How Quickly Can the Work Be Done?

Time requirements for a business valuation depend on the type of valuation you need and on the availability of records. Usually, obtaining needed records is the defining issue in how long a valuation will take to complete. In general, however, the following guidelines can help give you an idea of the timeframe for several different types of valuations.

Complete Valuation Analysis With Full Written Report (60 to 80+ pages) (Conclusion of Value)

This is the type of valuation you will need for gift or estate tax purposes, to meet the requirements for an ESOP plan, or if your particular needs dictate a full valuation.

Typical Time Requirement is 40 to 60 hours.

Complete Valuation Analysis With Summarizing Letter (2 to 4 pages) (for litigation only)

This is the type of valuation usually requested in divorce litigation. Typical time requirement is 30 to 40 hours.

Calculations of Value (4 to 10 page report)

This is the type of valuation to request if you want a rough, ballpark estimate of value. Typical time requirement is 5 to 15 hours.

How Is The Value Of A Business Determined?

Many lengthy and ponderous tomes have been written to answer the question of how the value of a business is determined, but ultimately value depends on cash flow, either today or in the future. Determining what that cash flow ought to be is one of the prime objectives of the professional valuator.

There are many ways to estimate cash flow and value, but primarily the process involves (1) valuing tangible assets such as:

Cash

Accounts Receivable

Inventory

Equipment

Machinery

Furniture

and (2) valuing intangible assets such as:

Goodwill

Trademarks

Reputation

Physical Location

Trained Work Force

Customer/Patient Lists

Special Agreements and Contracts

Often the value of the intangible assets outstrips the value of tangible assets.

In order to determine the value of the cash flow coming from these assets, the valuator must analyze the company, its history, and its prospects. An important part of this analysis is normalizing financial performance, which is a process for adding back excess owner compensation, removing the financial impact of unusual occurrences, adjusting for aggressive depreciation methods, and so on. The objective is to estimate the cash flow that ought to flow to the owner of the business.

In addition to estimating cash flow, the valuator must also estimate reasonable rates of return, effective control of the business, the difficulty of marketing the business, and many other important variables.

Rules of Thumb

Many industries have widely known rules of thumb for valuing a business in that industry, often based on a multiple of sales or net income. Unfortunately, such rules rarely return a valid value for a business, and dependence on a rule of thumb can lead to erroneous decisions.

For some valuations, such as gift or estate tax matters, the use of rules of thumb cannot be the basis for a business's value. At best, rules of thumb provide a reasonableness check for a value derived by more appropriate methods.

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