Top five business valuation tips from recent training webinars

As a busy business valuation professional, you may not always have the time to attend training events. BVR has you covered. We’ve compiled the top five tips from recent BVR webinars on the most timely and important topics in the profession.  

Tip 1: Get a reliable set of projections

Webinar: Small Business, Big Challenges: Navigating Main Street Valuations
Speaker: Pasquale Rafanelli

Management Projections

If management cannot provide a reliable set of projections and has no means of doing that, the first questions to ask are always, “Why can’t you? What don’t you have? What is preventing you from creating them?” Oftentimes, it is that management has never created projections before and doesn’t know how to start. Explain to management what a set of projections are, how it would arrive at them, and the steps, procedures, and assumptions it would need to consider for the methodology. Then, if manage­ment can arrive at a projection, that’s great; if not, I default to the capitalization of earnings. I wouldn’t walk away from an engagement just because management and I cannot agree on a set of projections per se. Usually management held up on that for a reason, and I would dig into it and arrive at what the reason is and see whether we can still work together.

Ultimately, if management and I cannot agree and I don’t believe the projections are accurate, the options are either to walk away or to make an extraordinary exception under USPAP (if you follow USPAP). We would say that management gave us these projections and explain why we don’t believe they are reliable, but we make this hypothetical extraordinary assumption. If it turns out they are not accurate, our value would be different.

Tip 2: Know your judge

Webinar: Behind the Bench: Two Experts and a Judge on Valuation in the Courtroom
Speakers: Jay Fishman, William Morrison, and Thomas Zampino

Legal Illustration

It is important to know your judge. Just like you perform site visits and talk to the company to know the business, you need to know about the judge you are appearing in front of. That will usually come from your teammate, the lawyer.

Is this a judge who has been in family law for 10 years, so that your base elevation can rise? Or is it some­body who has been here one year and was a prosecutor without a business background? It is important for you to know when preparing your presentation—what is the knowledge base that the judge has. You want to make the judge feel comfort­able, not overwhelmed, with your testimony.

Tip 3: Use at least six publicly traded companies when performing a guideline company analysis

Webinar: Common and Not So Common Errors in Business Valuations
Speaker: Gary Trugman

Finance Illustration

When you are working with guideline companies, the first thing that you have to ask is, “How many should you have to have a relevant sample size?” Can you really do a good guideline company analysis with two or three companies? Personally, I don’t think so. I would tend to use it and put very little weight on it. Ultimately, I might use it as a sanity check to see whether my market approach substantiates my conclusion under an income approach. But, in a perfect world, I would like to have at least six publicly traded companies. Even with that, sometimes it is not enough. A lot of it really depends on the industry, and how similar these businesses really are to the subject.

Tip 4: GAAP Financial Statement may not show impact of TCJA

Webinar: Depreciation and Amortization in DCF Analyses and the Impact of the New Tax Law
Speaker: Gil Matthews

Financial report illustration

GAAP financial statements are not sufficient for DCF calculations and many of these Tax Cuts and Jobs Act changes will not show up in GAAP income statements. For example, depreciation for GAAP accounting purposes will not be accelerated. It will continue the same way it has. The cash savings from accelerated tax depreciation will not be directly shown but will show up to some degree in changes in deferred taxes.

To do your analysis, it will be necessary to ask clients for projections not only on a GAAP basis, but also on a tax basis. You can still use GAAP financials for the market method because all of your comps will be on a similar accounting basis. But, in the case of using the income method, it will not show the actual benefits of the accelerated depreciation.

Tip 5: Always attempt a site visit
Webinar: BVLaw Case Update
Speakers: Jim Alerding and Sylvia Golden

Site Visit Illustration

In Jensen v. Jensen, the trial court found that Larson's conservative estimation of Arista's value was more credible. Specifically, it found that his estimation was ‘more detailed’ and ‘involved seeing the site, interviewing the owner of the business, [and] understanding the business in more detail.

The opposing expert did not see the site nor visit with the owner. It is difficult to do sometimes when you are not representing the owner, but this case demonstrates your vulnerability if you fail to make the effort. In a case where I failed to gain access, I was able to overcome the attorney’s objection by pointing out that the other side refused my request for a site visit and an interview with the owner. This situation is one reason the SSVS does not require a site visit.

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