Anyone with a little business and financial knowledge can do a quick-and-dirty calculation using a industry rule of thumb, such as multiple of annual sales or earnings. But experienced valuation professionals apply tested valuation approaches that are based on real world market data -- and they also possess strong verbal and written communication skills that enable them to explain and support why their appraisal conclusions are appropriate and reliable.
When valuators report their conclusions, they have two options: verbal or written reports. Some limited situations may call for verbal reports. For example, if management is curious about the company's value and intends on using the valuator's conclusion for internal decision making, a verbal report may pass muster. Or some attorneys might opt for a verbal report in a litigation setting to lower fees during the settlement process, or as a strategic move to prevent the opposing side from critiquing a written report.
But that strategy often backfires in the courtroom. During deliberations, many judges prefer to have a tangible written report to reference after the expert testifies. Verbal reports also require the attorney to be skilled in asking detailed, technical direct examination questions in order to tell the entire story behind valuing the business. In most litigation and tax situations, a comprehensive written report is the best option. But how do you know whether an expert's report has covered all the bases?
A valuation report should tell the story of the business being valued. This shows the reader that the valuator understands the business. Reports should also document the research, analysis, and methods used to value the business. The valuator should build a clear and logical case for how and why the valuation conclusion was reached. After reading a valuation report, the reader should have a basic understanding of the business, understand how and why the valuation was reached, and see how the conclusion makes sense, even if the reader disagrees with it. A strong report provides enough detail to allow the reader to replicate the expert's analyses, if he or she desires.
A valuation report should not be judged by the number of pages alone, but it is not possible to explain the business and the valuation process in just a few pages. Often valuation reports start with an executive summary and provide expanded details that cover these elements:
Various appendices often appear at the end of a comprehensive valuation report. These may include the valuator's qualifications, statements of assumptions and limiting conditions, bibliographies, and numerical exhibits and graphs.
A comprehensive report explains the valuator's thought process and provides market evidence to support his or her assumptions, methods and conclusions. When evaluating a business valuation report, it's easy to get caught up in the technical details and lose sight of the obvious: a report that can't be understood or doesn't make sense is worthless even if it's technically flawless.
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