A couple of weeks ago I put a model together for a customer. It was a simple “mom and pop” operation and I used the SDCF method to give the customer a rough and simple estimate of what the value of his business was. Today I found myself thinking back about that short but productive meeting and the fickle, and highly subjective, world of valuations.
It still amazes me, and this is partly the reason why I enjoy doing this, how subjective valuations can be. It mostly depends on the expertise of the accountant or financial specialist doing the valuation and the approach used. Sometimes the same approach can yield vastly different valuations.
This brings me to another interesting point. Most small business owners seeking a valuation are either interested in selling the business, going thru a personal situation that requires a valuation (such as a divorce) or are involved in succession planning. In all three instances assets and liabilities can be valued differently because the purpose of the valuation is different. The point is to not get fixated on the value, small business owners need to realize why they are seeking to assign a specific value to a business before arguing to merits or imperfections in any valuation. Once again the customer is at the helm in this process.