Business Valuation Blog | Understanding Buying / Selling a Company

Occasionally, appraisers are asked to provide opinion letters based on a review of another appraiser’s work product or from a company’s internal analysis for which they need independent validation. This process can seem more simple and informal than a typical valuation project, however, the time involved with completing the effort can be as much or even more than an appraisal.

Those businesses looking for a less expensive and time-consuming alternative to a complete appraisal will find the result can often be the opposite. Reviewing third-party work and commenting on their opinions and estimates for reasonableness, creates a two-fold process that can be more complicated than reviewing financial and asset data while estimating value.

At the very least, the appraiser needs to complete a high-level valuation of their own in order to comment on whether third-party opinions make sense or not. In many cases, the analysis required to provide a supportable opinion of another’s work product involves a similar amount or even more work compared with simply providing an independent appraisal of their own.

Opinion letters typically need to be generated from scratch given each project is unique and the requested deliverable will change with each engagement. With standard appraisal reports, most valuation professionals rely on a boilerplate framework that provides a more efficient way in which to develop their narrative summary.

Another issue with requests for review opinion letters is that many certified and accredited valuation professionals are not comfortable providing this type of report. The need to go outside the lines of their normal framework may create too many inconsistencies with the formal appraisal practice requirements that are adhered to in the normal course of business.

“Informal” is not a word appraisers like to use when providing opinions given the uniform standards they must commit to in their profession.

Typically, it will make more sense to have the appraiser complete their own analysis and valuation report which can then be compared to the other party’s work effort. This may seem repetitive and more costly; however, you may be surprised at the additional benefits you will reap when your auditors have an easier time approving the total work product. And there is a high likelihood that the time and cost involved will be very similar or even less when you ask for a more straightforward scope of work to complete the task at hand.

Though it's common to get a business valuation report when you're buying or selling a company, the type of information contained in a valuation report can provide you with strong insights into your company's overall situation. This makes it much easier for you to explore new options and make smart investment decisions that will benefit your company's bottom line. Here's a quick look at what kind of information is contained in a business appraisal report and how it can help you make positive changes in your company.

What can you do with a business valuation report?

The main thrust of most valuation reports is the overall value of a company, typically researched around the sale of a company. But when the valuation specialist researches the company and industry while developing the report, a great deal of other information has further value. What kind of information is covered in these reports?

Research into the industry is a vital part of the valuation process. The appraiser carefully considers past performance, new innovations and reasonable future projections to determine the type of growth the company may see down the road. This often includes an evaluation of your competitors, helping show where your company is strong in the market and where it is weak. 

Next, the appraiser will look at your company's finances. By looking at your finances as well as that of similar companies, it's possible to determine your business' overall financial health. This part of the process helps you find areas where your company needs work or where it is doing great. As an example, you may have a higher percentage of your business tied up in bad debts from unpaid invoices or a higher amount of capital that isn't being put to work expanding your operation when compared to most similar companies.

What about your company's material assets, equipment and machinery? Most companies prefer to simply use tax-based depreciation to determine the value of their business assets. However, if you have ever invested in high-quality equipment that is continuing to function well and provide value for long after it's been fully depreciated or have hard-used equipment that has failed well before it's been fully depreciated, those values will be inaccurate, painting an inaccurate financial picture. Part of the appraisal includes looking at the condition and determining the real-world value of your assets.

Your operation will also fall under scrutiny when your company is appraised. Are there aspects of your operations that are inefficient or behind the times in terms of beneficial technology? Are you a leader through innovation in your research and development of new products? Is there excessive waste in your production line or job sites? These areas are studied during a business valuation and their part in your company's successes and failures can provide you with strong insights into how you can improve your company's operation and bottom line while maintaining the basis for your company's success.

By getting a business valuation report on your business, you can quickly discover a wide range of benefits, from in-depth insights to market positioning information. However, you'll only be able to get this level of information from a certified business appraiser's report. This is because of the depth of research and solid methodologies that certified appraisal professionals use. Have an appraisal performed and learn where your business can thrive.