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What are the best practices for reviewing a business valuation report?

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A business valuation report is a document that summarizes the estimated value of a company based on various methods, assumptions, and data sources. It can be used for various purposes, such as mergers and acquisitions, litigation, taxation, or strategic planning. However, not all business valuation reports are created equal, and some may contain errors, biases, or inconsistencies that can affect the reliability and accuracy of the valuation. Therefore, it is important to review a business valuation report carefully and critically before relying on it for any decision-making. Here are some best practices for reviewing a business valuation report.

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1 Understand the purpose and scope

The first step in reviewing a business valuation report is to understand the purpose and scope of the valuation. Why was the valuation performed? Who commissioned it? When was it done? What standard of value and premise of value were used? What level of confidence and assurance does the report provide? These questions can help you determine the relevance and suitability of the report for your specific needs and expectations. For example, a valuation for tax purposes may use a different standard of value than a valuation for sale purposes, and a valuation for a minority interest may use a different level of value than a valuation for a controlling interest.

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Ange Andoh KOUAKOU
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Knowing the objective – selling the business, securing funding, or settling taxes – is key. As Han Smit would say, the "why" can significantly influence the "how" of the valuation approach. Next, the scope can be seen as the boundaries of the analysis. Are we valuing the entire company or just a specific division? A valuation of the whole company requires a deeper dive compared to a single asset. Understanding the assets being evaluated sets the stage for a more meaningful analysis. The level of confidence and detail provided in the report will depend on the scope.

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2 Evaluate the methodology and approach

The next step in reviewing a business valuation report is to evaluate the methodology and approach used by the valuator. What methods did they use to estimate the value of the company? How did they select and apply the methods? What sources of data and information did they use to support their assumptions and calculations? How did they account for the risks and uncertainties affecting the company and the industry? These questions can help you assess the validity and reliability of the valuation results and identify any potential flaws or gaps in the analysis. For example, a valuator may use the income approach, the market approach, or the asset approach, or a combination of them, depending on the nature and characteristics of the company and the availability and quality of data.

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Ange Andoh KOUAKOU
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There is no single best method; the choice depends on the nature of the business and the availability of reliable information. And as Damodaran suggests, look for consistency. Does the chosen methodology make sense in the context of the industry and company specifics?

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3 Compare the results and conclusions

The final step in reviewing a business valuation report is to compare the results and conclusions with your own expectations and knowledge. Do the results make sense in light of the company's performance, prospects, and competitive position? Do they align with the market conditions and trends affecting the industry and the economy? Do they reflect the purpose and scope of the valuation? How sensitive are the results to changes in key assumptions or inputs? These questions can help you verify and validate the valuation results and conclusions and identify any areas of disagreement or discrepancy. For example, a valuator may provide a range of values or a single point estimate, depending on the level of confidence and precision required by the valuation purpose and scope.

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Ange Andoh KOUAKOU
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Compare the results against industry benchmarks, past performance, and even competitor valuations. Context here is key: are the conclusions supported by the overall market trends and the company's historical performance? This step helps validate the reasonableness of the valuation.

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Ange Andoh KOUAKOU
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Consider the qualitative factors. What's the size of the company? How robust is the management team? What's the competitive landscape? Are ESG practices and frameworks important in the industry? As Damodaran often mentions, "Valuation is not about precision; it's about understanding and managing uncertainty."

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What are the best practices for reviewing a business valuation report?

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1 Understand the purpose and scope

2 Evaluate the methodology and approach

3 Compare the results and conclusions

4 Here’s what else to consider

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