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Valuing a business

How do I value a business with incorrect set of accounts?

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Hi

A new client has asked me to produce his Ltd company's accounts ending in July 2019.

With that, he has also given me a letter from court requesting a witness statement from the accountant about the business' value (he is getting a divorce).

He has around £100,000 in directors loan account for the money he invested in the business. He extended the (rented) premises and bought equipment in the previous years.

However, there is nothing shown in the balance sheet as assets (tangible or intangible or cash).

I have come accross paperwork showing payments towards equipment for the past 3 years and this has not been recorded by previous accountants (or the client did not provide them with the information).

So, if I were to value the business just looking at numbers, the business has a negative value.

However, I know from the client and from experience that the business' market value is around £150,000.

The client has no intention of deceiving the court or his partner. He just doesn't understand anything in the accounts. He hardly speaks any english... And he has no idea of what is going on in the accounts.

The deadline for the witness statement is tomorrow and I don't know what to do. I feel wrong in valuing the business negative while in reality is worth £150,000.

Replies (31)

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By ireallyshouldknowthisbut
20th Nov 2019 10:41

I imagine you don't do anything.

Unless you have sat on this for weeks on end, its unreasonable to dump something like this on your with a deadline of tomorrow. Tell your client you are booked out with meetings.

More widely, if you don't feel confident doing this, get a business valuer to do it.

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By Tim Vane
20th Nov 2019 10:42

On the face of it the value of the business is zero. If it has value to a buyer beyond what is on the balance sheet then clearly you cannot assign a quantum to that value without an expert valuation. You will need to instruct the client to have the business valued by an industry expert, which is what the court presumably had in mind. For your sake I would hope you would not venture to assign a value in these circumstances. Decline the appointment if necessary.

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By lesley.barnes
20th Nov 2019 10:47

Can you extend the deadline for the valuation of the business? How much notice did the client give you to correct these accounts. I certainly wouldn't want to put a value on the business from the information you've provided. Your valuation will be open to challenge from both parties solicitors and clearly you don't have any idea what the business is worth. You are in a no win situation. Have you asked the previous accountant about the errors in the accounts, could they have any information that might help. I would seriously decline to act unless the client has the business valued professionally.

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Bramble
By Chris.Mann
20th Nov 2019 10:47

I've appeared in court, in support of client's case and from that experience I can safely say that you should not venture to provide the (requested) valuation.
If I were in your position, I would respond to the court request to state, unequivocally, that you are; an accountant and not a valuer and, in your opinion, you have no qualification, or expertise as regards providing a value for the said business.
It really is as simple as that. You should not wear any other hat.

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Replying to Chris.Mann:
By Red Leader
20th Nov 2019 15:02

Well put. It's a bit like banks asking us for credit references. Asking the wrong person!

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By JoF
20th Nov 2019 10:48

Cynic that I am, I wonder why the client has recently changed Accountants, whilst at the same time dropping that in your lap? Do you consider he is putting pressure on you, as it certainly sounds that way.

The witness statement being required tomorrow is not your problem - he needs to go back to his legal counsell and get an extension.

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Psycho
By Wilson Philips
20th Nov 2019 11:03

You say that the accounts are wrong, ostensibly because assets may be understated. But in the context of a trading company valuation that may be irrelevant - the starting point is to look at profitability. Of course, if that produces a low, or negative, figure then one would turn to the balance sheet. I assume that in this case that is the problem - little or no profits but potentially positive net assets?

To those that are suggesting appointment of a professional valuer I would say that if the company is genuinely worth only £150,000 or so most accountants should be able to arrive at a fairly robust estimate of its value using normal valuation principles. Having said that, if there is a dispute involved, it may well be better to let someone else carry the load, regardless of the amounts involved.

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Replying to Wilson Philips:
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By Clinton Lee
22nd Nov 2019 21:44

With respect, there are no "normal valuation principles" for a business this size.

How do you quantify the risk? It's off the scale for OMBs / businesses reliant on a couple of founders.

At this end of the market transactions happen at prices dependent far more on personalities, desperation and psychology rather then DCF or whatever. Comps are difficult to obtain unless you've done a lot of transactions yourself.

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By johngroganjga
20th Nov 2019 11:20

Does the “letter from the court” identify you as “the accountant”, or is it worded differently?

