How the Business Valuation Process Works?
Business valuation refers to the method used to determine the financial value of a company. This process is essential for various purposes, including litigation, preparing exit strategies, buying or selling the business, acquisitions, mergers, or strategic planning.
Given its complexity, business valuation involves several steps, formulas, rules, and specifications. Engaging an experienced firm like RNC ensures accuracy and reliability. Below is an overview of the processes involved in business valuation:
1. Drawing Up a Valuation Agreement
The first step involves a business valuation expert identifying the ownership interest to be valued. This includes determining the valuation date, purpose, premise, and standard of value. Additionally, the type of engagement and report required are established.
2. Furnishing Necessary Documents
Various documents are essential for conducting a thorough business valuation. These include historical financial statements, balance sheets, income statements, tax returns, articles of incorporation, operating agreements, private agreements among stakeholders, partnership agreements, contracts, leases, and buy-sell agreements. These documents help ensure an objective and comprehensive valuation.
3. Analyzing Economic and Industrial Data
The valuation expert assesses the state and prospects of the relevant industry and the overall economic outlook. This analysis may cover national, regional, local, and, if necessary, international economic conditions.
4. Reviewing Financial Performance
The expert reviews the company's financial condition, nature, and history through historical financial statements, income statements, and balance sheets. This review includes comparing financial trends and performance to industry averages.
5. Normalizing Earnings
Historical financial statements are normalized to obtain realistic operating results and fair market value (FMV) of assets and liabilities. This process provides meaningful projections and forecasts and facilitates better comparisons with industry averages and peers.
6. Conducting Valuation Analysis
The valuation expert determines the worth of a privately-owned business or the ownership percentage in a business. One of three methods—asset, market, or income approach—is used for valuation analysis, with the chosen method explained in the report.
7. Applying Discounts and Premiums
Adjustments are made based on the chosen valuation method. These adjustments may include discounts for lack of marketability, control premiums, and discounts for lack of control.
8. Reconciling Indicated Values
Values indicated by various valuation approaches are reconciled to estimate the final value. This step considers all relevant facts and considerations.
9. Drafting the Report
A draft report is prepared, incorporating all the steps mentioned above. The client reviews the report and suggests revisions. Once the client is satisfied, the process is finalized.
Engaging a reputable business valuation firm ensures that the valuation process is conducted accurately and comprehensively, providing valuable insights and supporting informed decision-making.
