Whether you are an entrepreneur nurturing your brainchild, a manager overseeing daily operations, or a director guiding strategic decisions, having an external party evaluate and value your company can be exciting and nerve-wracking. However, it also presents an opportunity to gain deep insights into the actual value of your organisation and, more importantly, how to enhance that value.

As the saying goes, “Failing to prepare is preparing to fail.” Regarding third-party valuations, meticulous preparation ensures a smooth and accurate assessment of your company’s value. This article aims to guide you through the crucial steps and considerations you should undertake before the valuation process begins.

From assembling the right team of experts to conducting a comprehensive examination of your financials and operations, we will delve into the essential preparations to make the process more efficient and ensure a fair and reasonable  valuation. So whether you’re contemplating selling your business, seeking investment opportunities or simply aiming for an understanding of where your company stands in the market landscape, our tips below will empower you to navigate through the valuation process successfully.

The valuation process begins with selecting the most suitable methodology; a discounted cash flow model (DCF) is commonly utilised (to estimate the value by discounting its expected future cash flows to their present value) along with a market multiple approach (estimating value based on other market transactions of a similar size and nature). However, there are many methodologies, each offering different benefits in accuracy, ease of process, and sensitivity to bias/estimates.  The choice of methodology hinges on the company’s specific characteristics and the information available. For instance, a DCF model is more suitable for companies with predictable future cash flows, while a market multiples approach might be better for companies with less certainty over cash flows such as start-ups.

Finding the right valuation expert will necessitate looking for someone with the correct qualifications, experience, and industry knowledge to perform an accurate valuation. However, depending on the expected use of the valuation, having an expert with good credentials, clear independence and objectivity, transparency in documentation, and good references can be invaluable.Especially when looking to use the valuation performed for reporting purposes or raising capital through the use of new equity participants.

When looking for the right valuations expert, a key focus should be on professionals with a client-centred approach and good communication skills. The valuation process can be highly technical and heavily reliant on assumptions, estimates, and judgements, which require strong reliance on management knowledge, experience, and expectations, overlaid with an unbiased view utilising historical and market trends.

Depending on the methodologies utilised the required inputs can vary significantly depending on the methodologies used. However, it’s essential to have the most up-to-date financial information prepared, formatted, and available at the starting date to avoid delays in the valuation process.

Having upfront discussions on the methodological approach, as well as required inputs, should be commonplace in all valuation processes. However, the below information is a fair guideline on what will likely be needed.

• Annual financial statements for up to four prior years.
• The current and most up to date current information.
• If available, a financial model forecasting for at minimum five years, ideally including an income statement, balance sheet, and cash flows statement. However, many experts will be able to perform this model; this will, however, require more time and effort so having one pre-prepared can be time and cost-efficient.
• Should a financial model not be available, a forecast of at least the income statement will be required to aid in offering insights into management’s expectations for growth.
• Providing a good overview of the company’s strategies, plans, goals, ownership structure, and business plan, together with having a clear and concise document which highlights key assumptions, can aid in making the process smoother and more efficient. These assumptions should consider management predictions, estimates, changes in funding, operations, and expected growth. Having a complete view of these inputs upfront can be pivotal in avoiding miscommunications. It can provide clarity in direction, avoiding updates and changes which can increase the cost of a valuation.
• Holding an upfront discussion explaining the nature of expenses, incomes, assets, and liabilities, with a focus on:
  • Fixed, stepped, and variable costs,
  •  Contracts with customers and suppliers which impact on cash flow trends,
  • required capital inputs,
  • capital structuring decisions,
  • and any normalisation adjustments for unusual events during the current period.
• Providing any information on market and industry analysis can be valuable in dealing with conflicting views on market conditions upfront and avoiding unnecessary changes, updates, and potential for conflict.

In-depth preparation and providing detailed information are crucial for a successful valuation process. By focusing on thorough preparation, assembling the right team of experts, and having comprehensive financial data readily available, you can effectively minimise expenses and maximise the benefits gained from an external business valuation.