Understanding the Business Valuation Process

Overview

A business valuation is the analytical process of determining the economic value of an entire business or company unit. This process combines financial analysis, market comparisons, and professional judgment to estimate what a business is worth in today's market. Understanding each stage of the valuation process is essential for business owners, investors, and advisors alike.

1. Define the Purpose of the Valuation

The first step is clarifying why the valuation is being conducted. Common purposes include:

• Mergers and acquisitions (M&A)
• Family succession, exit planning or a sale of the business
• Partnership buy-ins and buy-outs
• Estate and gift tax reporting
• Divorce or shareholder disputes
• Financing or capital raising
• ESOPs (Employee Stock Ownership Plans)

Each purpose may require a different standard of value (e.g., fair market value, investment value, or fair value), and influence the type of reports and certification required.

2. Gather and Normalize Financial Data

The foundation of every valuation is accurate and complete financial information. Analysts typically collect and review:

• Historical financial statements (3–5 years)
• Interim financials
• Tax returns
• Budgets and forecasts
• Key operational metrics (customer concentration, churn, margins)

Data is then normalized to adjust for non-recurring, discretionary, or owner-specific expenses, ensuring comparability with similar businesses.

3. Analyze the Business and Industry

A certified valuation professional assesses both internal and external factors:

• Internal: business model, management depth, customer dependencies, IP, operations.
• External: market trends, industry risks, competition, and macroeconomic indicators.

This qualitative analysis provides context for the financial performance and risk profile.

4. Select Appropriate Valuation Methods

There are three main valuation approaches:

a. Income Approach

Focuses on the company's ability to generate future cash flows. The most common technique is Discounted Cash Flow (DCF), where projected cash flows are discounted back to present value using a risk-adjusted rate.

b. Market Approach

Compares the business to similar companies or transactions using valuation multiples (e.g., EBITDA, revenue). Sources may include public comps or private transaction databases.

c. Asset Approach

Values the business based on the fair market value of its assets minus liabilities. This approach is most common for asset-heavy or distressed businesses.

5. Apply Discounts and Premiums

Certified appraisers may adjust preliminary values to reflect specific factors such as:

• Discount for lack of control (DLOC)
• Discount for lack of marketability (DLOM)
• Control premiums

These adjustments refine the value to match the ownership interest being valued (minority vs. controlling stake) and other risk factors.

6. Reconcile Results and Issue Final Valuation Report

After analyzing results from multiple approaches, the appraiser reconciles them into a final conclusion of value. The report typically includes:

• Description of methods used
• Data sources and assumptions
• Supporting exhibits and calculations
• Certification and signature of the accredited professional

This certified report is defensible in legal, tax, and financial contexts.

7. Key Standards and Certifications

Certified valuations adhere to recognized standards, such as:

• USPAP – Uniform Standards of Professional Appraisal Practice
• ASA – American Society of Appraisers
• AICPA SSVS No. 1 – Statement on Standards for Valuation Services
• NACVA – National Association of Certified Valuators and Analysts

Summary

Understanding the valuation process empowers business owners to make informed decisions during critical events—whether selling, raising capital, or planning for succession. A certified valuation is more than a number—it's an objective, defensible analysis of what your business is worth based on all known information under current market conditions.