A few weeks ago, in response to a series of commentaries on business valuation, a reader asked this very good question:
“What are your views on funeral home brokers? I know Johnson Consulting will perform a valuation and then broker the sale, but how is it possible to ensure that the company doing the valuation is being fair when their compensation is dependent on a percentage of the sale? I realize this is common practice for a few companies that do funeral home valuations but it seems like a huge conflict.”
I felt my reader deserved more than a flip answer so I spent some time on research and, from this formed an opinion which i provide at the end of this article. If you aren’t interested in the background just scroll down to the last paragraph.
Many years ago I shared a podium with the “Father of Business Valuation,” Shannon Pratt who, quite literally wrote the book on the subject. He taught me that business valuation is both a science and an art. There are many variables involved in the process of valuing an individual business which makes each valuation more or less “situational.” In the end, however, the valuation falls back on the “highest and best use of the subject property.” He also taught me that valuation often finds itself in the classic struggle between buyer and seller: ‘The seller wants more than it is worth and the buyer wants to pay less than it is worth” This is the primary reason, Independence and objectivity stand with professional competence as the three interdependent legs that bring trustworthiness to the professional valuation analyst.
There are three organizations in the United States that certify valuation analysts or appraisers specifically for business valuations (as opposed to property appraisals). Each of these have recently promulgated codes of professional standards and by clicking on each of the names below you can obtain a copy of their standards:
- The Institute of Business Appraisers
- The National Association of Certified Valuation Analysts
- The American Institute of Certified Public Accountants
They all share Mr. Pratt’s emphasis on Independence, Objectivity and Professional Competence. They also add a fourth which, in light of the first three seems redundant: Integrity.
After surveying all the websites of the most prominent valuation companies in our industry and then cross-checking with the membership directories of all three organizations it appears that none of them are certified by these organizations or, for that matter, even members. I hope I am wrong but I checked several times and couldn’t find any references on their websites and when I entered individual names, company names and the word “funeral” in the specialty section in the membership directories I got nothing. I even entered the states they are located in to see if individuals in the firms were certified.
Lest we jump to judgment it should be emphasized that this is a “Niche” specialty with equally “niche” buyers so I am not convinced certification in the general practice of business valuation is necessary. At the same time adherence to a third-party code of ethics as well as active attendance at continuing education seminars would seem to be a good idea.
Now to my opinion and answer to my reader’s question.
Given the emphasis of the certifying organizations on independence and objectivity, it is natural that potential “conflict of interest” is called into question. I did not delve into the question of how these organizations handle this issue. Surely their members deal with it. All of them seem to agree that it should be disclosed. It seems to me that a more important question is whether or not the buyer of the valuation’s interests are aligned with that of the analysts. If, in fact, the success fee influences the valuation then it would seem obvious that the SELLER’s and analysts interests are aligned. Further, since compensation is directly in proportion to the ACTUAL price received an explicit quality control mechanism is built in. On the other hand a valuation performed for a buyer by the same entity that brokers the business may be in conflict. If I were the buyer I might want to acquire an independent opinion. In reality most active buyers are as astute (and sometimes more so) as the valuation analyst. But what about valuations performed for reasons other than the actual purchase or sale like “buy-sell” and estates? These are special purpose valuations that sometimes take into consideration other issues like minority interests. In these cases it is important to preserve objectivity and independence. Again reference to the three organization’s standards provides guidance.
Finally, however, the potential conflict of interest you are concerned about is also a benefit. You mention Johnson Consulting Group. When they complete a valuation it results in an excellent offering package that can then be presented to multiple buyers. More importantly, most if not all of those concentrating on the funeral and cemetery businesses are Niche experts and maintain a list of potential buyers and sellers that create a convenient fast track to transaction.
As always, especially in transactions of this size, an attitude of “buyer beware” is the first and foremost step to protection.
Thanks, Alan…good clarification.