“Why You Need a Business Valuation Expert” by Kimberly Robison | Associate – Business Valuation & Litigation

As an owner, you may require a business valuation for a number of reasons including litigation support, Employee Stock Ownership Plans, estate and gift taxes, succession planning, transactions or financial reporting. When the need arises, make it a priority to employ a business valuation (BVAL) professional who will not only seek to understand the numbers within financial documents provided, but will also go beyond the numbers to discover the narrative behind them.

Value of a Business Valuation Expert

A prolific business valuation expert, Dr. Aswath Damodaran, has written an entire book on this concept titled, “Narrative and Numbers: The Value of Stories in Business.” In Dr. Damodaran’s words, “In a good valuation, the numbers are bound together by a coherent narrative, and storytelling is kept grounded with numbers.”

Due to the existence of a ready market, the transaction value of a publicly-owned company is apparent through its stock share price on any given day. Since there is no ready market in which to buy or sell ownership interests in privately-owned businesses, a reasonable market value must be calculated with assumptions concluded from an expert’s understanding of historical and prospective data and research. Business valuation analysis is a balance between art and science, requiring a compelling narrative to support the crucial inputs used to compute a reasonable valuation.

Stages of Research in Business Valuation

When a client comes to a BVAL expert with a request, there are several stages of research necessary for an expert to gain a holistic understanding of a company’s narrative. The expert must first zoom out until international and national economies are visible. The expert then zooms in until the industries associated with the client’s company come into focus. Next, the BVAL professional focuses more specifically on the company, which is analyzed in the context of the broader economic and industrial environments. The expert studies all available resources and historical financial records until it is time to hear the story of the business as told by management.

The individuals on a company’s management team are in a favorable position to give expert commentary on their specific business and industry. The BVAL expert’s independent analysis and research is corroborated or adjusted based on the interaction of management’s story with the story the expert has discovered. At this point, a business valuation professional can start to nail down assumptions needed to execute appropriate valuation methods.

In business valuation it’s important to use an expert who will not only understand the numbers, but will also go beyond the numbers to discover the narrative behind them.

Impact of a Business’s Story on Valuation

An expert’s understanding and interpretation of a business’s story can meaningfully influence inputs of the business valuation analysis.

For example:

  • Sales growth projections would be quite different depending on whether a company’s dramatic sales increase in the prior year was due to a sustainable gain in market share or due to a large one-time job which temporarily inflated sales.
  • An increase in net working capital (NWC) could be the result of increased accounts receivable resulting from several customers negotiating longer payment terms or from one delinquent customer in which case NWC may be expected to return to historically lower levels.
  • While a company’s margins may have trended downward during the historical period in review, margin projections could be affected by recent development of a new, high margin product now creating buzz in the market.
  • Members of management may shed light on potential positive or negative implications of a new presidential administration.

In short, a BVAL professional must be able to incorporate the unique challenges, risks and opportunities faced by each individual business skillfully into an analysis to create a business valuation with the highest level of accuracy and integrity.

Communicating the Narrative

The most credible BVAL professionals are not only capable of determining the most plausible inputs to incorporate into their analyses, but they also must be gifted at communicating the narrative of each valuation to clients and other end-users through verbal explanations and written reports.

For end-users of a valuation to be empowered to best utilize a valuation conclusion for their desired purpose, the end-users must understand and believe in the valuation presented to them. Armed with a BVAL professional who both respects a business’s narrative and can also effectively communicate that narrative, clients can rest assured that they will be prepared and protected with sound, rational data and support.