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November 1999

Managing: Valuation

Is Your Valuation Soft?

Are software programs that appraise your business a good idea?

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 for them.

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.



 

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