1. If the business valuator experiences an inappropriate attempt to influence the valuation, the counterpart will be notified of this. It will also be documented in the valuation report. It is not allowed to tell the business valuator what you think the business is worth, or do something else that the business valuator considers an attempt to influence.
2. Payment is required before the valuation starts. Therefore, it does not matter which of the business partners that purchases the valuation, as it prevents any leverage by the payment. However, you get to meet us in person before the payment is required.
Why valuations without anti corruption policy aren't trustworthy
Valuations without an anti corruption policy are as trustworthy as your opposing party’s lawyers. This is not to say that lawyers aren’t trustworthy, but this is to say it is the job of the lawyer to protect your interests and therefore also be biased. Lawyers typically don’t deny that they are there for you, and your legal needs, only. In some jurisdictions, it is even illegal for a lawyer to help or support the opposing party. However, when it comes to expert witness testimony, the expert is not supposed to be biased, even if he was brought there by someone biased. Most business valuations don’t end up in court, as they are instead used as the basis to negotiate a transaction. This negotiation however, may look somewhat similar to the negotiation that could take place in court. If the negotiation falls apart, the next step is usually to have your lawyers continue the negotiation. If that also falls apart, then the case is usually brought to court. Claims that a business valuation is biased, is one of the most common objections by the opposing party. Often, they are not wrong, and this is generally the reason why the negotiation fails. Down below are two fictive scenarios of how valuations without interview can be manipulated towards a higher value, or a lower value.
John Doe´s Art LLC is the life work of John and he is very proud of it, with his 25 years’ experience as a painter (of art). He has an art studio in Manhattan, but his business is barely breaking even, due to his low volume and expensive rent. This is despite him not having taken a salary since moving the studio out of his home, into Manhattan. An acquaintance of his, who is also very interested in art, has shown interest in buying into his business, with the condition of sharing his art studio. This is exactly what John would need, not only for his business to survive, but also for his dream to continue.
He brings in a business appraiser, but when the business appraiser starts asking questions about his financials, he gets defensive, trying to deflect the conversation back to his amazing paintings and the prime location. While it is indeed true that both of those increase the value, the financial numbers can never be overlooked in a business valuation. Once the valuation is done, and gets sent to John, he perceives that the business appraiser didn’t appreciate the amount of work that he puts into his art, nor that the business appraiser understood art. Therefore, he says that he is unhappy with the valuation, and the number that the business appraiser has reached, as it wasn’t the same number that he had wanted. He refuses to pay the invoice, until he gets the number that he believes that he deserves for his 25 years of experience of creating paintings. The business appraiser complies only to get it over with, and get paid.
John Doe Furniture Manufacturing Inc is a family owned business since 1948. The 8000 sq ft manufacturing plant has several new pieces of machinery, and is located on the family property. Since it is a manufacturing company, it is asset intensive. When Jane Doe files for divorce, he tries his best to shop around for a valuation that is as low as possible. While the morality of the legislation for marital dissolution might be a subject for another discussion, it doesn’t, or at least shouldn’t change anything when it comes to business valuation that isn’t corrupt. It is typically recommended for all business owners, regardless of gender and business type, to always get a prenuptial or postnuptial agreement that separates the business ownership. As John Doe shops around, he explains the situation and most business appraisers he talks to are able to feel his emotional attachment to his family business. None of the business appraisers want him to lose his business, nor any part of the business to be compromised due to any potential settlement.
John Doe eventually chooses a business appraiser, but when the valuation turns up “normal”, he disputes it, as he claims to disagree with the business appraiser. He says that he is unwilling to pay the invoice until they reach an agreement. The business appraiser eventually gets too emotionally involved with his client, and decides that he wants to save him from losing his business, while at the same point wanting to get paid himself. John Doe gets what he wants.
Business valuation is the process of determining the most likely value of the business, in a transaction, where both parties are equally motivated to transact. A qualified valuation of a business should be according to the concept of intrinsic value and include an unbiased normalization of the financial statements. The final calculation of a business appraisal is fairly simple and quick, which is typically what you only get, when ordering an online valuation, without an on-site visit. The process of normalizing the financial statements along with weighing in the different valuation methods against each other, is what requires the most amount of time and competence, by the business valuator. The normalization of the financial statements is typically what affects the valuation the most. A company valuation should only be considered as reliable when it is properly independent and unbiased.
The most common methods for valuing a company are; the market approach, the income approach and the asset approach. They all have their strengths and weaknesses, and their own subcategories. No valuation method is complete enough, to solely be used to value a company.
The market approach doesn’t properly weigh in the profitability or assets of the company, which arguably are the most central aspects when valuing a business. Therefore, most valuations according to the market approach, are not of intrinsic value.
The income approach doesn’t take the assets that the company owns, into account. Therefore, companies with lots of assets get deceptive valuations.
The asset approach doesn’t take the profitability into account. Therefore, profitable businesses get deceptive valuations.
Want to go with a cheaper option or even do the valuation yourself? Nothing is stopping you, but...
You may lose the lawsuit, due to the valuation failing to be waterproof.
You may never settle the conflict, hurting the relationship with your counterpart.
You may get deceived while entering or exiting your partnership.
Tell us how we can help you
We work with the same valuation methodology as the big4, yet we charge half the price, and provide better personal service. If you have a small store/restaurant/salon, or a business that does not yet have revenue, we instead recommend using a business broker for the valuation.
Christoffer Nielsen meets all clients in Texas personally. Cell # 737 232 0838