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How Does the Business Valuation Process Work

By November 21, 2022June 17th, 2024Blog4 min read
How Does the Business Valuation Process Work

Business valuation refers to the process by which the financial value of a company is calculated. It may be done so for different purposes. A company will have to draw up a business valuation in case of litigation to prepare an exit strategy in case of a buying or sale, acquisition, merger or strategic planning.

Business valuation can be a complex process with many steps, formulas for calculation, rules, and specifications. Only an experienced business valuation firm like RNC can be trusted to do it correctly.

This article looks at the different processes involved in a business valuation process.

1. A Valuation Agreement is Drawn up

A business valuation expert identifies the ownership interest to be valued. Then the valuation date, the purpose of valuation, and the premise and standard of value based on which the value is to be used are determined. The kind of engagement and the type of report are also determined.

2. Necessary Documents are Furnished

There are different documents to be produced to conduct a proper business valuation. These documents include historical financial statements, balance sheets and income statements, tax returns, articles of incorporation, operating agreements of LLCs, private agreements among stakeholders and partnership agreements, contracts, buy and sell agreements, contracts, leases etc. All of these are required to make an objective, well-rounded business valuation.

​3. Economic and Industrial Data are Analysed

A valuation expert evaluates the state and prospects of the concerned industry and the overall economic outlook (national, regional, local, and, if necessary, international).

4. Financial Performance of the Company is Reviewed

A thorough understanding of the financial condition, its nature, and its history are gained from historical financial statements, income statements, and balance sheets. Financial trends and performance are compared to the industry average.

​5. Normalisation of Earnings

The normalisation of historical financial statements is done to get more realistic operating results and fair market value (FMV) of the assets and liabilities. It also gives more meaningful projections and forecasts and makes a better comparison with industry averages and peers.

6. Valuation Analysis

A valuation expert determines the worth of a privately-owned business or the percentage of ownership in a business. Either of the three methods- asset, market or income approach is used to conduct a valuation analysis. Why it was chosen is also explained in the report.

​7. Discounts and Premiums are Applied

The valuation expert adjusts certain values according to the method of valuation chosen. Lack of marketability, control premium and discount for lack of control are some of the adjustments made.

8. Indicated Values are Reconciled

Various valuation approaches indicate values that are then reconciled to get an estimated value after considering all relevant facts and considerations of the valuation.

9. Report is Drafted

After all of the above steps, a draft report is prepared carefully. The client then looks for revisions. Once the client is satisfied with the report, the process is wound up.

Hire Business Valuation Experts Who Can Tie it All Together for the Best Outcomes

Perhaps the most crucial step is hiring a business valuation expert who can conduct the whole process without errors. That’s why at RNC, we are trusted for our professional and experienced business valuation experts. We have been conducting business valuations over the years, making us a leader in the industry. Get in touch with us to know more about our business valuation services.
Also Read, How Revenue Is Important in Business Valuation