I am always amused when people who do not buy businesses for a living deal with the subject of valuations. Here is the questions posed by one website with biz listings: Can an Accountant Value a Business for Sale? Short Answer: Yes.
There are a lot of cute responses I have to this. 1) Short Answer: No 2) Short Answer: Yes anyone can. 3) Short: Maybe. But they will get it all wrong.
Valuations can be skewed in any direction depending on what you want them to show. It is assumed that the accountant in question knows the methodologies, thus the valid question is can an accountant value a business objectively? The problem of course is that the accountant is paid by someone (a buyer or seller) and therefore cannot be objective in a highly subjective art.
The other problem is that accountants make their living by accounting, not valuations. Understanding valuations isn’t just understanding or recording numbers. It is understanding a financial story that is unfolding before you about a company.
Let’s dissect the article a little further. The author realizes he would like to steer clear of the trap of complicating an already complicated topic. There are lots of valuation techniques each more complex than the last. But when you start talking about Earnings method, Asset method and Market Method you immediately dig yourself in too deep. Concepts like “various formulas”, and “combination of the three” start clouding the issue. Problem: too many variables.
Don’t get me wrong, there is a slice of this pie that matters. Earnings matter and assets matter. In that order. Comps? Well good luck with that. The buyer needs to know one thing: where is the lowest end of the price range? The seller just told him the high end. How did the seller arrive at that high end? He pumped up the earnings, then pumped up the earnings multiple then pumped up his asset values. How simple is that? The buyer does the same in reverse if he is smart and that is where the negotiation, and his offer, starts
