When we begin a business valuation project the first thing we do is provide an extensive document request list. A week or two into the analysis, we send a customized questionnaire to help us understand the business in appropriate depth. Our questions are designed to understand the facts and circumstances of your business well enough to develop a reliable opinion of value. To the extent we can, we try to streamline and tailor our requests so as not to overwhelm the client.
Most clients trust that we have a method to our madness and dutifully respond to each request and question. Sometimes however we get comments like: You asked for that before! Why do you need that? What does that have to do with value? So and so didn’t ask for that.
It’s an investigation, not an interrogation.
A key fact in most privately held businesses is that owners run personal expenses through the business. We ask about these for several reasons. For starters, a buyer would want to know the core expenses and cash flow of the business; they aren’t usually interested in paying for your kid’s health and auto insurance and cell phone bill. Second, when we add these expenses back, it increases the value of the business. Lastly, and very often overlooked, when owners evaluate post-exit income they often use flawed inputs to forecast income needs.
Case in Point:
On a recent exit plan an owner told me he thought his business was expensing $30,000 in perquisites annually. After we investigated, the actual amount turned out to be closer to $80,000. And that’s pre-tax. To replace that $80,000 after he exits the business, he would need around $120,000 in pre-tax income. That’s a $90,000 annual difference from his guesstimate. Inflation adjust for a 25-year retirement plan, and it produces a very large spending shortfall – or a big change in lifestyle. Isn’t that worth discovering today rather than when you run out of money 5 or 10 years into retirement?
And, no, we are not IRS agents!
This example illustrates why we ask a lot of questions. There are many more areas of your business that we need to investigate. Short-circuiting the valuation process only compromises the result and leads to poor decisions. A reasonably thorough analysis by a qualified valuation expert on the other hand produces a result that can be relied upon to make the best decisions for you, your shareholders and your family.