Many business owners need a business valuation for a variety of reasons including annual planning, tax and estate planning, preparing for a sell, ownership buyouts, issuing stock options, etc. Business owners look to a valuation to know the dollar range for which their company is worth. However, in addition to this dollar amount, there is much more to a valuation report and if applied can be used to grow and add value to your company.
What are the basic elements that are likely found in a business valuation report?
1. Cover Page
The cover page typically has the name of the company being appraised, the interest being valued (i.e. 300 shares), the type of report, who the report is for and who performed the appraisal.
2. Executive Summary
An executive summary briefly mentions each of the parts included in the report. This may include:
- Brief company description
- Interest being valued
- Standard, premise, and level of value
- The effective date of the report
- Purpose and intent of the report (tax planning, stock options)
- Valuation approaches used
- Key inputs (discount rate, growth rate, valuation discounts and how they were determined)
- Major assumptions
- Conclusion of value
- Any subsequent event information or pertinent notes of disclosure
3. Company Overview
Here you will learn about the business being valued. Background information including the company’s history, what it does, and who the key players are in the business. It will also include the corporate structure of the company (i.e. LLC, LP), business locations, customers and ownership.
4. Economic and Industry Trends
The economic outlook is broad and discusses the overall economy. Parts of this section often come from a third-party provider who may have a different viewpoint or perspective. The industry analysis is integral to a business valuation and is more detailed. This section should thoroughly cover the industry’s fundamental characteristics and features. Key value drivers may be addressed as well. Who are the major customers or suppliers? What causes the industry to grow or decline? Is the industry fragmented or concentrated?
6. Financial Analysis
The appraiser will provide an in-depth evaluation of your company’s financial and operating performance. This includes a look at both the balance sheet and income statement. Normalization adjustments may be made to account for discretionary or non-recurring items or unusual accounting practices that may distort financial ratios. The appraiser then performs a relative financial analysis comparing your company to peer groups or industry data. This is used to determine how well the company is performing compared to other businesses in the same industry.
7. Valuation Approaches and Methods Used
The report then lists all three valuation approaches and states which approaches and methods were chosen, followed by a detailed explanation of why the method was or was not used. The appraiser then describes each of the valuation approaches used. This is the largest portion of the report as the assumptions and forecasts are examined and discussed. If more than one valuation approach is used, the appraiser will likely weight each approach by their respective merits.
8. Discounts and other Considerations
Some valuation assignments call for discounts. The most common discounts are for lack of control and lack of marketability. However, other discounts such as voting, key person and blockage discounts might apply. This section of the report discusses which discounts are appropriate and why. It should also provide evidence to support the discount rates taken.
9. Appraisal Conclusion
This is usually just a paragraph or two. The appraiser restates the interest being valued, effective date, standard, level and premise of value, and then states the value conclusion reached. The appraiser, appraiser’s manager or firm will then sign this page.
10. Appendices and Schedules
Most reports contain few graphs, financial statements or charts. They will be found here labeled with Exhibit X as found in the narrative portion of the report. Most of the meat can be found here and is referenced within the report.
Common appendices and schedules include:
- Historical financial statements
- Adjusted (normalized) financial statements
- Financial projections (for the income approach)
- Market approach comparable information
- Other financial information
- Sources of information used
- Statement of Assumptions and Limiting Conditions
- The appraiser’s representations
- The appraiser’s qualifications (licenses, designations)
A comprehensive business valuation should include significant information about each of the above topics. In addition, it should include substantive insight into the valuator’s thought processes and provide market evidence to support the assumptions, methods, and conclusions made so as to leave little question that the value concluded is reasonable.
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We at Peak Business Valuation would love to help you understand what your company is worth and how you can add value.