SC Lawyer, Sept. 2005, #3. The devil is in the details - when you don't know what you don't know: Five steps for evaluating business valuations.

• Author: By William H. McAfee and John M. Jolley

South Carolina Lawyer

2005.

SC Lawyer, Sept. 2005, #3.

The devil is in the details - when you don't know what you don't know: Five steps for evaluating business valuations

South Carolina LawyerSeptember 2005The devil is in the details - when you don't know what you don't know: Five steps for evaluating business valuationsBy William H. McAfee and John M. JolleyHow do you know that a business valuation you receive from a financial analyst is properly done? How can you tell that it meets the proper standard of value for the scenario for which you requested it? These questions are of significant concern to legal counsel in evaluating the product of valuation professionals.

Scenario: An attorney is assisting in the transfer of a business between generations and tells the client that a valuation of the entity must be done by someone qualified to render an opinion of value. The attorney and client agree to engage a third party to render an opinion as to the value of the entity. The report is delivered to the client with a copy to the attorney. In the interest of saving time (and avoiding unnecessary fees), the attorney reads the cover letter and executive summary and uses the given number representing value on tax filings in conjunction with the transfer. Is the valuation accurate? If not, what are the potential results? Can the opinion be defended? What responsibility does an attorney owe to the client in reviewing the valuation analysis?

Often, the opinion of value given by a business owner is too high, which stands to reason due to their bias towards their company. Amazingly, many opinions of value rendered by "experts" are also too high, and if you are an attorney relying on that opinion, that can be disastrous. In reviewing valuation reports that have been relied upon by attorneys and their clients for planning and to substantiate value, a significant number of the conclusions are based on improper assumptions and faulty logic, as well as a misinterpretation of financial concepts. The problem created for the attorney is that in relying on the "expert" opinion of the valuation analyst, the attorney may actually render poor advice to his or her client. How then does the attorney ensure that the opinion of value is accurate given the circumstances in which it is to be used?

While there are many potential areas for error in business valuation, there are five basic pieces of information that should be examined on every valuation report used in the course of a client engagement. It is crucial that anyone examining a valuation report be familiar with the basic...