When preparing a business appraisal for a business, financial statements, tax returns, leases and operating agreements are often reviewed and utilized. Such information is useful in deriving an opinion of value, but often only provides a narrow and incomplete picture of the business. As most business owners will tell you, there is more to their company than just the numbers.
One of the best opportunities to get insight into a company is through a management interview and a site visit. In some circumstances, the interview and site visit may be difficult to schedule. For example, management may be reluctant to meet with the appraiser and may not be forthcoming with information in a litigation setting. The appraiser should always exercise a degree of professional skepticism and examine financial and nonfinancial data to support or refute positions. The appraiser needs to exercise care and recognize that the individuals who are being interviewed may be biased and providing false or incomplete information.
Clearly, visiting the site and meeting with management provides the opportunity for the appraiser to “kick the tires” of the business. As an example, we were in the process of appraising a business that was located a few hours south of us. The purpose of the appraisal was for a divorce. During discussions with management, they painted a picture of financial despair and that they recently had to move due to the need to downsize. When mentioning the desire for a site visit, the owner aggressively tried to talk us out of making the trip. Fast forward to the drive down to the business… we passed the old location, which was a dilapidated building, and continued down the road. Our directions took us to a new industrial park, with the street named after the business. The building was much larger than their previous location. When parking, we noticed a reserved parking spot with a name that we did not recognize. When we walked around the facility, we noted that there was a lot of excess capacity, with empty racks, and spots designated for new equipment. During the tour, we asked about the name on the reserved parking spot. The parking spot was for a new salesman, who was deemed to be the industry guru and just recently joined the company from their largest competitor. Certainly, the site visit was providing much more information than what management was providing over the phone. Although they had suffered some financial hardship, the company was positioning itself for aggressive growth and had plans to expand operations.
Some of the information that can be obtained from interviews includes:
- Does the company have adequate management depth;
- Does the continued success of the company depend on any key personnel;
- Are there plans to grow operations through acquisition or capital investment; and
- Does the company have competitive advantages or disadvantages;
- Does the company have excess capacity, or are there limitations to growth based upon their facility;
- Does the company seem busy and productive;
- Are there problems within the facility (and equipment) that may warrant future improvements/costs?
Site visits and management interviews are in important aspect of the valuation process. It provides the appraiser with an opportunity to understand aspects of the business that are not reflected in the numbers.