Different Types of Business Valuation – and How to Get There
Business Valuation Process Varies By Need
Darren Mize, ASA December 1, 2020
What’s driving the request for a business valuation? Different circumstances call for a more – or less – comprehensive business valuation. Your specific need will determine both the timeline for a final report and the actual process a business valuation professional will follow.
Different Types of Business Valuation
The most detailed form of business valuation, a full-form appraisal looks at every aspect of the business, and documents the methodology and assumptions used to arrive at the value conclusion. This is the level of valuation you need if you expect a challenge or a dispute that could end up in court. The American Society of Appraisers (ASA)and the Institute of Business Appraisers (IBA) issue standards that a comprehensive business appraisal should meet.
A summary appraisal involves the same level of investigation and analysis as the complete appraisal but delivers a summarized version of the salient information. A summary appraisal takes less time to prepare.
Calculation of Value
In some cases, a basic understanding of the value of a business will be sufficient for the task at hand. A calculation of value should not be considered in the same way as an appraisal – it arrives at an approximate value for the business, based on a limited amount of investigation and due diligence. Conducted for a lower cost and within a shorter time frame, it can be a useful tool to support management decisions when there’s not a defined requirement for precision and documentation.
When you’d like a second opinion about a business valuationreport, an appraisal review offers commentary and critique that could lead to a better understanding of a business valuation prepared by another party.
Machinery & Equipment Appraisal
In many businesses, machinery and equipment represent a significant component of a business’ value. A rigorous and accurate appraisal of key machinery & equipment, performed by an entity that knows the marketplace for such equipment, can be useful in the sale of assets, to collateralize debt and to provide reliable data to help resolve disputes.
A Typical Process for Valuation
What are the typical phases of a business valuation process, and what are the obligations you and your management team should expect to meet? While the overall process involves a predictable set of steps, the appraisal’s objective will determine the depth and detail an appraiser pursues.
Gathering Information and Performing Due Diligence
- Extensive Review of Financial Statements & Comparable Performance Metrics
A comprehensive business appraisal will naturally involve an extensive review of financial statements for your business to develop an understanding of core performance metrics. The business valuation professional will also assemble and analyze industry and economic information, as well as data from comparable business transactions in your industry – if available – to assess the relative performance of your business.
- Live Review & Discussion with Key Managers
The most reliable business valuations involve boots on the ground to see the business in operation, and interviews with key members of the management team (when authorized) – numbers alone cannot and should not tell the whole story.
- Analysis & Report Preparation
Once these inputs have been gathered, verified and appropriately compared, it’s time to analyze for value and prepare a report that is meaningful to both the business owner and the party who requested the valuation.
The same basic business valuation processapplies to less-intensive business valuations; the difference among various types shows up in the depth, detail and documentation of rationale a report provides, which depends, of course, on the purpose it needs to serve.