A Business Valuation is Not Just In the Numbers

Leadership & Culture

The culture of an enterprise may be hard to measure, but it nevertheless very important to the worth and value of a business.  Employee retention and turnover is one important variable that appraisers will want to understand, as well as some of the underlying drivers.  Companies with weaker benefits and compensation programs will likely face more competitive employment pressures and increased turnover, which in turn creates increased discounts to value when analyzed by a qualified appraiser.

Another issue many businesses face is key person risk.  We have enjoyed a strong economy over the last decade, which has led to strong new business formation and also to labor shortages in many markets.  With tight labor comes increased competition for talent, especially experienced talent in key areas such as sales, operations or finance.

The risk of losing a key employee is certainly real, and can with some effort, be quantified by a business appraiser in terms of its impact on a business value.  There are several good rhetorical questions which stem from this, not the least of which is the cost to hire and train replacements.  Also, what is the revenue and operational disruption should they lose one or more of these so-called “key” employees…?

For example, a business may have an employee who represents a key sales relationship, sales channel or has skill in developing strategy.  Some businesses have people who possess critical knowledge of the products or services or a proprietary process.  The adverse financial impact to the business of the loss of this type of person can be significant, and a good appraiser will certainly take that into account during their assessment.   The ability for a company to find ways to retain that key talent, through advanced compensation and retention programs, retirement plans and the like, can add meaningful value to a business in an appraisal.

Another aspect of key person risk is the exposure that a key person loss will have on the efficiency and productivity of the staff or leadership.  As difficult as it is to assess culture, an experienced appraiser will be able to discern whether the loss of key employees will disrupt the team esprit de corps, or perhaps remove a key personality or psychological attribute from a high performing team.

Sometimes, the loss of a key employee might be good thing, if that person was deemed influential but toxic to team balance or efficiency.  A comprehensive appraisal should be able to look past the adjustment or transition period to account for the long-term gain in this case.

Owner Psychology and Readiness

Going beyond the application of control premiums and minority discounts, another important yet difficult to measure component of a qualified appraisal is the mindset of the ownership team.  What are their goals, aspirations and motivations?  If there is a single owner, how long have they been in the business?  Are they happy, motivated, and satisfied?  What would make them stay in the business longer (or leave earlier), and what does the future look like for them?  If there are multiple owners, what is the relationship between the owners?  Does the distribution of ownership adversely impact operations, satisfaction levels, or efficiency in any way?  Also, what is the view of the ownership team of how they define “exit”, and what does that future look like for each of them?

A valuation performed as part of an effective exit planning process will certainly consider the existence and vitality of a succession plan.  Most owners do not go through the exit planning process, however, and fail to create either a plan of succession or fail to cultivate and train the future leadership identified in the plan if it exists.  Each of these issues on their own would lead to a discounted valuation by a qualified appraiser.  In the case of family-owned businesses, oftentimes so-called “anointed” family members actually do not wish to carry on the legacy, leaving a void in succession which usually does not bear itself out until the eve of the transition or shortly thereafter.

A valuation performed as part of a transaction will want to assess why the owner(s) seeks to exit the business, sell or transition the business, as well as assess their view of the business legacy they are leaving behind.  Sometimes, owners become frustrated by the tedious nature of running a growing business, especially if they were not effective in delegating or advancing the operating infrastructure noted above.  Sometimes, it is due to business or personal divorce, where sale is the only possible solution to a difficult problem.  Seller motivations are far and wide, but it is important for an appraiser to incorporate anything which might lie below the surface, as seen through the eyes of the owner.


In conclusion, an appraiser’s job in valuing a business, on its face, can be fairly straightforward.  The conventional wisdom suggests that a simple review of the published financial data, coupled with an assessment of industry multiples, should suffice in determining value.  However, business appraisal is as much an art as it is a science, and it is important to note just how important and influential the “soft” data and details can be in arriving at the final calculated value.

A skilled appraiser will want to understand the various components described in this article, because it helps to paint a more relevant picture and a deeper profile of the company being valued.  The output from this important exercise can lead to adjustments in the risk and attribute weightings that are applied within the valuation approaches, which in turn can have a meaningful impact on the valuation.  The end result should be a better, more complete valuation encompassing both available information and accessible feedback.


Jeffrey Elder, MBA is a Merger and Acquisition Advisor, IBBA Certified M&A advisor, and Texas Certified Business Broker for Austin, Texas based International Business Exchange (IBEX)

Eric Boyce, CFA is CEO and co-founder of BKA Wealth Consulting, Inc. and BKA Business Consulting, LLC.  He is a Chartered Financial Analyst (CFA) and he is a member of the National Association of Certified Valuators and Analysts (NACVA).