Before you can use any method for business valuation you need to prepare a number of key inputs that the methods require. Usually, you would start your analysis with a set of the typical business financial statements such as its income statements and balance sheets.
But the accounting financial statements are just a starting point. The statements are usually prepared for tax filing purposes. One objective business owners have is to minimize taxable income. Thus the financial statements may not show the business earning potential in the best possible light.
That is the main reason why the company’s financials typically require a number of adjustments, known to business appraisers as the financial statement reconstruction or recasting. The goal of recasting is to reveal the earning power of the business focusing on cash flow metrics such as the net cash flow or discretionary earnings (SDE).
Business value is about the earnings you can expect from the business in the future. Historic financial statements are useful to the extent that they assist you in generating an accurate earnings forecast. In fact, the business valuation methods you are likely to use, such as the discounted cash flow technique, require that you provide a future cash flow projection.
In addition to establishing the cash flow, you would need to assess the company’s risk. This step gives you the important discount and capitalization rates to use in your business valuation calculations.
Valuation methods under the asset approach will require that you review and adjust the business asset base and its liabilities in order to establish its current economic position. This may be quite different from the cost-basis financial picture that you get from a typical accounting balance sheet.
ValuAdder software includes financial statement recasting worksheets that help you complete all these important tasks:
- analyze and adjust your historic income statements
- generate an accurate earnings forecast
- review and adjust the values of assets and liabilities
- assess the company’s risk and calculate the discount and capitalization rates
- prepare all the inputs you need for the various business valuation methods
ValuAdder financial worksheets also include these important figures you may find useful in your valuation:
- discount for lack of marketability (DLOM) when you value a private company but use public company comparables data
- discount for lack of control to use in valuations of partial ownership interests
Based on your inputs, ValuAdder worksheets summarize the inputs to use for any of the business valuation methods. The worksheets also capture all your financial statements and adjustments on a single page that you can easily share with others, print out or include into a report.
Be sure to review and adjust your historic financial statements in order to make this information useful in your business valuation.