There are very good reasons why small business buyers should make sure the business is properly checked out and valued before they buy, and equally good reasons why they usually end up doing the valuations themselves.

But there are also very great dangers in doing so without first finding out and being trained on how to do it professionally.

1.         It’s not the same as buying a house

Valuing a business is a serious matter, especially if the reason is to help you decide if you should buy it. You may well invest more money in buying a home, but that is far easier than buying a business.

With a house you have many others of similar construction and design to look at, you have knowledge of how prices compare, and what you see is what you get.

In other words you can be confident that what you are buying is worth the price and you know that it is a low risk investment.

Not so with a small business. Every one has its own unique characteristics, it’s difficult to make price comparisons, and the risk level varies widely from one to another and from industry to industry. Most importantly, what you see is never what you actually get. As any small business owner will tell you, the reality of taking it over is always different from their preconceptions.

2.         You can easily be cheated or fall into a trap

No wonder then that a survey showed that the biggest deterrent to buying a small family business is FEAR! Many buyers back out of a deal because they are not confident that they really know what they are getting in to, that they are not paying too much, and that they are not being tricked or cheated in some unknown way.

In my many years experience as a CPA specializing in consulting to small “Mom & Dad” family businesses, the main reason I am asked to value a business is when a client wants to buy one. But they don’t just want to know if the asking price is too much, they also want to know if the information and figures given by the seller are genuine, and if there are hidden reasons for selling that have not been disclosed.

So I am doing much more than a simple mathematical calculation using a “one size fits all” formula to calculate a value. I’m actually checking out all aspects of the business, verifying the facts and figures, uncovering the hidden secrets and looking at which way this business and the industry it is in is headed. And then I incorporate all of this in the valuation.

3.         It’s too expensive to get an accountant to do it

So what is an intending small business buyer to do? First reaction? Engage a CPA like me to check out and value the business. But that costs money – lots of it! I was recently told by a client “Brian, I shopped all over town before I found you. Most others wanted a minimum of $10,000 to value my business – your quote is that it won’t exceed $2,000”

This made me realize two things. First, I should be making a lot more money than I am. Second, and more importantly, most small business buyers can’t afford these fees – even at $2,000.

Because very rarely do you buy the first business you have a good look at. It’s like buying your new home. You look at a lot before you find the one you really want.

So if you get your accountant to check out even 6 businesses before you find the right one, it’s going to cost you $12,000 even at my modest fees.

4.         Accountants try to avoid valuing small businesses

Why do CPA’s (especially the bigger firms) charge so much for this kind of work? I believe there are two reasons. First, they are afraid of being litigated against if you’ve bought a dud on their recommendation.

Secondly, they don’t like valuing businesses of this size. It’s too messy, the figures may not be complete or accurate, and (unlike the bigger businesses they are used to) they usually haven’t been audited.

Add this to their inexperience of the nitty gritty of small family businesses means the chances are high that they will in fact get it wrong. So charging these high fees is their way of saying they don’t really want to do it.

5.         The dangers of doing it yourself without really knowing how

So what actually happens? Buyers do the checking out and valuing themselves even though they have no experience or training at it. When they find the one they think is right, they may get their accountant to “run their eyes over the figures” before they go ahead.

The result is the chances are high that they have overlooked something or got something wrong. Too often it ends in disaster. They may have to close, struggle on and hope to recoup their money, or sell out at a loss.

In summary, there are very good reasons why buyers should do the valuations themselves, but very great dangers in doing so without finding out how to do it professionally first.

This article was written by Brian K Fitzgibbon CPA.

Brian is an experienced accountant and small business consultant. He runs his own business, lectures extensively on small business topics and has checked out and valued many hundreds of small businesses for buyers.

Brian is also the author of the highly acclaimed and invaluable
"How To Value A Business And Buy It Without Fear"
A do-it-yourself guide for first-time and experienced buyers alike.

To download a FREE Chapter from Brian's book please follow this link: "HowToValueBusiness.com"

June 7th, 2009 | Tags: business valuations, buying a business, checking out a business, dangers of business valuations, diy business valuations, due diligence on a small business, expense of business valuations, how to buy a business, how to value a business, tips on buying a business, traps to avoid in buying a business, valuing franchises | Category: articles | Subscribe to comments | Leave a comment | Trackback URL  |