As most business valuation needs fall within financial planning, many business owners turn to their CPA for guidance. Often this works out fine; the CPA refers you to a valuation consultant in their networks. Other times, the CPA may take it on themselves, and things don’t work out quite well.
If you seek capital, bring in partners, share equity with critical employees, sell the company, or simply plan for the future, then hiring a professional specializing in business valuation often makes sense. The business valuation process determines the business’s actual value.
Business Valuation Responsibilities
The responsibilities of a business valuation specialist include:
- Giving financial opinions in matters of litigation
- Recapitalization, business risks, exit strategy planning, and retirement
- Providing opinions for estate taxation and planning
- Succession and future earnings projections
- Transfer pricing engagement,
- Valuation reports for mergers and acquisitions and the assets of a company.
Business valuations also help business owners get helpful information regarding the risks involved in their business, a comparison of the company’s financial performance with its peers, the value drivers present or needed in the business, strategies to improve operational and financial performance, and ultimately, the ways to increase business value.
Also, the business valuation process includes specialized tasks like objectively analyzing a company’s management, reviewing the capital structure, identifying future earnings prospects, and determining the market value of assets.
So, why do business owners continue to work with their CPAs for business valuation purposes?
Advantages of Consulting a CPA for your Business Valuation
Business owners have longstanding relationships with their CPAs and are confident that those professionals know their business well (at least financially). They fear working with new advisors who may or may not understand the intricacies of their unique business.
The CPA is already in the circle of trust for the business owner, making it easy to work with them for valuation-based services. On the other hand, building a trusted relationship with a new advisor takes time.
Knowledge of the company’s financial situation
The CPA already knows the company’s track record and earnings history. They are well aware of the business’s strengths and weaknesses, so the owner believes that the CPA can better determine its fair value.
Knowledge about the business owner’s financial situation
CPAs commonly know the business owner’s financial situation. Therefore, the business owner believes that the CPA will give valuation advice conducive to their financial situation.
Disadvantages of Consulting a CPA for your Business Valuation
Lack of Experience in Business Valuation
Valuation is a specialty skill, and most CPAs focus on taxes, accounting, audits, and financial planning. So, they’re mainly out of their element in business valuation.
Working with a CPA specializing in valuation can be beneficial, but not as much if they have little or no knowledge and experience in determining how to improve business value. Preliminary discussions concerning business valuation with your CPA help, but you need experienced valuation professionals to calculate your business value and strategize your exit plan.
Experience matters! If your CPA works only on a few assignments a year, then that professional has not yet developed the efficiencies or economies of scale needed in that specialized field to help you achieve your exit goals.
Again, experience matters! If your CPA has little or no experience in business valuation, you are paying for inefficiency or paying for them to learn while working for you. Why would you want to pay someone for doing trial and error on your valuation project when you can get highly experienced and expert valuation advisors?
Also, most CPAs charge on an hourly basis, which could be very expensive for you. Many valuation advisors charge a fee for the entire project. You could also set an hourly fee with them, depending on the scope of the project. But what’s important is you know that you are paying for the best valuation services.
Business valuation specialists have extensive, appraisal-specific experience; they can do the job faster, resulting in fewer hours billed. Additionally, a faster process can expedite the accomplishment of the business owner’s goals.
Lack of Specialization in Business Valuation
Large accounting firms usually employ valuation specialists, but those specialists focus on the technical side of valuation, i.e., valuation for litigation support or tax matters. Such a specialist may be technically correct but factually wrong–meaning that the math might be accurate. Still, the conclusions drawn by the appraiser do not match how the market would price the company’s assets. Experience in actual market transactions is incredibly important to be accurate in business valuation.
Related: CPAs in Exit Planning.
Is Your CPA the Right Person to Perform Your Business Valuation?
Leverage the expertise of those best equipped to help you with business valuation and represent you, if need be. A CPA can and should be a part of your team of advisors to ensure that your financial house is in order, your book of accounts is clean, and all the required financial statements and documents are in place. But, they probably shouldn’t be doing your valuation unless the firm has a true specialist in place with prior experience actually doing deals.