As a business owner, you’ll probably need a clear, accurate business valuation of your company at some point in the business life cycle. Whether the goal is to sell your business, secure financing, plan for your future, or resolve legal issues, a thorough understanding of the business appraisal process can help ensure a positive outcome.
You might expect a professional business appraisal to be a quick, straightforward process, but an accurate and thorough business valuation can take weeks or even months to complete. Knowing the steps to a comprehensive business valuation process—including when to seek a valuation and how to select the right valuation expert—can make the procedure more manageable and ultimately successful.
Following is a highly simplified version of the valuation process that will give you an idea of what to expect.
Common Reasons for a Business Valuation
Business owners seek professional business valuations for many different reasons. Depending on your situation, you may be motivated by one or more common issues, such as:
- Buying or selling your business or property. If you’re contemplating a sale or acquisition in the near future, knowing your business’s value can create a fair starting point for negotiations.
- Legal and tax matters. A valuation can support estate planning, tax compliance, a divorce settlement, or other legal matters you may be facing.
- Raising capital or securing financing. Investors and lenders may require a valuation to assess the viability and potential of your business.
- Internal planning and decision-making. If you’re thinking about restructuring, succession planning, or some other strategic move, a valuation can offer insight into your business’s worth.
The purpose of your business valuation will impact not only the method used but also the level of detail and expertise required. Regardless of the reason, a professional and well-documented valuation can provide a solid foundation for your critical business decisions.
How to Choose the Right Valuation Expert for Your Business
Once you’ve decided to obtain a business valuation, selecting a skilled and qualified valuation expert is an essential part of achieving an accurate appraisal. Not all professionals are equipped to handle complex business valuations; qualifications, track record, and specific expertise all play a role in ensuring a successful outcome. Here are some factors to consider:
- Look for business valuation professionals with certifications that indicate their training and knowledge in business valuation. Examples include Certified Valuation Analyst (CVA), Accredited in Business Valuation (ABV), Certified Business Appraiser (CBA), and Accredited Senior Appraiser (ASA).
- Industry knowledge. An effective valuation professional will possess a strong understanding of finance, tax laws, and the nuances of your industry. Industry experience can significantly influence the accuracy and defensibility of your valuation.
- Proven track record. Ask potential valuation partners for details on previous valuations they’ve performed, especially any that have been challenged or scrutinized by agencies such as the IRS. A history of success in these cases speaks to a professional’s skill and reliability.
- References and reputation. Seek recommendations from other trusted business advisors, such as attorneys or accountants, who can vouch for a valuation professional’s expertise and judgment.
If you choose a valuation expert who passes each of the tests described above, you should feel confident that they will take the time to develop a clear understanding of your company and the marketplace to derive a reasonable value.
The Valuation Process: A Step-by-Step Guide
A professional business valuation generally follows a structured, step-by-step process, which can vary in complexity depending on your type of business and the purpose of your valuation. Below is a typical breakdown of the seven vital steps to an accurate and optimal appraisal.
Step 1: Initial Consultation for Business Valuation
The business valuation process starts with an initial consultation to discuss the purpose of the business valuation, the scope of the work (including the percentage and type of interest to be valued), and the specific characteristics of your business. This conversation typically takes no more than 15 to 30 minutes and will provide your valuation professional with essential context.
Step 2: Reviewing the Engagement Letter for Valuation Services
Following the initial consultation, your valuation professional will issue an engagement letter for valuation services that outlines the terms objectives, reason, cost, and time frame of the business the valuation. The timeline largely depends on the complexity of your business and the documentation required. After reading the engagement letter carefully to ensure all the facts are correct, you will sign and return the letter to initiate the business valuation engagement.
Step 3: Comprehensive Information Gathering for Accurate Valuation
A significant part of the business valuation process involves gathering the relevant financial and operational documents and providing them to the valuation professional, who will review them in detail to gain a comprehensive understanding of your business’s financial health, operations, and market position. Some of the commonly requested documents include:
- Historical financials. Typically, the past five years of tax returns and financial statements are enough to present a solid foundation.
- Year-to-date financials. Your current financial statements are crucial to an accurate, up-to-date valuation.
- Forecasts and projections. Any business plans or projections can offer insight into your company’s anticipated future performance.
- Articles of incorporation and operating agreements. These legal documents can clarify your company’s ownership structure and other important factors.
- Contracts, leases, and intellectual property (IP) details. Significant agreements and IP documents yield information that can directly impact your business’s value.
Producing complete and accurate documentation will ensure that the valuation expert has all the information necessary to perform a thorough and reliable valuation analysis.
Step 4: Conducting On-Site Visit and Interviews for Business Valuation
If your business is particularly complex, your chosen valuation professional may conduct an on-site visit. This provides an opportunity to meet with the management team, interview various employees, tour your facilities, and gain insight into your company’s day-to-day operations.
Step 5: Valuation Analysis
Your valuation can be performed using one or more of several methodologies, depending on the nature and particulars of your company. Using one or more of the following approaches, the professional will analyze the data to arrive at an appropriate value:
- Market approach. Compares similar assets or businesses to determine value.
- Income approach. Relies on the expected future cash flow or income potential of assets or businesses.
- Cost approach. Calculates the cost to replace or replicate the asset or business.
Deciding which valuation approach to use can be complicated; your valuation professional will help you understand the best method based on your objectives. Regardless of the method used, this step often involves constructing detailed financial models to support the final value.
Step 6: Draft and Review of Business Valuation Report
Upon a complete analysis of your business and industry and a reconciliation of the valuation approaches, a value will be determined. This is usually an iterative process involving several rounds of peer review by the valuation team to form a solid rationale for the valuation.
Once the value is determined, the valuation professional will prepare a draft report for your review. This draft allows you to confirm the accuracy of the details and provide feedback, if necessary before the final report is issued.
Step 7: Delivery of the Final Business Valuation Report
After any revisions are made and approved, the professional will issue a signed copy of the final business valuation report, which typically includes an executive summary, a description of the valuation method used, a financial analysis, and the final determined value. The business valuation report, which concludes the process, serves as a vital document not only for your immediate needs but also as a baseline for future reference. Having an accurate, professional valuation on record can make your future business decisions smoother and more informed.
A Final Word on Business Valuations
The steps and methods involved in valuing a business are anything but straightforward, and the complexities lie in the details, such as determining a reasonable discount rate and set of projections. A great deal of research, thought, and experience is required to properly develop these assumptions. To value your business accurately, therefore, you should always employ a qualified valuation analyst—the benefits of doing so far outweigh the costs.
Ready to know your business’s true value?
Whether you’re preparing for a sale, financing, or future planning, a professional valuation is your next step. Contact the experts at PCE for a free consultation to discuss your goals and learn how we can provide an accurate, reliable valuation that sets you up for success.
Discover Your Business’s True Value: Schedule a Free Valuation Consultation
- Expertise You Can Trust: Nearly 30 years of valuation experience.
- Tailored for You: Customized insights for your industry and goals.
- Make Better Decisions: Support for sales, planning, or financing.
- Proven Results: Accurate, defensible valuations every time.
