What can I expect during the valuation process?

Content provided by Mercer Capital.  www.mercercapital.com

Introductory Phase

During the initial introduction, the appraisal firm will request certain descriptive and financial information (usually recent audits and marketing brochures) to help define the scope of the business, in the appraisal. Defining the project is a critical phase of the valuation and can be accomplished with telephone and personal visits with the company and its professional advisors, as required.

Engagement Phase

Once the valuation project has been defined, an engagement letter or an agreement may be issued setting forth the key elements of the appraisal assignment. Typical elements included in the letter are the name of the client, the official name of the entity to be appraised, its state of incorporation or organization, its principal business location and the specific business interests to be appraised. Additionally, the letter will indicate the appropriate standard of value, the premise of value, the effective date of the appraisal, and the type of report to be produced. There are three scopes of work, including appraisals, limited appraisals and calculations as defined by the American Society of Appraisers, as the ASA Business Valuation Standards.

The engagement letter or agreement will provide a descriptive project overview, the qualifications of the appraiser and set forth the timetable and fee agreement. Accompanying the engagement letter is a comprehensive checklist request for information which is forwarded to the company. The information requested includes the company’s historical financial statements and detailed operating and structural information about the business and the market in which it operates.

The Valuation Phase

A preliminary analysis of the company will begin and upon review of the checklist and industry information, the valuator will schedule an on-site appointment with management to discuss the operations of the business. Normally, one or two business valuation professionals will visit with management at the headquarters location to:

• review in detail the company’s background, financial position, and outlook with appropriate management personnel;

• review appropriate corporate documents not normally exchanged by mail;

• tour the operations; and

• respond to questions from management.

The company visit provides an important perspective to the business valuation, since it puts the analyst in direct contact with the individuals responsible for shaping the future performance of the company. In a very real sense, management’s input will shape the investment decisions to be made by the appraiser in reaching a conclusion of value.

Following the company visit, the appraiser completes the analysis, making specific documented adjustments discussed with management, in context with more subjective conclusions involving the weighting of some factors more than others. The appraiser will then prepare a report explaining how and why value was assessed the way it was and providing information about how the business fits into the marketplace.