Elements Of A Good Business Valuation

Written by Elements Advisory Group
December 12, 2023
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business, Business Analyst, business performance, business strategy, Business Value, Valuations, value

Wherever you may be in your business journey, a crucial step for business owners is obtaining a comprehensive and accurate business valuation report.

Whether considering a sale, a partnership restructuring, dealing with taxation matters, or navigating divorce proceedings, a well-prepared valuation can be a valuable tool in decision-making.

In this article, we’ll explore the key factors that make a valuation report of good quality and what business owners should look for when engaging with professional evaluators.

The Valuation Process

A business valuation, also known as a company valuation, involves a meticulous analysis of all aspects of a business to determine its economic value.

Common approaches include reviewing financial statements, employing discounted cash flow models, and comparing similar companies.

While business owners may attempt their own valuations, the disparity between buyer and seller perceptions makes professional assistance essential.

Why Do Professional Business Valuers Matter?

Engaging a business valuer offers distinct advantages. These experts are more attuned to current market values and can provide a comprehensive picture of a business’s value.

Elements Advisory Group has developed a process to maximise desired outcomes. Our business valuation specialists can provide valuations for many different purposes.

Our expertise can expedite negotiations and simplify the sales process, making the transaction more efficient.

Components of a Good Valuation Report

A high-quality valuation report is not merely a numerical estimate but a detailed document supporting and defending its conclusions. Here are key components that contribute to the robustness of a valuation report:

1. Clarity of Purpose

The valuation’s purpose must be clearly stated, whether for gift or estate, buy/sell agreements, financing, or litigation. This clarity determines the standard of value, such as fair market value, fair value, strategic value, or liquidation value.

2. Business Description

The valuation professional should demonstrate a deep understanding of the business. This includes articulating the nature of the company’s operations, strengths, weaknesses, opportunities, and threats. A lack of understanding may lead to errors or omissions, compromising the report’s authenticity.

3. Industry and Economic Trends

External factors influence a company’s value. A good valuation report should address industry and economic trends, providing a context for understanding the environment in which the business operates.

4. Financial Information

An accurate valuation includes thoroughly examining financial statements and considering adjustments for discretionary or nonrecurring items. The report should also include a forecast of future operations or, at a minimum, address the company’s expectations for the future.

5. Discounts and Premiums

In some cases, discounts, such as lack of control or marketability, may be applicable. The report should discuss relevant discounts and provide empirical evidence to support the chosen discount rates. Comprehensive reports may also incorporate nontraditional sources of valuation evidence, such as previous transactions and offers.

6. Adherence to Fair Value Standards

A good valuation report adheres to fair value standards. Companies should expect the valuation professional to invest in the relationship rather than immediately pass the assignment to a junior analyst.

7. Industry Expertise

Industry-specific knowledge is crucial for accurate valuations. A professional with expertise in your industry is better positioned to understand the nuances affecting fair value measurement.

Place Your Best Foot Forward

A good quality valuation report goes beyond numbers; it provides a holistic business view.

Ensure your business valuation includes its history, employees, legal and commercial aspects, financial information, goodwill, market conditions, and industry trends.

Unfortunately, business value can be lost or damaged due to a business not being properly prepared for the valuation, not seeking the right advice during the transaction analysis, or having a false perception of the value of the business.

Engaging professionals with industry expertise and a commitment to fair value standards ensures a reliable and defensible valuation that can be valuable in various business scenarios.

Elements Advisory Group’s highly experienced advisors assist clients throughout the valuation process. We have developed a process designed to represent a business’s most accurate and realistic valuation and a way to optimise the business value moving forward.

Ready to take the next step? Contact us at the Elements Advisory Group for a comprehensive business valuation.

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