A Business Valuation Report is a financial report determining the current (or projected) value of a business or asset (property, marketable securities, etc.) using the financial statements, assumptions, and various methods and approaches. It simply communicates how to value a business.
A Business Valuation Report is not solely for business owners, investors, and potential buyers. Lawyers can also use a Business Valuation Report for wills, estate, and litigation purposes. These can also be used by financial institutions such as banks to assess business loan applications. Also by regulatory agencies such as collecting taxes and enforcing tax laws and securities and exchange commission.
Valuation in business is an important process; preparing and developing it can be complex.
A good Business Valuation Report is like a biography of the business. It presents the story of the business, its history, its strengths and weaknesses, and importantly the business’s potential. A well-researched Business Valuation Report provides the user with an independent, objective, and reliable estimate of the business value. The end-user of the Business Valuation Report should have a basic knowledge of the business, understand the valuation process, and see how the value makes sense, even if he disagrees with it.
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Here are the 8 essentials for developing a proper Business Valuation Report:
1.) Avoid typographical errors in both words and numbers:
This may be trivial, but this is the most common error in any report. A misplaced or missing apostrophe and misspelt words (companies vs company’s or their vs there) are easily overlooked but are the easiest ways of reducing the report’s credibility. These errors are eliminated by taking the time to proofread the report. Also, typographical errors in numbers can be a big mistake. An erroneous additional zero in a department’s total expense can spell lower profits, over budget and poor performance.
2.) Refrain from stating unquantifiable statements:
Stating the company’s management is “capable”, or “competent” can be expressed better by a detailed presentation of the management team’s educational background, employment history, experience, and expertise. In addition, it is best to present numerical values for growth, variances, etc. in amount or per cent rather than stating in the valuation report the business and industry are experiencing “strong” or “robust” growth or the company’s bottom line has improved “significantly” or “deteriorated”.
3.) Set your sight on Relevant Information only:
If you are valuing a small business up for sale with customers and suppliers located in the immediate area, then the country’s bond rating may not be an important piece of information. Likewise, if you are preparing a business valuation report for a SaaS Technology Company whose only customers are Insurers, then a discussion and analysis of the Insurance industry may be more relevant than the SaaS industry.
4.) Curb your enthusiasm and avoid making overly optimistic forecasts:
Revenue can be considered one the most important part of valuation since all businesses start with revenue regardless of their size. If the revenue forecast for the valuation report is wrong (too optimistic), then the business’s determined value will be wrong. Understanding the business’ products and services, branding, marketing, sales cycle, delivery, and after-sales service are key areas to look into to grasp the company’s growth potential. When doing a business valuation report, sample questions like the below can be helpful:
- Does the company have a growth plan? What are the strategies?
- Is their market share lagging, growing or slowing down?
- What are the products or services’ growth constraints?
- Did the management conduct a market analysis? Does management have a strong understanding of the competitive landscape, trends, etc.?
5.) Stick to the correct Standard and Premise of Value:
The results of a business valuation report can vary considerably depending on the selected standard and premise of value. A standard of value is the measurement of how to value a business. Fair market value, fair value, intrinsic value, investment value, and strategic value all have different meanings. The selected standard of value also helps identify whether discounts and premiums apply to the business. The premise (basis) of value relates to the assumptions and projections made in the valuation report. For example, is the value determined on the assumption that the business will continue operating (going concern) or assume it is for sale (liquidation)?
6.) Always investigate mathematical errors in the spreadsheet:
Mathematical errors have a big impact on the business valuation report. A simple error, like a missing parenthesis in a formula, that occurred early on in the analysis can affect assumptions made. For example, a mistake in the number’s positive and negative signs can mean differentiating gains and losses. Imagine treating a loss as a gain! It will be equivalent to overestimating earnings and causing the results of the business valuation report to be grossly overvalued.
7.) Don’t get lost in translation, interpreting the valuation conclusion:
Confusing Value vs Price. Value is dependent on a set of assumptions and forecasts, and normally it will have different values for buyers and sellers. We can say that value is relative. A R10 million company value calculated in a spreadsheet might be lower or higher for a potential buyer. This is especially true of a strategic buyer; strategic value and fair market value are different. The strategic value of a business contains an extra value; normally, due to synergies, the buyer believes he can get from the business on top of what might be considered “normal” for other buyers.
Understanding Valuation vs Pricing: Weighing Value vs Price can make a BIG difference!
8.) Double-check, and when in doubt, get a professional opinion:
Financial accounting and analysis are areas in Finance that rely on and benefit from Excel spreadsheets. There are numerous resources for valuation report samples and business valuation templates available. Preparing a valuation report is a complex process with large stakes involved.
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