The Business Valuation Process

The Valuation Business Steps to Determine the Value of a Company

What is Business Valuation?

Business valuation is the process of determining the economic value of a business. It’s a crucial step for business owners, investors, and stakeholders to understand the worth of a company. Business valuation involves analyzing various aspects of a business, including its financial statements, market trends, and industry standards, to determine its fair market value. The process helps to identify the strengths and weaknesses of a business, providing a basis for informed decision-making.

What are the Steps of the Business Valuation Process?

How do you end up with a perfect product or service? It starts with a perfect purchase order. What are the client and their advisors trying to accomplish? Is this valuation so the business can go to market, or is it for the courts or the IRS? The critical first step is knowing the final audience and who might attack the valuation. Knowing this, you can choose the correct business valuation methods.

Please read what a business valuation is and how your business is so much more than its book value.

Create a Proposal & Engagement Letter

After understanding the purpose, audience, and stakeholders involved, the engagement letter can be crafted to ensure all parties are on the same page. This is typically the first step, which can often change the perceived needs of the stakeholders. Additionally, Assumptions and Limiting Conditions should be considered, outlining the parameters and boundaries of the valuation process. The valuation analyst and the client should agree upon or acknowledge these, such as when the analyst accepts the client’s financial statements and associated information without further verification.

Establish the Standard of Value, Purpose, & Valuation Date

Taking all the above into account. The applicable standard of value must be specified and defined to provide the basis for any appraisal report or engagement. The applicable standard of value selection is determined primarily based on the use to which the appraisal is to be put, such as determining tax liability or a price at which a particular transaction will take place.

Who Dictates the Engagement Rules?

The statute, regulation, case law precedent, or binding legal document governing a transaction often dictates the standard of value for a particular appraisal engagement. It is important to recognize that many value terms have different definitions when used in different contexts. The appropriate standard of value must be defined. This also includes the approaches and methodology employed to conform to the standard.

Setting the As of Valuation Date

An asset has a dollar value at the point in time of the valuation date. It commonly refers to the valuation of assets distributed upon the occurrence of an event when using this term. Or a periodic determination of worth for reporting purposes. For example, it may be the designated time of closing (monthly, quarterly, etc.) for the determination of account balances in a defined-contribution or defined benefit plan. The general rule will be that a court will most strongly consider the value at the distribution date.

By having the ability to determine the valuation dates within its discretionary power, the court has another tool at its disposal to bring equity to asset distribution. For instance, when dealing with a divorce matter, the court may need to figure out how to divide assets such as a family home, securities, commercial real estate, or business goodwill. Depending on the state, the valuation date may vary, with the trial date, the date of final separation, or the date of divorce complaint typically used. Yet, some states may have a more discretionary approach to the date in question. It is important to consult local laws for specific requirements in your area.

Gather Data for the Business Valuation

Business Appraisal FL|GA|HI business valuation checklist allows users to pre-gather data, including various business assets. The faster you get the data to us, the faster we can generate a draft valuation once you know how and under what conditions a business’s worth will be measured. It is time to gather the relevant data that impacts the business value. This data may include the business financial statements, operational procedures, marketing and business plans, customer and vendor information, and staff records. The quality and timeliness of the data are also variables.

Data You Need to Value a Small Business to Buy

We have a comprehensive list to value a business. However, at the very least, you should gather the following:

• Business financials, including Balance Sheet & Income Statement

• Cash flow statements

• Tax Returns

• A/R and A/P aging, if applicable

• Working capital needs and financial projections

• Asset lists, both tangible and intangible assets, like websites and intellectual property

• Professional licenses, business licenses, and permits that are needed

• Client or Customer Base and Vendor Concentrations

• All operating and management processes

• Sales pipeline and sales agreement

• Copies of any leases or rental agreements

• Business loans or bank loans

• UCC filings on the business’s assets

• Your capital structure

• Any partner ownership agreements

• Business plan, if available

• Reason for selling your business

• Personal assets not staying with the business

Tax Return/Financial Statement Analysis & Ratios

Businesses must file federal tax returns annually. We can use the information in these tax returns to determine the business’s financial strengths and weaknesses. Lenders often perform a detailed analysis of a business’s tax returns to assess the risk associated with lending. The analysis involves examining the tax return and calculating financial ratios from tax return numbers. To ascertain the business’s performance according to industry benchmarks, one often compares it to other businesses in the same industry.

