To determine how much a business is worth, a valuation professional first must develop a comprehensive understanding of how it runs. Financial statements and tax returns tell only part of the story. Face-to-face insights provide additional information that can significantly impact value conclusions.
Owner & Manager Interviews
If a valuator hasn’t previously toured an organization’s facilities, expect them to request a site visit soon after being hired. This gives the expert an opportunity to observe business operations and interview personnel. Depending on the organization’s size and the engagement’s confidentiality requirements, the valuation expert might want to talk to managers from various departments in addition to the owner(s) and other top leaders.
Interviews typically cover a broad range of subjects, including but not limited to:
- Operations history
- Management quality and compensation
- Hiring practices
- Technology
- Marketing and sales programs
- Methods of distribution
- Condition of fixed assets
- Historical financial performance
- Accounting methods
- Internal controls
Interviews typically conclude with an open-ended catchall question, such as, “In your opinion, is there anything else about the business we haven’t discussed that could potentially affect its value?” Such a question limits the danger that management will withhold information or a valuation expert will overlook a key fact.
Preparation Pays
An experienced valuator won’t show up at an organization’s facilities without doing some homework. A preliminary review of the organization’s financial statements and other relevant documents helps ensure efficiency and customize interview questions.
Valuators also may send a questionnaire in advance to help management prepare for the interview. Submitting answers to these questions before the visit can be helpful.
Benefits Of Being Face-To-Face
You may be wondering why an in-person interview is needed on top of a written questionnaire. It’s because reviewing written responses on their own simply isn’t as effective as also seeing the organization’s facilities and talking to personnel, especially in an adversarial situation. For example, a divorcing business owner might downplay the organization’s growth prospects or hide assets to skew the value conclusion. Interviews and site visits can help reveal errors, omissions, and misrepresentations.
A side benefit of a face-to-face interview is establishing a positive working relationship between the valuation expert and the organization’s employees. This facilitates the valuation process. It also builds confidence that business personnel are open and honest about sharing relevant information and that the value conclusion is reliable.
If a valuator can’t conduct a site visit or is denied access to part of an organization’s facilities, the valuation report may list it as a limiting condition. This can severely compromise the perceived reliability of a valuator’s conclusion.
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Business owners and attorneys sometimes resist interview and site visit requests, especially when valuing businesses for litigation purposes. However, these steps are critical for uncovering insights that financial statements alone can’t provide. Contact us to learn more about this essential part of the valuation process.