In adversarial situations — such as divorces, contract breaches and shareholder disputes — you might need to hire an outside business valuator to evaluate complex financial matters. To get the most from these professionals, it’s important to understand the two key roles they can play in conflict resolution. Keeping these roles separate helps prevent valuators from being seen as “hired guns” by judges, juries, arbitrators and mediators. Expert witnesses Valuators often serve as expert witnesses in litigation. In this role, they may provide written opinions and verbal testimony on financial issues concerning: The value of a business, including the fair market value or fair value of a specific owner’s business interest, Economic damages, including temporary lost profits and diminution in business value, Formal rebuttal of...

Mergers and acquisitions can be stressful for entrepreneurs who have invested blood, sweat and tears in their businesses — or second-generation owners who are selling their parents’ legacies. Setting the asking price and understanding the deal terms, including complex tax matters, can be overwhelming. Fortunately, a business valuation professional has the financial knowledge and real-world experience to help maximize the selling price and minimize the guesswork. Preparing for sale Valuators understand the relationship between risk and return as well as factors that affect value. So they’re equipped to assist in making companies more attractive acquisition candidates. Before a business goes on the market, a valuation pro can help address the following critical items: Financial statements. Audited financial statements offer prospective buyers greater assurance than reviews, compilations or internal...

The starting point for a business valuation is generally the subject company’s financial statements. Here’s an overview of how historical financial statements can serve as the basis for a valuation professional’s conclusion under the cost, income and market approaches. Cost (or asset-based) approach Because the balance sheet identifies a company’s assets and liabilities, it can be a reliable source of financial information, especially for companies that rely heavily on tangible assets (such as manufacturers and real estate holding companies). Under U.S. Generally Accepted Accounting Principles (GAAP), assets are recorded at the lower of cost or market value. So, adjustments may be needed to align an item’s book value with its fair market value. For example, receivables may need to be adjusted for bad debts. Inventory may include obsolete...

Business valuation experts will usually provide formal written reports that explain how they arrived at their conclusions. Asking seven questions can help you determine whether an expert’s report is comprehensive and on-point. (1) Did the expert properly define the engagement? Most valuation reports start with a detailed description of the assignment. Beyond the name of the subject company, the definition includes: The size of the interest (the ownership percentage of the number of shares or units), Effective date of the valuation, Intended uses of the report, The standard of value (for example, fair market value, fair value or strategic value), and The basis of value (minority vs. controlling basis and marketable vs. nonmarketable basis). If the expert applied discounts for lack of control or marketability, a substantial...