In the final analysis, business valuation is all about trust. Many of the issues we confront (and that I write about) concern this fundamental topic.
If we could not trust financial statements, we would all have to become auditors, which would force us non-CPA’s to get a great deal of additional training and vastly increase the cost and time required to do valuations. I rely on the accuracy of financial information furnished by my clients, and so state in my engagement letters and reports. If that is a problem, I insist that they get accurate statements or decline the engagement.Â
If we could not trust the reliability of Excel, we would have to check all of our work by hand, which would increase the cost and time required. (I learned financial analysis back in the Stone Age before computers and calculators: that is precisely what I did. I hated it.)
Basically, we have to trust:
- Source data, whether it be from clients, their advisors, third parties (e.g. Ibbotson), allied specialists (fixed asset appraisers), and so forth.
- Instructions from qualified advisors about legal and related matters (does a given buy-sell agreement or case involve valuation discounts?)
- Generally accepted appraisal practice.
- Report users’ understanding of basic financial and business information: there is a big difference in users’ sophistication. If we are valuing a single location retail establishment for sale, the level of sophistication of the seller and buyer will often be pretty low. On the other hand, in a financial reporting assignment, the auditor and CFO may know as much as we do about valuations!
- Our own informed judgment, common sense, and reasonability, all of which give us confidence our ability.