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How to Review a Valuation Report

Business valuations are prepared for many purposes, including litigation, estate and gift tax, and the purchase or sale of a business. To properly understand and utilize a valuation, the reader should critically review the report to determine its accuracy and reasonableness.In reviewing a business valuation report, the reader should determine if the report is prepared by a qualified appraiser, includes detailed planning, identifies the critical factors, and documents and analyzes specific information.

While reviewing the report, it should be evident that the appraiser has an understanding of the company’s unique characteristics including the history, ownership, management, products, services, customers, suppliers, facilities, and personnel. It should be apparent that the valuation analyst has analyzed and understands the risks involved with ownership, the stability or irregularity of the earnings as well as any other relevant factors that affect the company being valued. In the report, the appraiser should consider external factors that may affect the company as of the valuation date including the national and local economic conditions, relevant governmental regulations, and demographic trends.

Ask the following questions:

  • Does the appraiser possess the proper education or experience to perform the valuation?
  • Is the report mathematically accurate?
  • Does the appraiser properly apply case law and statutes?
  • Has a site visit been performed? By performing a site visit the appraiser is better able to understand the business’s products, assets, liabilities, and the competence of employees. We’re among the old school firms that require a site visit.
  • Has the appraiser properly identified and valued the interest? For instance, is the interest a minority interest or controlling interest?
  • Has the appraiser properly analyzed the books and records of the company and made appropriate adjustments?
  • Was an analysis made to find material personal expenditures? It is important to understand the accounting methods being utilized by the company and to determine if they were being applied   consistently. Our firm consists solely of CPA’s, skilled in analyzing financial statements
  • Has compensation been properly adjusted, if appropriate? Failure to properly adjust compensation could have a material impact on the valuation.
  • Has there been a thorough and thoughtful analysis of the factors affecting risk?
  • Has the appraiser addressed the discounts that were applied, how the specific discounts were computed and discussed empirical evidence and the company’s unique characteristics?

After analyzing the valuation report, the reviewer should consider whether the conclusion of value determined by the valuation analyst makes economic sense for the purpose that the valuation was prepared for. Would the reader buy (sell) the business for the value stated?