What Does a Business Valuation Look Like?

Appraisal Reports

An appraisal report is a self-contained document that describes the procedures applied, information considered, and analyses performed to achieve the conclusion of value. If written well, the reader of an appraisal report should be able to understand every facet of the valuation, even if the reader has minimal financial training and no prior familiarity with the company. In theory, this document is appropriate to be used by anyone the client chooses to designate. Most appraisal reports are 40-60 pages in length, and some may be considerably longer. Appraisal reports (or some variant) are almost always required in Federal Court cases, IRS gift or estate tax returns (they are called “Qualified Appraisals”), and employee stock ownership plan (ESOP) valuations. Appraisal reports are typically desirable for resolving shareholder buyouts, as a tool for buy-side due diligence, and to aid business owners with strategic planning.

Restricted Reports

A restricted report is a summary document that states the procedures applied, information considered, and analyses performed to achieve the conclusion of value. While the procedures and rigor in the development of the business appraisal are identical to those that support the appraisal report, the restricted report condenses the narrative to the bare essentials and carries with it the implicit assumption that the reader already understands the nature of the company and its business, and has a sufficient grounding in accounting, finance, and economics to mentally make the links that an appraisal report would typically make for the reader. Restricted reports are common for situations such as 409a (stock option) valuations, fair value accounting valuations, and valuations for civil litigation in state courts, mediations, and arbitrations. Restricted reports are often used for sell-side strategic engagements as well.

Oral Reports

Oral reports are valuation reports that are delivered as a voice presentation only. Some exhibits may be presented, but the most important substance of the report lies in the oral presentation. Oral reports are typically called for when either the client determines that a written work product is superfluous, or they wish to avoid the creation of a written record of the valuation result. Oral reports are most commonly associated with litigation, and in some cases, the testimony of a business valuation expert witness in deposition or at trial may be considered an oral report.

Calculation Reports

Calculation reports fall short of appraisal reports in that the report does not supply a conclusion of value but rather a calculation result. Calculation engagements are sometimes alternatively called limited procedure engagements because, in contrast to business valuation projects, which must allow any procedure that the appraiser deems appropriate, calculation engagements take place under limitations specified in advance of the engagement by the client. The client defines the parameters of the calculation and the valuation procedures to be applied. There is no opinion, either explicit or implicit, of the company’s or subject interest’s value – just a statement of the result of the calculation in accordance with the parameters that the client set forth. Calculation reports are most frequently used for preliminary planning purposes and are commonly referred to as “back of the envelope” valuations.

What format should a business valuation take?

Professional standards envisage a number of formats for a business valuation deliverable. There are no hard and fast rules that tie a report format to a specific purpose or audience, which is a good thing because every valuation assignment is different, and the needs for each assignment are different. There is a business valuation deliverable format for whatever purpose the valuation is serving and whatever audience is expected to rely upon it. The key is, like a tool, choosing the right valuation for the right job.