Do You Need an Industry Specialist to Value Your Company?
Business owners and their advisors often ask if they should hire a business valuation expert or an industry expert to value their company. An industry expert, by definition, is very familiar with the industry, how companies within the industry operate, the economic factors that affect the industry and its unique aspects. However, through independent economic and industry research, and one or more interviews with members of management, the valuation expert can identify those industry factors that would impact his valuation.
That knowledge will supplement the valuator’s many years of experience in the valuation of many companies in many industries. This, in combination with the valuation expert’s experience and training over many years, informs his judgment and knowledge as it relates to several key portions of the analysis.
Application of the appropriate standard of value is an important focus of the valuation. The value of the company could be vastly different under different standards of value; for example, the fair market value standard, used for gift and estate tax purposes, considers hypothetical, unrelated parties, whereas a valuation for synergistic purposes, for a matrimonial dissolution, for an ESOP or for an employee stock option would each be performed under a different standard of value, with differing procedures, inputs and results. The valuation expert has many years of training in identifying the necessary standard of value and applying the appropriate procedures in the circumstances.
Similarly, the treatment of normalizing adjustments for discretionary expenditures, non-recurring expenses and non-operating assets can be an important part of the analysis and valuation conclusion. Identifying such items comes from a careful and detailed financial analysis, for which valuation experts are specially trained. Such adjustments could take the form of salary and compensation adjustments, the separate treatment of excess working capital or the identification of above or below market rent. These items can have a significant impact on the valuation, and a valuation expert has experience in isolating them, and their effect on value.
There are three approaches to valuation, the Income Approach, the Market Approach and the Asset Approach, each of which relies on different sets of empirical data, each of which have their own unique characteristics and each of which requires the considered judgment of the valuator. For example, the selection of the proper rate of return under the Income Approach requires a thorough understanding of the underlying empirical data and its application to the subject company. The valuation expert is uniquely qualified to make these assessments.