Last updated on Aug 12, 2024
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- Valuation
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1
Define the scope
2
Choose the method
3
Collect and analyze data
4
Estimate the value
5
Reconcile and conclude
6
Present the report
A valuation report is a document that summarizes the analysis and findings of a valuation process, which aims to estimate the fair market value of a business, asset, or equity. A valuation report can be used for various purposes, such as mergers and acquisitions, litigation, taxation, or financial reporting. However, not all valuation reports are created equal. To ensure that your valuation report is credible and comprehensive, you need to follow some key steps and include essential information. Here are some tips to help you prepare a high-quality valuation report.
Key takeaways from this article
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Include sensitivity analyses:
When presenting valuation results, include a range of outcomes based on different financial scenarios. This not only shows depth in your analysis but also prepares you for various market conditions.
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Highest and Best Use analysis:
To accurately value property, perform a Highest and Best Use analysis. This ensures you're considering the property's most profitable use, giving you a solid foundation for your valuation.
This summary is powered by AI and these experts
- Lori Noble Consumer Protection | Valuation |…
1 Define the scope
The first step in preparing a valuation report is to define the scope of the valuation, which includes the purpose, date, standard, and basis of the valuation. The purpose of the valuation determines why you are valuing the subject and who will use the report. The date of the valuation defines the point in time at which the value is estimated. The standard of value specifies the type of value that is being measured, such as fair market value, fair value, or investment value. The basis of value indicates the level of ownership or control that is being valued, such as minority, majority, or marketable.
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- Saeed Rasooli Investment Analyst | Communication and Analytical Skills
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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.
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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.
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- CA Ovais Shah Top Voice | CA (US CPA Equivalent) | x Mazars | Startup Mentor | Startup Compliances | High Value PitchDecks | Valuation | ESOPs | Financial Modelling | Business Model Assessment | FEMA | Indian Subsidiary
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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.
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- JUAN LAMAS Financial Advisor
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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.
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When preparing a credible and comprehensive valuation report, it's essential to first conduct thorough research and analysis. This involves gathering relevant data from various sources and scrutinizing them meticulously. Next, it's crucial to employ recognized valuation methodologies, ensuring transparency and accuracy in the process. Collaborating with subject matter experts can also enrich the evaluation, offering diverse perspectives and insights. Lastly, maintaining clear documentation throughout the valuation process is paramount, providing a solid foundation for the report's credibility. Overall, adhering to these key steps fosters confidence in the valuation outcomes and enhances its usefulness for decision-making purposes.
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2 Choose the method
The next step is to choose the appropriate valuation method for the subject and the purpose. There are three main approaches to valuation: the income approach, the market approach, and the asset approach. The income approach values the subject based on its expected future cash flows or earnings. The market approach values the subject based on the prices of comparable transactions or publicly traded companies. The asset approach values the subject based on the net value of its assets and liabilities. Depending on the availability and reliability of data, you may use one or more methods to estimate the value.
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- Saeed Rasooli Investment Analyst | Communication and Analytical Skills
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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.
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- Ravi Agarwal Professor of Finance and Accounting. Editorial Advisor - Emerging Market Case Studies Journal
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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.
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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.
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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.
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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.
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3 Collect and analyze data
The third step is to collect and analyze the relevant data for the valuation, such as financial statements, industry reports, market data, and projections. You need to perform various adjustments and calculations to normalize the data and make it comparable and consistent. For example, you may need to adjust for non-recurring items, non-operating assets, working capital, depreciation, and taxes. You also need to analyze the historical and projected performance, growth, profitability, and risk of the subject and its industry.
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- Lori Noble Consumer Protection | Valuation | Regulatory Compliance | Licensing
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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.
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- Joseph Philipsz
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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.
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- Koledoye Adedayo Uchechukwu. MBA Real Estate Professional || Business Development ||| Project Manager ||||
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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.
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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.
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- Fernanda Belmonte CEO | FB Advisory | Mergers and Acquisitions | Valuation | Due Diligences | Accounting and Tax | CFO
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The third step in business valuation involves collecting and analyzing relevant data like financial statements, industry reports, and market projections. Adjustments are necessary to normalize this data for comparability, including correcting non-recurring items, non-operational assets, and variations in working capital.Analyzing the company's historical performance and future projections is crucial. This includes assessing growth, profitability, and risks within the company and its industry. Industry analysis is key, helping to understand market forces like technological trends and regulatory changes, facilitating a more accurate valuation.
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4 Estimate the value
The fourth step is to estimate the value of the subject using the chosen method or methods. You need to apply the appropriate valuation multiples, discount rates, capitalization rates, or other factors to the data to derive the value. For example, if you use the income approach, you need to discount the future cash flows or earnings by a discount rate that reflects the risk and return of the subject. If you use the market approach, you need to multiply the relevant financial metrics by the valuation multiples of comparable transactions or companies. If you use the asset approach, you need to subtract the liabilities from the assets to get the net asset value.
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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 numbersTypically, 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 groundIn 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.
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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.
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5 Reconcile and conclude
The final step is to reconcile and conclude the value of the subject based on the results of the different methods. You need to weigh the strengths and weaknesses of each method and consider the quality and quantity of data. You also need to apply any discounts or premiums that may affect the value, such as lack of marketability, lack of control, or synergies. You should arrive at a single or a range of values that reflect the most probable and reasonable value of the subject as of the valuation date.
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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.
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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.
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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.
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6 Present the report
The last step is to present the report in a clear, concise, and professional manner. The report should include all the information that supports your valuation, such as the scope, method, data, assumptions, adjustments, calculations, and conclusions. The report should also follow the relevant standards, guidelines, and best practices of valuation. The report should be easy to read and understand by the intended users and should provide sufficient disclosure and transparency.
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- Fernanda Belmonte CEO | FB Advisory | Mergers and Acquisitions | Valuation | Due Diligences | Accounting and Tax | CFO
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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.
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- Michael Leyba Senior Director of Investor Relations at Trimble Inc.
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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.
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