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What Does It Take to Value a Business?

As CPAs, we get so consumed with our day-to-day challenges of serving clients and employers that we can neglect some of the big-picture issues that are going to impact the not-so-distant future of our profession. That’s what was behind the AICPA’s Vision 2011 project, and more recently our CPA Horizons 2025, but it’s also the subject of a series of panels we’ve convened to bring thought leaders together. Last month’s topic was value versus valuation, which is not a new issue, but one that has intensified in recent years. This video is just a snippet of that conversation. You can view the full video on AICPA TV.

Valuing a business today has become a much broader task than just quantifying its traditional financial assets. How do we measure assets like brand equity, impact on the environment, and the durability of its intellectual property? One of the most important intangible assets, for example, is a company’s people, but how do you put a valuation on employee satisfaction or tenure? A company that values its people and their talent will be in the best position to grow and move forward, so these are not inconsequential measures.

CPAs are in a unique position to take a leadership role in the effort to expand the definition of decision-useful information. We have the accounting skills, to be sure, but we also have the other necessary skills, such as independence, objectivity, integrity, critical thinking and deductive reasoning.

What makes information decision-useful? It must be relevant, timely, accurate and reliable. It has to provide a perspective on the decision-making process. Today it must include not just how a company sells a product, but its process for conceiving it and bringing it to market. Is their process repeatable and sustainable?

It's almost as if those who are determining the value of intangibles have to be futurists, since determining the future of the external environment is critical to valuing intangibles. That’s the beauty of the CPA, because while we may not be classified as futurists, one of our strengths is the ability to bring different disciplines together. We have to be the quarterback on a team that includes experts who understand the external environment and have an expertise at analyzing trends and looking at the big picture. In fact, project management is the number one skill accounting students need upon graduation -- the ability to bring different disciplines together and make complex information understandable for people who are trying to interpret it.

Another part of the valuation process is to address the risks associated with non-tangible assets. Take intellectual property, for example, which different countries protect to varying degrees. The uniqueness of a company’s intellectual property can be lost overnight because of something that occurs in a remote part of the world, so companies have risks today they didn't a couple of decades ago, and those risks have implications to value. 

The AICPA has a long history of looking into the future and trying to determine what’s on the horizon for our profession, for our clients and employers, and for our obligation to the public trust. In 1995 the AICPA led a process called enhanced business reporting, beginning with what was called the Jenkins Committee, which investigated the notion that we need to go beyond baseline financial reporting. It may have been a little ahead of its time, but it got the conversation started. The next generation of that discussion is now the International Integrated Reporting Council, which is working on a set of international standards that would create a more holistic picture of a business.

Integrated reporting has so far received more traction in other parts of the world than it has in the U.S. For a company to be listed on the Johannesburg Exchange, for example, it is required to not only file a set of financial statements as it would in the U.S., but also to provide two other major pieces of information -- an assessment of the strategic risk and opportunities of the business enterprise, and its sustainability from an environmental perspective. Is the company a net contributor to the well-being of the planet or a net user of the earth’s finite resources? And what kind of an impact does that have on the company’s ability to remain as a going concern?

In the future the CPA’s job is going to be to make the intangible more tangible – to source the relevant information, validate it and then assimilate it into the decision-making process. CPAs are uniquely qualified to do that.

What other decision-useful information is important in valuing a business? Are there resources you use or need to properly value a business today?

Richard J. Caturano, CPA, CGMA, Chairman of the Board of Directors, American Institute of CPAs.

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