Business valuation: strategic decision making versus service

At one point or another most successful business people face a dilemma. Do I figure out the business value by myself or outsource the project to an outside appraiser? The decision may depend on the reason why you need the business appraised.

Assessing strategic investments

Consider a strategic investment opportunity where the owners offer all or part of an existing business up for sale. The investor makes the decision on whether to invest, how much to invest, and for what share of business ownership. You may need to go through a number of what-if scenarios that involve different investment strategies before choosing the right one. To do your valuation itself, you will most likely go though an iterative process. In other words, you will consider a number of scenarios under different assumptions.

You may think twice about going to an outside business appraiser in this situation. The appraiser usually sells time and performs valuation under one set of assumptions. As a result, considering different ways of approaching business acquisition will likely result in high costs and consume a lot of time. At the end of the day, the decision to invest and how to structure your investment rests upon your shoulders.

Role of business valuation as a strategic decision making tool

In other words, business investment is an area of strategic decision making for a business person. Knowing the value of business investment is critical to making the right decision. That is one reason professional business investors such as venture capitalists usually perform their own business valuations.

When you need an objective business appraisal

Now consider a case of legal dispute, such as a divorce. Here, the accuracy of business valuation is less important than a legally binding agreement between the parties. To resolve the dispute, the judge is likely to appoint an independent business appraiser. The number for business value may not be highly accurate, but it is still enforced by the court. All the parties can do is abide by the judgment.

Here, you may find the use of a business appraisal service necessary. The court will likely turn down business valuations from either party as biased. To reach a compromise, you would need an independent business appraisal.

Other situations may not be as obvious. As a general guideline, a scenario where you largely control the outcome is best addressed with you having full knowledge and understanding of business value. In addition to business investments, partner buy-sell agreements and owner insurance coverage are good examples.

If, on the other hand, the situation involves parties with very different views, an independent business appraisal may be needed. In addition to legal battles, tax disputes and rigorous lender negotiations are typical examples.

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