What is the valuation process?
Business valuation (appraisal) projects typically involve the following steps, however client needs and circumstances make every assignment unique.Phase 1. Understand Your Needs
We will have an initial conversation with you regarding …
- The business to be valued: nature, brief history, entity, ownership
- Purpose of the valuation (intended use)
- The appropriate client(s) and their relationship to the business
- Financial highlights: revenue, profit, trends, major assets & liabilities
- The specific ownership interest to be valued
- Appropriate standard of value
- Date of valuation
- Access to information
- Special circumstances, factors, challenges or restrictions
- Appropriate scope of analysis
- Reporting requirements
- Intended users of the report
- Deadlines and desired timeframe
- Client responsibilities
Confidentiality: We hold your information in the strictest confidence and use it only to propose the right valuation services.
Integrity: We carefully consider any conflicts of interest and our ability to perform the engagement.
After our conversation and some preliminary research, we can estimate our time and expenses to complete the work and provide a proposal letter. This usually takes a day or two. As soon as we are engaged we can go to work.
Phase 2. Discovery
- A document request will be included with our engagement letter
- Gather requested documents from you or someone you designate
- Provide business profile questions or schedule a management interview
- Visit the business, review operations, conduct management interview(s)
- Compile third-party resources and data
- Review and synthesize business information
- Research and analyze economic data
- Research and analyze the industry and market in which the business operates
- Analyze company financial data:
- Enter 4-6 years financial statement detail
- Reformat financial information
- Obtain client input and make "normalization" adjustments
- Analyze business financial condition, performance and trends
- Calculate appropriate financial metrics and relevant financial ratios
- Obtain industry financial data and compare performance
- Identify and assess key business value drivers and risk factors
- Analyze management’s financial forecast and assumptions, or develop a forecast
- Resolve remaining questions regarding history, operations, outlook, market environment, financials, adjustments, assumptions
- Analyze risks, privileges and restrictions of the specific interest being valued
- Consider all possible valuation approaches and methods and select those most likely to yield meaningful indications of value for the subject
- Market Approach:
- Determine guideline company criteria
- Using multiple sources, research and collect public and/or private guideline company business and transaction data
- Analyze guideline company similarities and differences; refine
- Analyze statistically and calculate appropriate market multiples: price/earnings, price/revenue, price/book value, etc.
- Choose the best price multiple(s) for the subject company
- Develop indications of value
- Income Approach:
- Select appropriate methods, which may include discounted cash flows, excess earnings, and one or more capitalization of earnings methods
- Apply these methods using appropriate benefit streams and discount and capitalization rates, based on the above research and analysis
- Cost Approach:
- Adjusted Book Value or Liquidation Value
- May require separate real estate or equipment appraisals
- Consider and apply appropriate premiums and discounts to values indicated by the above methods. For minority interests, consider control and marketability attributes.
- Each valuation method produces a somewhat different result, which is expected since they each view a business from a different perspective. Review these results and decide how much influence each should have in the value conclusion.
- Apply tests for the reasonableness of the value conclusion
- The final step is to write an understandable report in the agreed upon format for the intended users that presents the relevant facts, explains the analysis and procedures used, and provides supporting evidence for conclusions.
- Review, proof-read and finalize the report
- Deliver the report to client
