When preparing a business valuation, quantitative data — from tax returns, financial statements, contracts and other sources — is important. But there’s more to a company than numbers. Qualitative factors also contribute to a company’s overall value.
It isn’t always easy, however, to gain insight into qualitative aspects of a business’s operations. Websites and marketing materials can provide only limited insight. So there’s almost no substitute for conducting a one-on-one interview with a company’s owner or management team.
Answering key questions
Depending on why a business valuation is being sought, your valuator will ask a variety of questions during the management interview. Among other things, interviews usually provide answers to the following key questions about a company’s operations and outlook:
Does the company have adequate management depth? A company’s financial direction and corporate policies may be decided by just one individual or by a team of executives. Companies generally benefit from the contributions and varying opinions of multiple people.
Does the continued success of the company depend on any key personnel? Operations that are dependent on one or a few key people risk suffering financial losses or even failure if these individuals die or leave the company. An adequate succession plan, therefore, is essential to any business’s financial future.
Are there plans to grow through acquisitions or capital investments? The answer to this question indicates how management intends to gain further market share. Plans should produce growth without significantly compromising the company’s core business or its liquidity. Valuators may also inquire about any plans management might have to sell the business or discontinue unprofitable segments.
What are the company’s competitive advantages and disadvantages? This helps valuators identify the company’s value drivers and less-successful products or services. Knowing these advantages and disadvantages, valuators can estimate future financial performance.
Facilitating the meeting
At least in theory, when business owners are obtaining a valuation for, say, succession planning or estate planning purposes, it should be relatively easy to get the owners to schedule interviews with themselves and any other key management. But when a valuation is needed for litigation purposes, scheduling interviews can sometimes be difficult, and participants may not always be accommodating or forthright during the interview. Yet as many attorneys know, performing management interviews is important because it can help enhance a valuator’s credibility in the eyes of a court.
Attorneys can help valuators arrange meetings and ensure cooperation among participants. If necessary, attorneys may need to request depositions or file detailed interrogatories to obtain information from management.
Getting the straight story
Valuators access a variety of resources to learn about the company they’re valuing. But quantitative data can tell only part of the story. To get past the numbers and perform a well-rounded analysis of a company, valuators need to get management’s take, too.