Article written by:
Eric Dollin, ASA
Director, Valuation & Financial Opinion Services
The business valuation report can be an intimidating document to review, often in excess of 100 pages, with numerous assumptions, methodologies, technical terms, and other factors for readers to parse and digest. Below are seven key items to look for in your review of the business valuation report.
1. Forward-Looking Analysis.
Valuation is inherently a forward-looking exercise, as an investor in a business is primarily concerned with the future cash flow generating capacity of that business. As such, the valuator’s analysis should include a discussion and analysis of expectations for future performance, and will often include a valuation methodology that is based on the projected future cash flows of the business.
2. Long-Term Perspective.
At the same time, the valuation report should include a detailed analysis of the company’s historical financial performance. A company’s historical performance can serve to act as a point of comparison when looking at projected performance and may inform trends in the company’s performance characteristics in a wide range of economic climates (which can be particularly important for businesses in highly cyclical industries).
3. Multiple Valuation Approaches.
There are multiple commonly-accepted valuation approaches and methodologies that a valuator can use in their determination of value. A robust valuation report will often include more than one of these approaches (typically a combination of an income-based approach using management’s forecast for future performance coupled with one or more market-based approaches, which might look at pricing multiples of public companies or multiples exhibited by recent transactions involving similar companies) to bolster support for the ultimate conclusion of value.
4. Treatment of One-Time Items.
A company’s financial performance in a given year can often be impacted by one-time or non-recurring events. Left unaccounted for, these non-recurring items can paint a distorted picture of a company’s performance and ultimately result in the valuator relying on historical information that is not representative of expected future performance. As such, it is important for the evaluator to properly account for, and provide detail for, any non-recurring items in the valuation analysis.
5. Balance Sheet Considerations.
The valuator should account for any temporary abnormalities in the balance sheet, typically, either in the form of a surplus or deficit in working capital on the valuation date, which may not reflect a “normal” level of working capital for the business (this is often the case in businesses that are highly seasonal, with working capital balances that fluctuate substantially during the year). Unaccounted for, a company’s abnormal working capital balance could result in the valuator over/underestimating cash flow requirements for the business in the future, which may distort the ultimate conclusion of value.
6. Standard of Value Applied.
The valuation report should clearly define the standard of value being applied in the determination of value, as the standard of value often impacts the assumptions used by the valuator in the application of the selected valuation methodologies. Further, valuations for regulatory purposes (e.g., estate and gift tax planning or Employee Stock Ownership Plan-related valuations) have a statutory requirement that the valuation be prepared on a “Fair Market Value” basis. Other standards of value, including Investment Value, Fair Value, or Liquidation Value, may be appropriate in certain circumstances and may result in the use of different underlying assumptions by the valuator.
7. Thorough, Logical, Well-Documented Report and Analysis.
A quality valuation report will be organized in a logical manner that is easy for the reader to follow, and all assumptions used in the report will be thoroughly documented and explained. The valuation report should be able to “stand alone”, with the reader being able to follow the underlying assumptions made and valuation methodologies used in the determination of value without the need to reference supporting work papers or other documents.
Please contact one of GBQ’s valuation professionals with any questions regarding your current valuation report or any other valuation needs of your business.