Is Your Valuation Soft?
Are software programs that appraise your business a good
A nationwide accounting publication recently reported on software
packages for complex appraisals. The conclusion: though good
software is available, it takes a trained professional to report
the results. I believe it's better to have a qualified business
appraiser involved from the beginning.
Appraisal software uses financial models that cannot eliminate
subjective selections by their users, which jeopardizes the likelihood
of an accurate appraisal. Most models are based on an arithmetic
mean (average). If the appraised business' value is right in
the midpoint, then we're fine. But what if the business performs
better or worse than industry norms? What if limited data are
available? These situations do arise, and software doesn't account
Understand What You're Getting
While there's a place for business appraisal software, clients
should be paying for knowledge and asking themselves important
questions, such as:
- Does your appraisal report discuss the location of the business
and traffic count when they are relevant?
- Does it examine the number of similar businesses in the area,
when applicable, and ease of entry into the market?
- Does the report make adjustments to financial statements
to reflect fair market value vs. traditional accounting standards
of "book value," which may fail to consider intangibles
such as reputation and location?
- Does the report consider actual market transactions of similar
businesses, review a multiyear period for trends and develop
how the "multiple" of earnings is derived?
- Does the report make adjustments to fixtures, equipment and
operating and non-operating assets to reflect market value, not
depreciated value? In some cases it might be advantageous to
use this value. In other cases, when these assets are in good
condition, their value in use is much greater than their fully
depreciated value. We once valued an asphalt company that was
contended to have an asset value near zero, but its trucks, spreaders
and other equipment were well-maintained and worth close to $800,000.
These are a few examples where the client's figures can just
be "punched in" to a computer and the software generates
a nice, neat report but with grossly inaccurate values. If you
or your appraiser is using a software package to value your business,
ask the above questions to ensure the numbers are hard facts,
not soft trends.
By Carl Lloyd Sheeler
Carl Lloyd Sheeler is an expert witness in business valuation
and the managing partner of Allison Appraisals & Assessments,
a 45-year-old appraisal company with headquarters in Providence,
RI, and San Diego, CA. The company specializes in appraisal review,
litigation support and valuation for estate planning. Reach him
at (800) 286-6635 or csheeler@AAppraisals.com. The company's
Web site is www.Aappraisals.com.
Copyright © 1999 by Bond Communications.