​Step 1: Defining the Engagement

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First, we will need some key details to clearly define the engagement. These include:

• Why is the valuation needed? Will it be used for internal planning, management, a potential sale or purchase, restructuring, tax, or another reason?

•  What ownership stake is being valued? Is it 100%, a 50% block, a 25% block, or another percentage?

• What is the “as of” date for the valuation? For many of our clients, it’s the previous year-end, but it can be any date depending on the purpose and the time of year. It’s important to note that the chosen valuation date can have a significant impact in some cases.

• Who will be engaging us for the valuation? Sometimes it’s the business owner or management, but it could also be an attorney or another advisor.

 

Once we have the answers to these questions, we will prepare an engagement letter that outlines the scope of work and includes either a fee estimate or a fixed fee for the specified services. After the client reviews and signs this engagement letter, we are ready to move forward.

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​Step 2: Gathering Information

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The engagement letter also includes instructions for accessing our document request, which outlines everything we need to begin the valuation. To determine a reliable value, we look at not only historical financial data but also the qualitative factors that influence a company’s worth. Typically, the requested documents include:

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• Five years of year-end financial statements

• Organizational documents including certificate of incorporation, shareholder register and shareholder agreements

• Year-to-date management accounts and most recent asset register

• Business plan and financial projection (if available)

• Information to help us consider qualitative factors

• A list of competitors

• A list of the top 5 customers (names can be kept confidential) to assess customer concentration risks

• A list of the top 5 suppliers to assess supplier concentration risks

• Organizational chart to evaluate management structure, turnover, and culture

• Facility leases and recent tax assessments

• List of any contingent liabilities, such as lawsuits or environmental issues

 

This information ensures a thorough and accurate valuation.

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​Step 3: Applying Valuation Approaches and Determining Value

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After reviewing the collected information, we create a summary of the past five years of financial statements and schedule an initial meeting with the owner(s). During this meeting, we discuss the business’s history and key milestones, review financial trends, and address any questions from the financial summary. We also look ahead, exploring the future plans, opportunities, and risks that could affect the business.

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Together with the owner(s), we establish assumptions for financial projections. These projections are critical for the income approach, one of the three valuation methods we use. We ensure these projections reflect the company’s ongoing and future business plans.

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Behind the scenes, we conduct research into the industry and economy and gather comparable transaction data for the market approach, our second valuation method. The third approach, the asset approach, considers the business’s assets sold off individually. However, this approach is generally only relevant for asset-heavy companies, as most businesses generate more value through their ongoing cash flows.

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We also consider the industry, market conditions, and the specific risks facing the business. This helps us apply appropriate discounts—such as those for lack of marketability—to arrive at a fair, supportable value conclusion.

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Step 4: Applying Valuation Approaches and Determining Value

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Typically, within 3 to 4 weeks of receiving all required documents, we arrive at a value conclusion. This is shared with the owner(s) in a meeting and/or through a detailed written report. Thanks to our specialized focus on business valuation, this process is both thorough and efficient. 

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Our four-step approach goes far beyond simply applying a multiple to a single earnings number. That shortcut overlooks future potential and the unique qualitative factors that truly shape a company’s value—factors that can make one business far more (or less) valuable than another, even in the same industry.

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After multiple years of working in this field, we have seen that valuing a closely held business means understanding its distinct story and structure. Even within the same industry, two businesses can be vastly different based on how they’re run and the strategies of their owners.