So, you know you need a business valuation, but you’re not sure what the valuation process entails. Business owners who experience a valuation for the first time are often surprised by the robust process that valuation professionals use to determine the value of a business. Here’s an overview of what you can expect in each step.

Step 1: Finding the Right Fit

While there are many qualified business valuation professionals, it’s important to find one with the professional training and experience that matches your specific needs, based on factors such as the purpose of the valuation, the size of your business, your industry niche, and more. Additional considerations that can help you find the right provider include:

• A valuator who specializes in assessing small and midsized, closely held businesses will bring added perspective about the factors that drive value for your unique business.
• A valuation provider who is part of a team with broad business advisory experience brings perspective to the role; focusing exclusively on valuations can lead to limitations based on a narrow focus.
• A team that works with buyers as well as sellers will understand what purchasers are thinking about when they explore a potential deal, so they can view your business through the lens of a prospective buyer.
• Similarly, being regularly cross-examined helps professionals who provide valuation services in divorce and litigation proceedings become adept at seeing the business from different angles.

The initial call is a chance for you to ask questions to help you learn about the provider’s process as well as their experience, availability, and fees. You’ll want to make sure they’re available when you need services. (Timing of a valuation can be especially important in estate planning.)

They’ll ask about your reasons for seeking a valuation, your industry, and basic information about your business. Your answers will help them understand what type of valuation you need — a calculation report or a valuation report — or if you need a formal valuation at all. They’ll let you know whether they can help you, and if so, they’ll give you options based on the purpose of the valuation and the type of valuation that’s most appropriate for your situation.

Step 2: Information Gathering

Once you’ve retained a valuation professional, you’ll need to provide a wide variety of details to help them understand your business. Gathering the required data and documentation may take just a few days for a small business, or as long as several months for larger or more complex organizations. This phase materially impacts the length of your valuation engagement. Once the valuation professional receives the requested information, expect them to return their results roughly 60 to 90 days later, in most cases.

A typical request list might include:

• Tax returns and financial statements dating back five years or more
• Ownership schedules and shareholder agreements
• Details of all transactions involving ownership stakes in the company
• Key performance indicators for five years or more — relevant metrics that aren’t reported on financial statements, e.g., gallons produced, products sold, number of new customers, customer retention rate, and cost of customer acquisition
• Fixed assets, capital expenditures, and depreciation schedules
• Leases and other legal contracts
• Marketing materials
• Trade association benchmarks, if applicable

Step 3: Financial and Nonfinancial Analysis

Your valuation professional will use the information you provided to analyze the company’s normalized cash flow and estimate a future cash flow stream. They’ll also assess the risk associated with achieving that cash flow stream and expected growth.

Step 4: Site Visits and Management Interview

Your valuation team will want to see the business in action so they can assess the company’s facilities and operations. They’ll ask a management team leader to show them around the site and answer questions about business processes and workflow.

Then, they’ll sit down with the leader to ask more detailed questions to gain a deeper understanding of things like:

• Factors that drive cash flow
• Products and services you offer
• Management and ownership structures and relationships
• Your customer base, market area, and competitors
• Supply chain and vendor arrangements

Management’s expectations for cash flow and growth

Step 5: Valuation Analysis

Armed with information from multiple sources, the valuation professional must determine the optimal valuation method before they can crunch the numbers. They’ll consider each primary valuation approach — including the income approach, the asset approach, and the market approach — weighing each one’s relative strengths and weaknesses in the context of your specific business situation. Then they’ll draw upon their training and experience to synthesize everything they’ve learned about the company to arrive at an estimated value.

Step 6: Communicating the Valuation Report

The valuation team will communicate the results of their assessment to you in writing. They’ll typically provide a first draft of the report in PDF form for you to review. As you review, make sure all the facts that they’re basing their valuation on are correct — misheard or misreported information can make the valuation less accurate. You and your valuation analyst can discuss any potential factual issues via email or phone before the valuation report is finalized.

When the report is complete, you’ll have a formal conclusion of value or calculation of value, depending on the type of valuation you opted to pursue.

Leveraging Insights from the Valuation Process

Besides the current value of the company, a report prepared by a professional who is accredited in business valuation may offer insights about opportunities to improve the value of the business. 

Those opportunities will likely be presented in very general terms within the valuation report, since this kind of forward-looking consulting is not usually included within the scope of a valuation. However, an additional consulting engagement with the valuation team can be a worthwhile investment that can help you identify and prioritize ways to build the value of your business.

Finding Actionable Answers

Your business is worth the world to you. Your years of hard work are what got it here — but they also make objectivity impossible. Whether you’re seeking new investment or looking to exit the company, only a qualified valuation specialist can give you the unbiased insights you need to satisfy potential lenders, buyers, and other third parties. Reach out to the experienced business valuation professionals at CRI for answers you can count on, so you can make your next move with confidence.