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Replying to johngroganjga:
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By Finding Accounting
20th Nov 2019 11:27

It reads: "The respondent must send to the court a witness statement from the business'accountant answering..."

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Replying to Finding Accounting:
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By bernard michael
20th Nov 2019 14:25

Finding Accounting wrote:

It reads: "The respondent must send to the court a witness statement from the business'accountant answering..."


That's not you judging by what you said.
To cover it you should send to the court a short note stating

We have acted for the business (from and to dates) and based on the information supplied we are unable to offer a meaningful valuation

This says everything & nothing as far as you are concerned and leaves the problem with the judge

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By Accountant A
20th Nov 2019 11:21

Finding Accounting wrote:

However, I know from the client and from experience that the business' market value is around £150,000.

As others have said, do you really think that is adequate to present to a court?

Whatever the client is offering to pay you, it's not enough. Have you checked your PII to see if you are even covered for this kind of work?

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Replying to Accountant A:
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By Mr_awol
20th Nov 2019 13:16

I'd argue that whatever the client is paying might be too much.

It might be because the OP is in a panic and has just spewed a load of garbled thoughts onto the screen without reading it through but from the initial posting I'm not sure that the OP should be taking on business valuations at all. It reads as if they are unsure on how to value the business, are fairly confident the net assets are nil (or negative) but seem keen to continue to value it on that basis, whilst throwing around an 'actual' value of £150k without giving us any idea how that figure has been arrived at.

Now I know that business valuations aren't an exact science most of the time and that we'd all value this one differently even if we had the full facts - but this all just reads far too wooly for me.

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Replying to Mr_awol:
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By Finding Accounting
20th Nov 2019 12:30

AW is becoming a playground for bullies from what I usually read here...

If you can't saying anything helpful, then dont say anything at all.

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Replying to Finding Accounting:
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By Mr_awol
20th Nov 2019 13:14

On the contrary - I was giving you the benefit of the doubt. Sometimes we all get an issue with a tight deadline and ask what might be some daft questions in a rush to get a second opinion - or don't explain a question too well.

You on the other hand seem undecided on how the business should be valued, and even come up with this chestnut further down the page:

Finding Accounting wrote:

They ask for a valuation and ask to specify the method used for that.

I could easily do a straightforward net asset valuation method and arrive to a number (backed up by company's accounts).

My concern here was should I do that and let them decide for themselves this is not the correct approach, or refuse alltogether?

This all suggests that you might be better off not getting involved in this case.

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Replying to Finding Accounting:
RLI
By lionofludesch
20th Nov 2019 13:29

Finding Accounting wrote:

AW is becoming a playground for bullies from what I usually read here...

If you can't saying anything helpful, then dont say anything at all.

Well, the interpretation you put on the advice is up to you.

If you want to go ahead, feel free to do so.

But not posting what you want to read is not bullying.

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RLI
By lionofludesch
20th Nov 2019 11:49

At the moment, this isn't your problem.

Make sure it doesn't become your problem.

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David Winch
By David Winch
20th Nov 2019 12:11

You should not provide a valuation for the court if you do not feel capable of providing a valuation (either because of your lack of relevant experience or because of a lack of reliable information on which to value the company).
Write to your client (having in mind that this letter may be shown to the court) briefly explaining (i.e. in a few sentences) why you are unable to provide the requested valuation.
Forensic accountants routinely act as experts to assist courts with these sorts of issues. Advise your client to instruct one.
(For your information, the first thing a forensic accountant would do is to establish as best he can some reliable figures - there is no way he would use figures he believes to be incorrect.)

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By Finding Accounting
20th Nov 2019 12:52

They ask for a valuation and ask to specify the method used for that.

I could easily do a straightforward net asset valuation method and arrive to a number (backed up by company's accounts).

My concern here was should I do that and let them decide for themselves this is not the correct approach, or refuse alltogether?

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Replying to Finding Accounting:
Stepurhan
By stepurhan
20th Nov 2019 13:03

Finding Accounting wrote:

They ask for a valuation and ask to specify the method used for that.

I could easily do a straightforward net asset valuation method and arrive to a number (backed up by company's accounts).

My concern here was should I do that and let them decide for themselves this is not the correct approach, or refuse alltogether?

