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As M&A Ramps Up Again, Companies Need Good Business Valuation Specialists

Since the slowdown of the early pandemic, demand has been growing for talented business valuation professionals. More than 60% of 800 business owners interviewed for the 2022 MassMutual Business Owner Perspectives Study said that knowing the value of their business was important. “Measuring business health” was the primary reason, but there are many situations in which a company needs a definitive and defensible figure—for example, when the business is up for sale. In 2022, M&A was almost back to pre-pandemic levels, according to The 2022 M&A Report from Boston Consulting Group. Robust demand for business valuation specialists will likely continue throughout 2023 and beyond.

Valuing a business accurately isn’t a job for novices. Unlike real estate deals, business valuations and transactions aren’t published in a public database or otherwise readily accessible. It takes experience to know which of the widely varying techniques and methodologies to use—why the special valuation approaches appropriate for a fintech startup may not be right for more established businesses, for example.

Not only is business valuation a specialized skill, but for most use cases, regulations and stakeholders require that the analysis be conducted—and the report published—by a neutral third party in order to avoid conflicts of interest. This means you must hire a valuation expert from outside your company—whether it’s through a specialized investment bank, a public accounting agency, or a valuation agency—or hire an independent contractor.

This hiring guide offers insights into how to hire the best business valuation consultant for your particular needs.

What distinguishes quality Business Valuation Specialists from others?

When you’re looking for a quality business valuation professional, experience should be your primary criterion. Ideally, your candidate will have a minimum of 10 years of experience in conducting business valuations generally, as well as specialized sector experience relevant to your use case. For instance, if the valuation is being used for tax purposes, it will be subject to extensive scrutiny and liability, so you should hire someone who knows how to handle those tax-specific requirements. If you’d like an indicative valuation, to understand your business’s present worth, someone with fewer than 10 years of experience may be acceptable. It’s not advisable to hire a business valuation specialist with less than five years of experience.

A business valuation analyst uses a variety of data sources and business valuation methods to arrive at a value or range of values that a business would likely command in a transaction between willing parties operating in a normal business environment—in essence, its fair market value. While there are a variety of approaches and methodologies to determine an accurate business valuation, some of the most frequently used include discounted cash flow (DCF) analysis, which assesses value based on the company’s future cash flow as projected in different ways; comparable company trading/valuation multiples (comparable company or comps) analysis, which compares the company to others of similar size in the same industry; and precedent transaction valuation (precedent transactions) analysis, which considers prices paid for similar companies to arrive at a valuation. Depending on the methodology, the results can vary. Knowing which approach is most appropriate is a matter of skill and experience, particularly in fluctuating market conditions and in alignment with current market trends.

While you may see a variety of valuation certifications when researching candidates—such as ABV, CBA, CSC, and CVA, among others—a business valuation analyst doesn’t need a specific valuation certification in order to be good at their job. That said, CFA (chartered financial analyst) is a significant qualification. Globally recognized, the CFA is a general credential for investment professionals that evaluates valuation and financial analysis abilities, among other skills. Certification requires a rigorous three-part exam, as well as years of experience in the field.

How can you identify the ideal Business Valuation Specialist for your project?

Your business valuation professional should possess a mix of hard and soft skills to best determine a company’s intrinsic value. These include:

• Strong data collection and analysis expertise.
• Deep knowledge of business-specific needs, use cases, and stakeholders. Professionals offering valuation services should also be capable of translating complex analysis into strategic insights for executive-level decision-making.
• Sector-specific experience relevant to your use case, including industry-related techniques and expectations.

• Skills in analyzing, quantifying, and qualifying business-specific risks; a business valuation specialist must understand how to work with risk, as it affects the potential value of the business. This includes assessing potential impairment losses, especially when projecting long-term financial performance.

• Critical thinking and facility with writing.
• Ability to communicate effectively with company management.

In addition to these valuation skills, the following may be relevant:

• General knowledge of accounting and tax principles – Most candidates are likely to have relevant financial experience and credentials. If they don’t, it’s a good idea to check their knowledge of basic accounting and tax principles.
• Experience with analyzing and adjusting profit margins – Profit margins are a major driver in valuations, so knowledge of how to calculate and interpret them can be useful. Experience with assessing asset impairment or negotiating with a lender may also be critical, depending on the project scope.

Finally, if your use case pertains to any of the following areas, be sure the business valuation analyst has significant experience (at least five years) with that specialty, as all three are subject to regulations and/or a high level of scrutiny:

• Compliance and other legal matters
• Tax reporting
• VC fundraising

How to Write a Business Valuation Specialist Job Description for Your Project

First, clearly describe your use case and business sector, including the stage in a negotiation when the valuation will be used. This will help candidates with relevant experience self-select, based on their experience, as well as give them a clearer sense of the nature of the project.

