Business Valuations

There are a lot of rules of thumb out there.  For certain areas such as dentists or tax practices, perception has become reality, and as such these can not be ignored.  Ones based on a multiple of revenue have some credibility.  We are much more wary of any that are a multiple of profits, just because the word “profit” is so hard to pin down form the perceptive of both the buyer and seller.

As covered in the “Business Sales” section, the type of business that is being sold is a big factor too.  I would suggest reading it if you are thinking about a business valuation.

Related party transactions such as salary or rent to the owner will most likely vary from market rates.  We also may have a fancy new car or child employee the company is paying for that the buyer doesn’t care about or want.  We could go on and on, but just want to say the definition of profits is much more vague that revenue.  Not to say that a valuation professional ignores profit and cash flow, but rather it takes a lot of expertise to convert book profit to what we will term “valuation” profit

Since I like to keep my blood pressure low, I prefer areas in which we can mediate or even arbitrate, or areas where we represent a buyer, seller, or taxpayer.  Divorce and/or shareholder dispute related areas can be discussed with us being in an advisory role, but I think we do the customer much more good helping in reaching a resolution, rather than representing one side in court in a legal contest. 

I will freely admit there are valuation engagements where I might be better to refer on than handle, but will try to be fair and do what’s best for you.  There are valuation experts that have more credentials, might make a better appearance in court, and/or a situation that involves extensive travel or admittedly an area I just don’t know much about.  I have referred cases beyond what I which to handle to Laura Markee at Markee Valuations in Vancouver, and Charles Wilhoite at Willamette Management in particular.

As such, areas of special interest include:

  • Advisory roles for attorneys or others who wish to settle a case  or are drafting a buy/sell.
  • Helping a buyer determine if an asking price is fair.
  • Mediation or arbitration.
  • Pricing a business for a seller.
  • Valuing a business or partial interest in real estate for estate or gift taxation issues.
  • Review (but not preparation) of commercial real estate appraisals and business appraisals for rationality.  I see too many that seem to have a lot of boilerplate, plug numbers in formulas, and not enough arm’s length thought about the real world.

I try to use a simple and locally oriented approach.  I don’t include pictures, maps, or 32 pages of statistics about the local economy.  Like the Verizon commercial says, how much do you want to pay for something you don’t want?  I think the answer was “Nothing”.  Gifts of items such as a partial interest of commercial property within a partnership/LLC come down mostly to lack of control and lack of marketability discounts, which include an extensive review of the partnership itself.  Most the rest come down to a combination of an income, market, and depreciated replacement cost approach, including MAI valuations of real estate.