Don’t be fooled by online offers for business valuations — real ones take weeks
This is good article written by Liesl Malcolm, and published in SmartCompany on Nov. 15, 2022. (Link)
Type the words “how much is my house worth” into a search engine and it will deliver around 6.2 billion results.
Countless lenders, real estate agents, and home builders are lining up to offer curious consumers a quick house valuation, using everything from calculators to ‘comprehensive’ price reports.
These tools spit out the value of a house using homeowner inputs for various metrics such as location, the property’s age, block size and other factors, and all claim to deliver the most accurate valuation. But if you try to take that valuation to a bank to refinance a mortgage, for example, expect a polite rejection.
Banks source an independent valuation to ensure impartiality in determining a home’s value. A quick calculation from an app might satisfy your curiosity but it is worthless in every other respect.
Business valuations are no different.
Online valuations are part of the ever-growing automation services being peddled to accountants and business owners with promises like ‘comprehensive business valuations in 20 minutes.
But people who make decisions based on these online or auto-valuations are playing a dangerous game because these tools can get it really, really wrong.
These services offer up anything from an online questionnaire to professional-looking software packages offering transparency and unique insights. However, business owners and accountants will get a wildly inaccurate figure. Online valuations rely on inputs from a person directly involved in the business or closely linked to it, such as an accountant, rather than an independent party.
Usually, the software requires financial information such as profit and loss or a balance sheet from recent years, and will get users to tick boxes on key business activities, allocating them into a specific field and determining what the multiple might be. Proponents will argue that the more information a user puts into the software, the better the valuation at the other end. This has a ring of truth. But, like the software, it’s a claim that doesn’t give the full picture. It is highly likely the people inputting the information cannot accurately answer all the questions.
They might be asked about earnings adjustments, for example, but business owners typically don’t understand why that question is being asked and its relevance. They might provide an adjustment that is not correct and needs further discussion. It’s a level of detail that these automated models just cannot deliver. The risk in online valuations also depends on the purpose.
If it is just for curiosity, to get a feel for value for internal purposes and with no intention to take the data outside the four walls, then the valuation will be harmless, like that house price calculator. But if that’s the case, why waste your money?
The figures provided will be worthless for any litigation matter, it won’t stack up with the CRA or satisfy financial reporting purposes. Most importantly, the number won’t reflect the value of the business.
An independent valuation process includes a management meeting, where a valuer will spend time discussing the operations in detail, and ideally, it will include a site visit. Valuers will critically analyze the financial performance of the business and gather insights from the business owner as to the risks and opportunities that exist. All this information will be used to determine an appropriate and supportable multiple, discount rate, and value.
A valuation report takes several weeks. Nothing comprehensive or useful ever takes 20 minutes. Be highly skeptical of any product claiming its award-winning technology can do the job faster or better.
With a real valuation from an expert valuer, business owners will emerge with a genuinely accurate snapshot of the business that they can literally take to the bank.
Malahat Valuation Group specializes in business valuation and real estate appraisals to owners of privately-owned companies and their professional advisors.
When owners need to leverage, sell or reorganize their assets, we answer the age-old question "what is it worth?".
We provide our clients and their advisor's peace of mind by preparing professional valuations that stand up to scrutiny from lenders, the Courts, and Canada Revenue Agency.
Malahat Valuation Group Inc.