Next, list the data sources and financial documents you think the valuation specialist may need. You need not have these materials on hand, but think about the steps to acquire them and at what point in the data collection process you’ll want the business valuation expert to step in. Clearly state whether the role will involve ongoing financial reporting or contribute to broader consulting services. Including information about the scope, intensity, and length of the work you need performed will help both you and potential candidates understand what realistic project deadlines and budgets might look like.

Finally, be clear about your expectations in terms of qualifications and experience, bearing in mind the aforementioned guidance about special cases that require advanced expertise. Be specific about what you need.

What are the most important questions to ask when interviewing Business Valuation Specialists?

By the interview stage, you’ll have had the opportunity to look at the candidates’ education and prior positions, and you can then delve into their experience and how it applies to your particular use case.

How should this use case be approached?

It’s important to understand how the interviewee would calculate your valuation, especially if you’re in a niche market. If your company is a fintech or a startup, for example, inquire about their experience with fintech valuations or startup valuations. Or if you’re looking to buy a software company, be sure your analyst understands how to value intangible assets. While you may not be familiar with all valuation techniques, the candidate should be able to explain what approach they think is best for your case and why.

Will this valuation require additional information or data beyond what’s provided?

The answer to this question will help you assess how well the candidate understands your use case, as well as give you a sense of whether the time and money you have budgeted for the project are likely to be on target.

What steps do you follow in your workflow?

Regardless of use case or methodology, a business valuation specialist will generally follow a workflow such as this:

Step 1: Define objectives, stakeholders, resources, and methods.

• Understand why you need a business valuation, what data is available, and what specific challenges might arise.
  
• Choose methods and data sources based on the valuation objectives and stakeholders.

Step 2: Gather data.

• Compile information about the business, including a business operations overview.
  
• Aggregate historical business financials, and develop a financial model and financial projections.
  
• Adjust the model and projections, and define sensitivities and scenarios, incorporating risk in conjunction with business management. (Financial statements prepared for tax purposes and audited financials must be interpreted properly and reclassified as appropriate for business valuation use cases.)

Step 3: Research and analyze data.

• Perform in-depth analysis of company documents, audited financial statements or tax returns, business operational information, intangible assets, macro and business-specific risk factors, and other data.
  
• Research macro and industry- and business-specific economic factors, industry trends, and risk factors.
  
• Analyze public and private comparable industry transactions and trading multiples.

Step 4: Produce a valuation report.

• Design a comprehensive presentation of specific business risk factors.
  
• Draft a detailed company description and establish market positioning.
  
• Generate an industry-specific review and assessment of prevailing economic conditions and trends. Include evaluations of commercial real estate holdings, if relevant, and incorporate expected market conditions into the analysis.
  
• Create detailed historical and projected financial statements in line with business valuation standards.
  
• Contemplate, underwrite, and execute industry-specific valuation methodologies, utilizing best practices for accurate valuation determination. (No two companies are identical, and each business will have a unique scenario and stakeholders.)
  
• Validate all assumptions and results.
  
• Arrive at a customized, comprehensive, and defensible business valuation.

Step 5: Present and review the preliminary report with management.

• Present the preliminary business valuation report to enable a thorough understanding of its conclusions, verify accuracy, and ensure the report fulfills its objectives.
  
• Revise the preliminary draft, if needed, and issue the final report with customary disclaimers, representations, and warranties.

What will the deliverables look like?

The candidate should respond that the final report will include a business overview, market positioning, and industry and macrodynamic reviews, as well as supporting documents to validate and justify their results. They should also demonstrate how their valuation aligns with fair value principles and supports accurate financial reporting. If you would like the report to include specific information or formatting, request it. Also, ask how the candidate would defend their conclusions if challenged.

Can you describe how you worked through the last similar business valuation?

Ask how recently this valuation was performed. Expect each candidate to detail how they approached the case and note how nuanced their approach seems. The more recent and robust their experience with your kind of use case, the better.

Why do companies hire Business Valuation Specialists?

There are many reasons you may need a thorough, accurate, data-based business valuation of your company. Besides a potential sale, reasons may include partnership buyouts, estate and gift taxes, buy-sell agreements, divorce, corporate litigation, SBA loan applications, raising equity or debt capital, succession planning, stock options/employee stock/ESOP, incentive programs, fairness opinions, tax allocation and tax reporting, and valuing intangible assets. For any of these use cases, hiring a qualified business valuation specialist will demonstrate due diligence and reduce the likelihood of problems resulting from an incorrect or unsupported valuation during or after a transaction. Engaging a consultant who offers comprehensive valuation and advisory services ensures better alignment with your broader strategic goals.

No matter what size your business is or what industry you’re in, you’ll probably need to hire a business valuation specialist at some point. Being able to describe the nature and scope of your job will help you identify the specialist with the appropriate skills. Hiring the best specialist for your needs will, in turn, make the valuation process go as smoothly as possible.