Business Valuation Inventory List For Consultants
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Business Valuation Inventory List for Consultants
Business valuation is a complex and multifaceted process. For consultants offering valuation services, a structured approach is crucial for ensuring accuracy, consistency, and defensibility. This comprehensive inventory list outlines key areas and information requirements for conducting thorough and reliable business valuations. This inventory is organized into categories to facilitate a streamlined workflow and prevent overlooking essential elements.
I. Engagement and Planning
A. Client Information and Understanding
- Client Identification: Legal name, address, contact information, and ownership structure.
- Purpose of Valuation: Clearly defined reason for the valuation (e.g., sale, merger, acquisition, litigation, estate planning, gift tax, employee stock ownership plan (ESOP), financial reporting).
- Intended Use and Users: Who will be using the valuation report and how will it be used? This dictates the level of detail and rigor required.
- Ownership Structure and History: Details about current and past ownership, including any relevant agreements (e.g., buy-sell agreements).
- Premise of Value: Going concern vs. liquidation. Determine the appropriate assumption based on the specific circumstances.
- Standard of Value: Fair Market Value, Fair Value, Investment Value, etc. The standard of value is legally defined and dictates the hypothetical transaction to be considered.
- Valuation Date: The specific date for which the value is being determined.
- Scope Limitations: Any limitations imposed by the client or circumstances that may affect the valuation. Document these clearly.
- Conflicts of Interest: Identify and disclose any potential conflicts of interest.
- Engagement Letter: A formal agreement outlining the scope of work, responsibilities, fees, and timelines.
B. Preliminary Research and Industry Analysis
- Industry Identification: NAICS code and a detailed description of the industry in which the business operates.
- Industry Trends and Outlook: Research current and projected industry trends, growth rates, and key drivers.
- Competitive Landscape: Identify key competitors, market share, and competitive advantages.
- Regulatory Environment: Understand applicable regulations and their potential impact on the business.
- Economic Conditions: Assess the overall economic environment and its influence on the industry and the business.
- Sources of Information: Identify reliable sources for industry data (e.g., IBISWorld, MarketLine, government publications).
- Company Specific Risks Analyze the current and potential risks of the company in relation to its industry.
II. Financial Information Gathering and Analysis
A. Historical Financial Statements
- Audited Financial Statements: Ideally, obtain audited financial statements for the past 3-5 years.
- Unaudited Financial Statements: If audited statements are unavailable, obtain unaudited statements and understand their limitations.
- Interim Financial Statements: Obtain the most recent interim financial statements to provide an up-to-date picture.
- Tax Returns: Review tax returns for corroboration and additional information.
- Statement of Earnings (Income Statement): Analyze revenue, cost of goods sold, operating expenses, and net income trends.
- Balance Sheet: Analyze assets, liabilities, and equity to assess financial health and solvency.
- Statement of Cash Flows: Analyze cash flows from operating, investing, and financing activities.
- Capitalization Table: Details about ownership, including the number of shares outstanding and ownership percentages.
B. Financial Statement Adjustments
- Non-Recurring Items: Identify and adjust for non-recurring revenue and expenses.
- Related-Party Transactions: Scrutinize related-party transactions for fairness and adjust accordingly.
- Excess Compensation: Adjust for any excessive or below-market compensation paid to owners or executives.
- Normalization Adjustments: Adjust financial statements to reflect a normalized level of operations.
- Working Capital Adjustments: Evaluate and adjust working capital balances as needed.
- Depreciation and Amortization: Review depreciation and amortization policies for consistency and reasonableness.
- Tax Rate Adjustments: Apply the appropriate tax rate for valuation purposes.
- Off-Balance Sheet Assets and Liabilities Review for any assets or liabilities that aren’t on the balance sheet, but impact valuation.
C. Prospective Financial Information
- Management Projections: Obtain management’s financial projections for the next 3-5 years.
- Support for Projections: Request documentation to support the assumptions underlying the projections (e.g., sales forecasts, expense budgets).
- Sensitivity Analysis: Conduct sensitivity analysis to assess the impact of changes in key assumptions.
- Discount Rate Determination: Estimate the appropriate discount rate using methods such as the Capital Asset Pricing Model (CAPM), Weighted Average Cost of Capital (WACC), or build-up method.
- Terminal Value: Calculate the terminal value using a growth rate or exit multiple approach.
- Capital Expenditure Plans: Review all capital expenditure plans to see how they affect future earnings.
III. Operational and Qualitative Information
A. Business Operations
- Products and Services: Detailed description of the company’s products and services.
- Market Position: Analyze the company’s market share, brand recognition, and competitive advantages.
- Customer Base: Identify key customers and assess customer concentration.
- Supplier Relationships: Evaluate the company’s relationships with key suppliers.
- Technology and Innovation: Assess the company’s technology and innovation capabilities.
- Management Team: Evaluate the experience, expertise, and stability of the management team.
- Employees: Analyze the employee base, including skills, training, and turnover rates.
- Operating Processes: Understand the company’s key operating processes and their efficiency.
- Intellectual Property: Identify and assess the value of any patents, trademarks, copyrights, or trade secrets.
- Physical Assets: Review the condition and value of the company’s physical assets.
B. Legal and Regulatory Matters
- Legal Agreements: Review key legal agreements, such as contracts, leases, and licenses.
- Litigation: Identify any pending or threatened litigation.
- Regulatory Compliance: Assess the company’s compliance with applicable regulations.
- Environmental Issues: Investigate any potential environmental liabilities.
- Insurance Coverage: Review the company’s insurance coverage.
C. Site Visits and Management Interviews
- Site Visit: Conduct a site visit to observe operations and assess the condition of assets.
- Management Interview: Interview key members of management to gather information and insights.
IV. Valuation Methodologies and Application
A. Valuation Method Selection
- Asset Approach: Determine the net asset value of the business.
- Income Approach: Use discounted cash flow (DCF) analysis, capitalization of earnings, or excess earnings method.
- Market Approach: Use guideline public company method (GPCM) or guideline transaction method (GTM).
- Selection Rationale: Justify the selection of the chosen valuation methods based on the specific circumstances.
B. Application of Valuation Methods
- Data Input: Use accurate and reliable data in the valuation models.
- Assumptions: Clearly state and support all assumptions used in the valuation.
- Calculations: Perform calculations accurately and consistently.
- Weighting: If multiple methods are used, determine the appropriate weighting for each method.
C. Discounts and Premiums
- Discount for Lack of Marketability (DLOM): Consider discounts for lack of marketability for closely held businesses.
- Discount for Lack of Control (DLOC): Consider discounts for lack of control for minority ownership interests.
- Control Premium: Consider premiums for control for majority ownership interests.
- Key Person Discount: Consider if the business suffers a reliance on a key employee or member of management.
V. Report and Conclusion
A. Valuation Report
- Clear and Concise: The valuation report should be clear, concise, and easy to understand.
- Comprehensive: The report should provide a comprehensive overview of the valuation process and findings.
- Supportive Documentation: Include supporting documentation and exhibits.
- Assumptions and Limiting Conditions: Clearly state all assumptions and limiting conditions.
- Qualifications of Valuator: Disclose the qualifications and experience of the valuation consultant.
- Opinion of Value: State the concluded opinion of value.
- Report Date: Document the date of the report.
B. Conclusion and Recommendations
- Summary of Findings: Summarize the key findings of the valuation.
- Recommendations: Provide recommendations based on the valuation results (if applicable).
This inventory list provides a framework for conducting comprehensive business valuations. The specific requirements may vary depending on the engagement. Thorough documentation and sound judgment are essential for ensuring the accuracy and defensibility of the valuation.
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