Valuation Process

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 years being 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)

Download our preliminary document request list here.

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, and other documents as necessary.

Once we have data, 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 the 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.

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.

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.

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.