Quality of Financial Information – is it Important?

When we develop an opinion of value for a particular operating business, we look at the quality of the financial information as either an additional risk factor or value driver.

In business valuation and especially from an investor’s viewpoint, quality of the financial information or truthfulness of the data plays an important role. Everyone has heard of QuickBooks which helps business owner’s organize their financial information to track assets, liabilities and operating expenses. Federal tax returns are filed on an annual basis and may contain additional information related to tax elections (i. e., allowable deductions that may reduce taxable income). Both tax returns and QuickBooks documents are used in a valuation assignment; however, there are two other types of financial statements that might help the business increase its value.

Audited financial statements are prepared to state whether the financial information is presented fairly, in all material aspects. Audited statements are the most costly and take more time to complete; however, they can increase value by a quarter point to a half point more in valuation multiples. Consider for a moment, a business earns $500,000 in earnings before interest, taxes, depreciation and amortization (EBITDA); applying an EBITDA valuation multiple with an additional .50 equals an increase in value by $250,000.

The last types of financial statements are called unaudited. Unaudited statements come in two categories; reviewed and compiled. Compiled financials are prepared based on information provided by the business owner and requires less work than audited financial statements. Reviewed financial statements fall somewhere in-between a compiled and audited.

Of the five types of financials discussed here, if you were an investor which type of financial statements would you be most comfortable with in making an investment decision? From a business owner’s perspective, the additional cost of having audited financial statements prepared annually would seem to be a smart return on investment, especially if planning on transferring the business in the future. We would recommend a business should have three-to-five years of quality financial information if seeking a business transfer or investors to insure the highest value.

How can American Business Appraisers Help?

Business valuations require a significant amount of careful consideration and judgment. Our experienced staff recognizes and quantifies a business’ risk factors and value drivers. The more risk factors a business has, value is driven downward. On the other hand, identifying value drivers will increase the value of a business.

Call us to discuss any specific valuation needs. Every individual situation is different and not everyone requires our certified appraisal services and sometimes just talking with one of our appraisers is all that may be necessary. With our initial consultation, there is no cost or obligation to you. We promise you two things; first, to invest a reasonable amount of time to gain an understanding of your specific requirements, and second, our communication will be kept confidential. We invite you to visit our website at www.abavalue.com to see for yourself the services we offer, along with our qualifications.