Sellability and Business Valuation Report

How to Use a Business Valuation Report

Assessing Small Business Sellability through a Business Valuation Report

A business valuation report outlines the results of an appraisal, which assesses the company on key factors determining the objective value of the business - what it’s worth to others with no current stake in it. There are a number of reasons a company would need a business valuation report, including proof of risk worthiness, raising funds, planning for the future, or preparing for an imminent or eventual sale. 

We use it in partnership with business owners, investing and working with them to get their businesses ready for sale or transfer whenever they are ready for that step. The valuation report not only serves as a guide to identify areas of focus, opportunity, or concern, but also as a benchmark for comparison to show prospective buyers the value they could acquire.

Whether the goal is near-term sale or long-term success, business owners want the business valuation report to tell a positive story of strength, stability, growth, profitability, opportunity and sustainability. If the report tells a different story, the opportunity remains to use it as a starting point and guide for a strategic reset, performance improvement and organizational turnaround, and sooner or later, sellability.

Who Develops a Business Valuation Report and What’s In It?

Most often, the business valuation report is developed by an accounting firm, investment banker, or broker. We consider these to be intermediary partners in the journey of our customers - business owners who operate firms with $3 - $20 million in revenues. As such, we can easily refer you to a resource who can undertake your business valuation to get the process started. Here’s what you need to know about the report.

There are key elements that most business valuation report contains. There are standard structural elements, including purpose, scope, methods, credentials and date of the valuation. These are important for consistency, credibility, and ability to compare across companies. 

Beyond that important housekeeping, the guts of the business valuation report will contain a review and discussion of:

  1. The business and what it does
  2. Industry and regional economic conditions that affect the business
  3. Organizational structure including a functional overview 
  4. Methods of valuation, results produced and an opinion of the overall business value

Business Description

The business description sets the stage for exactly what is being evaluated, and can drive things like relevant Key Performance Indicators (KPIs), competitive landscape, and revenue potential. It should contain an overview of the company’s focus, including:

  • Mission: who are you and what is your business purpose? 
  • Product and/or Service Offering: What do you sell and provide?
  • Primary markets by geography, industry and customer segments
  • Key customers and competitors

Industry and Regional Economic Conditions

This part of the business valuation report covers the macro environment within which the company operates. These external factors include factors that could present threats or opportunities that could have an impact on the viability and value of ongoing operations. Examples of industry and regional economic conditions could include:

  •  New market entrants
  • Consolidation, M&A, Divestiture
  • Disruptive technologies, product and process innovation
  • Supply shortages and/or cost
  • Labor shortages, layoffs, skills gaps

Functional aspects of the business,

The guts of the business valuation report are in the details of how the company is conducting business, from staffing and production to generating and accounting for revenue. Starting with the company’s structure, the assessment details functional areas, including:

  • Leadership: Governance, Strategy, Structure, Vision, Management
  • Finance: Accounting process and methods, Investments, Free Cash Flow, 
  • Operations: Efficiency, Capacity, COGS, Customer Satisfaction, R&D
  • Human Resources: Staffing, Training, Benefits & Administration, Employee Turnover
  • Sales: Sales Cycle, Pipeline, Close Rate, Cost of Acquisition, Retention Rates
  • Marketing: Product & Brand Management, Pricing, Engagement, Lead Generation

Methods of valuation, results produced and an opinion of the overall business value

There are three primary methods of valuing a business, and the business valuation report must state which approach is used. The three methods re:

  • Intrinsic Value Approach is calculated or perceived value measured by estimate, ratio, weighted assumptions, etc.
  • Market Approach  or “Comps” based on comparable situations and prior transactions. Note:  Comparable company analysis (also called “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios. Multiples of EBITDA are the most common valuation method.
  • Cost Approach based on the cost to build or replace

Finally, the assumptions, credibility. results and associated opinion of the valuation expert who wrote the report are essential to the ability to use the business valuation report as a basis for determining sellability or other strategic decisions.

How much does a small business valuation cost?

Business valuation prices can vary dramatically from firm to firm. This is due to a provider's areas of expertise, available resources, geographic restrictions, infrastructure, etc. Traditionally, professional business valuations will cost anywhere from $2,000 to $30,000+ based upon complexity. The Corporate Finance Institute (CFI) offers a useful infographic depicting a detailed valuation framework.

An Alternative to Selling Now: Using Your Business Valuation Report to Enhance Sellability

As you can see, this is a comprehensive evaluation of your business and its value, which is an essential factor in determining sellability. Your business valuation report might show that your business is sellable right now. Whether or not you’re ready to sell, it means you’re in really good shape. If it shows that your business is not immediately sellable, it still creates a valuable opportunity to get it there over time. 

We use the report to help identify exactly where to invest, what to work on, and how to determine the right time to sell, even if it’s far in the future. Leveraging the report to develop a transformational strategy and plan can be nuanced.

That’s why we provide this unique alternative with a hands-on approach and a mid- to long-term time horizon. Because we’re not brokers, bankers, or consultants, we are not in a hurry. We are investors helping you determine where you are and where you need to go, and then work with you to help you get there. It’s all about driving business value, and eventually, when you’re ready, sellability.

We are the W Alexander Group, headquartered in Cincinnati. We are not consultants or business brokers. We are private minority investors who work in active partnership with owners to provide an alternative to selling their business now through strategic and operational initiatives.  Our uncommon approach protects owner equity and provides an interim step, allowing for a more planful change and down-the-road sellability when you are ready to transition.

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