Ever been in the unenviable position of needing immediate services from a skilled tradesman tasked with keeping your house feeling like a home? Whether it is a plumber, electrician, or HVAC specialist, they probably have one thing in common—right under their company name and logo, their truck adds the phrase: “licensed, bonded & insured.” And just as prominently, you’ll find mention of their Better Business Bureau score—as well as boasts of positive Google and Yelp reviews. Your business deserves the same level of qualification, especially when it comes to business valuation services. In fact, a company valuation without the right credentials backing it up can be disastrous—especially if things end up in court. More on that soon.
According to data from the Bureau of Labor Statistics (BLS), over 43 million Americans held a professional certification or license as of 2018. This number is probably way higher today. A brief glance through LinkedIn demonstrates the importance professionals, employers, and jobseekers place on certifications and licenses, to the point where the site even has multiple guides on how to best showcase such certifications.
Many business leaders know the importance of such certifications and licenses when choosing vendors and hiring professionals in specialized fields.Even a partial list of certifications applicable to business has enough acronyms to put the federal government’s “alphabet soup” of three-letter agencies to shame. But in my experience, some business owners fail to apply the same rigor to professional services firms when they need a company valuation. Far too often, they think a general accounting or financial planning certification is all that’s required.
Certainly, the letters “CPA” behind the name of a certified public accountant (including my own!) carry much weight when it comes to general accounting and tax knowledge, from building a depreciation schedule to filing accurate federal or state taxes. However, having a CPA title is not a magic bullet when it comes to business valuations. In fact, a professional in-joke in the financial world is that CPA actually stands for “Can’t Pass Again,” a jest pointing out that CPAs tend to extend themselves too far instead of concentrating on core competencies. Just as your home deserves a tradesman with the right credentials, your business also deserves a valuation advisory firm with the right credentials. (Also, many CPAs subsidize the price of a business valuation because it has a big benefit for them—it entrenches clients for profitable work like asset management, business brokering, or other accounting services.)
At Sofer Advisors, our team of experts is guided by not only tremendous skills and experience, but the very certifications I’ve worked diligently to earn and maintain. As mentioned, I hold a CPA title in the state of Georgia. I also possess four more specialized certifications:
- ABV—Accredited in Business Valuation. The ABV is an acknowledgement of significant experience and expert knowledge specific to company valuations.
- ASA—Accredited Senior Appraiser. The ASA is the result of six hours of written examinations and over 10,000 hours of appraisal work. This credential truly differentiates those that perform an occasional valuation from true experts.
- CEPA—Certified Exit Planning Advisor. The CEPA credential indicates Sofer Advisors has demonstrated an emphasis on helping business owners align their professional and personal financial goals while simultaneously strengthening their family’s financial plan. After all your initial valuation may not be the valuation we want to grow to or what we refer to as the valuation gap.
- CM&AP—Certified Mergers & Acquisitions Professional. Developed by Kennesaw University with M&A Source, the CM&AP is a credential focusing on ensuring M&A deals—some of the most complicated transactions a business owner can ever experience—play out just as they should.
Undoubtedly, the most critical part of the valuation process for every business owner is the strength of the valuation and what it enables them to accomplish. Selecting the wrong business advisory services firm without the right credentials typically results in an inferior business valuation. Such valuations fail for several reasons.
When a valuation is completed by a general financial professional like the CPA who does your taxes or a financial advisor, there is an increased probability of their valuation having insufficient defensibility due to bad assumptions. This is a common problem when financial professionals lack the specialized knowledge represented by the certifications listed above and backed by the fact that valuations and related services are the entire focus of the Sofer Advisors team. In essence, these professionals do not follow standard processes for due diligence and this results in a garbage-in garbage-out dynamic on the valuation methodologies they deploy.
Lack of future insights
One of the most valuable components of a Sofer Advisors company valuation are the insights we provide into how your leadership can improve your business’ value going forward. When a general professional completes a valuation, they are less likely to take what they’ve learned about your company and translate it into a roadmap for future improvement. While having a number for your business is important—it is of lesser importance than insights on impacting that figure.
Legal and IRS pushback
Both the IRS and the court system expect valuations to be backstopped by serious credentials and expertise. In short, your expert witness better be a real expert. Presenting a valuation to the IRS or a judge that isn’t sufficiently supported by credentials is likely to cause problems. Big ones. That is exactly the case in one trial that unfolded in the Spring of 2023. Please read on.
What having an unqualified appraiser looks like in court
The importance of having a qualified business appraiser with the appropriate credentials was shown in the 2023 case of Hoensheid v. Comm’r (In re Estate of Hoensheid). To boil a long court case down to how it applies to business valuation, the company’s shareholders voted to sell their shares and donate proceeds to charity. As part of the process, an investment banker lacking valuation credentials performed a business valuation, then the company was sold, and the funds donated. Everything seemed fine. That is, until the IRS objected to the shareholders’ charitable contributions listed on their tax returns.
One of the points of contention was that the company was valued by an individual lacking proper credentials to withstand court scrutiny. Freeman Law’s The Tax Court in Brief summarizes the court’s findings:
Petitioners failed to show that the charitable contribution met the qualified appraisal requirements of section 170. The appraiser was not shown to be qualified, per regulations, at trial or in the appraisal itself, and the appraisal did not substantially comply with the regulatory requirements. “The failure to include a description of such experience in the appraisal was a substantive defect. . . .
Petitioners’ failure to satisfy multiple substantive requirements of the regulations, paired with the appraisal’s other more minor defects, precludes them from establishing substantial compliance.” In addition, Petitioners failed to establish reasonable cause for failing to comply with the appraisal requirements “because petitioner knew or should have known that the date of contribution (and thus the date of valuation) was incorrect.” Thus, the IRS’s determination to disallow the charitable contribution deduction is sustained.
If you don’t feel like reading legalese, the point is the legitimacy of the shareholders’ charitable donation was dubious. Why? They failed to secure a business valuation from a qualified expert. For whatever reason, they chose to go to court with a valuation completed by an individual working in the financial arena, but without the necessary skills, experience, and certifications to stand up to the scrutiny of the federal government. Yes, one plus one equals two, but in valuation mathematics, a qualified appraiser, plus a qualified appraisal, equals a report that can stand the test of time.
There’s a lot to be learned from this cautionary tale. The key point is your business deserves to be valued by experts who are qualified appraisers. This is not only for the invaluable assistance expert business valuation services provide in protecting against tax and legal threats, but also for the potential to empower your organization long-term. Contact Sofer Advisors today for your free consultation to learn how we can help protect and grow your business.
David Hern is the founder and chief executive officer of Sofer Advisors, LLC focusing on business advisory services related to litigation assistance, estate and tax planning, and business enterprise valuations for various privately-held and public companies. He is a qualified financial analyst with a proven ability to simply and clearly communicate analysis to boards of directors, presidents and CEOs, CFOs, controllers and private equity portfolio managers. David has been recognized for enabling organizations to determine their enterprise and equity value for a variety of situations including strategic planning, sale or IPO, mergers and acquisitions, financial reporting (common stock, stock options grants, purchase price allocations, impairment analyses, etc.) and tax compliance (estate & gift, 409A, NUBIG). Industry experience includes, but is not limited to, professional services, business service, healthcare, information technology, financial services, and manufacturing & distribution