Who Has Time For A Business Valuation?

Most business owners incorrectly assume they do not have the time to have a valuation performed on their companies. In reality, the valuation process is relatively quick and painless. The process is designed to minimize the amount of time and involvement required by the business owner and managers of the subject company.

The business valuation process typically includes the following four stages: engagement, information gathering, research and analysis and report delivery.

Engagement

The valuation process begins with a few key questions. Who is the client? What is the purpose of the valuation? What type of business is to be valued? These questions assist the valuator in framing the assignment.

Using this information, the valuator provides the business owner with an engagement letter, which contains a price quote and outlines the rights and obligations of the parties.

Information Gathering

The next step involves the gathering of important company documents. These can include financial statements for the current and preceding 3 years, a list of extraordinary expenses incurred and other items that often must be obtained from an attorney, accountant, manager or shareholder.

Company background information is also gathered in this stage. Examples of this information are the year of incorporation or formation; details on management experience; information on facilities, customer base and competition; and shareholder and ownership breakdown. The client must also complete a brief questionnaire provided by the valuator.

During the information-gathering process, the valuator may ask the business owner, key managers and employees a number of in-depth questions designed to identify critical areas of value, risk and business knowledge. This dialogue helps the valuator understand the business, product or service, and the marketplace in which the subject company operates. The question-and-answer process is normally conducted on the telephone or during site visits and may be ongoing throughout the engagement.

Research And Analysis

At this stage, the valuator will review the information provided to discern the company’s operating history. He or she will determine what makes the company different from its competitors.

The valuator might also thoroughly investigate the subject company’s industry, market, competitors, risk and value factors, applicable laws and regulations and the state of the economy, as well as comparable companies, products and services. Then, recent transactions involving comparable companies or assets are identified. The valuator researches valuation metrics relevant to the subject company’s unique situation.

Report Delivery

Throughout the valuation process, the valuator is preparing a comprehensive, effective report. Each full report consists of several parts, including definition of the valuation assignment, company description, financial analysis, discussion of valuation methodologies, adjustments, value conclusions, assumptions and limiting conditions and appendices or relevant exhibits.

In the end, the business owner has not only learned what the business is worth, but also has gained a stronger grasp of the economic and industry environment in which the company operates, as well as the company’s financial performance and its position in the market.

The entire process typically takes 15 to 45 days once the valuator has been engaged and receives all the relevant information required.

— Precision Machined Products Association