When the parties know what to expect at each phase of a business valuation project, it makes the process easier for everyone. This awareness promotes collaboration and timeliness, as well as minimizes potential surprises, misunderstandings and rework. Here’s the five-step process that’s used when valuing a business or interest in a business.

1. Engaging a valuation expert

The first step is retaining a business valuation professional and agreeing on the price, deliverables and scope of the assignment. Typically, the valuator and client sign an engagement letter, which serves as a legally binding contract that helps the parties understand such parameters as the:

• Company being valued,
• Percentage or number of shares to appraise,
• Effective valuation date,
• Standard of value (such as fair market value, fair value or strategic value),
• Premise of value (controlling or minority, marketable or nonmarketable),
• Basis of value (as a going concern entity, in orderly liquidation or in forced liquidation), and
• Purpose of the valuation.

Engagement letters also confirm the fees. Expect to sign a revised engagement letter or an addendum to the original contract if the scope of the project changes.

2. Gathering relevant information

The valuator will provide a list of documents that will be needed to understand how the business operates. In addition to the last five years’ financial statements and tax returns, the expert might request shareholder agreements, leases, marketing materials, trade association benchmarks and other relevant documents.

If an opinion will be used in a legal proceeding, involve the valuator in the discovery phase. This is especially beneficial when you lack access to the company’s financial records and premises, such as in a dissenting shareholder case or a divorce. It’s harder for a controlling shareholder to deny access if it’s been mandated by the court.

3. Conducting site visits

Next the valuator will visit the company’s facilities to conduct site visits and interview management. This is an integral part of the valuation process, not to be overlooked.

The purpose of the site visit is to see firsthand how the business operates and ask relevant questions before the valuator crunches the numbers. This step is essential to understanding the risk factors and opportunities the business faces.

4. Preparing the report

The valuator will then analyze the data, arrive at a conclusion of value and draft a comprehensive valuation report. Full written reports typically start with a summary letter, followed by a more detailed description of the valuation methodology used and conclusions made. Appendices may include statements of sources used and key management representations, the appraiser’s curriculum vitae, and numerical exhibits that summarize financial analytics.

In some situations, it may be appropriate for a valuator to issue a condensed “calculation report.” Although value calculations may cost less than conclusions of value supported by comprehensive reports, they’re appropriate only in limited circumstances and generally not used for litigation purposes.

5. Testifying, if necessary

A valuator may serve as an expert witness when the value of a business interest is the subject of a legal claim. The valuator’s written report may serve as his or her direct testimony in U.S. Tax Court. But other courts allow experts to provide direct verbal testimony when they value a business for other purposes, such as minority shareholder disputes, economic damages claims and marital dissolutions.

Before appearing in court, most experts ask clients to pay their fees in full, excluding court time. If they don’t, the expert could be perceived as a hired gun who gets paid only if the court rules in his or her client’s favor.

Get the ball rolling

Although valuators use a variety of analytical techniques and possess different qualifications, they generally adhere to the same process. Contact us to get the ball rolling on your business valuation project. You can also visit our related service page for more information on how we can assist you.

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