The value of valuation
In this part of the world, our valuation practice is unique. I don’t say that casually, but it is true. Most valuation people explain ‘the why’ of a particular valuation by referring to “financial ratios” that, for the client company, are either notably better or notably worse than composite of the particular industry in which the client competes. In essence, they are saying that ratios ‘cause’ the valuation to be where it is.
We don’t see it that way at all. For us, a financial ratio is an effect, not a cause. So, if, for instance, a company’s inventory turnover is lousy compared to the industry composite, we will inquire about what training the person who does the company’s purchasing has had. Is that person a CPM (Certified Purchasing Manager)? Does s/he stay current in her/his knowledge through membership in the ISM (Institute for Supply Management)? And so on.
We ask those questions because you can’t run a $20 million company the way you ran it when it was generating revenues of $2 million/yr. If you do, you’re going to end up with too many people on the payroll. That is why, for instance, a client company’s annual revenue per full-time-equivalent-employee (FTEE) is so important: it is the primary measure of a company’s productivity.
When we ask those types of questions, we find out the underlying causes of the aberrant performance metrics (i.e., financial ratios). We identify ‘the whats’—the outlier ratios—and then we explain ‘the whys’. This gives our valuation reports a valued-added dimension that no BV service-provider in our primary geographical market offers. We define that market, incidentally, as a radius of about 75 miles from Lexington; it includes Roanoke, Staunton (pronounced STAN-tun), Harrisonburg, Charlottesville, and Blacksburg.