The Significance of Site Visits in Business Valuation
Valuing a business goes beyond simply crunching numbers from financial statements or relying solely on new unproven AI software. It requires a thorough understanding of a company’s operations and the environment that it operates. While financial statements and sales reports provide valuable data, they only reveal part of the story. In such cases, site visits play a pivotal role, especially in challenging situations where outside factors may be playing a larger role than initially expected. In these situations, it is best to rely on a business valuation professional who can consider those factors and apply an appropriate dollar value to them.
Exploring Company Facilities
During site visits, valuation experts conduct tours of the company’s facilities. A few things to observe while touring facilities:
- Are the company’s operations efficient and well-organized?
- What is the demeanor of employees and managers: productive and competent, or disgruntled and overworked? (Hint: Speak to as many people as you can and if possible, across different shifts when applicable.)
- Are there any capacity constraints impacting the business?
- What is the condition of the company’s property, plant, and equipment, including any obsolete or nonoperating assets?
- What is the condition of the inventory and when was the last physical inventory taken? (Hint: Look for damaged inventory or inventory with dust build-up in the corners of the facility.)
- For retail operations, are signage, ingress-egress, and parking sufficient?
These are among the hundreds of questions a business valuation expert may ask during a site visit. The main function of these questions is to identify other unknown factors that could impact the future performance and value of the company.
The Timing of Site Visits
Valuators generally prefer to perform a preliminary review of financial statements and industry data before scheduling site visits. This approach helps them plan their visit so they can focus on high-risk areas and other relevant points specific to that organization.
A preliminary examination of the company’s financial documents aids in directing interview questions for management during the site visit. The interview covers a broad range of topics, that may include such things as:
- Operating history
- Management compensation and skills
- Hiring practices
- Marketing and sales strategies
- Distribution channels
- Supply chain management
- Condition and valuation of assets
- Historical financial performance
- Accounting methods
- Concentrations of customers or vendors
There are many additional areas that should be covered, some of which vary based on the industry, type of organization, geography etc. An experienced professional will not limit themselves to any one line of questioning.
Considering Future Projections
Since valuations may depend on future cash flow projections, valuators may also inquire about the company’s future strategic plans during the site visit. This conversation can include plans for new buildings, new operating lines, expansion of current lines, new rounds of hiring, new sales platforms, and any other growth opportunities the company may have identified.
Handling Adversarial Situations
In some instances, business owners and managers may resist site visits, particularly in cases like divorces or dissenting minority shareholder lawsuits. When a site visit is denied, the valuator notes it as a limiting condition in the written report. Such refusals can compromise the reliability of the valuator’s conclusions and may raise concerns about transparency.
The Value of Seeing in Person
Site visits provide a hands-on opportunity to gain valuable insights into the company’s operations, interview management, interact with personnel, and witness business processes first hand. When formal site visits are not possible, valuators could be missing essential factors that significantly impact the company’s value, such as deferred or neglected maintenance, capacity constraints, and poorly designed processes.
How NAFA Can Help
For more information on business valuations and how they are conducted or to request a business valuation or quality of earnings assessment, please contact the closest North American Forensic Accounting office.