Business Valuation Report Made Simple
Many business owners need a business valuation for a variety of reasons including annual planning, tax and estate planning, preparing for a sale, 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 business valuation report. If applied, you can use it to grow and add value to your company. For additional questions, schedule a free consultation with Peak Business Valuation.
Elements in a Business Valuation Report
Below are the basic elements that are likely found in a business valuation report. For questions or to view a sample business valuation report, schedule a free consultation. Peak Business Valuation provides business valuation reports and appraisals for businesses across the United States. We are happy to provide a business valuation report for your business.
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 business valuation report. This may include the following:
- 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 includes 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. In addition, this section may address key value drivers. 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. The appraiser may use Normalization adjustments 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 determines 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. It states which approaches and methods the valuation expert chose. Followed by a detailed explanation of why the method was or was not used. The business appraiser then describes each of the valuation approaches used. This is the largest portion of the report as it examines and discusses the assumptions and forecasts. If the appraiser uses more than one valuation approach, they will likely weigh each approach by its 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 business appraiser restates the interest being valued, the 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 business valuation reports contain a few graphs, financial statements, or charts. They are labeled with Exhibit X as found in the narrative portion of the report. The report references the appendices and schedules as this is where most of the meat is.
Common appendices and schedules include the following:
- 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 report should include significant information about each of the above topics. In addition, it should include substantive insight into the valuator’s thought processes. As well as provide market evidence to support the assumptions, methods, and conclusions made. This leaves little question that the value concluded is reasonable.
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