Normalize and Adjust (if applicable) Historical Financials

Normalize adjustments to the Income Statement: What are they? We must adjust the income statement to compare the “normal” return of a private company to those of a public company. The owner needs to review and possibly adjust everything from their compensation to market rents. We make these adjustments to compare the income streams to that of a freely traded stock or ownership interest.

Privately held companies often require one-time adjustments for non-operating expenses or other one-time events. Please read about adjustments to income in a business valuation.

Company, Industry & Peer Analysis

How your company compares to its peers is a critical variable in the valuation process. Furthermore, as industries wax and wane, earnings multiples often fluctuate, expanding and contracting accordingly. Additionally, the size of your company relative to its competitors will also have a bearing on the overall valuation. Comparable company analysis starts with establishing a peer group consisting of similar companies of similar size in the same industry or region. Investors can then compare a company to its competitors on a relative basis.

Implement Selected Business Valuation Methods

In developing the valuation, the valuation analyst should consider the three most common valuation approaches:

1. Income (income-based) approach

2. Asset (asset-based) approach (used for businesses, business ownership interests, and securities) or cost approach (used for intangible assets)

3. Market (market-based) approach

The valuation analyst should select and use the appropriate valuation approaches and methods for the valuation engagement. Typically, discounted cash flow analysis and comparable market value are always used. Often incorporating multiple approaches and providing reasons for the selection. The market-based approach can also consider future cash flows to assess a company’s current market value. Please read what is a multiple of earnings in a business valuation report.

Generate a Draft Report

At least one of the party’s heads will have a lightbulb go off when they issue a draft report. Comparing the expected valuation to the reality given the parameters and constraining conditions.

All Parties Review the Draft Business Valuation for Accuracy

Your CPA, attorney, partners, or other stakeholders must understand the valuation and ensure all terms and adjustments pass the reality test. They can also understand how to read a business valuation report in this article.

Issue Final Report

A Valuation Time Frame (client-driven) can range from 2-6 weeks. The faster you get us the data, the faster you get a professional and certified business valuation by a certified business appraiser, issued by an accredited Business Appraisal FL|GA|HI team member. We can also perform valuations on intellectual properties as part of our business valuations services.

Valuation Variables

Valuation variables are factors that affect the value of a business. These variables can be internal or external and may include:

• Financial Performance: Revenue, profitability, and cash flow are critical indicators of a business’s financial health.

• Market Conditions: Industry trends, competition, and market size can significantly impact a business’s value.

• Management Team: The experience, skills, and leadership qualities of the management team play a vital role in the business’s success.

• Products or Services: The quality, uniqueness, and demand for the business’s products or services are essential valuation factors.

• Intellectual Property: Patents, trademarks, and copyrights can add substantial value to a business.

• Business Model: The scalability, sustainability, and adaptability of the business model are crucial for long-term success.

Understanding these valuation variables is essential for business owners and investors to make informed decisions about the value of a business.

Specialized Valuations

Specialized valuations are used to determine the value of specific assets or businesses that require unique expertise. These valuations may include:

• Intellectual Property Valuation: Determining the value of patents, trademarks, and copyrights.

• Real Estate Valuation: Assessing the value of commercial or residential properties.

• Art and Collectibles Valuation: Evaluating the worth of rare and unique items.

• Business Enterprise Valuation: Calculating the value of a business as a whole, including its assets, liabilities, and goodwill.

Specialized valuations require expertise in specific areas and may involve the use of specialized valuation methods and techniques.