The Management Interview
Why It’s an Important Piece of the Valuation Process and What You Should Expect
One critical part of the valuation process is the management interview or, as it is sometimes called, the due diligence visit. The management interview provides the business appraiser with an opportunity to integrate many sources of information about a business into a logical and consistent whole. The interview also helps to complete an overall understanding of how a particular business operates. The process of preparing for and conducting a management interview requires the appraiser to develop a command of the facts and circumstances of this particular valuation case.
The Objectives of the Management Interview
The specific objectives of the management interview include:
- Reviewing details of documents previously provided by management in order to ensure that all necessary financial and operational disclosure has been obtained and is reasonably understood.
- Forming an impression of the local economy based upon observation (to help challenge or verify economic statistics or management’s overview of the economic situation).
- Identifying those factors or trends that can reasonably be expected to influence the future performance of the business.
- Formulating an overall opinion of management’s ability to achieve anticipated operating results.
The management interview, if properly conducted, will enable the appraiser gain a more complete perspective of a business than is possible from reviewing documents alone.
Ultimately appraisers have the task of understanding the risk profile of the business as a whole and the facets that compose it and of assessing the opportunity profile of business. Risk and growth assessment are both over arching (the forest) as well as the core (the trees) of the appraiser’s valuation development and reporting processes.
Appraisers are often asked why they need to pose certain questions or to collect certain data (sometimes owners and managers chafe at questions in the why and what-if categories). In fact, a good management interview likely involves a few tense moments. Einstein may have said it best when he commented, “not everything that can be counted counts, and not everything that counts can be counted.”
Face-to-Face vs. Phone Interview
Most valuation firms make it policy that first-time engagements with a client company require an on-site interview. Subsequent valuations of the same business enterprise need not require a visit unless there has been a material change in the key personnel, facilities, financial performance, an extended time since the prior visit, or some other factor that, in the determination of the appraiser and/or the client, suggests something more than a teleconference and exchange of information. Special circumstances limiting the need and/or relevance of on-site visitation might include the valuation of investment vehicle entities, such as family limited partnerships or other entities that hold and manage assets that can be thoroughly studied from afar.
There are additional factors that influence the nature of the due diligence process. These may include the client’s need to address questions about the engagement, the client’s concern for engagement timing and expense, the nature of the valuation opinion, and the involvement and needs of other advisors, particularly fiduciaries.