Often times an individual focuses on a cascading fountain of numbers, ratios and financial jargon and is left mystified by the valuation process. While every valuation engagement is different, certain key considerations are the building blocks for obtaining a business valuation appropriate for the situation and often times these considerations are separate from high level financial analysis. These key considerations include:

1. Purpose of Valuation - The reasons for a valuation are many and varied. These include buying or selling a business, estate or tax planning, divorce/marital dissolution, business disputes, civil litigation and business value planning and maximization.
   
   
2. Standard of Value - Depending on the purpose for the valuation, different standards of value may apply. The IRS utilizes Fair Market Value as the standard for tax related transactions including estate valuation and planning, goodwill impairment and other IRS matters. Shareholder disputes and marital dissolutions may have a prescribed standard of value based on state or federal statute, such as Fair Value. In determining the acquisition or selling price of a business, Investment Value may be utilized. The standard of value is typically determined by the venue and purpose of the valuation.
   
   
3. What is to be Valued - While seemingly a simple concept, this is often overlooked. Depending on whether the valuation is for all of the stock of a company, some percentage of the company - either a controlling or noncontrolling interest, or for the assets of the company - the determination of value will be impacted by the nature and amount of any discounts or premiums required. For instance, a 51% controlling interest is typically worth more than a 51% pro-rata share of the total value of the company, while a 49% minority interest is typically worth less than a 49% pro-rata share of the company value as a whole.
   
   
4. Valuation Date - The value of any item is not a static amount. As the price of gasoline varies on a daily basis, the value of any asset or stock varies as well. Thus, the valuator must determine the value at a particular valuation date.
   
   
5. Valuation Approach - Each business or entity is different. In valuing a company, the valuator must consider many elements of the business including its capital structure, assets, and operating history and determine the most appropriate method(s) of valuation. Three basic types of methods are used, based on Assets, Income or Market Comparisons.
   
   
6. Level of Service - Differing levels of service may be appropriate, depending on the purpose and the intended usage of the valuation. For instance, in IRS matters, ESOP reports, litigation engagements or for less sophisticated users, a Formal Appraisal Report may be appropriate or required. For less formal purposes or for more sophisticated users, a concise Indication of Value Letter may be appropriate. For particularly narrow purposes, a Limited Scope Engagement in which only agreed upon procedures are performed may be applicable.

It is wise to consider these key elements in any valuation in order to obtain the proper valuation relevant for your situation, in the form it is needed and at the appropriate cost. Then you can start worrying about that cascading fountain of financial information.

This article is provided by Evergreen Capital LLC through the efforts of Andrew Runge, former Director of Valuation Services.