Should your accountant undertake your business valuation OR should you approach an independent valuation professional? There are pros and cons associated with each.
Your accountant, while not formally or technically trained in business valuation, likely has an intimate understanding of your business, more so than any independent entity would.
On the other hand, an independent and credentialed third party valuator has formal valuation training and tremendous experience in the field. Further, potential purchasers, external investors, taxation authorities, stakeholders and other users are likely to value independent figures over those generated in-house.
Business valuation services in Toronto help business owners better prepare for an exit or sale and reduce the likelihood of a shareholder or matrimonial dispute over value.
Does Your Accountant Really Have What It Takes?
If you’re considering calling in your accountant to value your business, ask yourself whether they truly have a sufficient understanding of your business and its risks in the marketplace. Do they have access to market trends, industry growth rates and key success factors? Do they have experience with actual transactions or conducting business valuations? If your accountant has likeminded companies in their repertoire, then they might be able to provide insights into how the business is currently operating and what its future potential is.
Some accountants specialize exclusively in business valuation. Others specialize in tax planning/compliance. Other accountants are generalists providing accounting/tax/consulting services and may or may not dabble in the technical field of business valuations. You should consider the extent to which your accountant has had any prior experience valuing businesses.
The bottom line? While your accountant may be able to assist with certain tasks involved in tax/succession planning or selling your business (e.g. tax planning, financial statement preparation, conducting due diligence, etc.), a valuation professional is likely better equipped to analyze and support a reasonable fair market value assessment for your business.
Is a Professional and Independent Valuator Your Best Bet?
A professional valuator will start by reviewing certain key financial documents (e.g. historical financial statements, income tax returns, major contracts, future cash flow projections, etc.). He/she will then spend considerable time identifying and assessing the risk factors that serve to impact the future cash flow projections (positively or negatively). This is extremely important as the valuation specialist will not simply go off of the paper value as an accountant might.
Although there are standard valuation models and approaches, business valuation involves a large degree of subjectivity and professional judgment. Valuation conclusions can vary from one valuation professional to another. This is why it’s always best to approach a credible professional who has been around for a while, with a portfolio to show for it.
Why choose a professional business valuator?
Experience Negates Errors
There are many challenges and complexities involved in the business valuation process. A reasonable and supportable value conclusion is extremely important if crucial decisions are being made based thereon (e.g. estate freeze, the sale of the business, shareholder buyout, equalization payment in a matrimonial separation, etc.). The consequences of not having a reasonable and supportable valuation can be very serious (e.g. challenges from tax authorities, not getting a deal done, costly and time-consuming shareholder or matrimonial dispute, etc.).
Accurately Estimates All Assets
Unlike an independent valuator, an accountant might find it challenging to assign an accurate dollar value to certain assets or working capital needs as they do not have the skill and the knowledge to do so. A professional valuator, on the other hand, does this day in and day out for a living. They not only consider tangible assets but also working capital needs as well as the pool of intangible assets that affect the company’s worth.
How are intangible assets valued? Intangible assets are non-physical entities such as a business’s goodwill, assembled workforce, customer relationships, contracts on hand, patents and trademarks, brand equity, intellectual property and so on.
In order to determine a value for the pool of intangible assets, a valuator will:
- Consider historical and projected net income and discretionary annual cash flows (i.e. earnings after taxes and capital reinvestment);
- Assess risk and select an appropriate valuation multiple or discount rate based on the company’s cost of capital;
- Determine the overall value of the company’s operations (i.e. excluding redundant assets and interest-bearing debt); and
- Deduct the value of the net tangible assets as at the valuation date.
Familiar With The Company’s Affairs
The valuation specialist will make assumptions regarding the company’s future cash flows taking into consideration historical patterns/trends, management’s expectations, market trends and various other risk factors. Besides this, the valuator will also consider certain unique aspects of your business such as a new product line, a new customer contract, an expansion or a recent business restructuring, etc. Valuation professionals are trained to understand how these changes affect value.
Get a Professional and Reliable Business Valuation Done Ahead of Time
Don’t wait for a potential dispute, divorce, departure, disability or death. Have your company professionally valued today. VSP offers professional, independent and supportable valuation services that will help you make smart and informed business decisions.
Contact us for more information!