CPA firms have an advantage over other professionals when it comes to performing business valuations because of their familiarity with all aspects of a business.
“CPAs perform audits and reviews of financial statements, evaluate internal controls, prepare tax returns, and consult on management practices and succession planning,” says Michael E. Stover, CPA/ABV, a director at Brady Ware & Company. “That gives them broad and unique insight into businesses that not many other professionals can claim.”
Smart Business spoke with Stover about the valuation process, the methods used and why CPAs are uniquely qualified to perform them.
Generally, how are business valuations developed?
There are three main approaches to business valuations that need to be considered: market-, income- and asset-based approaches.
A market-based valuation estimates value through analysis of recent sales of comparable publicly traded or privately held companies. Consideration should be given to size, growth, financial condition and operating performance, among other factors.
The income-based approach estimates value based on future or historical cash flows and appropriate returns on capital invested. A rate of return is developed based on a business’ specific risk characteristics. Greater risk in a business demands greater returns, which would equal lower value in relation to the cash flow it’s producing.
The asset-based approach assumes that a buyer would pay no more for a business than it would to purchase the components of the business at market prices. This approach is generally relied upon if the company owns significant tangible assets or if the company has a questionable ability to continue as a going concern.
A business valuation could take into consideration all three approaches, but the availability of information often dictates the method.
What is considered during a valuation and what factors may vary depending on the situation?
Among the first considerations is the appropriate standard of value. One standard is fair market value, which is the value of a business to a hypothetical willing and able buyer and seller who have knowledge of the facts and are not compelled to buy or sell. There is also investment value, which is the value of a business to a specific buyer or seller based on his or her specific set of circumstances. The economy must also be considered. Generally, the values of businesses were lower during the Great Recession compared to values today.
A change in the interest rates can also affect the value of a business — the lower the interest rate, the more expensive a business tends to be.
Valuation also considers risks both in the industry and the company. Risks could include low barriers to entry, limited immediate and long-term growth opportunities, as well as a high concentration of customers and vendors.
What advantage is there to hiring a CPA firm to perform a valuation?
It’s technically true that anyone could perform a valuation. There are boutique firms focused exclusively on business valuations and some attorneys will also provide them.
However, CPA firms have the knowledge and experience required to interpret financial information and make adjustments to reach the most accurate valuation.
In getting a business valued, there’s a lot of information to consider. Ideally, a business will work with someone who is ABV, ASA, or CVA certified. These credentials show that they know what they’re doing and their results can be trusted.
CPAs have a familiarity with businesses like no other professional. Take advantage of that expertise and knowledge to get the best valuation possible.
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