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Watch out for these frequent pitfalls in business valuation

Posted by Mary Ellen Biery
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Business valuation is often said to be part art, part science. Either part of the process, however, can lead to trouble for valuation professionals who aren’t careful. 

Gary Trugman, CPA/ABV, MCBA, ASA, MVS, who has literally written the book for accountants on business valuations, knows about many of the problems that can arise in business valuations – problems that might result in anything from a disappointed client to a malpractice claim. Trugman, president of Trugman Valuation Associates, is author of the AICPA’s book, Understanding Business Valuation: A Practical Guide to Valuing Small to Medium Sized Businesses, and he provides litigation support services in a number of situations involving valuations.

Because valuations involve opinions and professional judgment at various stages of the engagement, it’s important for valuation professionals to do what they can to standardize processes and protect against human error, Trugman said recently in the new book by Sageworks, Next-Level Accountants: Your guide to growing a firm of trusted advisors.

In addition, it’s good to be aware of some of the most common pitfalls in business valuation. Trugman will review these potential hazard spots and will describe strategies for avoiding them during an upcoming webinar. Whether new to valuation or looking to improve a practice, valuation professionals can benefit from learning more about common mistakes made in business valuation

Join the June 14 webinar, Common Pitfalls in Business Valuation.

Among the common pitfalls Trugman will discuss are issues related to the valuation method used in the engagement and issues related to the data used for comparisons.

Some business valuation professionals “take a liking” to a particular method and end up using it for all valuations, according to Trugman. For example, the excess earnings method is a favorite method used for small businesses. However, Trugman says that the correct valuation methods should be based “on the availability of information and the facts and circumstances of the assignment.” Relying on a favorite method should be avoided.

A second example of a common pitfall, according to Trugman, is tied to market data. “A major flaw in many valuations occurs when the valuation analyst is so sure that market data cannot be located that he or she never bothers to look for it,” Trugman says. “Market data should be looked for in every valuation.” Of course, another challenge related to market data is using it correctly.

The selection of guideline companies used in the valuation can also frequently pose problems for valuation professionals attempting to perform accurate business valuations. There are numerous ways an analyst can go wrong in the selection of guideline companies, but when guideline companies are not similar or relevant enough to the valuation subject, for example, it can mean they are not good companies to use in the assignment, according to Trugman. He will discuss other trouble spots related to guideline companies during the webinar.

Valuation professionals should also take care to avoid typographical errors and illogical conclusions, Trugman says. Typos “are an indication of carelessness,” he says. “There is nothing worse than seeing a valuation analyst charge a client thousands of dollars and not take the time to proofread the report properly.” Illogical conclusions are a function of the analyst failing to check the process along the way. To hear examples of illogical conclusions and other pitfalls, and to learn more about how to avoid mistakes and problems with business valuations, join the June 14 webinar, “Common Pitfalls in Business Valuation.”

Access additional resources, including practice aids and whitepapers, for business valuation professionals through Sageworks’ Business Valuation Resources page.

tags: business valuation, industry comparisons, industry data, valuation challenges, valuation methods