How To Detect Internet Hoaxes

and "Valuation Mills"

Valuation mills prey on unsuspecting business owners who regard business valuation as a bargain hunting exercise for the cheapest report available.  Most often, buyers are fooled and get lots of printed paper which ends up becoming worthless when confronted with a legitimate valuator who can quickly discredit both the process and the value conclusion.

Want to test the theory?  Have a look at the substantial qualifications of the principal valuation analyst and compare with the content of others, if available and verifiable.   To shift attention away from a lack of qualifications, mill operators boast about how many valuations they have done.  The operative question is, "How many have you done correctly?"

Here's another reality check.  According to NACVA and our experience, it takes at least 40-50 hours to perform a competent valuation for a straight forward business by a seasoned valuator.  More time will be needed if there are complicating issues or if the valuation is for an ESOP.   

Here are examples of questionable operators who prey on an uniformed public:

Example 1 - Self-appointed Credential, Fabricated Theory and False Claims of Conformity to National USPAP Standards

One brave operator in Ventura, Southern California, actually takes first prize for imagination: he has certified himself as a self-designated "Certified ValueMetrics Business Appraiser" -- named after his own company, possibly as the world's only "CVBA," and, thus, claims he prepares "certified" valuation reports.  When we asked if other valuators could qualify for the "CVBA," there was no response.

This operator has no qualifications in accounting listed on his web site.  He charges about $1,000 for what other operators charge $5,000. 

True to form, this operator lists irrelevant items as qualifications, but he has listed no business valuation education, qualifications nor designations.   He has justified his short-cuts and disregard of generally accepted valuation methodology by claiming he invented a new theory based on "algorithms" and warns others not to be duped by others who charge more.  An example of his imagination at work, this nonsense is quoted from his website on May 8, 2005:

"The [ name omitted ] algorithm combines both statistical and heuristic evaluations techniques to derive valuations that can pass a "reality test."

Moreover, this operator claims he "scrupulously adheres to the Uniform Standards of Professional Appraisal Practice."  Not possible, given a reading of USPAP standards 9 and 10 per the November 2004 Edition.  Standard 9 addresses the development of the appraisal and Standard 10 addresses the preparation of the report.  He violates nearly every section of both standards.  These standards are clear and unequivocal, which absolutely contradict the statements made by this operator. 

Unfortunately, The Appraisal Foundation, which publishes the Standards annually, prohibits our sharing them on the internet, as we have agreed to not to infringe on their copyright.  A copy of USPAP is available from The Appraisal Foundation in either paper or electronic form for approximately $40.  So, this operator is fairly safe in never being detected as a fraud since the standards he claims to follow are not broadly available to the public at no charge.

 

Example 2 - Meaningless and Repeated Boilerplate, Incorrect Theories, Unsupportable Value Conclusion and Suspicious Claims of Volume and Clientele

This internet valuation provider boasts on their site (May 8, 2005), "Since 1990 [omitted name] has appraised over 27,000 privately-owned businesses and professional practices."  If they have done 27,000 valuations since 1990 the proper way, that means they must have spent 1,350,000 hours in 15 years.  At a maximum efficiency rate of 75 percent, that means this firm must have spent over 111,000 man hours per year, which corresponds to an average of 53 full time valuators in a single office space in Maryland.  We think that's highly unlikely.  Or, this fellow has the largest single valuation office in the world.

More likely, this operation is a mill, based on our review of their valuation reports we've downloaded at their invitation.  In fact, there were approximately 35 pages of the sample report which were repeated exactly, word for word -- once in the introduction and again in the body of the report.  In terms of pure valuation work in a report of nearly 100 pages, less then 10 pages were specifically addressing the client company, and no information or conclusion provided in these few pages would be sustainable under the most generous and gentle scrutiny. 

If you were to eliminate all the filler in this $5,000 formal report, your cost for 10 pages of unsupportable valuation nonsense would be $500 per page.  The operator's revenue per person, assuming it took all day to prepare ten pages of nonsense, would be $5,000 per day per person.  A nonsense writer could cost up to $30 per hour, so perhaps the total cost for personnel could reach $500.  That would leave a gross profit for the operator of about $4,500 per client.  That's a large enough sum to pay for lots of internet "pay per click" advertising, which is what this operator does and is how we found him.

In terms of qualifications, here, again, the qualifications supplies are irrelevant filler to cover up that virtually no qualified training, examination or designation has been earned by the promoter of this operation.  No affiliations with legitimate valuation organizations, which have the authority to discharge members who prepare faulty valuations through their ethics committees and qualifications boards.  If anything, these qualifications show the guy isn't qualified.

Finally, this operator has been bold enough to publish his client contract, which, among other things, provides that he never submits a final report.  That means, he can continually update his report, charge the client, and never reach a conclusion of value that he will stick with.  Read the contract carefully, and you'll see this escape clause, along with provision that his expert witness and testimony fee is $5,000 per day.  That effectively prevents him from having to defend his work in court, where, presumably, qualified valuators and valuation-savvy lawyers would shred his work to pieces.