Business valuation services are invaluable for many firms, and it is easy to see why business owners call on trusted professionals for this work. A business owner who works with certified public accountants will likely turn to these professionals for help when undertaking a valuation process, but should they?
What is a business valuation?
A business valuation reviews the economic value of a company, with valuation reports offering useful information for a wide range of circumstances.
What business valuation methods are there?
The most common business valuation methods are:
- Asset-based methods – which reviews company investments to measure its value
- Earning value methods – which measures the business on its ability to generate wealth and future earnings
- Market value methods – which estimates the worth of the company relating to similar businesses which have been sold
Is fair market value the same as market value?
Fair market value, or FMV, is a hypothetical figure based on estimates and expected behaviour in “normal circumstances”. MV is based on actual events, and tries to more accurately predict a sales price.
A valuation report should indicate fair value, but with hypothetical factors involved, it is easy to see why current market value is linked to actual transactions.
What information is needed to perform a business valuation?
The following factors and financial statements are useful for a professional carrying out the business valuation process:
- Profit and loss statements
- Balance sheets and tax returns (commonly, for at least four years)
- Current year balance sheet
- Forecasts and projections
- Net income, cash flow information and accounts receivable information
Even if you don’t hire an accountant to provide an accurate business valuation, a bookkeeper or accountant preparing financial statements is useful for most businesses when paired with valuation services.
You need more than a balance sheet in determining book value in your industry
Other documents which are helpful include information relating to what the company does, an overview of assets and inventory, information regarding liabilities. Also, if the business has reports compiled by professionals and consultants, this is useful information for a valuation.
Why do businesses need a valuation?
There are many reasons businesses need a valuation, including:
- To better understand the business with respect to their growth, and current marketplace
- To make more informed business goals and to shape business strategy
- To build for maximum value
- To better understand replacement cost of assets
- To ensure assets are properly recorded and protected
- To develop a viable exit strategy, succession plan or sale process
- To better present to potential buyers
- To develop buy-sell agreements with partners in the business
- To present a viable application to lenders
- To develop a strategy for future earnings or acquisitions
- To develop informed tax planning
With so many reasons for businesses to carry out a valuation, even for public relations benefits if not encouraging investment, attention turns to who should conduct the valuation.
Do you need international certified professional accountants to value a business?
Commonly, a business valuation is undertaken by licensed professionals. In the United States, this work is may or not be carried out by someone who is registered with the American Society of Appraisers (ASA). However, other bodies are available, and international certified professional accountants are a sensible choice.
It makes sense to call on an independent party, and accountancy and specialty corporate finance firms are an option when hiring an expert to review a firm’s finances.
Be mindful of accountancy clients and business relationship
In the case of a firm who has a long-standing relationship with an accountant, it might be best for them to call on another professional to review their value.
A lot of accounting experts operate as an extended arm of a business, knowing the ins and outs of the company, offering insight and guidance. In these circumstances, it is often best to hire an external party to review the business value.
Do accountants carry out business valuations?
Yes, many accountants like Darlingtons Auditox Accountancy (based in the UK) carry out business valuations, but you shouldn’t assume all accounting professionals undertake business valuations, or indeed that all professionals are helpful in carrying out this sort of work.
Look for valuation specialists
Many accountants are specialists, which means they focus on one particular area of accountancy, or that they deal with certain firms. A tax accountant, especially from a CPA firm, is a highly skilled professional, but they are unlikely to have experience in reviewing all aspects of a business valuation.
Accountancy firms have a wide range of clients and in many industries
A tax specialist can undertake a business valuation for a company, but time and money will be better spent on a professional with experience in this line of work.
This means if you are looking to hire an accountant to undertake a business valuation, it is best to hire an accountant with a proven track record in assessing businesses, and undertaking business valuation services.
Factors an accountant should have or know when carrying out a business valuation, include:
- An understanding of the relevant business sector, including recent transactions and terms
- Experience in dealing with the internal revenue service
- Experience in preparing financial statements which allow people to make an informed decision
- Intangible assets
- What potential buyers are willing to pay and why
Know the true book value of your company
There is no denying knowing the present value of a small business is essential, and this is something that the accounting profession can assist with. However, firms looking for valuation services should only call on accountancy experts or an accounting firm with expertise in preparing business valuations, and to determine a fair value of the business.
Accounting services can help a client determine book value and market share
Given the importance of most business sales and market capitalization work, it is vital to have financial statements that determine and drive decisions. There are many accounting firms who can help, but business owners should look for a CPA firm or specialty corporate finance firm who will paint a more accurate picture of their business and value.