A business valuation report helps identify how much interest an owner has in a particular company. The report looks at the business as a whole by analyzing the financials, operations, sales and marketing practices, and other business-related activities. Businesses of all types need to have a valuation report prepared sometimes. The reasons to create a business valuation report include:
- To prepare for the sale of the business
- If there is a change in business ownership—for example, the primary owner leaves the business.
- If a valuation is requested for a major loan or other financial operation.
How the Business Valuation Process Works
An appraiser is called in to do a business valuation. The process usually starts with a visual inspection of the property and inventory checks.
Then the process of evaluating documents begins. Someone (usually the owner or someone designated) must gather up many documents and other information to be used in the report.
Basic Information in a Business Valuation Report
The business valuation report will list the company's legal type and ownership structure, including owners and each owner's percentage of ownership. There will be resumes and contracts for the top executives and managers and all company owners (unless a public company). Also, a calculation of the current monthly payroll data with the number of employees and their functions, and a current organization chart.
The appraiser will need information on employee benefit plans and costs.
You may also need a listing of all business advisers like the attorney, CPA, consultants and any contracts or retainers.
The appraiser will request a history of the company, to learn about the company to value its liquidity, viability, and solvency. This part of the valuation is particularly important when the business has stock or shares held, or there are multiple owners.
Business Financial Statements in a Valuation Report
Probably the most important part of a business valuation report is the financial information. The preparer will request a balance sheet for each quarter for the past three to five years—depending on how long the company has been in existence. They will also need Income statements and other financial statements for each quarter for the past three to five years. Other financial records include company financial forecasts such as balance sheets and income statements. Also, information on obligations for retirement plans, profit sharing, stock options, and bonuses will be required for the review.
Tax returns for the past three to five years will need to be accessible. If the business is a pass-through entity, like a sole proprietorship, partnership, S corporation, or LLC, the owner's personal tax returns will also be required. Other information you will need to supply includes:
- Any liens against the business
- All litigation (whether ended or continuing) for the past five to ten years
- Listing of all intellectual property like patents, copyrights, trademarks/service marks
- All license agreements
Common Adjustments Made to Income Statements
Financial and income statements must be adjusted to remove items that are unique to the current business or which do not accurately represent the continuing business value.
- Assets which are not part of operations are typically removed from the balance sheet. For example, assets like a corporate jet are not intrinsic to the continuing operations of a business, so these assets may be taken out of the deal.
- Excess cash is removed from the balance sheet if the cash is not going to be part of the deal. In many cases, the buyer wants the cash and will ask that it be retained. This is a negotiating point.
- Non-recurring income items and expenses are removed from the income statement. For example, a one-time sale of assets, the closing of a location, costs incurred for a lawsuit, or a one-time gain on a sale of a building might be taken out.
- Wages, salaries, benefits, and rental income are adjusted for current levels.
- Owner salaries are often taken out because these are discretionary and may not be continued by a new owner.
- Uncollectible accounts receivable are sometimes eliminated.
- Liabilities that have gone unpaid and have accrued interest may be added in if they're not already accounted for in the financial statement.
Removing discretionary, non-recurring and non-operating items from the balance sheet and income statement make the company's financial statements much more realistic for a potential owner to review. They give a more concise portrayal of a business's actual value for purposes of insurance claims and loan or mortgage qualification.
A Review Your Place in the Industry
The report will analyze your company's place in the industry. It will contain details on the industry and the company's market share in that industry. to value
A competitive analysis will cover the top competitors and their products/services. The report includes a summary of product inventory amounts for each product (from physical inventory) for the past three years and the list of all current suppliers. You will need a current customer list and the payment history of customers—including an, accounts receivable aging report—for the past three years
It may sound like a lot of information, but all of it is necessary for a valuation expert to gain a complete understanding of the company's financial position, obligations, and management.