One of the most common questions we hear regarding valuations is “How much does it cost?” (We have seen articles, blog posts, and websites indicating that valuations can range from $3,000 to $50,000 or more—that’s not too helpful!) Unfortunately, this is difficult to answer without having all the facts. First and foremost, what exactly is going to be appraised? Is it a business, a business interest, an intangible asset, a debt, or a complex financial instrument such as a derivative, a structured product, or another type of complex security?
Then, it is important to take a number of other cost factors into account, such as purpose, deliverable, timing, and information available. It’s a complex exercise, but below we offer some insight on these factors and outline other issues to bear in mind when you consider hiring a valuation expert.
What Do You Need Valued?
Maybe you want to know the value of your business for purposes of selling your company, or perhaps you need to know the value of only a portion of your business for purposes of buying out certain shareholders. This seems like a rather straightforward exercise (a phrase we hear all the time), but it is important to dig deeper.
If it is a business or business interest, what type of business? Is there just one operating unit that makes widgets produced from simple inventory, or is the company more complex, with multiple subsidiaries, sister companies, or joint ventures that need to be considered in the valuation?
What is the quality of the available financial information? Does your company keep orderly financial statements audited by a CPA firm, or is everything maintained by one person in multiple drawers or shoeboxes? Are there “discretionary” items that need to be adjusted in that financial information to produce a true picture? (For example, buying season tickets to your alma mater’s football games and sharing them with customers or prospects might sound like a great marketing tool, but could you generate the same revenue without doing that?)
What about the legal aspects of your company’s ownership? Are there restrictions on transfers or sales of shares, buy/sell agreements, a right of first refusal clause, or a contractual formula that must be considered when purchasing equity interest from another shareholder?
Or what if you need a valuation of something considered more complex, such as convertible debt, contingent liabilities, warrants, preferred shares, or equity instruments issued as compensation?
No matter the size or type of your business, or the subject of the valuation, investors, creditors, and board members alike need an accurate valuation to assist them in making critical business and investment decisions. If you’re a financial executive of a large organization, you may believe some valuations are required just to “check the box,” and you may be tempted to seek out the cheapest avenue for obtaining them… but if these valuations prove to be inaccurate, they could result in fines, lawsuits, or other damaging consequences. That little bit of extra cost might not seem so bad after all.
What Is the Purpose and Timing of Your Valuation?
As we noted earlier, many articles, blogs, and websites will imply that valuations can be completed for a relatively low price—but these authors don’t know the purpose of your valuation or the reporting requirements.
Different types of valuations range from a simple ballpark estimate for the sake of just wanting to know the value to a full-blown valuation analysis required for a fairness opinion or litigation. In the middle of that spectrum are valuations for financial reporting, estate and gift tax planning, and other compliance-related matters. All these valuation purposes are equally important, and the cost differences are a direct result of the number of hours needed to make each type of assessment. Litigation and fairness opinions require many hours of work because these experts may need to testify in support of their conclusions. On the opposite end, a ballpark estimate may require only a week’s worth of effort because it is for information purposes only and there are no significant financial consequences for anyone involved.
That said, if you do only need a ballpark valuation but your financial records are in disarray, that estimate of a week’s worth of effort may turn into several weeks’ worth. Even if tax returns are readily available, they do not always paint a complete picture of a company or its complexities.
What about your time frame for needing an answer? Is it Friday morning and your auditors just informed you that your audited financial statements require a fair value assessment of an asset or liability before the statements can be issued on Monday? Such a rapid response from your valuation experts will not come cheaply. Depending on the asset or liability that needs to be valued, it could require a team of experts for the next 48 hours to complete the work. What may have been a reasonably priced assignment with adequate notice may have just quadrupled in cost due to the urgency.
What Kind of Valuation Report Do You Need?
On completion of the exercise, your valuation expert will deliver a report that provides the concluded value or range of values. This report can vary depending on the purpose. As you might expect, if they are only ballparking a simple subject, then the report may consist of only a handful of exhibits that illustrate assumptions and calculations.
However, a more complex assignment or a valuation required for regulatory or litigation purposes will often result in a report that exceeds a hundred pages. Not only do these reports incorporate significant details about the assumptions, methodologies, adjustments, and conclusions, but the experts must often follow strict guidelines on how they write the report and, at a minimum, what type of information they include. The greater the reporting requirements or the scrutiny that a valuation report could be subject to, the greater the fee.
So, What Does a Valuation Cost? (It Depends.)
While there is no simple answer to this question, the information outlined above should help you as you consider the cost for your valuation. Like any professional service that you obtain, price is important but it really should not be the deciding factor when determining whom to hire. Selecting the low-cost provider might sound like a brilliant financial decision up front; however, what do you save if your $500 online valuation led you to sell your company for one price but an experienced appraiser could have helped you sell for double or triple that value by outlining specific tax strategies or synergies that a buyer might have been willing to pay for?
It is not uncommon to see both individuals and companies face enormous costs resulting from IRS audits, lawsuits, or fines because they chose the low-cost provider for the original valuation exercise. It is important that you be informed and have all the facts to share with your potential valuation advisors when you inquire about the cost of an appraisal. Be skeptical of the low-cost provider, but also be mindful that paying the highest fee for a well-known brand name is not always the right answer either.
If a prospective valuation advisor does not ask you the above questions before providing a quote, you very likely need to move on. We have deep experience providing valuation services to individuals, public and private companies, private equity firms, early-stage enterprises, and other closely held businesses and partnerships. We take the time to understand the subject, purpose, timing, and deliverable for your valuation exercise. Our valuations have been widely accepted, withstanding the scrutiny of auditors, the SEC, and other regulatory bodies. Contact us at 404-263-0702 for more information about our valuation services.
