Should My Accountant Do My Business Valuation?
Accountants are a vital part of business functions, but are likely not the best choice for business valuation.
I run a split practice. I specialize in both transactional advisory and business valuations. In my transactional advisory practice, it amazes me the number of times clients have come knocking on my door to discuss the sale of their business and present me with a ‘valuation report’ that has been prepared by their accountant.
What’s wrong with this, you say? Surely your accountant, given their knowledge of businesses and their accounting skills, should be perfectly suited to valuing a business? Based on the many valuation reports I have seen that have been produced by accountants, I would strongly disagree.
Many of the accountant-produced valuation reports I’ve come across just don’t stack up. In fact, many of them are not valuation reports at all — they’re simply calculations (i.e., net profit x 3 = value) — if your accountant has sold you something like this before, ask for your money back!
Here are the reasons why you should never ask your accountant to value your business:
Your Accountant Doesn’t Sell Businesses
I am of the strong opinion that one of the most important pieces of knowledge a valuer should have is an understanding of the ever-changing business sales marketplace, and accordingly strong knowledge about what prices business buyers will pay for what businesses.
As a case in point, I recall a recent accountant-produced valuation report which stated that a particular manufacturing company (with revenues of approximately $5 million) was worth 5x net profit plus the written down value of all physical assets. I can assure you that a business of this type would never transact in the marketplace for anything close to this — hence, the valuation report was a complete waste of money.
Your Accountant Most Likely Doesn’t Complete Valuations Very Often
Trust your accountant to do what they’re good at — let them calculate your EBITDA (there are some adjustments they can help you with), your present inventory value, etc. Most accountants are specialists in taxation, so unless your accountant is a specialist in business valuations, you should engage someone else to value your business.
I would never ever attempt to advise you on your taxes — it’s not what I do! Unfortunately, many accountants in the hunt for fee revenue will take on engagements to complete business valuations, even though it is not their area of expertise, and not something they do very often.
Unfortunately, this means a great deal of the accountant-produced valuation reports I’ve seen clearly demonstrate that the accountants responsible for them didn’t even pass Valuations101. Why waste your money?
Your Accountant Is Not Independent
Many businesses and individuals have used the same accountant for years and years. Given the length of the relationship between client and accountant, accountants cease to be an independent, arm’s length advisor and instead become an advocate for their client. Most times, this works exceedingly well to the benefit of the client. However, when it comes to valuing your business, you should engage someone who can act at arm’s length and provide independent advice.
So Who Should You Engage to Value Your Business?
I’ve found the best business valuations are produced by practitioners who specialize in completing valuations. These practitioners have specialist knowledge and expertise in the field of business valuations, meaning their advice is grounded in experience and logic. If you needed heart surgery, you wouldn’t use your GP — you’d go to a specialist. The same applies to business valuations!
Valuers should also have a well-rounded knowledge on the current state of the business sales marketplace. This means they should know how different businesses are transacting in the marketplace, and on what prices and terms business buyers and sellers are completing transactions. Understanding the business sales marketplace is vital to producing logical and defendable valuations that stand up in the face of current market conditions.
Further, it pays to know that there are many specialist business valuers in the market who have unique expertise in valuing businesses within specific industries. If, for example, you own a pharmacy, it would be prudent to engage a specialist pharmacy valuer who understands the nuances of businesses in the pharmacy industry and what impact these factors will have on a business’ value.
So ask yourself this question: does your accountant tick all those boxes?