Role of Professional Valuation Services to enable a CFO's Office

CFO’s will periodically be faced with situations where they will have to undertake and present very accurate and defensible valuation that reflects economic worth of assets.

The most credible way to approach this will be to partner with a reputed valuation firm that has deep expertise and resources to help along this journey.

Valuation performed by known and reputed third party organizations provide the most objective and unbiased view of the business and hold excellent credence in the eyes of stakeholders ranging from regulators, shareholders, boards, prospective investors, employees, lenders and management teams. Professional business valuation services provide an objective, well-supported, and defensible assessment of a company's value, which is critical for a multitude of scenarios. Click here For a view of the key players operating in the valuation space. 

Below is a breakdown of the key situations where businesses will turn to a valuation services firm and also what to consider when selecting a firm.

1. Transaction-Related Purposes

a)     Mergers and Acquisitions (M&A): Whether there is transaction related to either buying another company or selling. A robust valuation is the cornerstone of fair negotiations. For buyers, it prevents overpaying and helps identify synergies. For sellers, it ensures the business is priced appropriately to maximize returns.

b)     Fundraising and Investment: When seeking capital from venture capitalists, private equity firms, or even traditional bank loans (e.g., SBA loans), a valuation determines the equity stake offered for investment or the collateral value for debt, establishing a credible basis for financing discussions.

c)     Buy/Sell Agreements: For companies with multiple owners, a buy/sell agreement outlines how ownership interests will be transferred in events like retirement, disability, or death. Regular valuations ensure these agreements facilitate smooth and fair transitions.

d)     Joint Ventures & Partnerships: Determining the equitable contribution and ownership percentages for each party entering a new venture.

2. Taxation-Related Compliance and Planning

Tax authorities, such as the IRS, require precise valuations for various filings, often with strict guidelines and potential for scrutiny.

a)     Stock Option (409A) Valuations: Private companies issuing stock options to employees need regular valuations to establish the fair market value of their common stock to comply with IRS Section 409A regulations, avoiding adverse tax consequences for employees.

b)     Transfer Pricing: For multinational companies, valuations are essential to set arm's-length prices for intercompany transactions (e.g., intellectual property, goods, services) to comply with tax laws across different jurisdictions and avoid penalties.

c)     Charitable Contributions: Valuing business interests or other complex assets donated to non-profit organizations for tax deduction purposes.

3. Financial Reporting Requirements

Public companies, and increasingly private companies, need valuations to comply with accounting standards.

a)     Purchase Price Allocation (ASC 805): Following an acquisition, the total purchase price must be allocated to the fair value of all tangible and intangible assets acquired (e.g., customer lists, brand names, technology) for financial reporting.

b)     Goodwill and Intangible Asset Impairment Testing (ASC 350/360): Annually, companies must assess whether the carrying value of goodwill and other long-lived assets on their balance sheet has been impaired, requiring a fair value assessment.

c)     Fair Value Measurement (ASC 820): Valuations are used to measure various financial instruments and certain liabilities at fair value on the balance sheet.

4. Litigation and Dispute Resolution

In legal conflicts involving business ownership or value, an independent valuation provides crucial evidence.

a)     Marital Dissolution (Divorce): When a business is part of a marital estate, a valuation is often required to ensure equitable division of assets.

b)     Shareholder/Partnership Disputes: Resolving disagreements among owners regarding a company's worth, particularly in forced buyouts or dissenting shareholder actions.

c)     Commercial Damages: Quantifying economic losses or damages in breach of contract, intellectual property infringement, or other commercial lawsuits.

5. Strategic Planning and Internal Management

Beyond external demands, valuations offer valuable internal insights.

a)     Performance Monitoring: Regularly valuing the business can serve as a key performance indicator, tracking the effectiveness of management decisions and strategic initiatives.

b)     Strategic Decision-Making: Understanding value drivers allows businesses to make informed choices about investments, divestitures, capital allocation, and market positioning.

What to look for in choosing a strong, credible valuation firm?

Choosing the right valuation firm is paramount to ensuring the assessment is accurate, defensible, and serves your specific needs.

1. Accreditation and Credentials: Critical to seek out recognized professional designations such as Accredited Senior Appraiser (ASA) from the American Society of Appraisers, Certified Public Accountant/Accredited in Business Valuation (CPA/ABV) from the AICPA, Chartered Financial Analyst (CFA), or Certified Valuation Analyst (CVA) from the National Association of Certified Valuators and Analysts. These indicate rigorous training and adherence to professional standards.

   
   

2. Experience and Expertise:

   
   

   • Industry Specialization: Does the firm have relevant industry expertise. Industry-specific knowledge is crucial for understanding market dynamics, competitive landscapes, and unique value drivers.

     
     

   • Specific Expertise: Ensure the firm has a strong track record with the specific type of valuation the business needs (e.g., 409A, M&A, litigation, financial reporting). Different purposes may require different methodologies and reporting standards.

     
     

   • Complex Scenarios: If the business has complex capital structures, unique intangible assets, or is involved in contentious disputes, seek a firm with proven experience in such intricate situations.

     
     

   • Size and Scope: Certain firms have a significant specialization edge because they exclusively focus on the needs of private companies or venture backed startups. Other valuations firms have a national or global presence and cater more to enterprises or larger companies. So choose the firm that you feel will be best suited to the size and scope of your organization and the scope of the assignment at hand.

     
     

3. Independence and Objectivity: A truly independent valuation is unbiased and credible. This is especially vital in legal disputes, tax matters, or transactions where impartiality is heavily scrutinized. Avoid firms that may have conflicts of interest.

   
   

4. Methodology and Approach: A reputable firm will clearly explain the valuation methodologies they plan to use (e.g., Income Approach like Discounted Cash Flow, Market Approach like Comparable Company Analysis, Asset Approach) and why those methods are appropriate for your business and the purpose of the valuation. They should also be transparent about the assumptions and inputs.

   
   

5. Reporting and Communication: The final valuation report should be clear, concise, well-supported, and easy to understand, even for non-financial readers. The valuators should be able to articulate their findings effectively and defend their conclusions. For legal or tax purposes, the report must meet specific regulatory and judicial requirements.

   
   

6. Reputation and References: Research the firm's reputation in the market. Look for positive client testimonials and ask for references. For financial reporting valuations, inquire about their history with audit firms and acceptance of their reports.

   
   

7. Technology and Resources: Leading valuation firms utilize advanced analytical tools, access comprehensive financial databases, and may employ AI or data analytics to enhance the accuracy and efficiency of their valuations. This indicates a commitment to modern best practices.

   
   

8. Responsiveness and Client Service: The valuation process can be collaborative. Choose a firm that is responsive to your inquiries, communicates proactively, and provides clear timelines.

   
   

9. Cost: While cost is a factor, it should not be the sole determinant. A cheaper, less defensible valuation can lead to significant financial penalties, legal challenges, or missed opportunities down the line. Focus on value and the firm's ability to deliver a robust and reliable assessment.