During our initial contact it is important to clearly determine the scope of the engagement. Determining the scope includes (i) identifying the interest to be valued (a specific percentage or number of shares), (ii) the date the business is to be valued, and (iii) the purpose of the valuation and the type of report that is needed
We will provide a written engagement service agreement. It will define the scope of our service offering, expected timeline and fee for services.
A significant part of any business valuation is the process of obtaining documents and information necessary to prepare a realistic and supportable business value.
IBVA Pros initial document request is listed on this website under tab Data Request. The checklist can save the business owner time gathering documents and information.
Once the requested documents and data have been provided, the business valuation expert will perform an initial review of the company’s financial, operations, governance, and industry information. During the initial review and analysis of the information provided, the business valuation expert will develop a draft of the spreadsheets prepared and send to the client and/or the client’s advisors for review, along with a detailed list of questions for the owners or management which will be discussed during the management interview.
The documents and financial information only provide part of a company’s “story.” For a business valuation expert to fully understand the operations and financial condition of a business, it is usually necessary to speak or meet with the company’s owners and/or management.
A management interview provides the business valuation expert the opportunity to discuss questions regarding the documents and data provided as well as many other factors of the business including forecasts or projections, competition, customers, the company’s strengths and weaknesses (or SWAT Analysis), key employees, and many others.
The management interview can be conducted informally over the phone, via video conference, or in-person at the company’s location. The benefit of meeting at the company’s location is to provide the business valuation expert the opportunity to tour the facility and see the business operations in action. There are certain situations where an informal management interview may not be appropriate or allowed, such as, in certain litigation matters. In the event the business valuation expert has questions regarding the financials and/or operations, formal interrogatories may be required, or depositions may be necessary.
Business valuation experts typically review three main approaches to value, namely, the asset approach, income approach, and market approach.
Asset Approach – The asset approach, more specifically the adjusted book value method, sums up the value of the assets and subtracts any liabilities to reach an adjusted book value. The asset approach typically only considers value from the tangible assets and liabilities and excludes any value for the company’s goodwill or intangible assets. Because of this, the asset approach is best used for companies that are asset intensive or lack a history of earnings.
Income Approach – The income approach provides a value for a business based on the cash flows generated by the company. Two of the most common methods used under the income approach are the capitalization of earnings method and the discount cash-flow method (DCF). These are the most common methods used by valuation experts.
Market Approach – The market approach determines a value for a business by looking at multiples from similar companies which have been bought or sold and applying those multiples to the financial metrics of the subject company. There are several methods available within the market approach.
Once a value is reached using one or more of the approaches described above, discounts or premiums are often required to reach a final estimate of value. Whether or not discounts or premiums are appropriate depends on several factors including the purpose of the engagement and the standard of value. Some of the more common discounts and premiums are as follows:
Control Premium – An amount or a percentage by which the pro-rata value of a controlling interest exceeds the pro-rata value of a non-controlling interest in a business enterprise, to reflect the power of control.
Discount for Lack of Control – An amount or percentage deducted from the pro-rata share of the value of 100 percent of an equity interest in a business to reflect the absence of some or all of the powers of control.
Discount for Lack of Marketability – An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.
The last step in the valuation process is calculating a final estimate of value. This can be done by determining appropriate weightings for the values determined using the valuation approaches and methods, and applying the appropriate discounts and premiums, if necessary.
Finally, the business valuation expert will conduct a thorough quality control review to check for any errors or miscalculations. The final conclusion will be delivered to client electronically, hardcopy, or both.