Frequently Asked Questions
Valuation and Business Information
We’ve put together some commonly asked questions to give you more information about Business Valuation, Inc. and the services we provide. If you have a question that you can’t find the answer to here, please reach out to us via the contact page or call us directly.
Why do I need a business valuation?
In many cases an advisor, such as an estate or tax attorney, CPA, or financial advisor, may refer you to a valuation specialist for an independent valuation of your business or assessment of damages. It is important that you understand why the services of an independent valuator are valuable to you. There are many reasons for getting a business valuation. As a business owner, you may be considering one of the following activities:
- selling your business or acquiring a business
- developing an exit strategy
- buying out an owner or admitting a new owner
- obtaining financing
- transferring shares with a gift or estate tax impact
- structuring a management incentive plan
- forming an ESOP
- obtaining life insurance
Additionally, both business owners and others may find themselves in disputes that necessitate a valuation. Such situations include:
- divorce proceedings
- contractual disputes
- commercial litigation
- personal injury claims
- wrongful death claims
Regardless of the purpose, independent appraisals are valuable to you. Consider the following:
- The ownership interest in a business is usually very large compared to other assets.
- The value is not readily available (you can’t just look it up in the Wall Street Journal).
- Ownership interests in businesses are complex. Most people can’t value their company themselves and require outside expertise.
- Often, owners have to prove the value of their ownership interest or the amount of their damages to a court or tax authority. An independent valuation provides authorities with more comfort than a value asserted by the company’s owner.
What is the process for a business valuation?
The business valuation process starts with a confidential, no-obligation meeting or phone call. We need to understand your needs and address any questions you may have. This meeting generally includes a discussion about the purpose of the engagement, the scope of the engagement, the subject interest to be valued, the nature of the company, the standard of value, and the valuation date.
After the initial consultation, we will send an engagement letter that formally outlines the terms and objectives of the engagement. Once the signed engagement letter is returned to us, a data/information request is issued. Although every valuation engagement is unique, the requested data typically consists of items such as historical financial statements and tax returns, governing documents and agreements, management biographies, forecasts, budgets, accounts receivable aging reports, accounts payable data, and detailed management questionnaires, among other items.
After the requested data are reviewed, a management interview is scheduled so we can better understand the business and discuss the operations, outlook, industry, normalization adjustments, and any other outstanding items that are pertinent to the valuation with you. This interview typically takes place at the subject company if a site visit is an important component of the valuation. Alternatively, this discussion can be conducted over the phone if warranted.
Throughout the valuation process, we also gather and analyze other company-specific data, as well as data about the company’s industry and economic environment. Once we analyze the company’s historic financial statements, and if relevant information is available, we will compare the company’s financial results to other similar companies within the respective industry.
We will consider each of the asset, income, and market valuation approaches and applicable valuation methods to determine the most appropriate valuation methods to arrive at tentative conclusions of value. If warranted, adjustments related to the degree of ownership control, or lack of it, will then be made to these tentative conclusions of value. When all the relevant valuation factors have been individually analyzed and assessed, we will bring them together to arrive at a final conclusion of value.
The analysis is then documented in a written report that is prepared in conformity with professional standards and is subsequently issued to you. This may also include follow-up discussions with you, your personnel, and your professional advisors to address any questions you may have about the valuation analysis.
What kind of information is required for a business valuation?
Once you’ve decided to have your company valued, your valuator will give you a company questionnaire. This questionnaire is designed for many types of business so all of the sections may not be applicable to your company. However, document and data requirements are standard for any type of business. Providing all of this information in the first step of the valuation process allows your valuator to efficiently complete the project. If you don’t have some of the information, or you are unsure about what you can provide, speak to your valuator.
What will a valuation tell me about my business?
Valuations are designed to clearly communicate the value of an ownership interest in your business. For this reason, you can expect to see very specific statements such as:
The value of the Company’s common stock as of June 30, 2015 is $10,000,000 or $10.00 per share with 1,000,000 shares outstanding
While a conclusion of value is the end result of the valuation process, a well-prepared valuation report will also provide you with other useful information about your company. Examples of this information include:
- A summary of critical facts regarding the company’s products, services, customers, employees, suppliers, facilities, and other phases of operations.
- The rights and obligations associated with owning an equity interest in the company.
- The historical financial performance of the company and a comparison to other similar firms.
- Current and expected economic conditions and industry trends.
- The expected level of income and cash flows that the company will generate for its owners in the future.
- The risk associated with the company and the equity securities including both operational issues and market volatility.
- The specific risks associated with: (a) the marketability of the ownership interest in a competitive and unrestricted market, and (b) the ability or inability to control the company.
- The market value of specific assets owned by the company and the liabilities that are currently owed to creditors.
Also included in the valuation report are comparisons of the business to publicly traded companies, to similar firms that have recently sold in mergers & acquisition transactions, and to prior transactions involving the company’s equity securities.
How can I increase the value of my business?
Increasing the value of your company will attract buyers, strategic partners, and investors. Our value enhancement services are designed to improve the value of your company through proven methods delivered by our experienced professionals. One tool we use extensively is a Lean management technique called “Value Stream Analysis” which has helped many clients substantially improve specific business processes and improve profitability.
Value Stream Analysis (“VSA”) is one of the tools we offer as part of our value enhancement service portfolio. Using the VSA, we work alongside clients to design tactical plans that rapidly improve the value of the organization. We have successfully facilitated VSAs that dramatically improved the sales and marketing, operating, and administrative processes of clients in industries ranging from professional services to manufacturing.
Our experts will work with owners and senior management to identify opportunities for rapid improvement. Once the opportunity is identified, our experts will organize and facilitate a one to three-day VSA “event” that will involve selected company personnel ranging from senior management to hands-on staff.
The final product of the VSA event is a tactical rapid improvement plan and a path to implementing it. Within as few as thirty days of the completion of the event, the company can realize improvements within the analyzed process. Typically, these plans are fully implemented within three to six months.
Our proven track record in delivering value to our clients using the VSA tool is evidenced by a long list of success stories. Our clients have realized dramatic results after conducting a VSA with our experts. For example:
- A sales VSA resulted in an 85% increase in annual sales for a manufacturer.
- A manufacturing VSA resulted in an improvement of on-time delivery rates from 72% to 99%.
- An internal process VSA resulted in a $325,000 annual cost savings for a service industry client.
- Another sales VSA client in distribution realized an 82% increase in sales and a 15% reduction in annual costs the first full year after implementation.
Contact our experts to learn how your company, and your equity investment, can benefit from our VSA services.