For those who don’t know, business valuation refers to the process by which professionals calculate the financial value of a business. There are a couple of reasons why companies do this.?
For instance, a company will need a business valuation in case of litigation to prepare an exit strategy in case of strategic planning, merger, acquisition, or sale.?
Business valuation is complicated. It involves a lot of specifications, rules, calculations, and steps. Only a company that offers?business valuation services?can do it properly.?
So, how does the process work? Here are some things you should know.
Create a Valuation Agreement
First, a professional will identify the ownership interest to be valued. Next, he will figure out the premise and standard of value based on which the value is to be utilized, the reason for the valuation, and the valuation date.?
They will also determine the type of report and the type of engagement.?
Prepare the Required Documents
Business owners must prepare various documents to perform a proper business valuation. These documents include leases, contracts, buy and sell agreements, private agreements among stakeholders, operating agreements, tax returns, income statements, historical financial statements, and much more.?
A business owner must acquire all of these necessary documents to make a well-rounded and objective business valuation.
Analyzing the Industrial and Economic Data
A valuation professional will evaluate the potential and current state of the concerned industry and the overall economic outlook. This includes local, regional, national, and even international.
Reviewing the Financial Performance of the Business
The balance sheets, income statements, and historical financial statements will help provide a thorough understanding of the company’s financial history, nature, and condition. Then, the valuation professional will compare the financial performance and trends of the business to the industry average.?
Normalization of Earnings
A valuation professional will conduct a normalization of historical financial statements to get a fair market value of the liabilities and assets and get more realistic operating results.?
In addition, it provides more meaningful predictions and calculations and makes a better comparison with industry peers and averages.?
Analyzing the Valuation
A valuation professional will determine the company’s worth or the percentage of ownership in a business. The professional will choose one of the three methods of analyzing the valuation. This includes the income approach, market approach, or asset approach.?
The professional will also explain why he chose the method in the report.
Applying Discounts and Premiums
The valuation professional will adjust particular values depending on the method he chooses for the valuation. Some adjustments he can make include discounts for lack of control, control premium, and marketability.?
Reconciling of Indicated Values
Different valuation methods show values that the valuation professional will reconcile to get an estimated value after considering all relevant factors and considerations of the valuation.
Drafting the Report
Once the valuation professional performs all the above steps, he will prepare a draft report. Then, the business owner can search for revisions. Once the business owner is happy with the report, the business valuation process is complete.?