The Ultimate Business Valuation Checklist

An investor understands how important it is to plan and assemble detailed information while undertaking business valuation. How an investor measures business value and under what circumstances impacts the business valuation of an entity. In other words, both the standard of value and the premise of value is important for undertaking business valuation.

Say, for instance, a business owner decides to sell 100% of his ownership to someone who brings the best offer. Thus, in this case, the standard of value is the fair market value and the premise of value is the sale of 100% of ownership.

An investor or an analyst starts collecting the relevant information once he knows how and when to undertake business valuation. This is done with the help of a business valuation checklist. 

What is a Business Valuation Checklist?

A business valuation checklist is a business valuation tool that guides an individual or an entity through finding the important data points about a target business. Such critical data points help an individual to calculate business valuation of an underlying business. It is a questionnaire asking about the information an appraiser or an investor will need for preparing an accurate valuation of an underlying business.

Note that collection data and preparing an accurate business valuation report is an important step in business valuation process. It takes time, effort, knowledge, and skill sets to gather the information and present it accurately.

A business valuation checklist contains the tailored information necessary for compiling an accurate valuation as per the purpose and the way in which such a valuation is done. Which data points matter depends on the approach being used, so it is worth knowing the seven methods of valuation of shares before the checklist is filled in. 

The purpose of undertaking a business valuation is called the premise business value. It reflects the circumstances in which a business is valued. For instance, the main premises of value can be value in use as a going concern, value in exchange as a forced liquidation, etc.

Likewise, the measure of value used to determine the business worth is called the standard of value for a business valuation. Choosing a standard of value will depend upon the stakeholder or the entity for whom the business valuation is undertaken.

Business Valuation Checklist Template

1. Financial Information

• Historical income statements of the last five years
• Historical balance sheets of the last five years
• Ageing of accounts receivable and accounts payable
• Liabilities including loans and payoff information, creditors, and contingent liabilities 
• Interim and year-to-date balance sheets and income statements
• Profit and cash flow projections, budgets, or business plans
• Balances in all company bank accounts including trust accounts
• Property and equipment leases
• Tax issues
• Budgets, forecasts, or business plans or projections of any kind
• Compensation paid to each owner, director, manager, shareholder, and member
• Detailed depreciation schedules

2. Company Information

• Ownership information including controlling interest and shares owned by owners 
• Management information like non-disclosure agreements, insurance & employment contracts
• Average number of employees for the past 3 to 5 years along with their roles 
• Tangible assets like inventory, real estate owned, equipment owned, etc.
• Intangible assets like legal rights, licensing agreements, and other contractual obligations

3. Market Information

• Current market share of the subject business
• Competitors of the subject business and their estimated market share
• Product differentiators
• Market size
• Pricing strategy
• Barriers to market expansion
• Spread of customers and suppliers

4. Information Analysis

• Profit margins
• Business stability
• Type of income

5. Documents Needed for Business Valuation

• Last 3 years of Tax Returns
• Current Interim Financial Statements
• Cash Flow Forecast 
• Sales by Customer Report
• Sales Composition Report
• Summary of Current Insurance Coverage
• Schedule of Compensation Paid to Each Owner and Family Member for Each Year
• List of One-Time/ Non-Recurring/ NonOperating Revenues, Expenses, Gains and Losses
• Tax Returns for the  past 3 to 5 years.
• Lease Agreements
• Documentation on any current loans to or from the business.
• All relevant corporate documents including Company Constitution like AOA, MOA
• Loan agreements
• Existing contracts like tenders, supply, employment, not-to-compete, franchise, etc
• Copies of patents, trademarks, copyrights by the company

Information Needed for the Business Valuation Checklist

Business valuation is a complicated procedure following a set of guidelines charted out by the professional organizations. There is a need to thoroughly document and assess the value of a business taking into consideration relevant information. 

The following is the key information needed for business valuation:

1. Financial Information

The first type of information that an appraiser requires is the historical financial data of a target business. This information is represented typically in a company’s historic financial statements. These basic financial statements include Income Statements, Balance Sheets, and Cash Flow Statements. 

