BUSINESS VALUATION ISSUES 1
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A Business Valuation Issue, or Two
Olen C. Appleton
Master of Business Administration in Finance of Liberty University
BUSI 534: Business Valuation
Dr. Richard Fendler
Author Note
Olen Appleton
I have no known conflict of interest to disclose.
Correspondence concerning this article should be addressed to Olen Appleton
Email: oappleton@liberty.edu
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Abstract
This paper will provide an overview of two scenarios in which there could be issues
arising with the valuation of a private business entity. Business valuation is a set of steps used to
estimate what a business is worth. The path is not always a straight one and that is true and
helpful when given an assignment to find the issues with some topic. Business valuation, just
like the rest of us, has its issues. This paper will help briefly define a few of those issues and
present them in a manner that is relevant to our current day businessperson. Different steps,
techniques, and professional opinion on the matters will be touched for each issue and our
textbook will be the primary source of information for this paper.
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Business Valuation Issues
Business Valuation and the approximation of a business’ worth should be simple. Like
most other products in the world, many wishes that valuation of a business could be determined
much like the value of a piece of candy for sale at a grocery store. Just like the old school candy
maker, most owners of private business put a lot of work into the growth of their product
(business) and likely think much higher about the value of their product (business) than others
that have not put in the sweat equity to build the product, and thus this type of reason along with
a few other issues are what makes business valuation much more complicated than determining
the value of a product on a store shelf that customers support. The problem with valuing a
business like we can a piece of candy, is that business valuation is concerned with future growth,
stability, and income. Focusing on the future is difficult because of the risks involved with us
mere humans laughably trying to predict a future that our Lord only truly knows. That
uncertainty causes risks. “Growth and risk are twin variables, with higher values for one
generally going with higher values for the other. Determining how the net trade-off will affect
value is difficult to do in any valuation, but it is doubly so in relative valuation, where many
companies have both high growth and high risk (Valuation Issues, 2018) The risks with business
valuation and predicting the future is an issue all to itself. The two issues that I will discuss in
the often-complicated processes of valuation come from other risks inherent to valuation and
they are dissent and oppression, and potential problems when applying common valuation rules.
Dissent and Oppression
The United States has a history of trying to figure out human rights and freedoms and
adapt measures to increase freedom and fairness for all to best try to eliminate oppression and
avoid dissent. The business-world has been shaped by those efforts and one issue that still is
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around is the issue of dissent and oppression. “Because modern corporations’ function under a
system of majority rule, minority shareholders are vulnerable to exclusion or abuse by those with
a controlling interest. As a special protection, minority shareholders are granted limited rights in
dissent and oppression statutes as a check against majority rule. Dissenters’ rights proceedings
generally involve a minority shareholder who disagrees with the direction the board of directors
is taking the company. A disagreement will generally involve a merger, share exchange,
disposition of assets, amendment to the articles of incorporation that creates fractional shares, or
any other amendment to the articles from which shareholders may dissent.
Oppression cases often include more egregious actions than do dissent cases. Oppressed
shareholders are those who believe they have been treated unfairly or prejudicially by the
majority shareholders or the board of directors. Those cases often involve shareholder-
employees. Oppression cases can involve termination of dividends, compensation, or
employment or a siphoning of corporate assets for the benefit of the majority at the expense of
the minority” (Hitchner, pg. 45)
The textbook referenced to provide the information about this issue of oppression and
dissent was dated 2017. It has only been four years ago from today that this resource was
written, and still almost three entire pages was written to warn of the issue that still exists to
minority parties even in valuation procedures of a business. This issue of oppression and dissent
is important to still list because businesspeople and investors bottom line is to be in business to
earn a profit, and not just to be in business just to have a business. The goal of earning profits
can seem like one of just numbers and counting and doing what is necessary to make the
numbers count more favorably for yourself than the opposite parties desire for you. The issue of
oppression and dissent reminds us that business valuation and practices are not only about
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numbers and counting, but instead, are also about people. Getting the best value from a
valuation for yourself could cause unintended consequences for those people and an awareness
of that possibility will help make Christian Investors and Businesspeople avoid making this
issue, a negative issue because of them.
Rule of Thumb Dangers
Value-seekers search high and low to find the best prices for all their purchases and
investments. Some people are not born with the perfected understanding of what is considered to
manufacture the price(value) that they seek. Instead, those people must learn and start gaining
that knowledge through practice and study. Another grocery store analogy is that if you want the
best bargain(value) for snacks, then you just purchase the generic brand item that matches your
wants. In simplest terms, the value is found in getting something to fulfill a want of the
consumer, for far less cost then name brand and uniquely expensive alternatives. When it comes
to valuation of businesses, the second issue that this paper addresses are the issue of using
generic means while expecting name brand results.
In business valuation, the generic means that can become an issue for their valuation,
include the Industry methods like The Rule of Thumb. “Many industries and professions use
rule-of-thumb formulas to determine value. However, if these formulas are the only methods
used, an inappropriate valuation may result. Relying on uninformed rule of thumbs can be
dangerous. For example, the rule of thumb for the valuation of an accounting practice is that it is
typically valued at between 50 and 150 percent of gross fees. Therefore, an accounting firm with
gross billings of $500,000 per year would be between $250,000 and $750,000. This wide range
indicates the potential danger of applying an uninformed rule of thumb. (Trugman, digital pg. 33)
Usually, beginners at almost everything in life, rely on the opinions of several experts to help
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shape their opinion and understanding of a topic or skill. The issue with trusting the majority
and the rule-of-thumb generalities in valuation arise because of how the rule is so widely used in
practice for it to ever have become a rule in the first place, and that causes owners or investors
issues for them because not every business is the same and not every general approach has their
best interest in mind.
Conclusion
In conclusion, “Valuing a business can be one of the most challenging issues faced by
business owners and analysts alike. Valuing is a difficult and incredibly complex task, but one
that is utterly essential. On occasion, traditional modes of valuation simply do not suit the
business type. These techniques often assume a certain level of stability and an imagined risk
profile which may not be applicable, and without being adapted, this can result in critical errors
in valuation (ECOVIS, 2015) Valuation of your private business is a big issue that requires
commitment to performing correctly. Insufficient commitment to researching options and
addressing unique company situations can make business valuation have even more issues than
can be visible on the surface. Two of those issues are the issues of oppression and dissent, and
the issue of using generic rule-of-thumb practices instead of personalizing your approach.
Owners and Investors can avoid these issues by taking an enhanced period of review and
consideration of effects and impacts to all parties involved prior to deciding on their final
valuation strategy. Hiring professionals, and personal research reduces these addressed issues
and helps avert second and third order consequences of uniformed valuation decisions.
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References
Covis, E. (2015, July 28). DIFFICULTIES IN VALUING A BUSINESS. ECOVIS DCA.
https://www.ecovisdca.ie/2015/07/28/difficulties-valuing-business/
Hitchner, J. R. (2017). Financial Valuation, + Website: Applications and Models (Wiley Finance)
(4th ed.). Wiley.
Trugman, G. R. (2021). A CPA’s guide to valuing a closely held business (Small business
consulting). American Institute of Certified Public Accountants.
Valuation Issues | How to Value Growth Companies | InformIT. (n.d.). Informit. Retrieved April
2, 2021, from https://www.informit.com/articles/article.aspx?p=2928207&seqNum=3.
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