Posts Tagged ‘agreement’

Selecting a Business Valuation expert

by Steve Popell on February 18, 2010

Introduction

There are myriad reasons why the owner of a privately held company may want or need to have the company valued, including (partial list):

  1. Acquiring another company
  2. Selling the company
  3. Buy-sell agreement
  4. Repurchase of minority shares
  5. Divorce
  6. Partnership breakup
  7. Estate planning
  8. Probate

Regardless of the reason for the valuation or the urgency of the task, finding the right expert will pay off in the quality and utility of the opinion.  Here are a few tips to help you to make the best choice.

Background Check

Just as in hiring, you accept a resume on face value at your peril.  Always check references and publications.  In addition, go beyond the references provided by the expert.  You can do this simply by asking the listed references for the names of others who may have valid input on the competence and relationship skills of this individual.  These are called secondary references, and will typically be a more reliable source of information than the primary references.  You can even take it a step further by asking the secondary references the same question and, thereby, developing tertiary references.  Some questions you may want to ask will include the following.

  • Did the expert communicate clearly on all aspects of the prospective assignment at the initial meeting?
  • Did the engagement letter accurately reflect the shared understanding of the purpose of the assignment?
  • Was there a firm fee quote, or did the expert work by the hour?
  • Did the expert exhibit a genuine commitment to impartiality?  In other words, did the expert indicate clearly that s/he would simply go where the evidence led?
  • Was the request for data, including financial, reasonable?  If you didn’t have a particular document or piece of information readily available, did the expert insist on getting it, even if it seemed tangential?
  • Did the actual performance of the expert (data gathering, analysis, report, etc.) match up well with what you expected, based on the initial meeting and the engagement letter?
  • Was the report clear and easily understandable – even by non-financial people?
  • In the case of a divorce valuation, was the expert sensitive to the emotional aspects of the process?
  • How did the expert relate to other professionals on the case, such as a Collaborative Practice team, attorneys or mediator?
  • If you had to make this choice again, would you select this expert?

Absence of Ego in the Process

There is no place for ego or pride of authorship in the business valuation process.  One way to scope out this aspect of an expert’s approach is to determine if s/he is willing to submit a preliminary report that is open to criticism.  It is always possible that even the most competent expert will over-emphasize or under-emphasize some important data or, perhaps, miss something altogether.  It is also possible that something unexpected has cropped up during the valuation process that was knowable as of the valuation date, but the client(s) neglected to mention same.  The expert should be open to (even anxious for) the client(s) to provide such feedback.  The objective, after all, is the best valuation report possible, not the easiest to crank out.

Fundamental Understanding of What is Really Going On

Fair Market Value (FMV) is defined as what a hypothetical willing buyer will pay a hypothetical willing seller in a hypothetical free market in which both sides have essentially all the information they need to make an informed decision, and neither is compelled to conclude a transaction.  FMV is an appropriate standard of value in many situations, such as probate or any other circumstance in which the opinion will be presented in court or involve the IRS or other federal or state agency.  However, a number of other scenarios call for a different standard of value.

In a divorce, for example, or for a buy-sell agreement for a company with 2-4 owners, investment value is far more appropriate than fair market value.  The reason is very straightforward.  In either of these situations, the objective is not to determine what some outsider would pay for the company, or a portion thereof.  Rather, it is to ascertain what it is worth to one spouse (or one owner) to own a greater share of the company.

Avoid an expert who fails to grasp this critical distinction.

Flexible Fee Schedule

Anyone can charge several hundred dollars per hour.  It is more challenging to provide a fee schedule that offers the client genuine choices.  There are a few key questions in this regard.

  1. Will this opinion be offered in court or to some government agency?  If so, an “official” opinion will be required, and will be the most expensive.  If not, does the expert offer an “unofficial” opinion for a lot less money?
  2. Can delivering a much shorter report cut the cost significantly?
  3. Is there a choice between a broadly based analysis and report and one that considers financial documents only?  Is door #2 cheaper.

In sum, you have a right to expect quality performance from an expert with whom you have an excellent relationship, and for a cost that is commensurate with you needs.  Go for it!

This article has been contributed by Steven D. Popell CMC (Certified Management Consultant.) Steve has been qualified as a business valuation expert since 1974, and has published extensively on this topic. CMC, a certification mark awarded by the Institute of Management Consultants USA, represents evidence of the highest standards of consulting and adherence to the ethical canons of the profession. Steve was a 2007 winner Collaborative Practice California Eureka Award for contributions to Collaborative Practice in this state and is a Senior Partner in Popell & Forney, with offices in Los Altos Hills and Pleasant Hill, California.

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Result Orientation

by Himanshu Jhamb on November 13, 2009

resultsI was privy to an interesting exchange between two of my business associates the other day which led me to reflect upon what is it that people work for and how often they lose sight of what they are doing. The exchange went something like this:

P1: You don’t communicate clearly.

P2: Really? How come?

P1: Right now you are agreeing with what I am saying but that was not the case in your email.

P2: Yes. And what is the problem with that?

P1: You need to communicate clearly in your emails.

P2: Please understand that sometimes <whatever justification is being offered>

P1: Yeah, but it only happens in YOUR emails.

P2: Isn’t it also possible that it might be happening only to you?

Clearly, this is a typical disagreement conversation that is taking place between two people that is going downhill as quickly as a 100 tonne truck rambling down the downgrade with the brakes not working. There is obviously nothing wrong with the above conversation – It’s just that it is a Weak conversation. Weak because it is not oriented towards producing any result – it’s just a game being played between two individuals about who is right, wrong, superior etc. Notice how the conversation took a turn in the 3rd sentence – “Right now you are agreeing with what I am saying but that was not the case in your email”. Once the two folks have reached an agreement, what is left to talk about? The conversation is really over. Dissecting what was missing, incomplete or flawed in the email suddenly becomes irrelevant in the moment when it is declared “Right now you are agreeing with what I am saying”. PERIOD!

These are the conversations that take teams on a path of self destruction. It is important to understand and always bear in mind the question “For the sake of what.. are you doing… what… you are doing?” and use this question as the guiding light whenever you find your mind taking you into the dark tunnels of personal “Rights”, “Wrongs”, “Validations” and “Invalidations”. The same conversation becomes a powerful conversation had it simply gone like this:

P1: It was not clear from your email that <whatever it was that was not clear>

P2: Really? How come?

P1: That’s not really important because right now since you are agreeing with what I am saying and it seems to be sorted out…

P2: Great. I’d be open to hearing about what was unclear in the email at a later time, if you want to share.

Notice the stark difference.  The power comes from the fact that:

  1. The conversation is short and to the point.
  2. There is a mutual respect for each other and the two people seem to be “Sensitive” to creating a workable environment, even in the face of disagreement.
  3. The conversation is centered around “Producing a Result” and not on personal desires, beliefs, wants or preferences.
  4. The tone and the mood of the conversation remain positive and pleasant.

Take a moment to reflect upon the conversations you are having with others (… and also, yourself!). Are they oriented towards results or something else?

Himanshu JhambThis article was contributed by Himanshu Jhamb, co-founder of ActiveGarage and co-author of #PROJECT MANAGEMENT tweet. You can follow Himanshu on Twitter at himjhamb.
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