Beware: A Self-input Business Valuation is not a good idea

There is a type of business valuation software and service available that allows a business owner to input their own financial information.  Although this may seem like a good idea, it is a very bad practice.  Valuations, like tax returns are complicated and require a seasoned professional to analyze and input the data to get an accurate number for value.  One of the main reasons that a business owner would not want to do the valuation themselves is there are key expenses that can be added back into the EBITDA and Cash Flow calculation. If these expenses are missed, the valuation number is inaccurate.

Key add backs and charges tend to be buried in the tax returns or financials and are easily missed. These include:

  1. Amortization Expense, which is usually shown on the Schedules and buried in the tax return.
  2. Section 179 Depreciation Expense, which is usually shown on Schedule K-1 of the Tax Return and erroneously added back with the rest of the depreciation.
  3. Partner Wages and cost to replace the owners for a situation where there is multiple partners who own a business.
  4. Cost of a working spouse who is not paid.
  5. Adjusting the lease to the market rate.
  6. Correct calculation of SDE, EBITDA.
  7. Repair and Maintenance Expenses that need to be capitalized.
  8. An S-corp tax return will show more Taxable Income (Net Income) than the P&L due to the expenses and pass through items on the Schedule K-1’s. If the business owner doesn’t understand income and pass-through entity taxation, he will undervalue the business.
  9. Schedule M-1 on the Tax Return contains important information and business owners tend to not understand how Schedule M-1 works.

pexels-photo-374074.jpegBusiness Valuations are exponentially more accurate if a Valuations Expert or CPA gathers, assimilates, and inputs the critical information pertinent to the engagement to get an accurate value for the business.

The second consideration applies to financial advisors who refer clients to a third-party valuation service and allow their clients to input sensitive financial information themselves.  One main reason for a Financial Advisor to not want to refer a client to a self-valuation service like BizEquity is the client’s data is captured by the provider and that data is sold to competitors. Financial advisors often pay for the service, send clients to the service provider, and their clients’ personal financial information is resold by the business valuation service provider to anyone who wants to purchase it.  It doesn’t make sense to give competitors sensitive client information, especially when an advisor is paying for the service.

 

I recommend that a business owner contact a knowledgeable valuation expert who is an independent third party to get an accurate estimate of value for their business. If a client inputs the financial information themselves it is highly likely to produce an inaccurate value for the business.

About Rick Krebs, CPA - Business Valuations, Mergers & Acquisitions

Rick Krebs - Mergers and Acquisitions Professional, Business Broker, CPA. Rick brings a unique blend of sales, entrepreneurial, and financial experience to Business Sales Group. He began his career as a CPA, working in Nevada and Utah where valuable financial experience was gained. He uses those skills every day. He graduated with a Master’s of Science Degree and Bachelor’s Degree from Utah State University. As a business owner he started Liberty Mortgage, a mortgage bank licensed in 23 states nationwide. He eventually sold the successful company to an investor from California. He has been in the M&A space helping people sell their businesses since July, 2010. During his first year as a business broker with BRC, he listed and sold more businesses than the entire office combined. As a sale-side and buy-side advisor for Mergers and Acquisitions transactions Rick's advisory, accounting, and management skills are invaluable when advising sellers as they maneuver the intricate details of the deal through closing. Rick is also a CNA (Certified Negotiation Expert) which helps him negotiate the most favorable terms for clients in a transaction. ​ Rick was quoted by FORBES as an expert sales-side advisor who helps Sellers avoid the pitfalls of selling a business.

Posted on January 17, 2018, in Company News and Announcements and tagged , , , , . Bookmark the permalink. Leave a comment.

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