Whilst each business is unique and should be assessed on its merits, a standard business valuation approach should be applied to the company in question. There is no such thing as a standard valuation template or standard valuation formula. You should be very wary of so called ‘online valuations’ based on a black box formula or some other unknown method.
Each valuation should follow the following process:
- Understanding the Purpose
- Information gathering
- Financial Analysis
- Independent research
- In-depth understanding of the business
- Selection of an appropriate methodology and cross checks
- Providing a draft report
- Final report issued
1. Understanding the Purpose
There are a number of reasons for commissioning a business valuation. The first step of the process is to determine the reason and the type of report that is required. For example, you may need a valuation report or an expert report. There may also be other issues that need to be taken into account such as minority interests.
2. Information Gathering
Financial information is critical to the valuation process. Usually 3-5 years of profit & loss and balance sheets is ideal, along with forecasts if possible. Smaller businesses often have less detailed financial information, however it still requires a thorough financial analysis and assessment.
3. Financial Analysis
The business valuation expert should undertake a thorough financial analysis to identify potential adjustments, abnormal items and raise a number of questions to better understand the business and its financial performance. A number of adjustments and add add-backs may be required to normalise the financial results and adjust for abnormal, non recurring and non business items.
4. Independent Research
A good valuation report will include the outcome of a thorough industry research and competitor analysis. The industry research produces a through understanding of the industry and how the business has been impacted and is likely to be impacted. Competitor analysis focuses on finding comparable company to identify comparable company trading multiples and comparable company transaction multiples. This is not a simple mathematically exercise as a high degree of skill and experience is required to assess the merits of each comparable company to identify how comparable it really is and hence how much wight can be placed on it.
5. In-Depth Understanding of the Business
In order to form a proper view on the variables used in the valuation methodology and hence the valuation of the business, it is imperative to have an in-depth understanding of the business. This understanding is a result of the financial analysis, raising pertinent queries, ensuring thorough responses are received and having discussions with the business owner / operator. The valuation opinion is only as good as the thoroughness of the work undertaken and therefore templated or online cheap reports are lacking in this very important element.
6. Selection Of An Appropriate Methodology and Cross Check
There are a finite number of valuation methodologies, however care and understanding must be applied in selecting the correct methodology. Also, it is very important to undertake a number of valuation crosschecks to the main valuation methodology.
The most key business valuation methodologies that should be considered, include:
- Income approach, also known as the capitalisation of earnings or earnings multiplier approach
- Discounted Cash Flow (DCF) approach
- Asset approach
- Market approach
7. Providing a Draft Report
A draft report should be provided as an opportunity to correct any factual inaccuracies and an opportunity for the business owner / operator to add any further information.
8. Final Report Issued
Once feedback has been received, the report is finalised.