From Data to Dialogue: Why Management Interviews Are Crucial for Accurate Valuation
By Steven Amoroso, CPA, ABV, CVA, Supervisor, Advisory Services
Whether you need a business valuation for strategic planning, tax reporting, or matrimonial purposes, you may hear the following from your valuation expert: “When will you be free for a management interview?”
Interviewing members of the company’s management is a crucial step in determining the value of any business. While experts can prepare a preliminary analysis using company-provided documentation (tax returns, financial statements, projections, etc.), the management interview helps analysts develop a deeper understanding of the business, identify specific risks related to operations, and determine appropriate normalizations.
What Does a Management Interview Entail?
A typical management interview is a conversation (performed onsite or via Zoom) between the subject company’s management and the valuation team. During this time, the valuation team asks the company’s owners, accountants, and other key decision-makers questions regarding company operations. The valuator may inquire about specific line items from the company’s income statement and balance sheet to determine whether normalizing adjustments are necessary. While most clients prefer Zoom calls due to their efficiency from a cost and time perspective, a site visit may be required depending on the type of business or purpose of the valuation.
What to Expect During the Management Interview
Analysts will ask a variety of questions to assist in determining the company’s value. Standard questions may include:
- Can you provide a brief overview of the history of the business (company background, services, customers, key vendors, etc.)?
- Approximately how many employees does the company have?
- Are any of the company’s employees so integral to its operation that their absence would severely damage its ability to operate at a similar level going forward?
- Please provide a brief summary of the competitive landscape as of December 31, 2022 (e.g., primary competitors, pricing pressure or concerns, etc.).
Each question provides context and may help the valuation expert uncover potential risks that could impact the company’s value. Management should be prepared to answer questions related to significant fluctuations in the balance sheet and income statements during the historical periods analyzed. Questions may include:
- What drove the increase in revenue over the time period analyzed?
- Why did gross profit margins decline over the time period analyzed?
- Are any travel expenses personal/discretionary in nature? Could they be eliminated without negatively impacting the business?
- Are any of the legal and professional fees non-recurring? If so, what amounts in each year analyzed?
Why Participating in the Management Interview Is Important
Active participation in the management interview is an effective way to cut costs and provide the analyst with the information they need to determine as accurate a valuation as possible. If management cannot or is unwilling to participate, the analyst will rely on other means to gather information critical to their analysis. For example, the analyst may perform a deep dive into general ledgers and bank statements to determine non-recurring or personal items, or they may spend hours on Google researching the company for background information. The management interview is the business owners’ opportunity to tell their stories and provide their perspectives.
While a valuation analyst reaches a conclusion of value on their own accord, information collected in the management interview plays a vital role. As such, the more active and forthcoming management is in the interview process, the smoother the valuation will progress.