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  • Writer's pictureChris Burand

Agency Valuations

I recently returned from a phenomenal convention dedicated to business valuations. The presenters and attendees were high quality, extremely well-educated people focused on all the complexities of doing business valuations correctly.

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I hate to tell the readers who believe a business valuation is simply X times EBITDA that it is not that simple. Business valuations vary significantly by purpose, jurisdiction, and a myriad of other factors. For example, the value of a business legitimately varies depending on if the value is for selling to private equity versus a divorce versus partnership litigation versus ERISA compliance versus damage litigation versus tax compliance (and the many different types of tax compliance), and many other situations.

Additionally, the value is only half the equation! If the valuation might be litigated, and ALL valuations might be litigated, the way the report is written must comply with the applicable standards appropriate to the purpose. This means the valuation report format and material will vary depending on the purpose such as estate tax versus divorce litigation versus a sale.

As one speaker, a premier valuation tax expert stated, certain regulators look at valuation reports and note whether the value seems reasonable, whether the appraiser has a nationally recognized business valuation credential(s), and whether the format is correct. If so, then in about 5 minutes they decide whether to further scrutinize the report.

While reviewing my email during the conference, I saw two emails sent from an email list that made me a little queasy because I know many agency owners understand little about business valuations, so they are easy targets for these well-crafted marketing emails.

The first offered “free” valuations. At least they disclosed the valuation was not actually free but that potential buyers would pay for it. Never, ever should anyone have their agency valued for free. That won’t withstand scrutiny if ever contested. Moreover, never, ever have your agency valued if someone else is paying for it. As that internet saying goes, “If you do not know who is paying for something, know that someone is paying to take advantage of you.”

And they will. Your data will also become available to a pool of buyers or maybe a specific buyer, and then your agency is compromised. Additionally, why in the world would their valuation ever favor you? No one in their right mind should ever accept this offer.

In fact, a tax case in 2023 (Connelly v United States) was lost by the taxpayer, in part because the valuation report did not meet the standards of a “Qualified Appraisal” and the taxpayer used a nonqualified appraiser. A question that was asked as to why the business owner did not hire a qualified appraiser to write a qualified report was answered with, because it [the appraisal we received] was “free”! That free appraisal cost the taxpayer an additional $650,000 in taxes per the report in Business Valuation Update, January 2024. You get what you pay for and free appraisals are worth less than zero.

The second email was a do-it-yourself offer, “Here’s instructions on how to value your agency!” If you want to value your own agency and not pay anyone, buy Jon Persky’s book from the National Alliance. But don’t go onto a mailing list because then they know you are looking to sell and additionally, they know they have a seller who is too cheap to hire expertise – which means they know they have a potential seller who is ignorant and ready to be taken advantage of. I hate to be so blunt, but there’s no sugar coating the truth.

Additionally, understand that valuations for anything other than selling your agency to a third-party (not related parties) is the only situation in which you are effectively allowed to do your own valuation. Otherwise, tax law, labor law, corporate law, and common-sense dictate business owners cannot do their own valuations. The reason? Might the business owner be biased? Does the business owner know how to properly value a business?

These types of marketing offers are 100% designed to take advantage of business owners who don’t understand the importance and intricacies of a proper valuation.

Another situation of which to be aware is someone offering a Calculation of Value, Indication of Value, Letter of Value, or some other cut rate valuation. Most business owners do not know and really have no reason to know that such valuations are not even allowed under some ethics rules by important business valuation associations. Some that do allow these kinds of valuations only allow them if the appraiser is extremely specific with the client about how limited these appraisals are. To me, this means educating the client rather than simply inserting a disclaimer into the report.

These kinds of valuations have no use except for specific situations in which the client understands and agrees that they do not need a valuation that can withstand any kind of scrutiny or is to be contested. For example, maybe the client agrees that the valuation is for generic guidance only and that it is the responsibility of the shareholders to actually set the value. Even then, a smart appraiser may not agree to completing a limited appraisal because they might know that a law or regulation does not permit it or they simply don’t believe their client will use the valuation correctly.

I recently had a call from an agency owner who was burned by this. They had spent thousands of dollars and not only was the valuation worthless given their situation, but now they had a number from a worthless report that could still be held against them in litigation. Their extra legal fees specific to defending against this one point, if it goes to court, is likely to equal the valuation fee.

Business valuations are complex. Most small- and medium-sized business owners do not know much about these complexities and until a situation arises, they have no reason to know about all these requirements and specificities. This makes them quite vulnerable to being targets for people looking to make easy money.

An appraiser should possess one of the recognized business valuation credentials, and you’ll pay probably at least $7,500 for a simple valuation for a small agency as a starting point. Anything less might be questioned. Valuations are complex and they vary by purpose. The appraiser should be quite specific from the beginning in understanding the exact nature of your purpose and then you should ask whether their reports and methods are applicable and compliant with that purpose. Be direct with them.

Simple valuations are rarely any good. Your agency is likely your most valuable asset. This is not the situation to cut corners or be cheap. Take care and protect your asset.


NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.

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