When Should I Ask For a Formal Business Valuation?
For ADR professionals, there is always a need to balance cost against value. However, when a family owes and operates a business, and some of all of the income and property are tied up in that business, there is real value in determining its scope. FDRIO asked Matthew Krofchick when we should ask for a formal business valuation and here’s his response.
When you faced with a need for a business valuation in a matrimonial separation, the answer to your question, from my perspective is always and early. Here are the seven main reasons why:
- There is a common misconception among business owners that they understand the best way to value their own business. This misconception can often lead business owners to think they do not need a business valuation since they “know” the value of their company.
- Business owners tend to say that their business is worth nothing while their spouse thinks it’s worth millions. While it’s possible that one of them is correct, it is impossible that they are both correct. And in many cases neither of them is correct. The reason is that a formal valuation uses court accepted methodologies by trained professionals. Spouses typically have no experience in valuation, have a vested financial interest in advocating their positions, and are therefore not knowledgeable, neutral third parties.
- Likewise, business owners will often ask their corporate/personal accountants to prepare a valuation for family property purposes. There are a couple of issues with this approach:
- Relying on the business owner’s accountant to provide a valuation presents an inherent conflict of interest, since they cannot be relied upon as an independent third party when they have a financial relationship with the business owner.
- Unlike accountants Chartered Business Valuators are specially trained to value businesses.
- In some cases, people do not fully appreciate that a business might be one of the most valuable assets on their net family property statement and agree on a value that they believe is fair. With that in mind, suppose that two separating spouses agree that the value of a company one of them owns is $100,000; what would that same couple say if a formal valuation found the value to be $250,000? One of the parties is $75,000 better off ($250,000-$100,000=$150,000 / 2 = $75,000) and the other has lost $75,000. Most people would acknowledge that they would not be willing to accept this risk.
- Timing. One of the key benefits to engaging a Chartered Business Valuator as early as possible in the valuation process is that they can help identify what disclosure is required, identify areas that will need more in-depth analysis, and help to explain the process and methodologies used in the business valuation.
- It is also important to hire a business valuator when one spouse has little to no knowledge of the business. The valuator can help explain to the spouse what is and what is not relevant when reviewing the business.
- A valuator can independently review the financial statements to ensure that any adjustments necessary are made to get a true picture of the what the company is earning.
Overall, retaining the right expert for the right job ensures a neutral third party’s opinion and removes the guessing game of determining the value of one of the biggest assets a family may have.
Matthew Krofchick is a Chartered Business Valuator (CBV) and a Valuations Manager at Krofchick Valuations in Toronto. Matthew specializes in business valuations and income determinations for matrimonial purposes.