Business Valuation Process: What is Your Process?

Jacob Orosz Portrait
by Jacob Orosz (President of Morgan & Westfield)

Executive Summary

A valuation is based on both qualitative and quantitative factors. We must examine both sets of factors before arriving at the estimated value of your company.

Properly determining the value or range of values for a company takes time because there are dozens of qualitative and quantitative factors that must be taken into consideration.

Understanding the value of your company also requires examining how your business compares with others in its industry, including its growth prospects and risk factors. One seemingly small factor can impact the value of a company by over 50%, so a thorough investigation is paramount.

Our approach is structured and based on examining several hundred transactions, which allows us to quickly identify the salient factors that have the largest impact on the value of a company.

Below is our process for valuing a small to mid-sized company:

  1. We first request financial statements from you — generally, three years of Profit & Loss (P&L) statements, three years of balance sheets, and monthly revenue for the past three years.
  2. We send you a detailed questionnaire that we have designed to identify the factors that can positively or negatively affect the value of your company and help us gain a complete understanding of your business.
  3. Once we receive your financial statements, we “spread” the numbers (put them in our internal spreadsheet so we can analyze them). This helps us spot trends in your business that may negatively or positively impact the value of your company. We also prepare a comparative P&L that enables us to analyze the normalized P&Ls from year to year to identify trends and consistencies in your business. Next, we discuss a couple dozen questions regarding the financial statements. This helps us understand your company, its operations, and its unique competitive advantage.
  4. We then normalize or adjust your financial statements based on the adjustments you have provided to us. Once you send us a list of adjustments, we review and verify them for accuracy and discuss with you which adjustments are allowable and which are not.
  5. Next, we put the finishing touches on our financial model and send it to you for review.
  6. Finally, we normally spend one to two hours discussing the spreadsheet, the multiples, and the factors that can affect the value of your company. The purpose of our discussion is to ask several follow-up questions so we can put the finishing touches on your valuation and also to walk you through the possible range of values for your business and help you fully understand the factors that can affect the value of your business. Our goal is not just to provide you with a number but to provide you with a complete understanding of your valuation so you can see why your business is worth what it is and what you can do to increase its value.

Note: that we do not request tax returns until later in the process. Tax returns are used to verify the accuracy, to some extent, of the financial statements.

Here are the benefits of this approach:

  • You will gain a firm understanding of the range of factors that can affect the potential value of your company.
  • You will understand the range of possible values for your business, from low to high.
  • Our approach is simple and easy for you to understand and is based on how buyers value businesses in the real world.
  • You can view the changes we make to your valuation model live, which allows you to see the potential impact that changes can have on your valuation.
  • You will understand the factors that affect the value of your business.
  • You will be provided with a list of recommendations to improve your business’s value.
  • You will understand aspects of your business that buyers may see as deal-breakers.
  • You will learn about areas in your business that need to be strengthened and you’ll receive a list of actionable steps you can take to maximize the sales price.
  • You will gain a clear understanding of any gap between what your business is currently worth and its potential worth.
  • This process will help you understand the value of your business at a deeper level, which can help you crystallize your decision to sell, or you may decide to hold off on the sale and prepare your company for sale in the future after increasing its value.

View more about our process for valuing a business here.