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Hot topics in business valuation & Turnover Verification Hot topics in business valuation1) The Process: Professor Aswath Damodoran created passionate debate after saying in a conference session that: "Appraisers often have a value in mind before they start the process and try to back into it". Subsequently Prof. Damodoran apologised for hyperbole and overstatement but affirmed that "flawed processes lead not only to flawed valuations, but also to the abandonment of first principles and common sense along the way." We say "amen" to that. 2) Subsequent Events Another controversy has raged around the handling of ?known, knowable, and reasonably foreseeable events? in business valuation. With the credit crunch problems overseas clearly signalling a down turn in our economy many months ago and huge uncertainty as to when we will bottom and recover any prudent appraiser is forced to make more subjective judgements than usual. TURNOVER VERIFICATION It has become increasingly common for business sales agreements to include a clause permitting the purchaser to attend the business premises for a period to verify the stated sales. It is usually requested for cash-and-carry businesses such as cafes, dairies, lunchbars, superettes, etc. where up-to-date accounts are not available or there is a suspicion that the revealed turnover is not the true figure. These tend to be businesses with homogenous margins and establishing an accurate sales figure is a reliable indicator of earnings potential. Such verifications should only take place after all other conditions have been satisfied and should be carried out as unobtrusively as possible so there is minimal disruption for staff and customers. We don't particularly like it - but it is a fact of life these days! Our standard clause we employ is: "The parties both agree that provided the deposit has been paid and all other conditions of the agreement have been declared satisfied in writing to the Vendor or the Vendors Solicitor that only one of the Purchasers shall have access to the said business during normal business hours for a period of (____) weeks prior to the (____) day of (__________) 2009 to verify the average weekly sales of the business are $_________ GST inclusive per week. If during this period the weekly sales should vary by an excess of (_______) below this amount then this agreement may be cancelled at the Purchasers option and the deposit paid by the Purchaser shall be refunded in full and neither party shall have any further right or claim against the other." For the latest news on business valuation we recommend www.BVResources.com. Their newsletter is authoritative and invaluable. |
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