Eric Larson and Matt Rampe answer five frequently asked questions about the business valuation process. Watch the video below.
Eric Larson: A business valuation doesn’t need to be a long and complicated process. It begins with us issuing an engagement letter and a document request list.
The document request list contains a handful of items such as tax returns, financial statements, and other corporate documents that the business owner or team of advisors should have readily available.
Once we gather all that information, we typically set up a management or ownership meeting. And, when appropriate, get a tour of the facilities.
Once we’ve completed our analysis and our report, we conduct what we call a draft meeting where we walk through the report, explain our reasoning, and answer any questions.
After we’ve issued our report, we have additional services we can provide, if needed, such as attending mediation, or arbitration or providing trial testimony.
The biggest variable in how long it takes us to complete the valuation is how quickly we receive the information. Once we get all the information we’ve requested, the process usually only takes a couple of weeks.
Matt Rampe: One of the questions we get most often is, “How are you going to value my company?” And there’s three main approaches that we’ll use to value any business.
The first approach is the income approach. That’s one where we look at the future cash flows that could be generated by the company. We also think about the risk of realizing those cash flows and we’ll discount those back to today to come up with a present value of the company.
The second approach is the market approach and that one you can think about if you go to buy or sell a home, your realtor will look for comps. They’ll look for similar homes in your area that have similar features.
They might make a few adjustments, and that’ll indicate the value of your house. We use a similar approach in the market approach.
And the final approach is the cost approach. That’s where we take the assets of the company on the balance sheet and the liabilities on the balance sheet – adjust those to a fair market value, assets minus liabilities equals the company’s equity.
EL: There’s a lot of misunderstanding as to what services will be included with a valuation, and in fact, what a valuation is and it isn’t. A business valuation is performed to determine the value of a specific business interest as of a specific date.
As part of that process, we try and uncover the true earning capacity of the business.
We look at related party transactions such as family compensation, related party rents, and look at discretionary items like owner compensation, and benefits and perks, to uncover what the true earning power of the business is.
With that being said, a business valuation is not an investigation of fraud or searching for concealed assets or income, although we can provide those services. In addition, a business valuation does not mean preparing financial statements or tax returns.
MR: Here’s why I think it’s important to get your business valued. Not getting a business valuation done is sort of like having a big 401(k) account and just guessing at the balance, not looking at your brokerage statement.
People who own businesses, often that’s by far the largest asset on their marital balance sheet. When you have a business valuation done, you have confidence, clarity, and peace of mind.
EL: Our approach to valuation is to be fair, reasonable, and unbiased. We are not hired guns.
We produce a report that is well thought out, reasonable, and very defendable. Overall, we want to make this as easy for you as possible. Therefore, we are responsive, timely, and professional.
Have more questions about our business valuation process or team? Let’s talk!