New Jersey Business Valuation Accountant: Performing Valuations

Video Transcript 

My name's Robert Bonavito, New Jersey Forensic Accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions based on different facts and circumstances.

And today, I'm going to discuss business valuations. Just today, I had a guy in my office going...didn't understand why he needed a business valuation. This had to be a matrimonial issue, and he's, "Well, why can't we just say the value is this or that value is that?" I said, "No." I said, "First of all, if we're gonna establish a value for your company, there's certain things I have to do. Remember, the attorneys for the other side are gonna look at this, the judge is gonna look at this, and the jury may look at this. And there's certain procedures that I have to follow in order to be credible with the value of this business."

I can't just say that, you know, the deli or whatever sold for $50,000 next door, therefore, his deli's worth $50,000 because what if the deli is Carnegie Deli in New York? Well, guess what, that deli's probably worth $10 million, okay? The deli in town is probably worth $50,000 maybe, whatever, but as a business valuation expert, there are certain things you must do to look at it because everybody thinks that businesses are all the same.

They think that all McDonalds' are the same, they think that all these franchises are...they're not all the same, businesses are different, okay? Some businesses are in good locations, some are in bad. Some have great management, some have poor. Some are known for a product that they can't get anywhere, the best shake, or the best hamburger, or whatever. No two businesses are really the same and that's why you have to look, and do, all the work when you do a business valuation.

Now, if you need a business valuation done, first of all, you gotta make sure you have the right credentials because you can't testify if you don't study how to do a business valuation, okay? ABV, Accredited in Business Valuation, is very important. That's where they teach you how to do this, how to go through it, what procedures to do, or there's, like, four or five that are accepted. But ABV is one body, American Institute of Certified Public Accountants, which carries a lot of weight, CVA, Certified Valuation Analyst, is a big one. Those two, I think, are the important ones, but I do think that when you're valuing a business, a firm and good understanding of accounting is very important. Because a lot of what you're doing is gonna be looking at records and interviewing people, and understanding gross profit margins, and sales, and things like that. Why would you need a business valuation, okay?

Sometimes, it's a matrimonial breakup. It could be family...you wanna have a family limited partnership. It could be litigation, you're getting sued and they wanna know what the company's worth. It could be almost anything. A lot of times, valuations are done because partnerships are breaking up and when you break up a partnership, you know, if you have a partner who owns 33%, you gotta value that 33%. And remember, we're not talking about companies that are listed on a New York Stock Exchange, these are, you know, companies, small companies.

And you need someone to go in and say, "Listen, you own 33% of the company, okay? The company's worth $10 million, you know, your share is $3.3 million, whatever." Because this way they can break up because no one goes in and gives a valuation that is accepted by the judge and the jury. This minority partner can never get out, so that is a big part of valuations, or buying into a business.

You know, if you wanna buy into it, well, how much should I pay? I don't know. Well, who's gonna decide that? I mean, naturally, the buyer and the seller are gonna have to decide, but it can't hurt to have a valuation expert go in there and say, "In my opinion, this is what the business is worth." And maybe it's close to what they thought or maybe it's not, but at least you have an independent company going in there.

What procedures do you expect to be done? I like to interview management, take a tour of the facility to get a good understanding of what they're doing, and also...and see what kind of assets they have. Naturally, you're going to look at all the financial statements, try to establish a gross margin, you wanna see if they have a competitive advantage. Why is this business in business? Because let's face it, it's very competitive at the end. If they survive five years or 10 years, they have some kind of competitive advantage. Figure what the competitive advantage out is, and see if that's something someone is worth paying for.

Just getting in there and looking at the business, interviewing people, looking at the numbers, and then actually going out and comparing that to other sales, if you can. The three methodologies that you use when you value a business. You can value a business based on assets, which would be...Let's say you had an oil field and it was just sitting there, but you weren't doing anything with it, there's no cash flow. What is it worth? Nothing, no.

You can value it on the asset, which is the oil in the ground. What is a barrel of oil cost to produce and what's a profit? You could value it based on the asset value. You could value it based on other sales of other companies, okay? Like I said, it's not the best way, but if you know that, you know, certain companies sell at 90% of sales, and you have a company that's very similar, well, 90% of sales, that's a figure you may wanna use to value the company, and that's a legitimate methodology. Usually, you don't use that alone, but you definitely look at it.

The best method is how we value everything, cash flow, okay? What is the cash flow of this business? Because once you figure out the cash flow and you can figure out what the cash flow's gonna be for the next five or 10 years, you can just discount that back, and you'll come up with a value. This is how assets are really valued, everything. Everything on a stock exchange, you know, what is the cash flow, the future cash flow? And those three methodologies are something we look at for every single valuation. Combined with all the other work, we usually come up with a reasonable estimate of what the business is worth based on certain standards that we use. If you have any questions on this video, feel free to give me a call or email me.

[music]