ICYMI – Article originally appeared in 2015…. updated and revised for 2018! While getting my daily dose of Quora this morning, someone posed the question “What are the Top 5 Questions a VC should […]
So What's Involved in
Repeatable processes yield repeatable results.
At Quantive we insist on running a tight valuation process to ensure a high quality result.
Business Valuation Process
If there is something that we feel strongly about it’s that consistency in process yields consistent results. Quantive’s valuation process is crafted to do just that. What’s more – having a well defined valuation process also helps our clients understand what to expect – and when. We begin with a “discovery” phase, go into analysis, and finally detail our findings into a thorough report which we brief out to the client. This also helps use quickly complete assignments. End to end assignments can be as short as 2-3 weeks, and arrangements can be made to expedite as necessary.
While each assignment is different, the following are the steps you can usually expect when working with us:
- Data Collection
- Initial Analysis
- Management Interview
- Rinse and Repeat as needed!
- Deep Dive Analysis and Modelling
- Document Findings
- Brief Out 0l>
Data Collection and Document Requests
The actual request will certainly vary from case to case, but the core data request is usually somewhat similar. Ideally we want to see a five year period of data, with three the usual minimum. A typical request will include:
- Company tax returns
- Historical profit and loss statements
- Year-end balance sheets
- Profit and loss statement for the last twelve months (“LTM”)
- Current year-to-date profit and loss statement
- Current balance sheet
- AR and AP aging
- Customer demographic data
- Management forecasts or budgeting (if readily available)
Depending on the nature and scope of the assignment, we might also request other documents such as the company’s buy-sell agreement, corporate formation documents, inventory data, AR/AP aging, and other documents as necessary.
Once we have data in our analyst team will conduct what we call a “first pass analysis.” We’ll start looking at trending in the data, looking for variances, unusual items, positive and negative trends, and financial ratios. We’ll likely send you a detail of questions that we will want to cover during the management interview related to data provided.
You’ll hear us say this again and again: the numbers only tell part of the story. To really understand a company, we need to marry the narrative to the numbers. How did the company get here? Why is current performance where it is? What is likely to happen next? What are the risks? Where is the upside? The numbers alone don’t tell that story – but we want to understand it because it weighs on valuation.
To get there, we’ll conduct an interview with the client to get an in-depth understanding of what drives the business. Our goal is to quantify the financial statements, and beyond that understand both the value proposition and risk factors associated with the company. The interview will review a broad range of topics, including: growth prospects, customer profile, vendor data, staff and employment history, review of any ongoing litigation or potential claims, and so forth.
While the interview can be done on-site, oftentimes we are able to complete the bulk of the project via phone conference.
Rinse and Repeat!
Sometimes we get to this point and we are ready to push to the finish line. But in many (if not most) cases the management interview will uncover more questions and result in more requests. We iterate this process until we have an adequate understanding of the company.
Deep Dive Analysis: Crunching the Numbers
The appraiser will analyze the companies normalized financial statements, and use one or more of the several approaches below. Our professionals will consider each model that is appropriate for the subject company.
Approach to Valuation: There are 3 recognized approaches to valuation (with many models under each). They are:
During the analysis phase our professionals may also:
- Review buy-sell agreement for any controlling language or impairments to marketability and control
- Conduct a comparative analysis of the financial statements
- Complete any normalizing adjustments to the financial statements
- Gather and analyze comparative market data
- Develop an appropriate Discount Rate for the subject company
- Determine required Discounts for Control or Marketability
Reconciliation of Values
To arrive at a final estimate of value, the appraiser will reconcile the values derived in each of the valuation methods and combine them with appropriate discounts.
Documenting Our Findings: the Valuation Report
When a final valuation conclusion has been reached and all relevant information has been considered, the valuation report is delivered to the client. We thoroughly explain the report to our clients and their advisers and answer any questions to ensure a thorough understanding of our conclusions. A typical report runs between 40-60 pages and will frequently include:
- Summary Letter reviewing the valuation and findings
- Statement of Limiting Conditions
- Overview of Subject Company
- Review of adjustments to financial statements
- Detailed discussion of all valuation methodologies considered and used
- Detail of valuation calculations and supporting data
For most of our assignments we’ll conduct a brief out with our client. (In some cases this isn’t appropriate or necessary – think a “date of death” report for probate) For the most part, though, we feel that the brief out is the most important element of the entire engagement.
A frequent discussion we have with clients is that the final number is less important than 1) how we got there and 2) what happens next? Consider that our work up until this point has likely created a roadmap for corporate value. Like all maps, this provides direction as to where we might go next. And in many cases, we’re happy to work with you to develop what that roadmap might look like.
Get in Touch
How can Quantive Help?
We’d love to understand your unique situation and discuss how we might be able to help. Get in touch for a confidential discussion regarding your valuation requirements.
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