Business Valuation Reports in Decimal Outline Format
An alternate business valuation report format
This article briefly describes an alternate format for business valuation (BV) reports that can make them more understandable.
Business valuation (BV) reports are the culmination of a careful and lengthy process of gathering data about the valuator’s client business, analyzing that data, comparing it with other companies in the same industry, applying various techniques for estimating the value of a specific interest in the company, and finally reaching a conclusion of value of the subject interest. It has been my experience over long years as a BV professional that many otherwise highly competent valuators fail to tell a clear story about the company to support the conclusion of value reached as a result of the analysis and manipulation of the underlying data. Sometimes this failure is caused by the valuator’s inability to write a narrative in good, clear, and grammatically correct English. Often the valuator fails to organize and lay out the written material in a logical and easy-to-follow manner. In this short article, I would like to ask the reader to consider the use of a decimal outline form of presentation rather than simple prose form.
Many years ago when I was re-directing my career away from my classic CPA areas of financial accounting, auditing, and tax work over to BV, I attended lectures on report writing conducted by Steve Schroeder, one of the profession’s highly respected appraisers, lecturers, mentors, and report reviewers. In his presentations, Steve strongly urged the use of a decimal-based outline form of organization and presentation. For a few years after listening to Steve, I resisted his suggestion, believing that the use of numbers and decimals in the text and table of contents made the report look too “techie” and complicated. As I progressed in my valuation work, I realized that I was wrong. Contrary to my earlier belief, I realized that using a decimal outline format really simplified both the writing and the reading of the report. Using the decimal outline form makes cross-referencing between various sections of the report both easier and the whole report more understandable.
Below is a sample table of contents decimal outline that was recently provided to me by Steve Schroeder.
CLICK TITLES BELOW FOR TABLE OF CONTENTS OUTLINE
1. Introduction
1.1 Subject of the Appraisal
1.2 Summary Description of the Subject Interest
1.3 Restrictions to Alienation of the Subject Interest
1.4 Purpose of the Appraisal
1.5 Intended Users of the Appraisal
1.6 Appraisal Scope of Work
1.7 Date of Valuation and Report Date
1.8 Definition of Value
1.9 Ownership and Control
1.10 Principal Sources of Information
1.11 Assumptions and Limitations
1.12 Appraiser’s Certification
2. Economic and Industry Conditions that Affect the Subject
2.1 Economic Analysis
2.1.1 Overview of the National Economy
2.1.2 Overview of the State Economy
2.1.3 Overview of the local economy
2.1.4 Economic Outlook
2.1.5 How the Economic Condition Affects the Value of the Subject
2.2 Industry Analysis
2.2.1 Nature and Character of the Industry
2.2.2 Concentration of the Market
2.2.3 Barriers to Entry
2.2.4 Potential for Growth
2.2.5 How the Industry analysis affects the Value of the Subject
3. Analysis of the Subject Firm
3.1 Form of Organization
3.2 History of the Firm
3.3 Prior Transactions in the Subject Interest
3.4 Subsidiaries and Affiliates
3.5 Quality of Management
3.6 Staffing
3.7 Products and Services
3.8 Sales and Marketing Activities
3.9 Customer Base
3.10 Competition
3.11 Location and Physical Plant
3.12 Future Prospects for the Subject
4. Financial Analysis of the Subject Firm
4.1 Financial Statements Reviewed
4.2 Revenue and Earnings History
4.3 Financial Statement Analysis
4.3.1 Balance Sheet Analysis
4.3.2 Income Statement Analysis
4.3.3 Comparison to the Industry
4.3.4 Summary, conclusions, and Implication for Value
4.4 Adjustment to the Financial Statements
4.4.1 Balance Sheet Adjustments
4.4.2 Income Statement Adjustments
4.5 Financial Forecast
