The Art & Science Of Business Valuations
What Exactly Is A Business Valuation?
A business valuation, also known as a business appraisal, is nothing more than the opinion of the appraiser as to the relevant value of the subject asset.
So The Concern Is...
The opinion has more or less credit depending upon the skill, knowledge, and experience of the appraiser.
That Opinion Becomes Binding
The client is usually buying the appraisal to impress upon another third party the reasonableness of a specific value of the asset in question. And the crux of the matter is that when that third party makes a decision about the value based on the appraiser's opinion, it becomes binding upon the client.
The Bottom Line
You need the best representation possible. The reputation and accreditations, along with the curriculum vitae of that business appraiser, speak to the quality of work the client should expect. You also should consider the ability and willingness of the appraiser to defend his or her opinion - in court, to the IRS or to the buyer's representatives.
Writing The Appraisal Report
Developing An Appraisal
There are two parts to developing an appraisal. The first is developing the opinion of value and the second is reporting the opinion in a written report.
- Developing the opinion requires an appropriate understanding of the business including products and markets, staff and operations, and financial performance.
- The business valuation report documents what information was collected and analyzed, what other factors were considered, and justification for the opinion of value.
Who Reads The Report?
Readers of the report often include the business owners and their advisors. In other cases, the report may be submitted to opposing parties and their advisors, the court, or the IRS.
The Level Of Details Depends Upon The Reader
While all appraisals require proper investigation and analysis, the reports may contain different levels of detail depending on the intended readers. If the report will only be used by "insiders" that are fully familiar with the business, an abbreviated report may be sufficient. If the report will be shared with "outsiders" not intimately familiar with the business, then a full detailed report is required.
What A Business Appraiser Asks For And Why
The information required for each assignment is as individual as each business. The appraiser needs to gain a full understanding of:
- the business,
- products and services,
- markets and customers,
- employees and management,
- equipment and facilities,
- past financial performance,
- and its future prospects,
The Minimum Information Requirements
At a minimum, the appraiser will collect financial statements and tax returns for the past five years. A list of required documents and an initial questionnaire is completed by the client. An independent analyst will then visit the business, inspect the facilities and interview key management.