A valuation is a supported estimate of what a business, ownership interest, asset, or liability is worth at a specific date, shaped by its purpose and assumptions. For finance leaders, preparation starts with identifying the need, understanding the purpose, and assembling the information needed to support the analysis.
The purpose of a valuation determines the applicable standard of value, which in turn shapes the methodologies and assumptions used. Common purposes include:
- Financial reporting, such as purchase price allocations, impairment testing, and equity compensation
- Tax compliance, such as gift and estate planning
- Transaction support
- Litigation or dispute resolution
Financial reporting valuations follow fair value, an exit price in an orderly transaction between market participants at the measurement date, which emphasizes market participant assumptions and observable inputs.
Tax valuations generally rely on fair market value, the price at which property would change hands between a hypothetical willing buyer and willing seller with reasonable knowledge of the relevant facts, where discounts for lack of control or marketability are often central.
Shareholder disputes may apply statutory or legal fair value, which follows applicable statutes and case law, with treatment of discounts varying by jurisdiction.
A buyer evaluating an acquisition may instead focus on investment value, which reflects its particular objectives and potential synergies, while liquidation value, which refers to proceeds from selling assets individually, may be relevant when a business is not expected to continue as a going concern. Because each standard defines the hypothetical parties, relevant synergies, and appropriate discounts or premiums differently, it also influences which approaches carry the most weight. Confirming the purpose at the outset helps ensure the analysis applies the right standard and methods for its intended use.
When to Consider a Valuation
The most direct evidence of an asset’s value at a specific point in time is an arm’s-length transaction between informed, unrelated parties. However, outside of actively traded public securities, transactions involving the same or similar assets rarely occur often enough to provide a current, observable price. In the absence of such transactions, a valuation may be required for compliance purposes, such as financial reporting or tax filings, or may be useful to inform business decisions, such as evaluating an acquisition, raising capital, or planning an ownership transition.
Understanding the Three Approaches
The market approach looks to prices and multiples from comparable companies or transactions, making the quality of the comparisons and adjustments for differences especially important. CFOs should understand why the selected peers or deals provide relevant evidence for their business.
The income approach converts expected future cash flows into present value using a risk-adjusted discount rate. Its credibility depends heavily on the forecast, including whether expected margins, growth, and reinvestment are supportable and whether the discount rate matches the cash flows.
The cost approach considers the cost of replacing an asset’s utility, allowing for physical deterioration and obsolescence. For a business, an asset-based analysis may assess underlying assets and liabilities individually rather than simply relying on accounting book value. The CFO’s review should focus on why the valuator selected a particular method and how the results support the conclusion.
What to Expect
A typical engagement works through scoping, information gathering, and management discussions before moving into analysis, draft review, and the final report. At the outset, agree on the purpose, valuation date, and basis of value along with deliverables and fees.
Management discussions give the valuation team an opportunity to understand operations and risks while testing the assumptions behind the financial information. The draft review stage then provides an opportunity to correct facts and resolve questions, although new information may require further analysis. This review should build a shared understanding of the evidence while preserving the valuator’s independent judgment rather than negotiating a predetermined result.
A Practical Checklist
Use this checklist to organize documents and information before the engagement, then confirm any additional needs with your valuation professional. The final request will depend on the purpose, valuation date, and subject of the valuation.
Gather financial records:
Annual financial statements, tax returns, latest interim results, and prior-year comparisons. Identify nonrecurring items and related-party transactions with supporting explanations.
Document the forecast:
Budgets, projections, and business plans, including assumptions behind revenue growth, margins, capital spending, and working capital needs.
Clarify ownership:
Ownership chart, cap table, formation documents, and shareholder agreements, plus terms for options, warrants, and transfer restrictions.
Compile assets and obligations:
Fixed asset register, intangible asset details, debt schedules, leases, and working capital detail. Include contingent liabilities and pending litigation.
Explain the business:
Background on operations and management, customer and supplier concentration, competitive position, and key risks.
Collect supporting evidence:
Material customer, supplier, and licensing agreements, recent share transactions or offers, deal terms, and prior valuations or appraisals.
Know the story:
Make sure historical results, projections, and underlying documents tell a consistent, supportable narrative. Be prepared to explain what drove past performance, how those drivers carry into the forecast, and where the outlook departs from history due to new contracts, capacity additions, pricing changes, or market shifts. Supporting agreements, board materials, and management commentary should corroborate the assumptions rather than contradict them.
Pitfalls to Avoid
One fundamental problem is a weak connection between source records and the final value. Historical figures should reconcile to financial statements, adjustments need support, and the bridge from enterprise value to equity value should be traceable.
Another issue is a forecast that tells a different story from management’s operating discussion, such as growth assumptions that overlook capacity constraints or required investment. The analysis should reflect conditions at the valuation date and distinguish temporary performance effects from lasting changes.
Insufficient scrutiny of assumptions creates another risk, making it important to challenge comparables, long-term growth, and material sensitivities rather than focusing only on the headline value. Involving the appropriate finance, operating, legal, or tax reviewers early, and auditors when relevant, helps surface significant questions before issuance.
Bringing It All Together
Preparing for a valuation starts with a clear purpose and continues through the quality of the information, assumptions, and review supporting the conclusion. The CFO’s role is to connect the financial records with the business’s operating reality, challenge significant assumptions and involve the right stakeholders while preserving the valuator’s independent judgment.
The final test goes beyond whether the number seems reasonable: can a reviewer trace it to reliable evidence, understand what drives it and recognize its limitations? A complete, consistent report with retained supporting documentation provides the foundation for that review.
Whether you’re planning a transaction or addressing a reporting requirement, connect with CBIZ to start a conversation about your valuation needs.
Frequently Asked Questions
Consider involving a valuation professional when planning acquisitions, issuing equity compensation, or entering transactions involving warrants and other financial instruments. Existing assets and liabilities may also require impairment assessments or recurring fair value measurements under applicable accounting requirements.
Start with financial statements, tax returns, interim results, and forecasts with supporting assumptions. Gather ownership documents and material agreements, then work with your valuation professional to identify additional information specific to the assignment.
Focus on whether the financial data reconciles to source records, the forecasts reflect the business outlook, and significant assumptions have adequate support. Resolve material questions, confirm consistency between the report and supporting schedules, and retain a clearly identified final version.
© Copyright CBIZ, Inc. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. Material contained in this publication is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their organization.
“CBIZ” is the brand name under which CBIZ CPAs P.C. and CBIZ, Inc. and its subsidiaries, including CBIZ Advisors, LLC, provide professional services. CBIZ CPAs P.C. and CBIZ, Inc. (and its subsidiaries) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. CBIZ CPAs P.C. is a licensed independent CPA firm that provides attest services to its clients. CBIZ, Inc. and its subsidiary entities provide tax, advisory, and consulting services to their clients. CBIZ, Inc. and its subsidiary entities are not licensed CPA firms and, therefore, cannot provide attest services.
“Grant Thornton” refers to the brand name under which the Grant Thornton member firms provide services to their clients and/or refers to one or more member firms, as the context requires.
Grant Thornton International Limited (GTIL) and the member firms, including Grant Thornton LLP and Grant Thornton Advisors LLC, which operate as the US member firm, are not a worldwide partnership. GTIL and each member firm are separate legal entities. Services are delivered by the member firms, GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions.
