The Business Valuation Process-An Opportunity to Learn

By Sandy LeDuc
LeDuc and Sikowitz

Most business owners, accountants and other professionals think of business valuation as a necessary evil in gift and estate tax planning and as an integral part of negotiations in divorce or shareholder matters. What can the business owner expect from the process?

Business valuation procedures and standards have been developed over the years by the Internal Revenue Service -highly motivated by their desire to collect tax-and professional valuation groups such as the Institute of Business Appraisal and the National Association of Certified Valuation Analysts.

The process is designed to analyze a company, the industry and economy in which it operates.

The owner and management should be prepared to work hard. They'll be asked to expose sensitive information and to explain their plans and decisions. They'll educate the valuator as to their particular business, the markets it serves, its vendor relationships and its place in the industry. The process will challenge management's assumptions and force them to examine their styles and effectiveness.

The analysis of the company includes a thorough review of company financial statements, customer and employment contracts, benefit plans, budgets, marketing plans, tax returns, regulatory filings, and leases. Personnel at various levels of management as well as consultants and professionals are interviewed to delve into vendor and customer relationships, credit policies, cash flow issues, company risk and contingent liabilities, the existence of intangibles such as goodwill, the condition of and need for property, plant and equipment, and management competencies.

The industry is researched to verify that the company processes comply with best practices of the industry. Competitors are identified and assessed. Industry financial data is examined and compared with that of the company to assess risk.

The local, regional, national and even world economies are examined in relation to the industry and the subject company. Economic projections, employment statistics and other economic data are reviewed. Industry organizations are contacted for analysis of the economy as it directly relates to its members. Industry surveys are examined and compared to the subject company.

This research and analysis portion of a business valuation is a time consuming, exhaustive study of the many attributes of the business that make it valuable. Management's understanding of the process and commitment to a thorough analysis can benefit many management functions beyond the business valuation process.

Summer 2004 -Volume 14, Number 3

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