More often than not, it is a specific event which triggers a company or an advisor to request a business valuation. This can be from a tax reporting event (estate reporting, gift tax reporting, charitable contribution), litigation or divorce, or desire to sell or transition, among others.
However, we encourage businesses not to wait – the benefits of obtaining a business valuation on a regular basis can provide tremendous insight and enable executives to manage the company on an entirely new level. Not only will a valuation provide the fair market value of a business, it will detail useful information such as industry benchmarks and prospects, economic outlook, risk analysis, and a thoughtful look toward the future, enabling the company to set goals which create value and align with the strategic vision. A credentialed valuator will provide objective and independent analysis.
What information is included within a valuation report?
Valuation reports are thorough and detailed reports which include information about the company’s history and operations, industry and economic data, and a financial analysis of key indicators and ratios. Since valuation is a forward-looking concept, valuators often include one or multiple cash flow forecast scenarios.
Analysts typically offer different levels of service and can often tailor reports for management use, emphasizing the information most applicable or important to the company at hand. Companies may opt for a more limited scope engagement, working with the analyst to focus on key areas, which can offer a lower cost solution.
Market data and information
Critical to any thorough valuation is an analysis of the environment in which the company operates, including the industry and economy. A valuation will provide insights on industry prospects, relevant economic conditions, and financial benchmarks.
Benchmarking
A valuation will include an analysis of industry financial benchmarks. By comparing key performance ratios against peers, management can understand where improvements can be made in leverage, liquidity, profitability, or other areas. By the same token, the company may identify areas that outperform industry benchmarks, providing insight into a competitive advantage and positioning in the market.
Risk Analysis
Risk is a key component of value. The riskier an investment, the higher return an investor will require, in the form of a reduced price. Therefore, a company with higher risk will have a lower value, all else being equal. An objective analysis can help a business owner identify specific elements of the company that are increasing risk and could be impacting the value.
Forecast and scenario planning
Valuation is forward looking, and any investor or buyer will be most concerned with the cash flows a business will provide into the future. Therefore analysts will often forecast earnings over some time period, generally 3 to 5 years, but can extend 10 years or more, depending on the facts and circumstances.
Often times, a company will find itself at a crossroads and will want to consider possible scenarios based upon the likelihood of future events. These scenarios can help management plan ahead and make informed decisions as events unfold. Running through scenarios and making explicit or implicit decisions about the likelihood of each scenario can help management focus resources and attention where it is most likely to be needed. Similarly, if management is contemplating specific investments, valuations can be performed under multiple scenarios that can be helpful in the decision making process.
Objective Analysis
Valuation analysts holding appropriate credentials are held to standards which require independence and objectivity while performing valuation services. Having an outside perspective can help businesses understand and evaluate risks and keep biases in check.
Conclusion
A business valuation is far more than just a number—it can be a strategic tool that can help companies gain deeper insights, plan for the future, and identify opportunities for growth. By regularly engaging in the valuation process, businesses can benchmark performance, assess risk, and make informed decisions that align with long-term goals. Whether preparing for a transition, navigating industry shifts, or simply striving for operational excellence, a valuation can provide additional clarity that could be helpful in driving success. Rather than waiting for a triggering event, proactive businesses can leverage this process to stay ahead of the curve and maximize their potential.
Sara Maddox, ABV, AM, CVA, EA
Sara Maddox is a Senior Manager in Business Valuations. At DMJPS, her work includes valuing business enterprises using fundamental and complex analysis for purposes of succession planning, gift and estate tax, mergers & acquisitions, litigation matters, and shareholder buyouts. She works with a variety of industries, including retail/wholesale, real estate and construction, professional and personal services, and manufacturing.