Business valuation reports generally begin with a description of the national, regional, and local economic conditions where the valuation is being conducted. The business valuation also reports on the conditions of competing industries where the specific business is located. A common source of this economic information is government publications, which is available in most libraries. State governments and industry associations also publish useful data describing regional conditions, with a special emphasis on the industrial and service sectors.
A financial analysis involving trend, industry, and common size analyses are then conducted after economic conditions are determined. This involves a ratio analysis of liquidity, turnover, profitability, and other similar aspects. These analyses allow the valuers to compare a company to other businesses within the same industry and to discover trends that may affect the company in the future. How the company compares to the industry helps in the risk assessment; thus determining the discount rate and picking up of market multiples. All this is really important in order for the owner of the business to have an idea of the actual value of his business.
Normalization of financial statements is conducted after analyses are performed. This involves comparability, non-operating, non-recurring, and discretionary adjustments. In comparability adjustments, the business valuer may adjust the company’s financial statements to compare the company with other businesses in the same industry or location. Non-operating adjustments, on the other hand, involve retaining any assets not related to earnings production. But still it is included in business appraisal for a business.
For non-recurring adjustments, purchases or sales of assets that are not expected to recur are adjusted so that the financial statements will better reflect the management’s expectations of future performance. Discretionary adjustments, on the other hand, involve determining the fair market value to adjust the owner’s compensation, benefits, and perquisites to industry standards. Representatives from business appraisal services are generally trained and experienced in these kinds of transactions, and can come up with credible results. This is possible only if you go with a business broker who is quite familiar with how to do business appraisal for the purpose of ascertaining the actual value of a business.
Aside from the income approach, some firms that engage in company appraisal also use either the asset-based approach or the market approach. The asset-based approach determines the value of a business by determining the sum of its parts, while the market approach is generally based on the economic principle of competition. These are the common elements involved in business valuation that most business experts consider. Hope you will find this article helpful.