You can’t value a business you don’t understand
By Brett Goodyer, FCPA B.Com M.ForAccy – Forensic Accountant, Business Valuer, Bullshit Slayer
Before you open Excel, open your ears. You can’t value a business if you don’t understand the owner, the risks, and the realities behind the numbers. This one’s for the advisers who want to go deeper.
If your idea of valuing a business starts with opening Excel and plugging in numbers, you’re already in trouble. Because no matter how clean the P&L looks, if you don’t understand who’s running the show, how they’re making money, and what sort of chaos is bubbling under the surface… you’re valuing the wrong thing.
Let’s talk about Leo… Leo owns a dog grooming salon. He also owns the building it’s in, the café next door, and a rather unhelpful parrot that has apparently learned to say, “You missed a spot!” every time someone sweeps the floor. Leo’s business technically turns a modest profit. Bute here’s the problem, Leo has got three cousins on the payroll, none of whom actually work there, and he’s been running all his groceries through the business account (because the dogs like snacks too).
If you are trying to value Leo’s business based solely on his financials, you’d think it’s either a struggling side hustle or a money-laundering front for a shady pet mafia. But if you sit down with him, hear his story, understand the property arrangement, spot the real cash flow (not the creative one), and notice that he’s booked out three months in advance with a waitlist of pampered poodles, you’ll see it for what it is. A decent little business, being run in a very Leo way.
And that’s the whole point.
The numbers are important, sure… but context is king. You need to know who’s in the business, how reliant the whole operation is on them, what their exit plan is (if they have one), and what they think their business is worth (which is often somewhere between “retire forever” and “cover a decent weekend away”). You’re not just crunching numbers, you’re translating their story into something that makes sense to the market.
That’s where a good valuer earns their keep. (I hear that Brett Goodyer is an incredible valuer and people say quite the hunk to boot. Ok, my wife says that, but she’s people too).
Because anyone can examine EBITDA, not everyone can look at a business and see the hidden risks, the quiet value, or the red flags waving from the back office. And this is where accountants have a massive advantage, because you’ve often been there the whole time. You’ve seen the late lodgements, the weird spikes, the steady growth, or the slow bleed. You know what’s under the hood. Your job now is to take all that insight and turn it into a valuation that holds water.
That starts with the right questions. Not just “How much did you make last year?” but “What would happen if you stepped away for three months?”, “Who are your key clients?”, “What are you doing that no one else in your space is?”, “What’s keeping you up at night?”, and my personal favourite, “What’s the weirdest expense in your accounts that you’ll try to justify to me?”
That last one usually opens a very interesting can of worms.
Once you know the story, you can then choose the method. Sometimes it’s capitalisation of future maintainable earnings, sometimes it’s a discounted cash flow, or maybe net asset backing. Sometimes it’s just taking a deep breath and gently explaining why their “gut feel” valuation, which was based on what their mate Dave got for his café in 2012, might not stack up today.
The real art is in helping your client see their business the way a buyer would, not with rose-coloured glasses, but with curiosity, caution, and a calculator. And that shift only happens when you’ve taken the time to understand their world… not just their numbers.
So next time you’re asked to do a valuation, don’t open Excel first. Start with a chair, a chat, and maybe even an old-world notepad. Ask questions. Listen attentively. And then, once you’ve got the story straight, then you can get to the numbers.
Trust me… Leo’s parrot would agree.