What Data is Required for a Valuation?

So, you’re a middle-market entrepreneur or a business owner looking for information about selling your business. If that’s the case, you probably already know you need to get a business valuation. That’s where Quantive comes in.

Your reasons for needing the valuation could range from preparing for retirement to a divorce asset settlement. In between buying the business and planning your exit, there are many other triggering events that may require a business valuation like to support your position during litigation of shareholder disputes, 409(a) fair market value appraisals for your founders or employees, or to apply for a small business loan.

Whatever the reason, you need to be able to answer two questions before you can get started:

1. What type of business valuation is best for my circumstances?

2. What documents and information do I need to gather to support the business valuation?

Answering Question 1: The Types of Business Valuation

Business valuations can use one of three different methods: 1) the Asset Approach, 2) the Market Approach, and 3) the Income Approach. You can get an in-depth rundown on those three processes in our blog “Valuation Approaches: Choosing one for 2022”.

Here’s a quick summary of the three approaches:

1. The Asset Approach uses the bottom-line equation of Assets equal liabilities minus equity.

This approach does not consider a company’s earnings but works best in valuing companies with loads of assets that are being sold mainly.

2. The Market Approach essentially compares the business with its peers. It assumes that a business will sell for a similar price to other companies of a similar size and industry.

This approach is favored because the market value can often be more than the sum of its parts. It employs a straightforward, easy-to-understand method and assumes that similar companies will sell for the same amount.

3. The Income Approach analyzes the company’s cash flow using a variety of accounting and complicated analysis methods that include valuations of free cash flow or the firm’s value beyond a forecasted period.

This method is preferred if the accounting formulas show that the company can grow and keep its value in the future.

Not knowing what approach you should use compounds the fact that you probably don’t know the actual value of your company. You should get some expert help in understanding how business valuation works.

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Answering Question 2: Data and Documents Required in Business Valuation

The job can’t really begin in business valuation until the paperwork is gathered. To get an accurate valuation report, you’ll need to come up with 3-5 years’ worth of the following categories of accounting, legal, and general company data:

Financial Accounting Data Required for Valuation

Accounts Receivable Aging—An accounts receivable aging report shows unpaid customer invoices and unused credit memos by date ranges. The report shows how effective the company has been at collecting debts and how the unpaid receivable amounts are affecting the company’s cash value.

Accounts Payable aging—This report shows the due dates of bills and invoices that a business has to pay. This functions as a management tool for predicting 30-day increments of past, present, and future financial obligations.

Contract Backlog and Bid Pipeline “Waterfall” Chart—A “Waterfall Chart” is an accounting tool that projects revenue from recurring revenue streams. The waterfall chart displays future revenues and projects the eventual tailing off of future income.

Tax returns—Most business valuations require the previous 2-3 years’ records of tax returns. If the business is a sole proprietorship, partnership, S corporation, or LLC, the owner’s tax returns may also be needed.

Owner Compensation and Discretionary expenses—Those expenses would typically include disability and health insurance, auto expenses, travel, entertainment, and all the perks the business provides to the owners and their families.

Profit & Loss Statements—Frequently referred to as the income statement, a profit and Loss Statement summarizes the revenues, expenses, and costs incurred during a fiscal year. Valuations require those statements on an accrual—i.e., projected—basis.

Balance Sheets—The accounting reports show the company’s resources or assets and how those assets are financed, either through debt under liabilities or shareholder equity. The balance sheet is a snapshot of how management uses the company’s resources.

Forecast (if available)—A forecast predicts what the business will look like in the future from a financial statement. Financial forecasts use “Pro forma statements”—i.e., traditional accounting firms—to project cash flow, profit & loss, and balance sheets based on historical data and analysis of future performance.

Revenues by Customer, Last Five Years—This data is extracted from company invoices and income statements. Recurring revenue is a valuable asset and predictor of the company’s future performance. This data will include a listing of the five largest customers and the total amount of sales during the past year.

Other Documents Required for Valuation

Legal documents that list the following:

  • Company liabilities—Loans, outstanding notes with terms and rates
  • Property leases with descriptions and specifics of the leasing terms.
  • Corporate documents—stockholder or partnership agreements and stock option agreements, along with any offers to purchase or sell company stock, along with copies of the buy-sell agreements.
  • Pending litigation or indications of threatened lawsuits
  • Employee benefit plans—pensions, profit-sharing, and employee stock-option plans

Additional Company Data Required

  • Resumés or summary backgrounds and experience of all key personnel with an organization chart
  • A list of patents, copyrights, trademarks, and similar intangibles
  • Value indicators, such as property tax appraisals or valuations completed during the past five years—including stock transactions.

The previous listing of business valuation documents may not apply to each business. There may also be additional documents required before the valuation begins.

We know you still have questions.

We can help you with choosing the best business valuation approach and, for a flat fee, give you our findings with a comprehensive valuation report. Contact Quantive, and we’ll quickly scope your requirements and provide a quick quote to get the ball rolling and your business valuation on track.

Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.



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