The purpose of the Business Valuation is the most important factor in the valuation process and drives how the assignment is performed. A valuation performed on a going-concern basis would be very different than a valuation of the same business performed for liquidation purposes.
When performed on a going-concern basis, the valuation of a company is, in general, based on the projected earnings of the company. In other words, how much could a hypothetical buyer of the company expect to receive as a return on his or her investment? These projections are based on the current and historical financial performance of the company as represented by the financial information provided to the valuation analyst, and on management’s estimate of future earnings. We also look at relevant comparable companies, either public or private (Peer Group), and transactions that have occurred near the valuation date.
A valuation assignment generally takes approximately four to five weeks after all pertinent company information has been received by the valuation analyst. This information includes five years of historical financial statements (or tax returns), including the most recent interim statements (or quarterly returns). This information also includes company background information, organizational information, year of incorporation/formation, management experience, information on facilities, customer base, competition, employees, shareholder/ownership breakdown, extraordinary expenses incurred during the year, and management’s projected earnings for the next five years.
Prior to the completion of the assignment, a Discussion Draft is sent to management to verify that an accurate financial picture has been presented and that projections are a realistic expectation of future results. After this Discussion Draft is reviewed and accepted by the company management, the final report is issued.