Beware of Valuation Cons

Have you ever received a telephone or email solicitation to have your business valued?

In these times, Baby Boomer business owners are nearing retirement and may be thinking about selling or gifting their business interests. Legitimate business valuation professionals see this demographic trend as an opportunity to help business owners transfer their wealth.

Unfortunately, some unscrupulous individuals also exploit this trend for more nefarious reasons. Here's how to avoid getting scammed.

Don't Let This Happen to You

A business owner in California (Pat) was recently contacted by a company in Texas to value his business. Although Pat's business partner was on vacation, the owners (both Baby Boomers) had been talking about selling the business.

The so-called "valuator" claimed to know potential buyers in Texas who were interested in expanding into the California market. He told Pat these buyers would be willing to pay a "premium price" for an established company that was already licensed in the state.

Pat agreed to pay a $10,000 fee upfront to value the business. Along with a check, he sent copies of the company's tax returns and financial statements for the last three years. When Pat hadn't heard back from the valuator after three months, the business partners contacted their attorney.

The attorney had previously worked with credentialed business valuation experts, so she knew what to expect. She was immediately suspicious for three reasons:

1. The fee seemed high for a business with less than $1 million in annual revenue, especially for a valuation report that was planned for internal use only. A detailed written report typically isn't necessary when you're merely contemplating a private sale.

2. The valuation firm was located in Texas, but, legally, California businesses must be sold by professionals licensed by the state of California.

3. The valuation firm's website was vague. It didn't list the names of the firm's owners or any credentials held by professionals on staff.

The attorney advised the owners that they could file a lawsuit to obtain a refund. But pursuing the matter would be cost-prohibitive because it would require working with district attorneys in two states. To make matters worse, Pat didn't have a signed contract from the Texas valuation firm; he'd simply made an oral agreement over the phone.

Find a Legitimate Expert

Although the situation described above is fictitious, similar scams have been reported across the country. In some cases, business owners never hear back from the valuation firm. In others, the owners make important business decisions based on inaccurate valuation advice. So, how do you know that an individual is a legitimate business valuation professional?

First and foremost, ask for a referral from an advisor that you already know and trust, like your attorney, CPA or banker. Often, professional service providers have worked together on similar projects for other clients and can refer someone from your local area.

Don't automatically go with the first name you're given, however. It's a good idea to consider at least three candidates. Interviews provide only limited insight. So, when selecting your expert, ask for each candidate's marketing materials and a curriculum vita. Experienced experts will have these items on hand, and printed material can help you compare the expert's qualifications side-by-side. Also review their firm's websites, including any white papers or newsletters the experts have posted.

Take the time to understand each expert's qualifications. Hire someone who has attained a professional valuation designation from one of these organizations:

  • The American Institute of Certified Public Accountants (AICPA),
  • The American Society of Appraisers (ASA),
  • The Canadian Institute of Chartered Business Valuators (CICVA), or
  • The National Association of Certified Valuation Analysts (NACVA).

Inquire whether the candidates have completed all the requisite technical and ethical requirements to officially use the organization's designation — or whether they're still working on a professional designation. Moreover, it's important to verify whether the expert is up-to-date on the organization's continuing education requirements.

Look beyond an expert's technical competence, too. You'll be sharing a lot of confidential information with your business valuation expert. So, it's important to trust each other and communicate effectively. Even if all of the valuation candidates you interview are well qualified, you'll probably find that you connect better with one expert on a personal level than the others.

Finally, search for the name of the individual and his or her firm on the Better Business Bureau website. Then enter the name of the individual (and his or her firm) along with the words "complaint" and "scam" on your favorite search engine. Ask the expert for an explanation if anything suspicious turns up. It's possible that a legitimate expert could be targeted by unscrupulous competitors with false complaints.

Check In with Your Attorney

Once you've picked the expert that's right for you, it's important to enter into a formal contract for the valuation services. Contact your attorney before signing on the dotted line. He or she can review the contract to ensure all the bases have been covered.


DOUGLAS P. SOSNOWSKI, CPA/ABV, ASA, CFF
dsosnowski@briscon.com

Douglas P. Sosnowski provides business valuation, forensic accounting, and litigation support services for Brisbane Consulting Group. He has extensive valuation experience and has served as an expert witness, testifying in courts of law throughout the state of New York. Doug has experience consulting with publicly traded entities and valuing a variety of closely held companies in connection with mergers, acquisition and divestitures, business combinations, estate and gift tax planning, ESOPs and purchase price allocations. He also has experience in the quantification of lost income in determining business interruption claims for insurance adjusters. Doug is a member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and the American Society of Appraisers. Doug is a licensed financial advisor holding Series 7 and 66 securities licenses. He graduated with honors from the State University of New York at Buffalo earning his Bachelor of Science degree in business administration with concentrations in accounting and finance.