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