If you cannot decide whether a valuation method is appropriate, you should not do a valuation.
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Replying to stepurhan:
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By Mr_awol
20th Nov 2019 13:10

Careful. I alluded to this possibility and got called a playground bully. You've gone and outright said it which probably puts you on a par with Lucy Van Pelt

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Replying to Finding Accounting:
Hallerud at Easter
By DJKL
20th Nov 2019 13:07

Unless a non trading business (property etc) a NAV approach would to me not sound appropriate as a valuation approach.

I would tentatively suggest that some form of normalised profits (director salary etc adjustments) are established and a P/E approach thereafter taken, this possibly might be a better fit,but even then you would also need to consider other factors like lease length/tenure, etc and irrespective of care, attention, background detail etc re the valuation starting with accounts that are known to be incorrect at outset would hardly inspire confidence in the preparer or, I suspect, the court.

i would bodyswerve.

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Replying to Finding Accounting:
David Winch
By David Winch
20th Nov 2019 13:10

You say, in effect, that in your view the company's accounts are not reliable. In the circumstances you should not provide the court with a valuation which you believe to be misleading.

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Bramble
By Chris.Mann
20th Nov 2019 13:59

Reading between the lines here, a number of "respected" members have offered their opinion and in turn only you can decide, how you wish to react.
AW is a place where professional accountants, tax consultants, agents etc provide their opinion, entirely free of charge.
It seems to me that, with an increasing regularity, there is an atmosphere that; members should always politely respond to a variety of queries and not "challenge" the initial enquirer?
AW is an open forum, where contributors are entitled to voice their opinions, whether we agree with them or not.
Whilst there are some aggressive members on the forum, we would all do well to respect that the contributions, in whatever form they appear, are freely provided, at the point of delivery. AW is therefore, almost on a par, with the NHS!

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Replying to Chris.Mann:
Hallerud at Easter
By DJKL
20th Nov 2019 14:26

Not so, occasionally we do get some posters on here who have got themselves lost ( They can head westward thousands of miles for their Manifest Destiny ,across the entirety of the current US ,but get confused between .co.uk and .com ), so A W is not free of US intervention whereas we are all assured by Boris that the NHS is not on the table vis a vis his wannabe trade deal with Make America Great Again, and his America First doctrine

(Shock/horror, in a couple of hundred years will students be studying the Trump doctrine rather than the Monroe doctrine)

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By darkmatter
21st Nov 2019 18:34

I am becoming increasingly depressed about posts like this … why have people like this been allowed to be let loose on the public ?

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Replying to darkmatter:
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By Finding Accounting
22nd Nov 2019 17:37

Yet another example of bullying and rudeness.

I am also getting depressed by reading some of the comments.

Don't people have more important things to do than being unpleasant in this site?

If you cant help, just dont.

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Replying to Finding Accounting:
RLI
By lionofludesch
22nd Nov 2019 17:49

Au contraire. As Chris Mann said earlier ....

"Reading between the lines here, a number of "respected" members have offered their opinion and in turn only you can decide, how you wish to react.
AW is a place where professional accountants, tax consultants, agents etc provide their opinion, entirely free of charge."

Like many querists on this site, you don't like the advice you're given. You show your frustration by claiming bullying and rudeness.

You are pretty much alone in wanting to proceed. There's nothing to prevent you doing that. Go ahead.

I might add that, unlike the respondents who have given you free advice, you have only ever responded to threads which you yourself started. What exactly are you contributing to this forum community ?

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By Finding Accounting
22nd Nov 2019 18:29

I really don't have time for this.

Thank you all who replied sensibly. Really appreciate it.

Lionofludesh, FYI I have refused the appointment the very next day. So no, I was not desperate to proceed.

For the grumpy commenters, please bear in mind that some people here are learning. If everybody knew everything, there would be no AW!

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Replying to Finding Accounting:
RLI
By lionofludesch
22nd Nov 2019 18:33

Good - so having listened to and taken the advice which I amongst many others offered you, I'm not seeing the need to complain.

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By Clinton Lee
22nd Nov 2019 21:49

"However, I know from the client and from experience that the business' market value is around £150,000."

You know "from the client"?

Business valuation is easy peasy, lemon squeezy. As I've advised accountants before, there's a very, very simple formula: Ask the business owner how much his business is worth ...and divide by one gazillion.

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