Business Valuation 2019

Written on the 30 June 2009 by Biz Stats

In Julian Roche's excellent book "The Value of Nothing mastering business valuations" he lists a number of factors that distinguish good valuers from bad valuers.

The vices of bad valuers include:

Valuations that are done in a mechanical fashion.
Addiction to spreadsheets
Rigidity of thought
A trusting nature

The addiction to spreadsheets comes in for some very severe criticism particularly in respect of mechanical forecasts of data.

"Spreadsheet projections render this fanciful consistency ridiculously easy to achieve without necessarily engendering any sense of reality."

"One important question to ask .... must be how much expertise has gone into it (the spreadsheet)."

If the figures are not based on research about the market, the industry, the long terms threats and opportunities and the ability of the business to respond, then mechanical manipulation of data in a spreadsheet is meaningless and misleading.

Under rigidity of thought, he also criticizes those who are obsessed about any specific valuation methodology.

"Business valuation is not about using the right method, but is about getting the right answers.

"Business valuation methods work well when they can predict or replicate accurately what prices will be or have been paid for businesses on acquisition or disposal. Armed with a database of actual prices therefore and sufficient background information, it is possible to test proficiency in the art."

In contrast to his list of valuers' vices, he seeks one overriding virtue:

"Intellectual curiosity is the one requirement to be sought above all in prospective valuers."

So what should the valuer be curious about? We asked our technical advisory panel to come up with some answers to this question. The problem we had was that there are so many things that a valuer should examine, that it was difficult to limit the list.

Eventually we came down to 10 key questions with a number of subsidiary issues under each heading. I attach the list for you to consider next time you value an SME.


"The Value of Nothing mastering business valuations" Julian Roche LES50ONS Financial Publishing 2005

Guy Crozier MBA B.Com

TM Guide to SME Valuations

10 questions to ask when you value a business

1. What are you valuing?
Is it shares in a company?
Is it the going-concern "assets" (tangible assets i.e. plant, intangibles & stock - this is the way that most businesses are sold)
Is it a full interest or part interest?

2. What is the purpose of the valuation?
Buy / Sell decisions?
Partnership / Marital splits?
Litigation Support?

3. What standard of value will apply?
Fair Market value or Fair value?
A particular standard may be mandated.
Is it a formal valuation (AES No.2), or an indicative opinion?

4. What is the effective date of the valuation?
The "as at" date may be different to the present date.
Under AES No.2, the appraiser can only use information that was known, knowable or reasonably foreseeable at the effective date.

5. What is the key information concerning the business?
History, accounts, operational details, staffing, location, property tenure including rent reviews, customers, suppliers, processes, etc
What value modifiers apply to this business?

6. What is happening in the industry?
Market growth / decline?
Economic factors?
What risks does the business face key staff, technology or legislative changes?
7. What are the key intangibles of the business?

Identify intangibles (rights & contracts, intellectual property & databases, relationships, going concern goodwill, etc.)
How transferable are the intangibles? (Issues of personal goodwill.)

8. How 'honest' are the financial accounts?

Identify "one-off" sales or expenses
Are some expenses discretionary? i.e. personal, or not necessary for the production of income?
Normalise the accounts.
Historic figures are no guarantee of future performance.
An enquiring mind & a keen sense of curiosity may reveal more than an addiction to spreadsheets.
Can financial forecasts be supported?

9. Which are the appropriate valuation methods to use?

Asset-based, market-based & earnings-based approaches should be considered
Two or three methods should be applied to check your answer.
Sanity check what would you personally pay for this business?

10. What does the market say?

All valuations are only opinions - the only true test of value is an arms-length sale on the open market.
Is the business saleable?
Transaction data from actual sales of similar businesses provide a valuable guide

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Author:Biz Stats


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