Reading a business valuation report

At some point in your business life you will likely run across a business valuation report. It may look like a brief opinion of value or a detailed work product which leaves no stone unturned. Some points to consider when reading a business valuation report.

Read the report before jumping to the business value conclusion

It is tempting to sneak a peak at the conclusion of business value. You usually find it somewhere at the end of the report. You check the number, nod in agreement or shake your head in disbelief. Then file the report away.

While you can satisfy your curiosity with just the business value result, there is quite a bit more to be gained from reading a well crafted business valuation report. Think of it – business clients pay their appraisers for their judgment and skill. If you follow the expert’s reasoning, you may spot the critical decision points that led to the business value conclusion – whether you like the result or not.

Do you understand the appraiser’s logic?

As a general rule, every business appraisal can be challenged precisely because the work requires the exercise of professional judgment. For instance, you can question the business sale comps as no two businesses are the same. Comparing apples to oranges is the major weak point of the market approach to business valuation.

The forecasts of earnings can be attacked as too rosy or too pessimistic. Either way, the business valuation result that follows may be off. While most professionally prepared business valuations come within a narrow range, a persistent naysayer can always find a way to cast doubt on the result.

The mathematical precision of such business valuation methods as the discounted cash flow belies the fundamental truth – the appraiser’s assumptions define the inputs and these inputs drive the results.

Check the assumptions that led to the business value number

To judge the quality, or even the suitability, of a business appraisal report, you need to get to the bottom of each assumption made by the appraiser. Then ask yourself if you agree.

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