Accordingly, a business appraiser would access each quarter’s  income statements and balance sheets for the past three to five years. 

Note that the basic financial statements of a subject business helps an appraiser ​​to determine future cash flow and profits. Such data also helps him to calculate growth rates. Growth rates help a business demand attractive investments. 

2. Forecasted Information

A business appraiser may access the forecasted balance sheets and income statements to understand the true economic potential and earning power of the subject business. This helps him in understanding prospect of future cash flows of the subject business.

The appraiser takes into consideration the current strategy of the business and its performance to date to determine the future value of a business. Such insights help him to project future revenues, operating expenses, taxes, capital requirements, cost of capital, and market share of the subject business.

The business appraiser may even compare these financial metrics to the ones of other similar businesses. This helps him in obtaining more insights about the subject company’s future prospects. 

3. Industry Information

A business appraiser may also need the information pertaining to the industry and economic trends. Note that the external factors impact the future cash flows of a business. For instance, market factors like growth opportunities, changes in government policies, etc affect businesses in a specific industry. Such insights also affect the risk perceptions of a business. Thus, an appraiser gathers information on short-term and long-term industry outlook, economic factors, business’s competitors, barriers to entry, and its competitive advantages. He also collects information about market share of the subject business and market price of similar businesses. That’s because all these insights directly or indirectly impact the value of a business.

4. Tax Information

Besides the basic financial statements, a business appraiser may even obtain the subject business’ tax returns for the past three to five years. The tax returns help an appraiser to understand if there are any contingent assets and liabilities with regards to taxation on the company’s balance sheets. He also collects such information to know if there are any disputes with the income tax authorities or any existing tax liens. It is important for an appraiser to capture such details as they significantly impact the business valuation.

5. Information About Tangible and Intangible Assets

It is important for a business appraiser to have complete information on the tangible and the intangible assets of a business. Note that intangible assets like goodwill and intellectual capital are valuable intangible assets in business valuation. 

An appraiser breaks down intangible assets into four main categories: human capital, customer capital, structural capital, and social capital. Examples may include patents, copyrights, trademarks, goodwill, among others. This is done for comparison purposes especially if an appraiser values a business using the Market approach.

A business appraiser makes an adjustment in these different elements of value by comparing the subject company with the similar company. Such adjustments are done based on the experience, knowledge, and skill of the appraiser.

6. Information About Existing Contracts

An appraiser may even require copies of existing contracts. Such contracts may include supplier agreements, franchise agreements (if any), lease agreements, customer agreements, loan agreements, and any other legal agreements. 

It is important for a business appraiser to collect the information on such contracts. For instance, loan agreements, and any other legal agreements helps an appraiser understand if there are any legal or regulatory issues, pending litigations, etc. Such information also helps a business to understand whether the subject business complies with statutory, environmental, and safety laws. 

Further, the customer agreements help him understand whether the subject business has any long-term commercial contracts, their validity, and their worth to the business. All such information impacts the business valuation to a great extent.

Typically, a business appraiser presents all the above information in a business valuation report. Such a report not only incorporates the analysis of subject firm’s financial data. But it also includes an analysis of the industry and comparable companies.

A valuer may send you the same thing under a different name. A business valuation questionnaire, a business valuation form and a valuation information request are all asking for what is set out below: the financial history, the forecasts, the contracts and the asset detail. If you have prepared against this checklist, you can answer any of them without going back to the accounts a second time.

How to use this business valuation checklist

A properly performed business appraisal requires the collection and review of a good deal of data and company information before the valuation process. Evaluating a business can be a tedious task, especially if critical data points are not available in proper format. A business valuation checklist can simplify the endeavour of an appraiser. 

Working through a valuation checklist is one thing; having the financials and data room ready to survive scrutiny is another. KayOne embeds a senior fractional CFO into founder-led companies between $2M and $50M – the model, the board and investor work, the financial discipline. If that is where you are, see if we’re a fit.