1) Initial engagement

Once the client has provided a signed engagement agreement and the initial retainer, the valuation engagement starts after initial documents are collected. Typically 3-5 years of financial statements and tax returns, interim financial statements and management forecasts are requested.

2) Initial data review and meeting preparation

The provided financial statement data is transferred into a valuation model for comparability, manipulation, and analysis purposes. Once this transfer is complete, the financial statements are reviewed for trends, anomalies, and potential non-operating assets, liabilities, revenues and expenses. These trends, anomalies and potential non-operating items, along with qualitative questions regarding the subject company’s history, operations, employees, customers, competitors, etc. are composed in a management meeting agenda document which is provided to the client prior to the actual management meeting.

3) Management meeting

A management meeting is conducted with the client and other members of the subject company’s management team as appropriate. This meeting is often conducted by only one or two members of the valuation firm. This meeting sometimes occurs at the subject company if a visit to the company is a necessary part of the valuation engagement. On average this management meeting lasts 2-3 hours; however, in some cases it can be shorter or longer.

4) Company, economic, and industry analysis

After the meeting with management has taken place, the appraiser has much greater insight into the subject company and its industry. A view of the macroeconomic environment is developed to lay the foundation for industry analysis. The additional knowledge about the subject company and its operations, strategies and market position allows the appraiser to conduct a thorough industry analysis utilizing third party research and independent research. The appraiser then determines how the subject company fits into the industry and is ultimately impacted by the industry environment.

5) Financial analysis

The initial financial analysis is then expanded on and performed in greater depth based on a deeper understanding of the subject company and its industry’s dynamics. The financial analysis starts with the creation of pro forma financials, which normalize the subject company’s financial statements, removing non-operating and extraordinary items. Once pro forma financial statements are created a thorough trend and ratio analysis is conducted using industry benchmarks.

6) Valuation analysis

Once a thorough analysis of the financial statements has been conducted, the appraiser determines which valuation approaches and underlying methodologies are appropriate given the scope of the engagement, the qualitative characteristics of the subject company, and its historical and expected future financial performance. The following approaches are commonly utilized:

• Income Approach: Weighs the expected benefits from investing in the company against the required return for assuming the risk and uncertainty associated with it. This approach can account for changes in revenue growth, margin changes, working capital needs and future capital expenditures.
• Market Approach: Evaluates a company based on completed transactions of comparable companies or transactions of publicly traded companies.
• Asset Approach: Measures the fair market value of a company’s assets, less its liabilities. Frequently used for under performing companies, this approach is not appropriate for companies with significant amounts of intangible value.

Once the valuation approaches and their respective methodologies are employed, the appraiser must then reconcile the resulting values to arrive at a singular estimate of value for the subject company.

7) Application of discounts

Depending on the interest being valued, the appraiser may be required to apply a discount for lack of marketability and/or a discount for lack of control to the subject interest. These discounts are most commonly applied to minority interests or valuation methodologies that derive a marketable value.

8) Internal value presentation

After the appraiser has derived a value for the subject company (or subject asset being valued), the appraiser presents his or her analysis and conclusions to the rest of the team members overseeing the completion of the particular valuation engagement. This presentation provides team members the opportunity to question the appraiser’s underlying assumptions, analysis and conclusions in an effort to ensure the accuracy of the value estimate.

9) Draft valuation report

Once the appraiser’s analysis and conclusions have passed internal review process, the appraiser completes the draft of the valuation report, which documents all the steps taken in the valuation process from company, industry and economic analysis to financial statement analysis and application of valuation methodologies.

10) Quality control review

The draft of the valuation report is submitted to the Valuation Director or senior level manager for valuation report for assumption consistency, accuracy in the application of valuation methodologies, and proper financial analysis in the context of current industry and economy dynamics.

11) Finalization of valuation report and client presentation

After the draft valuation report has been reviewed, the necessary changes are performed and the valuation report is finalized. Once final payment has been received for the report, the report is then provided to the client either in person, via mail, or electronically depending on the circumstances of the engagement and needs of the client.

This document is for informational use only and may be outdated and/or no longer applicable. Nothing in this publication is intended to constitute legal, tax, or investment advice. There is no guarantee that any claims made will come to pass. The information contained herein has been obtained from sources believed to be reliable, but Mariner Capital Advisors does not warrant the accuracy of the information. Consult a financial, tax or legal professional for specific information related to your own situation.