Why should businesses be valued and what is the basic criteria when doing so?
There could be a number of reasons why an Expert Accountant would be asked to value a business. This includes acting for a client either purchasing or selling a business and whilst the methodology of valuing a business for sale may be similar, it is obvious that those sitting on either side of a transaction will seek either a high or a low figure accordingly.
There are of course other methods of valuing a business such as discounted future cash flows and a net asset value of the balance sheet on a specified date.
What are the valuation techniques involved?
In litigation cases, an instruction to value a business may be given in quite different circumstances. My responsibility is to my instructing client but ultimately to the court, to ascertain, in my opinion, an appropriate valuation.
I recently acted for a purchaser of a number of retail food outlets where they had withheld payment of deferred consideration. They alleged that the management accounts presented to them for the purposes of valuing the business and the purchase consideration were subsequently found to be inaccurate. In this situation, my initial work was to verify those management accounts based on documents and records made available to me by the lawyers.
Disputes can arise between parties on the basis of valuing the business.
The method of valuing the business referred to above was on a profits multiple basis, which is probably the most common method of valuing a business. This would require ascertaining an appropriate multiple for the specific business sector and would also depend on the marketability of the business, whether trading through a limited company or unincorporated entity and whether the whole or part of the business was being sold or acquired. The profit multiple would be applied to the operating profits of the business, at least, if possible, over an average of historic profits for a minimum three year period. There are of course other methods of valuing a business such as discounted future cash flows and a net asset value of the balance sheet on a specified date.
How can the above go wrong, which thus leads parties into disputes?
Disputes can arise between parties on the basis of valuing the business. This may, in fact, start with the accounts that should be used for valuation purposes. Profits in those accounts need to be scrutinised by an Expert to determine their relevance and accuracy for the purpose of valuing the business. This may vary between unaudited management accounts and those finalised at year end showing a true and fair view to comply with the Companies Act. The parties may disagree on the profit multiple or even the valuation methodology itself. As an Expert accountant, I have been faced with differing opinions to my counterpart. It is then best to have a meeting of Experts, often instructed by the court, to agree a joint statement on matters the Experts agree upon or areas of disagreement.
When appointed as a “single” joint Expert it is only my professional opinion which is being sought to resolve disputes between parties who agree to abide by the Expert’s valuation. This may arise out of the shareholder's agreement containing a clause referring to cases of valuing the business by the auditors of the company or an independent accountant.
Jon Barron
Partner
Blick Rothenberg
+44 (0)20 7437 7666
Email: Jon.Barron@blickrothenberg.com
I became a partner at Hazlems Fenton (now Blick Rothenberg) in April 1994 and developed a client base with a specialism in the fashion industry, providing accounting, audit and tax services. I started acting as an Expert Accountant in the late 1990’s and became a member of the Academy of Experts in 2003. I developed the corporate forensic accounting department in the firm along with a fellow partner. Blick Rothenberg acquired Hazlems Fenton in November 2018 and I remain a partner in our original office in Argyll Street, W1.
