X Factors In the Business Valuation Formula

X Factors In the Business Valuation Formula

Professional Expertise, Insight, and Industry Experience Bring Crucial Context

Darren Mize, ASA

GCF was engaged to value a pharmacy and the lender quickly explained how “strong” the deal was even stating: “This is a slam dunk!” So, we began the due diligence process and immediately discovered:

Whether you are a business ownera lendera business broker or financial advisor requesting a business valuation, you rely on the valuation company’s commitment to:

  • Accuracy
  • Timeliness
  • A holistic, defensible analysis that thoughtfully assesses and weighs both tangible and intangible elements that contribute to the value of the business, and supports the stated intent of the business valuation

Where – and When – Do Formulas and Algorithms Apply?

While every business valuation company applies its own formulas and algorithms to expedite the capture and analysis of financial data, these formulas are just one of several essential tools in the appraiser’s tool kit.

Basic macros make the process of importing and organizing data from financial reports as efficient as possible. Seasoned business valuation professionals have developed systems that enable them to look at a lot of data quickly, and isolate key variables for review – and most importantly, they know how the business valuation formulas have been built. This means they know what the patterns should look like, more or less, and when it’s time to break something down and study it more closely in case there’s underlying risk to address. One variable even just slightly off can compound quickly, and render a business valuation unreliable.

Speed is important to the process, but not if it sacrifices accuracy. And while the right, current technology is essential, it should never serve as a stand-in for human intelligence.  

Cookie Cutters and Black Boxes

If you need an immediate estimate of the range into which your business valuation might fall, an online valuation calculator can provide preliminary information. By engaging in the process of responding to standard, formulaic questions and plugging in numbers, you’ll begin to get a sense for the metrics involved with typical business valuation models.

The end product from an online valuation calculator won’t provide much in the way of analysis. If the marketplace is active, however, you should gain a sense of how the greater marketplace assigns value. The exercise is similar to when the real estate agent pulls comps to help you price your house – you have a data point based on transactions for broadly similar entities. 

Up another step on the ladder of expertise, you’ll find business valuation companies that provide a textbook business valuation, and promise your report quickly. Again, you’ll do most of the work to complete a detailed questionnaire and input financial data. There will be a degree of human interface, but likely no site visits or in-person interviews about your business.

For either version of the entry-level business valuation, you’ll end up with a serviceable report that lays out the basic groundwork for business valuation. What you won’t get is an opportunity to genuinely understand the assumptions and methodology, or ask questions and challenge findings. And you won’t find much discussion about intangibles. These models rely on a one-and-done approach, so they’re executed quickly – but they may well suffice when you don’t have a lot on the line. 

When You Need the Most Robust and Defensible Business Valuation

Above circumstances aside, the day will come when you need a thorough and reliable business valuation, one where the business valuation formula genuinely reflects everything your business represents, and one that ensures you will receive all possible credit in any transaction or dispute. 

In cases like this, accuracy matters more than ever. And while it’s always ideal to get it right the first time, both you and your valuation firm deserve the time and discretion to revisit an initial finding that doesn’t quite add up. Even a small discrepancy can have major implications for your final valuation. 

Experience. Industry Expertise. Professional and Managerial Insight.

In many cases, a valuation will set the stage for the future of your business. Whether that future involves new financing, a sale or merger, additional equity participation – or new roads ahead as you plan an exit strategy, thoroughness and accuracy will pay more dividends than a speedy, plug-and-play deliverable.

For the most airtight valuation possible, it’s important to build human intelligence into the process to interpret the big picture and spot any red flags or inconsistencies. And yes, technology can highlight an outlier, but it can’t tell you why it cropped up – and technology can’t discern between a simple error or oversight on the front end and a real discrepancy that deserves further study.  

There’s no substitute for what hands-on experience can contribute to the business valuation formula. Experience matters to the quality of the valuation report, whether it’s the product of a long and varied history completing different types of valuations for a broad range of entities – or brought from direct operating roles in industry, lending and finance. Regardless of its origins, experience supports facility with the numbers and an instinct to know when the story told by the numbers is missing a layer that could make a material difference. 

And while conventional financial analysis plays an important role in the process, true valuation expertise plumbs deeper because the intent and endpoint serve a different need. This is where training and professional business valuation credentials are important, such as those earned from the following organizations:

  • American Society of Appraisers (ASA)
  • National Association of Certified Valuation Analysts (CVA and CBA)
  • American Institute of Certified Public Accountants (ABV)
  • Institute of Business Appraisers (IBA)
  • International Society of Business Appraisers (BCA)

A valuation professional trained and certified by these organizations will ensure the valuation meets all established standards and holds up to the daylight brought in with deeper scrutiny or even a challenge from another party.

If you want to develop a better understanding of business valuation, request GCF’s free guide: How to Navigate the Business Valuation Process Successfully.

Questions about valuing your business? Please contact us here, and a GCF appraiser will get in touch with you directly.