What is the Valuation Process?
You may be wondering, "How much is my company worth?" When you go through the valuation process, you are basically determining what the company is worth. What that means is making reasonable estimates of the value of a company's assets.
Many companies measure their value by revenue streams and users. Newer companies, or startups, tend to tie their value to whatever funds they can raise at any given time.
How Valuators Determine Your Company's Worth
A valuator not only needs to see a business's financial information, but needs to know many other details about a company in order to properly appraise it.
Below is a list of questions that you will likely be asked as part of the evaluation. Not all questions apply to all types of businesses. For more information, see FindLaw's Business Finances section.
Business Organization
- How is the business legally organized (corporation, sole proprietorship, partnership, etc.)?
- If the business is a partnership, how many partners are there, and who are they?
- If the business is a corporation:
- How many shareholders are there?
- Who are the major shareholders, and what percentage of the total outstanding stock does each own?
- Is the stock publicly traded? If so:
- On which market?
- What is the recent market price for shares?
Business History
- How long has the business existed, and for how long under its present owners?
- Is the company engaged in any joint ventures or similar undertakings?
- What are the company's major accomplishments? What are its failures?
- What government agencies have regulatory or other control over the business? Is the business currently in compliance with all requirements?
- Does the company's success depend heavily on one or more key employees?
- Are there any potentially threatening situations in connection with management, products, services, finances, legal obligations, etc.?
- What is the company's litigation history?
Products and Services
- What are the company's main products and/or services?
- How long has the company been selling each product/service?
- What has the sales volume been for each product/service within the last five years?
- What are the costs and gross profit of each product/service?
- What portion of the cost is attributable to labor, overheard, and materials?
- What is the forecast for future sales of these products/services?
- What other products or services could be offered with the current facilities and staff?
- Which products/services are proprietary?
- What distinguishes your company's products/services from those of competitors?
- What warranties does your company provide?
- Which products does the company purchase from others for resale?
- What sorts of agreements does the company have with these suppliers?
- How much does the business rely on outside vendors?
Marketing
- What are the main uses and markets for each major product/service?
- What are the prospects for growth in these markets?
- Who are your current principal customers?
- What percentage of sales for given major products do these principal customers represent?
- What major potential customers have not yet been secured as customers?
- How do sales break down geographically?
- Who are your main competitors?
- What are their major strengths and weaknesses?
- What is their estimated sales volume?
- What is your company's position among its competitors with regard to sales volume/reputation?
- Does your company have a backlog for any of its major products/services?
- What is your company's forecast for sales of the major products/services?
- Does your business regularly use any advertising or public relations firms?
- Who is responsible for market research, advertising, and sales promotion?
- Who is responsible for exploiting new markets?
- How is your direct selling group structured (if any)?
- How is your distribution and/or sales representative group organized?
Finances
- What are the business's sales and earnings for the past five years?
- What salaries/dividends have been paid to owners/stockholders for the past five years?
- What is the state of inventory?
- What is the normal inventory level, and where is it presently?
- What is the condition of the existing inventory?
- Is any inventory on consignment?
- If so, how much, to whom, and on what terms?
- What are the details of the accounts receivable and accounts payable?
- What loans are outstanding, to whom are they payable, and on what terms?
- What is included in accrued expenses payable, and what is the current amount?
- Are all taxes current?
- What overhead rates are used in determining costs?
- What are the company's departmental budgets?
- What is the advertising and promotion budget?
- What is the total payroll?
- Does the company own equity in any other businesses?
- What liabilities exist in connection with warranties?
- Are there any existing claims or known liabilities?
- Are there any contract disputes or negotiations?
- Are there any outstanding stock options or the like?
Facilities
- Is real estate owned or leased?
- If owned:
- What is the appraised value?
- When and by whom was the appraisal made?
- If leased, what are the terms of the lease?
- What are the zoning restrictions on the current real estate?
- Is any equipment leased? Which?
- Is there excess or idle capacity? How much?
Personnel and Organization
- What are the roles of key executives and personnel?
- How many employees does the company have?
- Has the company established standard pay rates for its various positions?
- How do these compare with pay rates of other similar employers in the area?
- What is the salary review policy?
- What are the employee benefits?
- Does the company pay all benefits, or do employees pay part?
- If so, how much is the employer contribution?
- Are any employees relatives of the executives or owners?
- If so, what are their duties and how much are they paid?
- Are there any employees on the payroll for special reasons (friend of the owner, long-term service, etc.) who do not pull their weight?
- Are workers unionized? If so:
- Which workers?
- What are the details of the labor contracts?
- Have their ever been any strikes?
- What has been the turnover rate?
- Does the company provide formal job training?
- Are there written personnel policies?
- Are any employees or management under contract? If so, what are the terms?
Management
- What are the key management members' backgrounds/salaries?
- Does management receive any "perks?" If so, what, and how much are they worth?
- What are the management capabilities of persons in charge of key departments?
- Are there strong differences of opinions between management members? What are they?
- Do various departments work well together, or is there friction?
- If the business is a corporation:
- What control do major stockholders exercise over the business's policies and activities?
- Have there been proxy fights or attempts to take over the company?
If the Business Is For Sale
- What assets and liabilities are expected to be included or excluded from the sale?
- If the business is a corporation, will the sale include the capital stock or just the assets?
- What are the preferred payment terms?
- Do you expect a broker to be involved? If so, what is the fee and who will pay it?
- Are key management staff aware of the sale?
- Will a sale require substantial management reorganization?
- Which management members would remain following the sale?
- Will management cooperate in the sale and post-sale activities?
- Will the sale significantly impact union labor?
- What licenses, contracts, etc. must be transferred to the buyer?
- Are any partners or major shareholders opposed to a sale, and who big a hurdle will this create?
Getting Help from an Attorney
If you are considering buying a business or closing an existing one, the valuation process is a necessary task. Let a skilled business and commercial law attorney walk you through the steps and explain the laws.