If you want to sell your business or you want some loans from the bank, valuation your business is absolutely important.
So, what does a valuation report mean? What are the important contents of a valuation report? What are the methods to evaluate a business? I will try to answer all of these questions below.
Structure of a valuation report:
An ideal valuation report should follow the below structure:
- Introduction of the company.
- Sources of Information.
- Analysis of the Company and other Non-financial Information.
- Financial Statements and Analysis of the same.
- Valuation Adjustments.
- Approaches considered for Valuation.
- Any Financial Adjustments made.
- Conclusion of the Value of Asset.
- Details of the Analyst doing the valuation.
Let us now discuss in details, each of the above.
This is the summary of all the valuation report. It is similar to the index of a book.
Introduction of the company
A detailed introduction of the company, who are the major clients of the company? What industry the company represent? Basically, anything which would attract the interest of the buyer or the banker.
Sources of Information:
Here the evaluator mentions the various sources through which the information has been acquired. It mentions the industry norms. Details of the auditors who have audited the financials of the company.
Analysis of the Company and other Non-financial Information for Valuation Report:
This part of the report consists of the non-financial information of the company. It should have the below details:
- Nature and background of the company. How the company was formed and how it has evolved over times.
- What are the facilities owned by the company? It could be the leased office building or Self owned building.
- Structure of the company. Who is the owner? Is it a LLC company? Any branches of the company?
- A detailed description of the ownership and management structure of the company.
- Details of the products and services sold. The Geographic location of the company.
- Its USP and Competitive advantage over its competitors.
- Any specific risks threatening its existence.
- Business strategy and future plans.
Financial Statements and Analysis of the same:
Detailed Financial statements, including Profit and Loss accounts, Balance Sheet and tax return summary should be attached here. If the Company has audited its financials, the details of the audited statement to be attached here.
It should also include forecasts, projections, key ratio analysis.
If there are any adjustments in the financial statement that has to be included as well.
Adjustments are majorly shown if the company has undergone a major change after the date of valuation of the business. Any other adjustments to be made, specially to Appraise the business.
Approaches considered for Valuation:
There are three methods of Valuation of a business. Let us discuss each of them and what method you should follow:
The asset-based approach:
This approach is based on Net Asset valuation of the Company. It is the net asset less the associated liability. This approach is most appropriate on evaluating the net investment of the company, or it is for evaluating a company with little or no profit. For a company under liquidation this is the appropriate method.
Here the income and projected income of company taken at discounted value. Under this approach the income of the company is heavily relied on the projected income and projected cash flow of the company. This method is used when the company is making profit on an ongoing basis.
Here the valuation is arrived at a figure based on the value similar business which has been sold in recent past. There are numerous databasesthat analysts use which publish merger and acquisition activity of privately-held companies. Depending upon the industry, there may be hundreds of comparable transactions – or none at all. Generally, analysts would like to have a sample of at least 10 or 12 comparable transactions.
Any Financial Adjustments made:
The next part of the valuation report deals with certain discounts that might be applied to the values derived from the valuation methods described above. The key word is might since the application of the discounts and their amounts depend on the facts and circumstances of the valuation engagement.
Conclusion of the Value of Asset:
This section summarizes the values determined by each of the valuation approaches considered and concludes on a single value or range of values. Here the valuation date is also mentioned, which is the most important criterion.
Details of the analyst doing the valuation:
Here a detail of the analyst doing the valuation, his authority and experience is provided. Information about the qualification of the analyst is also mentioned.
Here is a list of data, calculations, third party information, supporting data that exhibits the valuation is added.
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