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For What It’s Worth: Valuation Faith, Science, and Art – January 2016

Every business valuation utilizes three types of information.

Faith based: Appraisers start by accepting certain information on faith, such as the integrity of reported financial and operating data, the relevance of laws and regulations, and the values of independently appraised fixed assets. These assumptions provide the foundation of what we do, but we have no means of independently establishing whether they are appropriate. That is for others to decide.

Science based: We then apply generally accepted theories and practices to determine a range of possible values for a business interest. In most cases, ethical and competent appraisers provided the same information, will come up with similar ranges. If they do not, differences often arise from their initial assumptions.

Art based: Finally, we exercise common sense, informed judgment, and tests of reasonability to narrow the range of value to a single number. This is where appraisers can reach legitimately different conclusions.

When two appraisers (or anyone, for that matter) disagree about value conclusions, it is most helpful to analyze their differences in terms of faith, science, and art. Once these are clear, they can go about reconciling them. If agreement cannot be reached, it will be much easier to present the differences and their causes to a judge, jury, or other authority that will make the ultimate decision.

Three recent engagements highlighted each type of information and its effects:

  1. A divorce engagement hinged on whether certain property was marital or not. The appraisers were given different instructions. The judge ruled on this issue.
  2. A merger negotiation was stalled on price and terms. When one appraiser showed the other that his valuation conclusion was too high (because the buyer would earn a substandard return on her investment at that price), the logjam was broken, terms negotiated, and a deal made.
  3. An estate tax return was audited, and the Service and the taxpayer could not agree on a discount for a minority interest. They were able to isolate their disagreement to a few fundamental factors, which were subsequently presented to a neutral arbitrator.

Valuations play a part in all tax, transaction, and litigation matters. For additional information or advice on a current one, please do not hesitate to call.

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About Western Reserve Valuation Services LLC
Western Reserve Valuation Services LLC, based in Columbus, Ohio, is a leading provider of valuation services and financial opinions relating to corporate finance transactions, corporate tax planning and compliance, succession planning and wealth preservation, employee stock ownership plans (“ESOPs”), financial reporting and portfolio / fund valuations. For more information, visit www.wesresvaluation.com or call (614) 448-3700.

Western Reserve Valuation Services is an affiliate of Western Reserve Partners LLC, a FINRA-member investment banking firm offering financial advisory services relating to mergers and acquisitions, capital raising and financial restructuring. For more information on Western Reserve Partners, please www.wesrespartners.com or call (216) 589-0900.

Representative clients

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