Business valuations need to be an adept balance of science and art

The availability of inexpensive and quick-turnaround options to get a private business valued has Brian Mazar, CEO of American Fortune Mergers & Acquisitions, upset. “Anyone can study and learn the mechanics of placing a value on a business, but those metrics should be the foundation for the rest of the valuation, not the final result,” Mazar emphasizes. And with that statement, Mazar released American Fortune’s tips on what a quality business valuation should include and what elements, beyond the foundational metrics, should be considered in a proper business valuation, reports.

The valuation of businesses has grown to be both a science and an art and business valuators must respect and pay attention to both pieces to properly value a business and any intellectual property it holds. To arrive at a defensible valuation, a valuation professional needs to follow the standards and norms of the asset-based approach, the market approach, and/or the income approach. But, many well-intentioned valuation professionals fail to produce accurate and defensible valuations because they do not possess the second part of the valuation, which is knowledge of the "art," Mazar  said. The art portion of a valuation comes from the forces of the market and the dynamics associated with expected rates of return for given risks.

Parts of a valuation are very subjective. How expert #1 feels about a market environment might be vastly different from how expert #2 feels. A business owner needs to be aware of this but not avoid it, he added. If a valuation is void of the “art” or subjective part, it is an incomplete valuation. Since valuations are based on 50% mechanics and 50% art (market forces), it is very critical the evaluator is well versed in both aspects.