What are the key steps to prepare a credible and comprehensive valuation report?

The scope of the valuation defines the purpose, premise, date, and standard of value for the valuation, as well as the level of detail and analysis required in the report. The scope of the valuation affects the choice of valuation methods, data sources, assumptions, and adjustments that are used to determine the value of the business. The scope of the valuation also helps to identify the intended users and uses of the report, and the limitations and qualifications that apply to the valuation . Therefore, defining the scope of the valuation is essential for ensuring that the valuation report is relevant, reliable, and consistent with the valuation objectives.

To prepare a credible valuation report, start by understanding the purpose of the valuation, as this guides the approach. Gather accurate financial data, typically from the last 3-5 years, and analyze the company’s business model, industry, and market trends. Choose an appropriate valuation method, whether it’s Discounted Cash Flow for stable cash flows, Comparable Company Analysis (CCA) for benchmarking against peers, or Asset-Based Valuation for asset-heavy businesses. Forecast the company's future performance based on revenue, profits, and cash flow, and determine the right discount rate or valuation multiples. Finally, ensure the report is clear, explains assumptions, and includes a cross-check of results to strengthen its credibility.

The scope of a valuation may also be influenced by the nature of the valuation. And it's purpose. It can also be influenced by the data availability and the locality.

Identify Y u're valuing the asset(e.g selling a business,raising funds). This sets the stanDARD of value(fair market value,investment value). Collect financial statements,industry reports,and details on the asset itself (property size for real estate). Depending on the asset and purpose, use 1 or a combination of methods(market multiples for similar businesses,discounted cash flow for future earnings potential). Use the gathered information to apply the chosen methods. Compare the results from different methods to arrive at a final value. Explain your reasoning and support your conclusion with evidence. MOst imp, Present your findings in a clear, well-organized report. Include disclaimers about limitations and the report's intended use.

En la preparación de un informe de valoración de empresa creíble y completo, el primer paso crucial es definir el alcance (Scope). Esto implica delimitar claramente los objetivos y límites del informe. Identificar los activos a valorar, determinar el propósito de la valoración (venta, fusión, planificación fiscal) y establecer la fecha de valoración son componentes esenciales. Además, especificar las metodologías a emplear, como el enfoque de ingresos o de mercado, contribuye a la transparencia. Al delinear el alcance con precisión, se establece una base sólida para un informe coherente y confiable, proporcionando claridad sobre qué aspectos serán evaluados y cómo se llevará a cabo la valoración.

A typical valuation report includes more than one method. Even a seasoned valuer often sticks in the dilemma of selecting an appropriate method of valuation. What is an 'appropriate method of valuation in the given case' is and will remain a hard point in decision making. Let us try to decipher it. If the firm has sufficient history and the business model is plain vanilla, then DCF does a great job. If the valuation is being done to acquire a small stake, then relative valuation or precedent transaction analysis will suffice. However, if the projections are difficult to arrive at due to absence of data, then real option is the answer. In any case, the valuer will do good if she includes at least two approaches in her valuation report.

Different valuation approaches and methods used in the report can lead to different results. It is the duty of the valuer to assign more weight to the most relevant method depending on the nature of the business, available information and value elements. It is strongly recommended to avoid giving equal weight to all methods, as well as weighting in cases where the estimated values by different methods are far from each other.

Choosing the appropriate valuation method is a critical step in preparing a credible and comprehensive valuation report. Each of the three main approaches to valuation has its own strengths and weaknesses, and the appropriate method will depend on the specific characteristics of the subject being valued and the purpose of the valuation. For instance, the income approach values the subject based on its expected future cash flows or earnings. This approach is often used for valuing businesses or investments that generate significant cash flows. The two main methods used in the income approach are the discounted cash flow (DCF) method and the capitalization of earnings method.

The asset approach would seem to apply to Business Valuation. In Personal Property, Machinery & Equipment, we consider three approaches to value: An income approach, a market approach and a cost approach. The cost approach considers the current cost of replacement of like assets.

Application of more than one method gives the valuer a fair analysis of the value putting the valuer in a position to decide on a fairer value to the benefit of doubt. More methods also interpret the market clearly by collating all relevant data to provide a strong assessment base.

The most important element of any forecasts is understanding the potential range of variance and the most critical assumptions behind the forecasts. Applying common sense to this is important.

A thorough Highest and Best Use analysis helps define the maximally productive use of the property. The process to determine the highest and best use is to value as though vacant. Then, analyze the site value as ideally improved and value as improved.

a proper analysis and collection of accurate data such as financial statements, industry reports, market data, and projections. You also need to analyze the historical and projected performance, growth, profitability, and risk of the subject and its industry.

Understanding the quality of the information you are analyzing is crucially important and should be weighed as you construct the valuation. For instance, projections that have been put together thoughtfully, with input from across the Company, pressure tested against changes in assumptions and including various scenario analyses and regularly adjusted to take into account actual results and changes in market conditions will be far more valuable than projections that management created months ago for a Board presentation and haven't revisited since.

The income approach stands out as the most accurate among valuation methods, yet it involves highly subjective inputs. Therefore, it's crucial to substantiate each input in the financial model with thorough research— You need to have a story that goes with numbers Typically, the market-based approach aligns closely with income-based value ranges, unless influenced by external factors like economic crises or pandemics, causing market fluctuations. Understanding these systematic factors is key to holding your ground In many sectors, the asset approach serves as the floor value, not fully reflective of future business potentials. However, exceptions exist, emphasizing the need for a professional guidance.

To estimate the value in a valuation report, apply the chosen valuation methods to the analyzed data. This involves calculating the value based on the selected approaches, such as discounted cash flow, comparable company analysis, or precedent transactions. Ensure that the assumptions used are reasonable and reflect the business’s characteristics and market conditions. It’s crucial to reconcile the results from different methods, weighing them according to their relevance and reliability. This reconciliation helps in arriving at a well-supported and credible value estimate, forming a solid foundation for the final valuation conclusion.

Presentation of valuation results should include sensitivity analyses based on the forecasted financials. Varying profitability, discount rate or growth rates could be used. The valuation results under different scenarios and multiples could be given in ranges.

In a liquidation value machinery and equipment appraisal, the report may include both a gross and net recovery value. The net value models an investment recovery plan, projecting and deducting costs relative to conducting an actual liquidation. Inclusion of net value depends on the appraisal problem to be solved in accord with the engagement letter.

In the "Reconcile and Conclude" step of preparing a valuation report, you synthesize the results from different valuation methods to ensure consistency and accuracy. Begin by comparing the values derived from various approaches, assessing their alignment with the business’s overall characteristics and the purpose of the valuation. Address any significant discrepancies by revisiting assumptions and adjusting methodologies as necessary. Conclude by providing a well-reasoned final value estimate, supported by a detailed explanation of how different methods were integrated and weighted. This step ensures that the final valuation is both credible and reflective of the business’s true value.

The final step in the valuation process is to present the report in a clear, concise, and professional manner. The report should include all information that supports your valuation, such as the scope, methods used, data, assumptions, adjustments, calculations, and conclusions. It should adhere to relevant standards, guidelines, and best practices in valuation to ensure credibility. Additionally, the report should be easily understandable by its intended audience and provide sufficient disclosure and transparency. This ensures that the stakeholders can fully comprehend the basis of the valuation and trust its conclusions, making it a useful tool for decision-making.

For really important valuation needs, I would talk to Jeff Tarbell @ Houlihan Lokey. His fees are not cheap, but when you need something really robust and defensible in a high stakes situation, he's awesome.