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With Haloween out of the way, it got me thinking about scary business events.  As someone who sells and values businesses, one of those scary business events is when a potential client says “My accountant said my business is worth $***** [insert grossly inflated figure]”

My approach is to ask for a copy of the accountant’s valuation to see where I may have made an error or misinterpretation.

Unfortunately, the “valuation” is invariably not even remotely compliant with the APES225 valuation standard and frequently is not even written down.  The normalisation adjustments are silly, the multiple may be reasonable for a listed company, but not for the business is question and the is often confusion as to what assets are to be included in the price of the business.  It is also devoid of any market evidence to support the common claims of 3, 4 or 5 times.

Not only do I have to justify my pricing expectation with the client and their accountants (which is expected), I am required to manage the relationship minefield of professional embarrassment for the accountant.  The reactions range from begrudging acceptance to outright rejection of demonstrable reality.

If an accountant is acting as an advocate (not an expert) for their client make sure that the client knows the realistic position.

My worst experience in this area was a business owner looking to retire and sell to another shareholder.  He said his accountant advised that his interest in the business was worth $2 million.  The “valuation” was not written, so I do not know who messed up.  I suspect it was a throw-away line by the accountant rather than any thoughtful discussion.  The business owner or accountant used earnings before owner’s salary, then applied a public company multiple, added assets and ignored debt.  The result was that a realistic view on his shares was about a quarter of what he was expecting, destroying his retirement plan.

Accountants have a critical role in assisting clients through the business sale process.  It is, therefore imperative that accountants know when to advise and when to seek external assistance.  Too often, I see accountants over stretching their areas of capability to the detriment of the client and impacting their role as a trusted adviser.

Peter Wallace is Managing Director of Endeavour Capital and Endeavour Valuations.  Endeavour assists smaller and medium sized businesses with business sales, business acquisition and business valuation services.  He is a Chartered Accountant Business Valuation Specialist, a Registered Business Valuer of Australian Institute of Business Brokers and is licenced to sell businesses in New South Wales and Victoria.