What is a Business Valuation Report?
A valuation report is a document that provides an analysis of a company’s worth, often prepared by a professional appraiser or a financial institution. The purpose of the report is to determine the economic value of a business, assets, or company equity.
This report is crucial for business sales, mergers and acquisitions, investment analysis, capital budgeting, and financial reporting. It can also be important for litigation, tax assessments, and planning for estate or gift taxes.
Here are some key elements that are usually included in a valuation report:
Introduction
This section includes a brief overview of the company, including its history, location, size, and operations.
Commentary
The final thoughts of the report, including the assessor’s final opinion of the company’s value.
Purpose and Scope of the Valuation
This outlines the reasons for conducting the valuation and the standards used to complete the report.
Methodology
The valuation methods and approaches used in the analysis, such as the Discounted Cash Flow (DCF) method, market capitalisation, market multiples, or net asset value method.
Financial Analysis
This involves a detailed review of the company’s financial statements, including profit and loss accounts, balance sheets, and cash flow statements.
Market and Industry Analysis
This involves a review of the market in which the company operates, including its size, growth rates, trends, competition, and regulatory environment.
Valuation
This section includes the actual value that was determined, including any assumptions or conditions that were factored into the valuation.
The different types of Valuation Methodology
First, it’s important to understand the two most common way to value a business are by using either Multiples Valuation, or Discounted Cash Flow (DCF) methodologies.
What is a Multiples Valuation?
A multiples valuation or relative valuation uses the known market valuation of number of peers within a sector, usually listed companies as their valuation is easily obtained. This ratio is then applied to your own company to provide an estimate of its valuation.
Multiples Valuation is therefore very much an estimate of your current valuation based on what the stock market believes are the future growth prospects of your listed peers rather than your own companies future potential.
An example of a multiple for an accountant firm is range from 1.0 to 2.0. However a FinTech will have multiples of 8x or more.
What is Discounted Cash Flow?
Discounted Cash Flow (DCF) is generally considered a more complex but accurate method for valuing a company.
In DCF, future cash flows are estimated and then discounted by the cost of capital to give their present values. This means DCF is more about the future growth and profit than past performance.
Therefore, to calculate DCF, you need to have your current cash flow with estimates of future cash flows and your cost of capital. In DCF, cash flows generated over the next 5 years and in perpetuity are estimated and then discounted back to what their total sum would be worth today based on a ‘discount rate’, usually weighted average cost of capital (WACC).
In DCF, cash flows generated over the next 5 years and in perpetuity are estimated and then discounted back to what their total sum would be worth today based on a ‘discount rate’ – usually weighted average cost of capital (WACC) In order to calculate DCF, you therefore need to have your current cash flow with estimates of future cash flows and WACC. DCF, like multiples have their flaws too, in general, the practice of valuing a company is an imperfect science. However, it informs a basis of discussion and overall market price.
What is a typical Business Valuation Process?
To create a comprehensive business valuation, typical the following process is followed.
Inputs:
- 2-5 years statuary accounts
- Ideally 1-5 years forecast accounts
- Company Sector
- Default Currency
- What is the Company Growth Stage? Idea, Development, Startup, Expansion or Established
Process:
- Inputs are feed into multiple valuation models (spreadsheet or application)
- A map of peer companies is built using a financial data platform like S&P, Pitchbook, BVD etc.
- An Analyst pulls together and analyses the above inputs, writes commentary and creates graphs to more easily present the data.
Outputs:
- Industry Sector Analysis
- Market Multiples & DCF Valuation
- Detailed Valuation Report (PDF)
Using a Client Reports to create a Business Valuation Report
Our Client Reports application can automate most of the business valuation report creation process, allowing you to rapidly provide your clients with one-off or regular business valuation reports.