
Adjusting for unusual events or circumstances that might distort the business’s true, or normalized, level of performance.
Presenting findings and outlining the methodologies used. Explaining the rationale behind the key details, processes and findings supporting the valuation in a report. This includes a logical chain of support down to the underlying facts and circumstances in play as of the Valuation Date.

Selecting the right business valuation expert

Selecting the right business valuation expert is a critical decision. It can significantly impact the outcome of the following — and more:

Financial negotiations
Capital transactions
Tax outcomes
Legal disputes
Strategic planning

The process is often complex, involving multiple variables, potential methodologies and standard practices. It combines both art and science, considering a variety of key nuances to develop a logical and defensible work product.

Why is choosing the right business valuation expert important?

A quality business valuation expert will provide an accurate, unbiased and defensible estimate that clearly conveys your company’s value. But the right business valuation expert does much more than provide a number.

In the event of a legal dispute, for example, they can provide expert testimony. They can assist attorneys in identifying relevant factors to consider, which:

Impact the concluded value.
Analyze opposing valuations.
Assess the fairness of a transaction.

It is essential to select a provider that:

Has relevant experience, education and credentials.
Possesses business and financial acumen to understand the purpose of the valuation.
Understands and comprehends all the factors that can affect value.
Appropriately selects the relevant approaches and incorporates assumptions that are reasonable and supportable.

The business valuation expert’s reputation, as well as that of the firm, is also important. It adds a layer of assurance that the valuation is both reasonable and defensible. This:

Increases stakeholder confidence.
Lends weight to the expert’s opinion in legal proceedings, negotiations and settlements.
Decreases the likelihood of challenges to the valuation’s validity.

It is critically important to select a service provider who has the credentials and credibility required to help:

Avoid potential hazards in the future when another shareholder reviews the analysis for reasonableness.
Avoid potential litigation.
Ensure supportability upon IRS review.

Hidden costs of choosing a valuation expert based on price

Selecting a business valuation expert on the basis of cost may be tempting. This is especially the case for startups with tight budgets, or businesses in some level of distress. Unfortunately, this often turns out to be a regrettable decision when analyzed over the long term. Such companies mature or face more critical ramifications related to reported values.

Low-end providers often keep their prices down by cutting corners and not performing adequate due diligence. The resulting analyses tend to lack the necessary rigor and thoughtfulness required to sufficiently support the value estimate. This can lead to:

Audit challenges.
Additional professional fees.
Potential tax penalties.
Delays in completing audits in a timely fashion.
Review failures.

Focusing on upfront costs is likely to create unseen, and often material, risks or future costs. These may greatly outweigh the short-term benefit. This is applicable whether the valuation is for financial reporting, tax compliance, transaction analysis or dispute support.

Red flags to watch out for

The following are common red flags that might prevent a valuation report from holding up to scrutiny:

One or more individual valuation experts don’t sign the reports

Prevailing valuation standards require one or more certified professionals to take ownership of a given report. However, some companies providing valuation reports lack qualified experts. They may have moved away from having individuals sign off on their reports.

Unclear project leadership and lack of communication

There is a good chance you will not receive a properly completed, defensible valuation upon issuance if:

Your communication with a firm providing your valuation is through a relationship manager for a subscription product.
You are unable to get one or more clearly experienced valuation experts on calls in a timely manner.

Insufficient qualifications

The absence of formal certifications may indicate:

Lack of formal training.
Limited knowledge of standards.
Low reputation recognition by professional valuation bodies, CPA firms, law firms or peers.

This could impact the provider’s ability to deliver accurate, defensible, professionally accepted valuation services.

Inexperienced valuation staff

Low-end providers often save money by leaving valuation work to junior employees. Quality valuation work, however, calls for significant judgment and expertise, which can often only come from experienced practice. A lack of experience can lead to poor judgment calls, oversights or errors.

Overreliance on outdated data

Historical transactions are very helpful in completing certain valuation analyses. However, overreliance on transactions from beyond 12 months prior to the Valuation Date may be a red flag. It can alert you that the requisite updated diligence was not completed in the developing analysis in question.

Incomplete financial picture

A report may be deficient if it does not include comprehensive financial information. This includes:

A company’s historical balance sheets, and profit and loss statements.
Inconsistent or unsupportable assumptions. For example, using inconsistent assumed exit terms throughout a single report.

Key qualities to look for in a business valuation expert

You need someone who meets the technical requirements of the job. They should also align with your needs for communication, support and professionalism.

The right qualifications

Professional certifications indicate a high level of expertise, adherence to industry standards and best practices and commitment to ongoing professional education. This helps ensure that valuations are accurate, reliable and credible in various professional, legal and financial contexts. The following are several recognized certifications worth noting:

Experience

A business valuation expert with both breadth and depth of experience is likely to have encountered and resolved a variety of valuation challenges. They will be more likely to understand the critical nuance of the valuation process at hand.

Willingness to support and defend analyses

Confirm that your expert is willing and prepared to stand behind their valuation. This includes situations such as financial audits, IRS reviews, negotiations, mediations or court proceedings. They should be able to defend their work against scrutiny and cross-examination. Unwillingness to do so is a red flag.

Qualified expert sign-off

This sign-off serves as an assurance of the report’s accuracy and the integrity of the valuation process. Failure to have individual qualified expert(s) sign off on your report can jeopardize third-party acceptance. This may also reflect poorly on the valuation’s credibility in any review setting.

Comprehensive financial analysis

Your expert should present the full financial picture of a company. It should consider all relevant factors that could affect its value. This includes analyzing financial statements, market conditions, industry trends and specific business risks.

Be wary of experts who rely on insufficient or unsupportable assumptions or over-rely on dated transactions. This can undermine the valuation’s credibility.

Availability

Business valuation is important, can be complex, and always involves nuance. Your business valuation expert should be willing to take your calls in a timely manner, talk you through the process and answer your questions. This is even more important when a third party scrutinizes a report, such as in a financial audit.

BPM’s business valuation experts

With so much at stake, it’s essential to choose a business valuation expert who not only has the right qualifications and experience but also aligns with your specific needs and goals. With extensive industry experience and multiple professional certifications, BPM’s business valuation experts tailor an approach that works best for you.

Our specialists provide:

Extensive experience: Certified Valuation and Appraisal professionals at BPM have been providing services to companies of all sizes for decades. Our practice leaders have over 60 years of combined experience and multiple professional certifications.
Compliance with guidelines: We help ensure your valuation meets current standards. These include those from the IRS and the Association of International Certified Professional Accountants (AICPA).
Comprehensive support: We can assist you at any critical juncture of the valuation process.
Collaborative approach: We leverage a diverse team of tax, accounting, transaction and assurance professionals.
Direct leadership access: You’ll work directly with practice leaders dedicated to exceptional, client-centric service.
Depth of knowledge: We understand complex capital structures and applicable standards-driven methodologies for accurate, defensible valuations.

To learn more about how BPM can fulfill your company’s valuation needs, contact us today.