Valuing a Small Business

Did you know that valuing a small business is sometimes a more challenging task than valuing a large company?  These types of valuations commonly arise in buy/sell transactions and divorce cases with marital property divisions, although they also come up in shareholder/partner disputes and other matters. Clients can have concerns about the cost of valuation, but attorneys and valuators can work together in a case to set and meet realistic client budgets and provide credible valuation. Considering a valuation? Here are a few things to keep in mind.

Valuation Standards.  Just like attorneys, accredited valuators are bound by standards of professional conduct. However, none of those standards distinguish between a valuation for a small business (and perhaps small budget) and a larger business. Once engaged, valuators sometimes find themselves caught between performing a complete and credible valuation, complying with the applicable standards, and keeping the job within a client’s budget. In disputes, valuation experts may be cross-examined on whether they adhered to the professional standards. If the answer is no, a lack of client funds is no defense, and the expert’s credibility as well as the client’s case could suffer.

Managing Expectations. Open communication with the client at the outset is just as important in the valuation as in the legal context. Valuators can help attorneys to inform the client why the business appraisal is necessary, its potential costs and the benefits for the client and case. Clients—especially in the emotionally-charged divorce setting—can sometimes have misguided expectations.  These clients need to receive the proper information and guidance from their professionals as to the scope of the valuation engagement, its process and the problems it can solve—as well as those it can’t, including creating value in a business when in reality there may not be as much as the client anticipated or hoped.

The Cost of Discovery. Few things can drive up litigation costs and fuel conflict faster than trying to compel another party to comply with applicable disclosure and discovery rules. At the same time, the other side may be genuinely frustrated by receiving an overly broad discovery request. Valuators can work with attorneys and the client  to narrow the scope, so  the experts will receive all  the documents they need—and none of those they don’t. Documenting clear, successive requests for production to the opposing party will also help if  a motion to compel or an interim motion for fees becomes necessary.

Why Experience Matters. Sometimes our initial due diligence reveals discrepancies, calling into question the integrity of the accounting records and tax returns presented. In these instances we often reconstruct one or more of the financial components to best estimate the business’s profit potential. We have significant case experience and techniques to find facts, probe discrepancies, and help resolve delicate situations where perhaps both sides have benefited in the past, yet the future may be more relevant.

Jeff Denning is a partner at Gilmore Jasion Mahler, LTD and leads the Firm’s forensic accounting and business valuation practice.  He has specialized in valuation and forensic services since 1997 and has provided expert reports and testimony on private company stock valuations, appraisals of professional practices, accounting investigations, and economic damage calculations. Learn more about Jeff’s expertise.

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