With many cheap or online valuation services on the market, clients requiring a valuation on a business need to ensure that they get a precise and detailed valuation report. Often it can be the final report and/or process that can let the client down – not the valuation figure. If proper and due process is not followed in preparing a valuation, the cost to rectify can far outweigh the perceived savings with a cheap or online valuation. Below I have provided 5 key points that should be included in a valuation.
First one is simple;
Did the Valuer go and inspect the Business? The old expression, ‘a picture tells a thousand words’. If the Valuer has not visited and inspected the business, then I am confident in when I say that if the valuation was disputed, the ‘valuation’ would not have much to stand on and you would then have the issue of finding a new valuer, making the process a lot more expensive than original hoped.
Has the Valuer outlined the purpose of the Valuation? In some cases a final valuation figure for a business may be different dependent on the purpose of the valuation. An obvious situation would be if a Business was valued on an asset based approach for liquidation verses being valued for a potential purchase or sale.
Has the Valuation been conducted in accordance with APES 225? Valuation reports must comply with and contain the statement that the Valuation Service was conducted in Accordance with APES (Accounting Professional & Ethical Standards) 225. If the report does not contain this statement, it leaves the valuation vulnerable.
Has the Valuer considered multiple valuation methods? A good valuer will consider and utilise multiple valuation methods before arriving at a final valuation. In many cases not all methods will be used in the final report, but you would want to see an explanation as to why one method was used or discounted over another method. In some cases the valuer’s instruction may be that the valuation be conducted using a specific calculation, if this is the case, this must be mentioned in the report which leads us onto the next point.
Has a ‘Letter of Engagement’ or ‘Instruction’ been prepared? Good valuers will prepare a ‘Letter of Engagement’ for their clients to read and sign so it is clear to both the client and the valuer of the requirements. In some cases, such as disputes, it is wise to have both parties sign the Letter of Engagement thus reducing any potential conflict when one party does not agree with the Valuation.
Other items a Valuation Report should contain:
• Description of business and ownership
• The date at which the value has been determined
• Name and qualifications of the valuer
• Statement to which the valuer was acting, independently or not
• The premise of value adopted
You should discuss with your Business Valuer that the service they will provide will suit your requirements. Please note, this is not an exhaustive list and you can consult the APES 225 Valuation Service Code of Conduct and ASIC Regulatory Guide 111 for more comprehensive details.