WFU Law School
Law & Valuation
5.4 Business Valuation - Discounts and Premia

5.5 Common Errors

Here's a checklist of questions that the valuator of a business (and his lawyer) should ask in reviewing a valuation. Some involve a careful review of the company's financials; others involve seeing thorough the financials to how the owners conducted the business (particularly how they withdrew money in the form of excess compensation, rentals or loans); others suggest vigilance about the valuation process itself.

5.5.1 - Normalize financials

The initial stage of any valuation should include the normalizing of the balance sheet and profit and loss statement. Questions include whether the accounts receivable been appropriately discounted, whether the work in process been accounted for and appropriately valued, and whether the inventory value based on LIFO or FIFO. (More 5.5.1>>)

5.5.2 - Method chosen

What method was chosen in the valuation (asset, income, market) and how were the weighted? (More 5.5.2>>)

5.5.3 - Owner's compensation

Owner's compensation should be adjusted to a reasonable amount. Excessive compensation will lower your earnings and understated compensation will overstate your earnings. Compensation information for accounting, medical, legal, and dental practices is available. (More 5.5.3>>)

5.5.4 - Professional competence

Is the valuation expert worth his or her salt? Check the expert's track record. Ask questions: for example, did the expert visit the business? Remember that an expert may have some immunity. (More 5.5.4>>)

Chapter Subsections

 

5.4 Business Valuation - Discounts and Premia

©2003 Professor Alan R. Palmiter

This page was last updated on: March 17, 2004