common mistakes in business valuation: how to connect the dots and avoid mistakes

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Page 1: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015 Copyright 2015 © All Rights Reserved

COMMON MISTAKES IN

BUSINESS VALUATION:

HOW TO CONNECT THE DOTS

AND AVOID MISTAKES

Moderated By:Brandi L. Ruffalo, MBA, AVA, CBA

Panelists:Marcie D. Bour, CPA.AVB, CVA, CFE, MAFF, ABAR

Robert Brackett, CGMA, CPA, CVA, ICVS, MM

Frank Rosillo, CPA/ABV, ABAR, CBA, CFE

September 25, 2015Brandi L. Ruffalo, MBA, AVA, CBA, Moderator

Valuation & Forensic Partners, LLC

Page 2: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015Copyright 2015 © All Rights Reserved

THIS PRESENTATION WAS PREPARED FOR INFORMATIONAL AND DISCUSSION PURPOSESONLY. IT IS NOT DESIGNED TO PRESENT THE OPINION OF THE PRESENTER ON ANYMATTER DISCUSSED, BUT RATHER TO PRESENT INFORMATION THAT CAN BE USED IN ANEDUCATION SETTING AMONGST PEERS.

THEREFORE, THE MATERIAL PRESENTED SHOULD NOT BE RELIED ON AS LEGAL, ACCOUNTING, VALUATION, OR OTHER PROFESSIONAL ADVICE.

ANY CLIENT MATTERS DISCUSSED SHOULD BE CONSIDERED HYPOTHETICAL AND NOTDIRECTLY APPLICABLE TO ANY COMPANY PRESENTER OR PARTICIPANT HAS, MAY BECURRENTLY OR MAY IN THE FUTURE WORK ON.

EACH APPRAISER / EXPERT MUST USED INFORMED JUDGMENT IN SELECTING THEAPPROPRIATE DATA TO USE IN ARRIVING AT HIS OR HER VALUATIONCONCLUSION. THIS INCLUDES THE METHODOLOGY APPLIED AS WELL AS THESOURCES USED.

COPYRIGHT 2015, VALUATION & FORENSIC PARTNERS, LLC AND THE BUSINESS DEVELOPMENT COMPANY.

Page 3: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015 Copyright 2015 © All Rights Reserved

AN UNINTENTIONAL ACT, OMISSION OR ERROR

…CATEGORIZED AS

MISTAKE OF FACT…WHEN A PERSON BELIEVES A CONDITION EXISTS

BUT IT DOES NOT

MISTAKE OF LAW…PERSON HAS KNOWLEDGE OF FACTS BUT IS

WRONG ABOUT LEGAL CONSEQUENCES

MUTUAL MISTAKE….WHEN TWO OR MORE PARTIES HAVE A

SHARED INTENTION INDUCED BY A COMMON MISBELIEF

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved

Page 4: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015

OUTLINE OF TOPICS

Copyright 2015 © All Rights Reserved

MATH OR EXCEL ERRORS

DATA ERRORS

IMPROPER USE OF EXTERNAL DATA

NOT UNDERSTANDING THE COMPANY

NOT NORMALIZING APPROPRIATELY

NO COMMON SENSE

OUTLINE OF HOW TO REDUCE ERRORS

Page 5: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015

MATH OR EXCEL ERRORS

Copyright 2015 © All Rights Reserved

Page 6: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015

DATA ERRORS

Copyright 2015 © All Rights Reserved

INAPPROPRIATE

RELIANCE OR

MISAPPLICATION

OF INDUSTRY OR

TRANSACTION

DATA

Page 7: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015

NOT UNDERSTANDING COMPANY SPECIFIC

FACTORS

Copyright 2015 © All Rights Reserved

• HOW DO THEY MAKE MONEY

• WHAT MAKES THEM UNIQUE

• WHAT RISKS DO THEY FACE

• HOW DOES CUSTOMER MIX IMPACT

GROWTH, PROFITABILITY, AND RISK

• WHAT INVESTMENT IS REQUIRED TO

ACHIEVE PROJECTIONS

• HOW ARE PAST AND FUTURE

COMPARABLE

Page 8: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015

NOT NORMALIZING CORRECTLY

Completely overlooked or missed

Not supported or reasonable

Do not incorporate management input

Not benchmarked for reasonableness

Inappropriate application of or reliance on benchmark

Not reflective of “expected” business operations or performance

Double counted in company specific risk adjustments or

discounts / premiums

No consideration of multiple outcomes for adjustments in

“expectations”

Not traceable or properly documented

Copyright 2015 © All Rights Reserved

Page 9: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015

WHY IS NORMALIZATION COMPLICATED?

Requires diverse

experience and

depth of

knowledge

Client input is

required BUT

Opinion based

Copyright 2015 © All Rights Reserved

Page 10: Common Mistakes in Business Valuation:  How to Connect the Dots and Avoid Mistakes

Southeast Chapter of Business Appraisers

Annual SE Regional Conference 2015

NOT APPLYING COMMON SENSE

Copyright 2015 © All Rights Reserved

Albert Einstein

Would I buy it?

Then redefine the buyer and test their willingness to buy