Resources

Request a Quote

Join Our Newsletter

Understanding the Business Valuation Process
November 5, 2017

Business Valuation Process
Most business owners are not familiar with the business valuation process. Therefore the valuation expert needs to start with a detailed discussion of the process itself. This will help reducing the turnaround time of the report by informing the client from the onset what data needs to be gathered for the appraiser. This can also avoid surprises about such things as identifying the risk factors that may impact value. There are generally five steps in the business valuation process.

Step 1: Introduction: The business appraiser reviews the appraisal needs of the client. The appraiser wants to know what exactly needs to be appraised. What is the nature of the business, the size of the company, and the reason for the valuation? What is the effective date of the valuation? Why is the appraisal needed? Will the subject interest be a controlling or non-controlling interest? How many classes of stock are there? When is the report required?

The purpose of the valuation drives the definition of value and the type of report needed. Depending on the purpose, a basic short report might be enough or a formal detailed report might be required. The conclusions are different with each definition of value (e.g., investment vs. fair market vs. liquidation value). Investment Value (the value to a specific buyer) is frequently higher than Fair Market Value (the value to a hypothetical buyer). If the client has any additional objectives for the valuation, this should be discussed in this introduction phase.

Step 2: Determining Price Quote: The business appraiser prepares a quote for the valuation report needed, which will depend on the complexities involved, the scope of analysis, the kind of report (basic or detailed), the size of the company, the intended users, time requirements, etc.

Step 3: Drafting Engagement Agreement: In this step, the business appraiser prepares the engagement contract, which spells out major points of the valuation assignment, including subject interest to be valued, the effective valuation date, turnaround time, fees and retainers. The valuation work begins with the client executing the engagement contract and enclosing the retainer fee.

Step 4: Proceeding with the Valuation Analysis: The valuation analysis includes the gathering of information and data needed to complete the valuation project. The client will need to provide company information such as historical financial statements, tax returns, corporate documents, and answers to a questionnaire. Other information that the appraiser will collect includes industry data, relevant economic information, market data on similar types of transactions, and rates of return available on investments of similar risk.

At times, the appraiser will schedule an on-site visit to meet with company management and appropriate personnel to discuss the company’s background, financial management, operations and outlook. This is typically done a couple of weeks into the assignment, so that the appraiser has some familiarity with the business and its environment prior to a visit.

Step 5: Issuing the Valuation Report: This step consists of writing the report or providing a verbal report. If it is a formal written report, a written draft of the company’s operations and financial analysis may be reviewed by the Company to assure factual correctness and provide any necessary clarifications. The report is then finalized and signed.

The formal report is a USPAP certified appraisal report in conformity with Rev Ruling 59-60. It considers all three valuation methods (asset-based, income-based, and market-based). The detailed report (typically anywhere from 60 to 80 pages) consists of several parts, including: definition of the valuation assignment, economic background, industry background, company description, financial analysis, valuation methodologies, adjustments, reconciliation and value conclusion, assumptions and limited conditions, reference sources, and appendices of relevant exhibits. The report will explain the appraisal process followed, the research performed, the analysis applied, the valuation methods employed, the rates of return and growth developed, discounts applied and the reconciliation of values by the various methods utilized. A summary report is also available (typically anywhere from 20 to 40 pages).

At last, the client will not only learn what the business or ownership interest is worth, but has also gained a stronger grasp of the economic and industry environment in which the company operates, the company’s strengths, weaknesses, opportunities and threats, its financial performance, and its position in the market. To take full advantage of the process, the client can use the business valuation as a planning and control tool that provides foundation and direction for the company’s strategic plan.

Valuations play a part in many tax, litigation, financial reporting, transaction, and strategic matters. If we can provide additional information or advice on a current situation, please call us.