What is the process for a business valuation?
By: ELI C. NEAL, CPA, ABV, CFF
What is your business worth? How do you know?
How can you make a good decision to buy out a business partner, sell your business, or give it to your kids without knowing your business’s value?
As a business owner, you don’t need a valuation every year. But, when you do need to get your business appraised, here’s what you can expect.
Introduction call – You explain the purpose of the valuation, the ownership structure, and the operations of the business. Together, we’ll explore the type of work that will help you the most.
Engagement letter – You execute the engagement letter outlining the ownership interest being valued, the scope of the valuation work, and the work product to be delivered.
Initial documents – The initial document request list has about 15 documents to provide. You upload them to our secured ShareFile system. The requests include balance sheets, income statements, org chart, customer list, vendor list, etc.
Document review – I review the documents provided and input the financial information into the valuation model to sketch out how we might value the business.
Management interview – Together, we dive deep into your business. We’ll discuss the historical financial performance of the business (looking for one-time aberrations and trends). We’ll also discuss the qualitative factors of your business impacting business attractiveness and risk. The management interview is typically about 1.5-hours in person or over Zoom.
Editor’s note: Business owners love the management interview. 1.5 hours discussing your business from inception to today. What are your challenges? What are your strengths? Who are your important customers? How important are they? Who are your critical vendors? How resilient is your business? What does the future of the business look like? This is where the learning takes place – for 4 Corners and the business owner.
Model fine-tuning and follow up – After the management interview, I tighten the screws of the valuation model. I review rules of thumb, databases with tens of thousands of real-world transactions, and cost of capital databases to inform the valuation. Further, I perform independent research of economic, industry, and geography information to consider macro trends affecting value. During this deep dive, a few more follow up questions might come up which we handle via email or Zoom.
Work product – At the end of the engagement, I will deliver the work product that is most helpful to you:
Consulting Schedules – If you’re simply gathering information for succession planning or mediation strategizing, consulting probably makes the most sense. I provide Excel schedules and explain the value indication over Zoom. We won’t hang up until you understand the key value drivers. Because there’s no report writing, this is a cost-effective way for you to understand how a 3rd party values the business.
Calculation of Value Letter – A 10 to 12-page letter with accompanying schedules that summarizes the business and the valuation procedures at a high level. For larger businesses, with multiple owners, this is a great option. It’s a formal letter that memorializes the value considerations and the resulting value indication.
Summary Valuation Report – A ~50-page report with accompanying schedules. The valuation report complies with IRS reporting standards for estate and gift purposes and is the basis of our expert witness testimony when testifying about the value of an ownership interest. This is our opinion of value, and we look forward to explaining it to and defending it before a trier-of-fact.
In all, the process usually takes about 4 to 6 weeks. However, my team and I love to hit deadlines. We’ll do everything we can to deliver a work product when you need it.
4 Corners performs business valuations in Bellevue, Washington. Our valuations can help in all the following situations:
Estate and gift tax reporting to the IRS
Stock grants to company management
Marital dissolution
Shareholder disputes
Shareholder buyout
Succession planning
If you’re ready to understand how a 3rd party would value your business, give 4 Corners a call at 425-998-7690 or schedule a video call here; we’ll listen to your situation and help you scope your project. We’d love to help you.