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"Caught between the Scylla and Charybdis": What Sting Knows About Valuing Small Businesses

Sting is one of the more cerebral pop musicians and he clearly is wise to the ways of business valuation practice. Sometimes I feel exactly as he described when valuing small businesses (generally businesses with less than $1 million in revenue); on the one hand there is pressure to keep costs of the valuation down since the amounts involved are relatively small, but on the other hand the nature of these engagements tends to push costs up.

Often the reason for valuing these businesses relates to litigation, usually in the context of divorce or a shareholder dispute. Because of the nature of these kinds of disputes, a valuation is likely to be challenged, and that challenge is likely to occur when the basis for the valuation is least reliable. Why would this be so? Well, in small businesses, the financial records of the company are often incomplete or unreliable. When compared with larger businesses with many owners and more accountability, there is a greater likelihood of the owner running personal expenses through the business or not recording revenues in the company's books. As a result, forensic work may be required to obtain a clear picture of the financial characteristics of the business, which of course, incurs additional cost.

Complicating things further, it is often the case that one of the parties to the dispute is not involved in the day-to-day running of the business. When performing a valuation for the "out" party, it can be challenging to extract information from the "in" party, undermining support for the valuation conclusion.

To top it all off, decisions that may change the value of a business by what might be considered a relatively modest amount can have a significant impact on the parties' lifestyle. To say the least, they are often very emotionally engaged in and extremely sensitive to these decisions.

There's no doubt that this type of valuation work can get the blood flowing but, to continue the classical metaphor with which I started, sometimes I feel like Prometheus in a state of perpetual torment when working on these engagements.