Michael B. Lehner, CPA/ABV, CFE, ASA
732-412-3825
MLehner@zbtcpa.com
zbtcpa
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5 steps to valuing a business

5 steps to valuing a business

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Business valuation experts use a variety of analytical techniques and possess different qualifications. But a common denominator is the process that everyone uses to value a business.

1.      Retention

The first step to valuing a business or an interest in a business is retaining an appraiser and agreeing on the price, deliverables and scope of the assignment. Typically, the valuator and client sign an engagement letter, which serves as a legally binding contract that helps the parties understand such parameters as the:

  • Company name,
  • Percentage or number of shares to appraise,
  • Effective appraisal date,
  • Standard of value (such as fair market value, fair value or strategic value),
  • Premise of value (controlling or minority, marketable or nonmarketable),
  • Basis of value (as a going concern entity, in orderly liquidation or forced liquidation), and
  • Purpose of the appraisal.

For example, you might retain an appraiser to determine the fair market value of a 20% interest in ABC Company as of Dec. 31, 2013, on a minority, nonmarketable basis as a going concern entity for estate tax purposes.

Engagement letters also confirm the fees. Expect to sign a revised engagement letter or an addendum to the original contract if the scope of the project changes.

2.      Document requests

The valuator will provide a list of documents that he or she will need to better understand how the business operates. In addition to the last five years’ financial statements and tax returns, the expert might request shareholder agreements, leases, marketing materials, trade association benchmarks and other relevant documents.

If an appraisal will be used in a legal proceeding, involve the valuator in the discovery phase. This is especially beneficial when you lack access to the company’s financial records and premises. It’s harder for a controlling shareholder to deny access if it’s been mandated by the court.

3. Fieldwork

Next the valuator will visit the company’s facilities to conduct site visits and interview management. This is an integral part of the valuation process, not to be overlooked.

The purpose of fieldwork is to see firsthand how the business operates and ask relevant questions before the appraiser crunches the numbers. This step is essential to understanding the risk factors and opportunities the business faces.

4.      Report preparation

Full written reports typically start with a summary letter, followed by a more detailed description of the valuation methodology used and conclusions made. Appendices may include statements of sources used and key management representations, the appraiser’s curriculum vitae, and numerical exhibits that summarize financial analytics.

A survey conducted at the AICPA Forensic & Valuation Services Conference in 2013 revealed that the average length of a business valuation report is currently about 50 pages. Participants at the recent conference also reported an increase in the demand for shorter “calculation reports.” Although calculation engagements may cost less than full reports, they’re appropriate only in limited circumstances and generally not used for litigation purposes.

5.      Expert testimony

An expert’s written report may serve as his or her direct testimony in tax court. But other courts allow experts to provide direct verbal testimony when they value a business for other purposes, such as minority shareholder disputes, economic damages claims and marital dissolutions.

Before appearing in court, most experts ask clients to pay their fees in full, excluding court time. If they don’t, the expert could be perceived as a hired gun who gets paid only if the court rules in his or her client’s favor.

When everyone’s on the same page

When all of the parties know what to expect at each phase of a valuation project, it makes the process easier for everyone. This awareness promotes collaboration and timeliness, as well as minimizing potential surprises, misunderstandings and rework.

Michael Lehner


This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. In addition, any discounts are used for illustrative purposes and do not purport to be specific recommendations.