What are the key steps to prepare a credible and comprehensive valuation report? (2024)

The scope of the valuation defines the purpose, premise, date, and standard of value for the valuation, as well as the level of detail and analysis required in the report. The scope of the valuation affects the choice of valuation methods, data sources, assumptions, and adjustments that are used to determine the value of the business. The scope of the valuation also helps to identify the intended users and uses of the report, and the limitations and qualifications that apply to the valuation . Therefore, defining the scope of the valuation is essential for ensuring that the valuation report is relevant, reliable, and consistent with the valuation objectives.

The scope of a valuation may also be influenced by the nature of the valuation. And it's purpose.It can also be influenced by the data availability and the locality.

En la preparación de un informe de valoración de empresa creíble y completo, el primer paso crucial es definir el alcance (Scope). Esto implica delimitar claramente los objetivos y límites del informe. Identificar los activos a valorar, determinar el propósito de la valoración (venta, fusión, planificación fiscal) y establecer la fecha de valoración son componentes esenciales. Además, especificar las metodologías a emplear, como el enfoque de ingresos o de mercado, contribuye a la transparencia. Al delinear el alcance con precisión, se establece una base sólida para un informe coherente y confiable, proporcionando claridad sobre qué aspectos serán evaluados y cómo se llevará a cabo la valoración.

Translated

(edited)

When preparing a credible and comprehensive valuation report, it's essential to first conduct thorough research and analysis. This involves gathering relevant data from various sources and scrutinizing them meticulously. Next, it's crucial to employ recognized valuation methodologies, ensuring transparency and accuracy in the process. Collaborating with subject matter experts can also enrich the evaluation, offering diverse perspectives and insights. Lastly, maintaining clear documentation throughout the valuation process is paramount, providing a solid foundation for the report's credibility. Overall, adhering to these key steps fosters confidence in the valuation outcomes and enhances its usefulness for decision-making purposes.

(edited)

A typical valuation report includes more than one method. Even a seasoned valuer often sticks in the dilemma of selecting an appropriate method of valuation. What is an 'appropriate method of valuation in the given case' is and will remain a hard point in decision making. Let us try to decipher it.If the firm has sufficient history and the business model is plain vanilla, then DCF does a great job. If the valuation is being done to acquire a small stake, then relative valuation or precedent transaction analysis will suffice. However, if the projections are difficult to arrive at due to absence of data, then real option is the answer. In any case, the valuer will do good if she includes at least two approaches in her valuation report.

Different valuation approaches and methods used in the report can lead to different results. It is the duty of the valuer to assign more weight to the most relevant method depending on the nature of the business, available information and value elements. It is strongly recommended to avoid giving equal weight to all methods, as well as weighting in cases where the estimated values by different methods are far from each other.

Choosing the appropriate valuation method is a critical step in preparing a credible and comprehensive valuation report. Each of the three main approaches to valuation has its own strengths and weaknesses, and the appropriate method will depend on the specific characteristics of the subject being valued and the purpose of the valuation. For instance, the income approach values the subject based on its expected future cash flows or earnings. This approach is often used for valuing businesses or investments that generate significant cash flows. The two main methods used in the income approach are the discounted cash flow (DCF) method and the capitalization of earnings method.

The most important element of any forecasts is understanding the potential range of variance and the most critical assumptions behind the forecasts. Applying common sense to this is important.

A thorough Highest and Best Use analysis helps define the maximally productive use of the property. The process to determine the highest and best use is to value as though vacant. Then, analyze the site value as ideally improved and value as improved.

The income approach stands out as the most accurate among valuation methods, yet it involves highly subjective inputs. Therefore, it's crucial to substantiate each input in the financial model with thorough research— You need to have a story that goes with numbersTypically, the market-based approach aligns closely with income-based value ranges, unless influenced by external factors like economic crises or pandemics, causing market fluctuations. Understanding these systematic factors is key to holding your groundIn many sectors, the asset approach serves as the floor value, not fully reflective of future business potentials. However, exceptions exist, emphasizing the need for a professional guidance.

In a liquidation value machinery and equipment appraisal, the report may include both a gross and net recovery value. The net value models an investment recovery plan, projecting and deducting costs relative to conducting an actual liquidation. Inclusion of net value depends on the appraisal problem to be solved in accord with the engagement letter.

Presentation of valuation results should include sensitivity analyses based on the forecasted financials. Varying profitability, discount rate or growth rates could be used. The valuation results under different scenarios and multiples could be given in ranges.

For really important valuation needs, I would talk to Jeff Tarbell @ Houlihan Lokey. His fees are not cheap, but when you need something really robust and defensible in a high stakes situation, he's awesome.