The Who, What and Why of Business Valuation

Understanding what your business is truly worth is a critical step in planning for the future. In this audio blog, Jason Hofferica, Assurance Manager at CK, breaks down the purpose of a business valuation, when you might need one and how the process works, from high-level industry insights to detailed financial analysis.

Transcript

My name is Jason Hofferica. I’m an Assurance Manager here at Cray Kaiser, and I’m a Certified Public Accountant and a Certified Valuation Analyst.

A business valuation, in short, is a process of setting the value of a business for several reasons. You can be looking to acquire a business. You could be looking to exit a business, sell a business, maybe for estate tax planning, purposes, gifting. So there’s all sorts of different reasons to want to go ahead and get a valuation for your business or for one that you’re interested in.

They could always ask to obtain their, if there has been one, they can go ahead and request one. Or if they’re more comfortable, they can hire their own personal valuation analyst to go ahead and run the numbers as well to see if the asking price is reasonable.

A business valuation is necessary because things just happen in general. You can have a disability or a shareholder death, gifting purposes. Perhaps you want to start transferring some shares to your children or to other family members. So for these considerations, a valuation sometimes is or often is necessary to come up with these values for transfer.

So a business valuation, the process typically starts from a very high level. And in order to properly value a business, you first have to understand many aspects of not only the macro environment, but the micro environment, the market, the industry. And so typically we start from a high level. We then discuss with the client, get company history. We read industry publications to come up with different things that might impact that specific industry. And from there we start honing in on these different things that might be considerations when valuing.

We then typically look at the financial statements and five years is typical. We do do analysis of financial ratios. We compare it to those in the industry. We try to get as closely to the size and complexity of the business that we’re valuing as possible. We will then go through a process of what is called normalizing the financial statements. Often when you have these closely held companies, officers are paid a certain amount. Rent sometimes is paid to a related party. Is that market value? So all of these different financial information gets adjusted to come up with a true revenue stream of expectations.

Typically the ownership is who will go ahead and get a valuation done for either estate tax purposes, gift purposes, maybe they’re looking to go ahead and sell or from buyers. Buyers will want to know if they’re interested in a business whether or not something is appropriately valued and we will be contacted from that aspect as well.

But really, anybody with these mergers, acquisitions, valuation can be used in all aspects of these. I would say to get a valuation done when there is an event or an occurrence, that would warrant a valuation to be done of your stock.

We do go ahead and we kind of give a good assessment of what the industry and all of those variables for that company to come up with an estimate as far as hours and theme. The final report is actually quite lengthy because of the amount of research and analysis that gets put into it.

Like I mentioned before we start, very high level and kind of work our way down to not only the macroeconomics, but microeconomics regional. We’d go into the industries and it even does include all the different methods that were considered as well as why they were considered or why they weren’t considered. So that the person reading the valuation report should have a clear understanding of the why and as to why a business was valued, where it was valued.