Is Business Valuation an Art or a Science?

Is business valuation a SCIENCE?

If business valuation was a science the numbers on their own would be fine, and everyone would be able to come up with their own result on an Excel spreadsheet. The typical error is manifest in "generally accepted multiples" used in price-to-earnings (PE) calculations dressed up as valuations.

If business valuation was a science you would be able to plug financial statements into an online engine with confidence in getting a result within minutes. This assumption is often seen in the annual reports of public companies where they may invite potential target businesses to approach them with the promise of a high PE multiple.

Is business valuation an ART?

Alternatively, if business valuation was an art, then a story on its own would suffice. But we see this all the time where everything ends in tears, and authorities issue glib statements like: "If it sounds too good to be true, then it probably is." People would buy businesses on promises and well-written sales pitches.

If business valuation was an art on its own there may be future earnings involved in the calculations, but it is unlikely the back-tests and reciprocal discounts would make much sense, and the results would teeter on the brink of believability. You would be able to employ a copywriter to write something inspiring and convincing to fit a desired number.

But here you are because life-changing decisions require care!

Business valuation is a CRAFT.

The truth is that business valuation is a CRAFT. It draws on the raw numbers of the financial statements, but then looks at their derivatives, ratios, and returns compared to peer companies country-wide of similar size, and industry. Our business valuation service leans heavily on our own database of standard industry classification (SIC) key performance indicators. Our KPI database extends well beyond the "usual batch of 8 KPIs." 

A properly crafted business valuation takes peer comparisons, and anomalies in the business, and uses the many stories embedded in the company, its products, suppliers, customers, employees, and its community to craft a credible expression of value.

If your industry is going through a tough time, showing signs of collectively risking bankrupcy, but your business is getting stronger, there is a story there, backed up by real numbers. We are able to use both the science and the art to craft a valuation you can take to the bank, a court, a negotiation, the board, or your financial planner.

Blending the science of the numbers with the art of the storyteller is the key to a properly crafted business valuation.