Quick answer: A useful valuation analysis states its purpose and the standard of value, shows how earnings were normalized, explains the market evidence and methods behind the value, gives a range with the reasoning for its ends, and carries the result through to what the owner would net. A reviewing advisor should be able to trace every figure to a source and every judgment to a reason. A single number with no support, or a rule of thumb presented as analysis, is a warning sign.
Key points
- The purpose of the work decides what belongs in it. A document written to estimate deal pricing is judged differently from one written for a tax filing.
- Normalized earnings are the foundation. If the adjustments are unsupported or one-sided, everything built on them is unreliable.
- Evidence should be identified and its limits stated. Comparable data for private companies is thin, and a credible report says how it was used and adjusted.
- A range with reasoning is more useful than a point estimate. The report should say what would move the answer to the high or the low end.
Why a review checklist helps
Advisors are often asked to look at a valuation a client has obtained, or to help the client choose a provider. Few advisors review valuations daily, and reports differ in format and detail. A checklist focuses attention on the elements that determine whether the number can be trusted. It also gives the client a plain way to compare two providers.
This guide is written for transactional valuations, which estimate likely deal pricing. Formal appraisals follow professional standards that add requirements. The comparison of the two lists them.
The sections that matter
| Section | What it should show | Question for the reviewer |
|---|---|---|
| Purpose and scope | What the valuation is for, the standard of value, the date and what was relied on | Does the stated purpose match the way the client will use it? |
| Business description | Products, customers, competition, management, history | Does it match what you know about the client? |
| Financial history | Several years of results, with trends and ratios | Do the figures tie to the statements and tax returns? |
| Normalized earnings | Each adjustment, its amount, its support and its direction | Are adjustments applied in both directions and supported by documents? |
| Evidence | Market data, comparable companies or transactions, with sources and limits | Is the evidence relevant to a business of this size and type? |
| Methods and reconciliation | Which approaches were used, why and how results were weighed | Is the weighting reasoned, not averaged? |
| Range | Low, high and the factors that separate them | Does the report explain what would move the value? |
| Net proceeds | The bridge from enterprise value to owner proceeds | Are debt, debt-like items, working capital and costs treated? |
| Buyer universe | Who is likely to pay and why | Does it say whether strategic or financial buyers set the price? |
| Assumptions and limits | What was relied on and what was not verified | Are limitations specific rather than boilerplate? |
Normalized earnings: where to look hardest
The earnings figure is multiplied by the multiple, so errors in it multiply too. The add-back guide lists what buyers accept and challenge. When you review a normalization schedule, look for four things.
- Support. Each adjustment should be traceable to an invoice, an agreement or a payroll record.
- Direction. Below-market rent, underpaid family members and deferred maintenance reduce earnings. A schedule with only favorable adjustments is incomplete.
- Consistency. An item described as one-time that appears every year is not one-time.
- Owner replacement cost. The compensation assumed for the owner’s role should match what a replacement would cost.
Evidence and methods
A credible valuation names its sources, says how they were used and says where they fall short. The guide to valuation methods explains the approaches, and the guide to multiples covers the use of public data. For private companies, the report should state that transaction data is limited, identify the sample and explain any adjustments for size, growth, margins and risk.
The report should also show reconciliation. If one method gives a value well above another, the author should explain the gap and the weight chosen, and not simply average them.
From enterprise value to what the owner nets
A valuation that stops at enterprise value leaves the question the owner cares about unanswered. A useful analysis carries the number through the steps in the bridge from enterprise value to equity value: debt, debt-like items, cash and working capital, followed by an estimate of transaction costs and, if appropriate, a note on taxes by structure. It should flag the points that buyers typically negotiate, such as the working capital target and the definition of debt-like items.
Illustrative example: How a report can look complete and still fall short
A report concludes that a company is worth $15,000,000, which is 6.0x on reported EBITDA of $2,500,000. It cites no source for the multiple, makes no adjustments to EBITDA, ignores $1,100,000 of debt and debt-like items, and offers no range. The reviewer asks four questions: where does 6.0x come from, which expenses are the owner’s personal costs, what is the net to the owner after debt, and what would move the answer up or down. The report cannot answer them, so the figure should not be relied on. The report is hypothetical and the figures are invented for illustration.
Warning signs
- A single figure with no range. Value is a judgment and a point estimate hides that.
- A rule of thumb presented as analysis. Industry multiples without adjustment for the business at hand.
- Unsupported adjustments, or only favorable ones.
- No treatment of net proceeds. The owner is left to guess what is received.
- No discussion of buyers. Value depends on who is paying.
- Boilerplate limitations. Standard disclaimers with no mention of what was actually unverified.
- Conclusions that match what the client hoped to hear. The independence of the provider matters.
Using the checklist
Share the list with the client when comparing providers, ask each one for a sample report and discuss what the client plans to do with the result. The guide on when to refer a client covers the earlier question of whether a transactional valuation is the right product at all.
Frequently asked questions
How long should a transactional valuation be?
Long enough to show its work, and no longer. Length is not a measure of quality. A short report that identifies the earnings adjustments, the evidence for the multiples and the net proceeds can serve an owner better than a long one that buries the reasoning in boilerplate.
What is the difference between a valuation and a fairness opinion?
A fairness opinion is a formal statement, usually from an investment bank, about whether the consideration in a specific transaction is fair from a financial point of view to a particular party. A valuation estimates what a business is worth. The two have different purposes, standards and audiences.
Should a valuation rely on a published industry multiple?
As context, yes, as the answer, no. Published multiples describe averages for groups of companies of various sizes and qualities. A good analysis explains how the subject company differs from the group and adjusts or weighs the evidence. Public company data in particular reflects larger, more liquid firms.
Can an advisor challenge a valuation they did not prepare?
Yes, and a good provider will welcome it. Ask for the normalization schedule, the sources of the evidence and the reasoning for the choice of multiple or rate. Questions about assumptions are routine and a provider unable to answer them is a signal.
A client asking what their business is worth?
The Impetus Group works with CPAs, attorneys and other advisors on transactional valuations and M&A advisory, so the client relationship stays with you. Book a discovery call to talk through a client situation.
Related guides
- Business Valuation Methods: Income, Market and Asset Approaches: The income, market and asset approaches to valuing a private company, the methods inside each, when each fits and how valuers reconcile the results.
- EBITDA Add-Backs: What Buyers Accept and What They Reject: Learn which EBITDA add-backs buyers accept in a sale, which they reject, and how adjusted EBITDA changes enterprise value, with a worked illustration.
- From Enterprise Value to Equity Value: What the Owner Receives: Enterprise value is the price of the business. Equity value is what owners receive after debt, debt-like items, cash and working capital. See the bridge.
- When to Refer a Client for a Transactional Valuation: A Guide for Advisors: For CPAs, attorneys and wealth advisors: the situations in which a business-owner client needs a transactional valuation, and when another tool fits better.
- Transactional Valuation vs. Appraisal: Which Do You Need?: A transactional valuation estimates what a buyer would pay. An appraisal estimates value under a legal or tax standard. See how they differ and which one fits.
- How CPAs Support Clients Through the Sale of a Business: Where the CPA fits when a client sells a company: readiness, normalized financials, tax structure, diligence support, the working capital true-up and proceeds.
- Keeping Your Client Relationship Through an M&A Process: A Guide for Advisors: How CPAs, attorneys, wealth advisors and bankers can stay central to a client's sale: roles, communication, conflicts and what to ask an M&A advisor.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.