19 Aug ValuTrax ValuHints
Comment from the BBP Staff
A Note on Engagement Letters – With the large increase in business brokers providing business valuation services, making sure that the client knows exactly what he or she is getting is critical. There have already been some issues with business owners thinking they are getting a business valuation that can be used in legal situations, to address IRS problems, etc. Most business brokers really only supply “opinions of value” which serve most purposes, but obviously not all. Using an Engagement Letter which outlines exactly what the client is receiving can protect the business broker or appraiser from any misunderstandings or worse yet, any legal problems.
We realize that the following article concerns a program we are marketing – ValuTrax, but it should be of interest to anyone providing valuation services. Keep in mind that even if you are just providing a business owner with an informal “written” appraisal or opinion of value or pricing report – you should still get something in writing and signed that tells a potential seller that it is just your opinion of what you think it should sell for. Regardless of what you may tell potential clients, if they have a written report on the value of their business, they could end up using it for purposes other than what you intended.
Use of ValuTrax
ValuTrax was developed as a tool to aid business brokers / business consultants in determining reasonable prices for small businesses. The ValuTrax pricing model is not intended for use in situations that require formal business valuations in compliance with the Uniform Standards of Professional Appraisal Practices, or the Professional Standards of the various appraisals associations.
In addition, it is important that the client understands they are not engaging the business broker / business consultant for a formal valuation when the engagement is for the preparation of a ValuTrax report.
In order to minimize such potential misunderstandings we recommend that ValuTrax users have their clients sign an engagement letter that contains the disclaimers included in the ValuTrax report.
While this may seem redundant, the engagement letter is important. If the client reviews and signs the engagement letter, they cannot say that they never saw the disclaimers. If you don’t use this type of engagement letter, clients may be able to say that you didn’t make them aware of the disclaimers; and, they didn’t see them until they received the ValuTrax report.
Hint – ValuTrax Buyer’s Test Loan Parameters
The Buyer’s Test pricing method in ValuTrax requires that the user input terms related to the expected business acquisition loan, which may be financed by the seller or which may be financed with an SBA-guaranteed loan. Assuming SBA-guaranteed financing, the interest rate may be as low as 5.5% (i.e., prime rate plus 2.25%). This low interest rate and other default loan parameters like the debt coverage ratio of 1.25, along with a typical term of 120 months, will likely result in artificially high indicated values. Such low interest rates, if available, relate to variable rate loans. At the current time, more reasonable loan parameters for the Buyer’s Test are:
|Debt Coverage Ratio||1.45|
These terms relate to a fixed-rate SBA-guaranteed loan currently offered by at least one lender. It is our opinion that at the current time, and given the current economic conditions, these terms will provide reasonable value indications for the Buyer’s Test pricing method.