‘Luke, I’ve got a situation: what’s my business worth?’

Friday 01 February 2013

I’ve heard that an accountant ‘...is someone who knows the cost of everything, and the value of nothing’. Whilst I am pretty sure that’s a misquotation of Oscar Wilde, I’m also pretty sure most people would agree. Ironic then that I’m often asked ‘what’s it worth?’ with the expectation of a legally binding, virtually immediate, response!

The fact is that there are a good number of universally approved methods for valuing a business; whilst the process in each is consistently followed, all of them rely on a fairly large number of assumptions. They also depend on answers to questions such as ‘at what date?’ ‘to whom?’ and ‘on what basis?’

Assumptions, inevitably, lead to disputes. I see this happen time and time again with business partners where perhaps one or both want out. It’s also a couple separation issue, where perhaps one owns and runs the business, where the other may or may not work in it.

I have been involved in a number of disputes where the company’s own accountant has been asked to give an estimate of value by an owner for the purpose of separation. I believe this is counter-productive as whilst it may require less immediate cash outlay there are significant problems inherent with the approach. Firstly, it is easy to see why the other party’s advocate will assume bias. It is impossible to argue the relationship between the accountant and his client does not pose a potential self-interest threat to the accountant’s independence. The advocate on the other side is therefore likely to be sceptical and will request an independent opinion delaying an end to proceedings and incurring more costs. Having been on both sides of this, I cannot see a way round it other than to employ an independent expert from the outset.

For example, a client of ours asked me to prepare a letter for his advocate in response to a request from his wife’s advocate outlining the value of his shares. Despite the logic in the letter being clear, the number of actual transactions that had taken place, and the fair approach taken, the fact that it came from the company’s accountant meant that it was automatically treated as biased by the wife’s advocate. Threats of further valuations and numerous letters went back and forth, incurring pointless extra cost, even though ultimately the other advocate accepted the position.

It’s also worth remembering that a company’s accountant for annual tax and accounts compliance may not have much experience or skill in valuing businesses in comparison to one who does so regularly. Business valuation is not a skill that is taught in detail during any formal accountancy training and much of it requires a commercial understanding of business and a great deal of training, learning and experience.

We have seen a number of situations where the accountant has done what he thought was best for his client and issued a valuation based on a feeling of what they or their client thought was right. Once an independent expert has been through the process properly and argued well-reasoned assumptions the first accountant is often at a major disadvantage. A real life example of this concerns a lady who came to us after her husband had told her the business was worthless as they were in so much debt. In this instance the other accountant had not been paid to review the business properly and, despite being close to the business, was not aware of formal valuation procedures. Once we had been through the detail and argued rationally at mediation the husband had to submit to the wife’s demands.

Whilst the above situations may not come as much of a surprise what does surprise me is the frequency with which these disputes happen, even when both parties seem keen to get the whole process over with.

A couple that came to us, both rational and intelligent people, said ‘...we both want this to be done fairly and we want you to just give us a number to take to our lawyers’. Very mature I thought, will save them lots of money in the long run. Two months down the line and the legal process is ‘getting to them’, accusations are flying around and the anger and frustration is leading to a complete breakdown in communication to the detriment of everyone involved. This is not a problem caused by ‘greedy’ advocates.

The problem is systemic. Advocates are paid to have their client’s interests at heart – which of course has to be the case – but it can easily lead to conflict and potentially long and drawn out proceedings. For the people separating it is therefore difficult to assess when the conflict is necessary and how it will affect the final result. That said, the frequency with which a 9 to 12 month process ends up with a similar, or worse, offer to the original being accepted is food for thought.

Throughout a separation process – business or life partners - the value of someone independent is huge as it can act as a further sounding board for what is reasonable. Ultimately, if it gets as far as Court, a reasonable outcome is what will be searched for and, whilst there are of course always exceptions to the rule, most of the time it will be achieved.

Defining myself, and part of my profession, as ‘a necessary evil’ sits very uncomfortably with me. It is however a fact of life that people go through stuff and ‘it’ happens. When it does, having an independent expert involved will help everyone through the process as quickly as possible and that’s important not only because most advocates and accountants charge by the hour but also to get life back on track as soon as you can.