Business valuations are riskier than ever: why you should tread carefully

Over the past 12 to 18 months, professional indemnity claims around business valuations have continued to increase.

Businesses kept afloat by government subsidies throughout the pandemic have been dealt several blows since the supports ended, with surging inflation and various other challenges now further impacting their bottom line.

Inevitably, demand for valuation services has escalated amongst owners looking to secure finance, attract investors, sell their business, or assess future growth opportunities.

In this volatile post-COVID market, accounting firms that provide valuation services are putting themselves at greater risk than they would in a normal setting, explains Drew Fenton CPA at Fenton Green.

“Valuations are a reflection on the environment in which we live,” he says. “In a nice stable environment, your risk profile would be a lot better.”

Extra complexity amidst uncertainty

Determining an accurate estimate for the business worth of a company can be difficult at the best of times, but in the current context, there is a range of unique factors that need to be considered.

For example, data from the Australian Bureau of Statistics (ABS) reveals that one in five businesses didn’t have sufficient staff in April, preventing them from operating at regular capacity. In addition, a recent hike in supply chain costs has resulted in more than half of all Australian businesses feeling the effects of higher operational expenses in the past three months alone. 

Exacerbating these anomalous dynamics, Fenton says any business valuation that involves a change of ownership carries significant risk, because no two owners are ever the same.

“They'll have different skillsets and different ways of going about their business,” he explains, pointing out that claims invariably arise when a business changes hands, subsequently encounters a decline in profits, and the new owner looks for a scapegoat – even if the decline has come about due to changes that they’ve implemented, or unavoidable scenarios, like the pandemic. 

Playing it safe

With so much uncertainty now exposing valuers to heightened litigation risk, Fenton advises public practitioners to steer clear of business valuations if they don’t have the requisite training or expertise; instead, he recommends referring clients to a professional valuation firm.

Even if asked simply to provide some financial background about a company, he encourages practices to ensure any information shared can’t be used against them, should a claim arise.

“If you do any sort of forecasting work for your client, please qualify it – for example, stating: ‘This is for my client only and not to be used by third parties,’” he suggests. 

Likewise, Fenton urges practitioners to qualify any statements they make in relation to a change of ownership, saying: “The new owner might drive the business and make it more profitable, but then again, if they're not as good, it might get so bad that the bank forecloses and brings in a receiving manager or liquidator.”

If an insolvency does occur, Fenton warns that the liquidator will look at the basis for why the new owner bought the business, which could potentially lead back to information provided by the vendor.

He warns: “If they believe it's incorrect or misleading, they may seek damages from the original owner and their accountant, who has put up the numbers in a valuation.”

Find out more at fentongreen.com.au/