There are few absolutes in business valuation. This is one of them. You must understand accounting to value a private business correctly. Why?
Issues in the accounting records can have a huge impact on value. If issues aren’t identified, the whole foundation starts to wobble. Knowing what to ask and how to ask it are keys to finding issues. Here are two real stories:
Me: “What about this truck on the depreciation schedule?”
Client: “Oh, that’s a personal truck (insert name) bought. I won’t be buying personal vehicles through the business.”
That was a $20,000 change to my capital expenditures estimate.
Me: “Can I see the Accounts Receivable aging schedule?”
Client: “Here’s our over 90 days past due list.”
It was over $40,000. A hit to book value and possibly future cash flows. Once you find issues, you must…
Handle Issues Correctly
Knowing where to look and finding it won’t get you home. You must know how to handle it using accounting. That inventory balance needs to go up. Every entry needs a debit and a credit. Where do you book the other side? Cost of goods sold or accounts payable? It depends. So, you dig a little further. You find the answer and make the adjustment. Maybe that changes the value $10,000…or maybe $100,000? Maybe not at all.
The Bottom Line
I rarely get a perfect set of accounting records. Even when I’m lucky enough to get CPA-prepared financials, it doesn’t guarantee there won’t be issues. Sometimes it’s as simple as reclassifying money from one account to another. Other times, I have to turn everything inside out. If you’re valuing a business, I hope you’ll learn the language of accounting or find someone who knows it. Otherwise, you could miss something big. I’m here if you need me.
Can I Help You?
Hi, I’m Josh Horn, CPA/ABV, CVA of Horn Valuation. I help with business valuations in friendly or unfriendly situations. I also help owners build valuable companies. My clients are business owners and attorneys. If you’d like more information, check out my website hornvaluation.com, email me at firstname.lastname@example.org, or call me at 217-649-8794.
I’m a licensed Certified Public Accountant (CPA) and double-credentialed in business valuation (CVA & ABV). I’ve been a tax and business consultant in a top 100 CPA firm and a controller in a large international company. I’ve also valued and been the primary advisor to multi-million dollar and small companies in various industries.
“If you’re not working on business value, who is?” Josh Horn, CPA, Certified Valuation Analyst and Accredited in Business Valuation