4.5.1 Revenue Forecast
4.5.2 Earnings Forecast
4.5.3 Capital Requirements
4.5.4 Long-term Sustainable Growth Rate
5. Valuation of the Subject Interest
5.1 Valuation Methods Considered but Rejected
5.1.1 Book Values
5.1.2 Prior Transactions in the Subject Interests
5.1.3 Dividend Paying Capacity
5.1.4 Guideline Company Method
5.1.5 Single Period Capitalization Method
5.2 Selection of Most Suitable Methods
5.3 Application of Asset (Cost) Approach
5.3.1 Adjusted Book Value Method
5.3.1.1 Conceptual Basis
5.3.1.2 Adjustment of Fixed Assets to Market Value
5.3.1.3 Valuation of Liabilities
5.3.1.4 Valuation of Intangible Assets
5.3.1.5 Summary and Indication of Value
5.3.2 Liquidation Value of Assets
5.3.2.1 Conceptual Basis
5.3.2.2 Continued Operating Costs during Liquidation
5.3.2.3 Summary and Indication of Value
5.4 Application of Income Approach
5.4.1 Application of Multi-Period Discounting Method
5.4.1.1 Conceptual Basis
5.4.1.2 Estimating the Future Returns of the Subject
5.4.1.3 Development of a Suitable Discount Rate
5.4.1.4 Summary and Indication of Value
5.5 Application of Market Approach
5.5.1 Application of Direct Market Data Method
5.5.1.1 Conceptual Basis
Search for Comparable Sales
5.5.1.2 Analysis of Comparable Sales Data
5.5.1.3 Selection of Suitable Multiplier
5.5.1.4 Summary and Indication of Value
5.5.2 Application of Rule of Thumb Method
5.5.2.1 Conceptual Basis
5.5.2.2 Rules of Thumb or Industry Formulas
5.5.2.3 Summary and Indication of Value
5.6 Adjustment for Control
5.6.1 Empirical Studies
5.6.2 Range of Applicable Values
5.6.3 Adjustment Appropriate for Subject Interest
5.6.4 Summary
5.7 Adjustment for Marketability or Liquidity
5.7.1 Empirical Studies
5.7.2 Range of Applicable Values
5.7.3 Adjustment Appropriate for Subject Interest
5.7.4 Summary
5.8 Weighting and Reconciliation of Indicated Values
5.9 Value Conclusion
The table of contents illustrated above is only a sample. It is very detailed and need not be so, depending upon the circumstances of the specific valuation.
Many readers of this article may now be using one of the report templates generated by excellent software programs that are available. One of these software programs is the Business Valuation Report Writer, developed and sold by ValuSource. It is possible to move between ValuSource software with the click of a button—see and change formulas and formatting as your engagement and practice standards require. Since Microsoft® Word has an available option to use decimal outline format, it is relatively easy to produce valuation reports in the decimal format.
The table of contents above offers a further advantage to the valuation analyst because it is a valuable checklist to assure that the professional standards of NACVA, AICPA, and IBA have been met. Lastly, if the reader is considering applying for the IBA credential, I want to point out that I understand that the volunteer IBA report graders strongly prefer use of the decimal outline format for the demonstration reports submitted to them.
In conclusion, I suggest that you at least give the decimal outline report format a try. You may find, like me, it is an improved way of telling your story in a clear fashion.
[author] [author_image timthumb=’on’]http://m.c.lnkd.licdn.com/mpr/mpr/shrink_200_200/p/2/000/095/268/1667536.jpg[/author_image] [author_info]Dick Thorsen is a CPA/ABV, ABAR, CVA, and CMEA. He has been an active CPA since 1954 and served as Chairman of the Minnesota State Board of Accountancy and President of the Minnesota Society of CPAs. Mr. Thorsen has been elected Vice President of the AICPA and has been a member of its Board of Directors, along with 21 of its committees. He has also served as Chair of its Responsibilities in Tax Practice Committee. He is a member of the Institute of Business Appraisers (IBA) Board of Governors and its Professional Responsibility Board and is one of its representatives on the NACVA/IBA Standards Unification Task Force. Mr. Thorsen is a member of NACVA’s Standards Committee and Examination Grading Committee. Dick can be reached at dickthorsen@msn.com.[/author_info] [/author]
