A Contrarian View of Report Writing

A Minimalist’s Suggestion on How to Lose the Boilerplate

What level of detail should valuation analysts include in a detailed report? In this article, the author shares six practices he follows to answer the above question.

You probably remember that college professor who said they graded term papers by throwing them down the stairs and giving the ones the farthest down the highest grade. This is how I feel many valuation reports are written.

Recently, I was asked by an attorney on a malpractice case to review a valuation report. It looked like a reasonable, professionally done valuation report. But on a closer reading, excluding the sections showing calculations, there was perhaps a paragraph or two of meaningful, relevant text.

When it comes to valuation reports I am a minimalist. So much so, in over 25 years of practice, I have never written what seminars on report writing say is a complete detailed report. Though some may have met the criteria. Much of what I write here, is applicable to both oral and written reports.

Mies van der Rohe, the renowned architect, introduced the Minimalist movement in architecture. Since then, it has spread to the art world and lifestyles. When applying Minimalism to business valuation reports, Minimalism is all about what adds value and meaning to your report and removing the rest. It is about removing the clutter and using your time and energy for what remains. It also means being respectful of the reader’s time.

“But the standards…” Let’s look at the AICPA SSVS reporting standard for a detailed report (.51):

“The detailed report is structured to provide sufficient information to permit intended users to understand the data, reasoning, and analyses underlying the valuation analyst’s conclusion of value. A detailed report should include, as applicable, the following sections titled using wording similar in content to that shown: …”[emphasis added]

Becoming credentialed in business valuation takes hours of study, passing a written examination, and submitting work product. Becoming someone considered to be a credible business valuation expert takes experience. So why do we think it is helpful to a client to write a treatise on business valuation concepts and methodology? If it were that easy, we wasted our time and money getting credentialed.

In valuation seminars when the discussion turns to valuations for tax purposes, speakers stress the importance of Revenue Ruling 59-60. For some reason, many valuation analysts seem to think that listing the Section 4 factors makes their report look credible. This is just empty filler. If you comply with the SSVS and other professional standards, your report will address each of these factors. If you really feel the need to show that you complied, use them as headings.

Minimalist Practice No. 1: Lose the boiler plate.

Let’s now look at some selected detail report requirements. The following is the list provided in the AICPA SSVS (.51):

 Letter of transmittal

 Table of contents

 Introduction

 Sources of information

 Analysis of the subject entity and related nonfinancial information

 Financial statement or financial information analysis

 Valuation approaches and methods considered

 Valuation approaches and methods used

 Valuation adjustments

 Non-operating assets, non-operating liabilities, and excess or deficient operating assets (if any)

 Representation of the valuation analyst

 Reconciliation of estimates and conclusion of value

 Qualifications of the valuation analyst

 Appendixes and exhibits

These form the basic headings of my reports. Though the order I use is somewhat different. The introduction is an executive summary with a table laying out the key attributes of the valuation. At the end of the report are my schedules showing the historical financial information for the subject company, historical ratios and comparison to industry, and my worksheets showing the valuation analyses.

.58 addresses the financial statement or financial information analysis. The key factors we discuss here are the historical trends for the company and its comparison to industry data when available. While I may use 20–30 rations, in my report I focus on only those that are most important to the valuation. The key is to address why a particular ratio is being discussed at all.

Too many times I read in reports descriptions of what the ratios are, but no explanation as to why the ratio is relevant to the subject company. Our financial analysis is to help us evaluate risk and future cash flow or earnings.

Many analysts put in extensive economic information in a report. This information includes facts like unemployment rates, new jobs, growth in GDP, inflation factors, interest rates, consumer debt, and on and on and on. Rarely do I see any of this information related back to the subject company. I am not an economist, and I do not pretend to be one. What I do is to ask the client what drives their business. For example, an executive recruiter explained:

“It doesn’t matter whether the economy is shrinking or growing. If it is shrinking, then businesses want to get an executive who can get them through the tough times. If the economy is growing, then there is demand for executives. What kills our business is a stagnant economy. No one takes action in a stagnant economy because they don’t know what to prepare for.”

Very succinctly, this recruiter explained how the economy impacts his business. You do not need an extensive discussion of the economy to get this across. Is the consensus economic outlook that the economy is growing or shrinking? How does this affect his business?

Minimalist Practice No. 2: Only include in your report that financial and economic data which is relevant to risk or future earnings. If you include something, explain why it is relevant and how it impacts risk or future earnings.

When I was beginning business valuation, working with an experienced CPA, he told me to not use adverbs in our reports. For example, the subject company’s current ratio is 3.0 and the industry average current ratio for similarly sized companies is 1.2. I should not say, the subject’s company’s current ratio is much stronger than the industry average. Rather, I should say, the subject company’s current ratio of 3.0 is higher than the industry average of 1.2. I need to then explain why this is good or bad in terms of the subject company.

Some people think it is better to use the fanciest sounding word when a plainer word will do. Will the reader understand erudite better than learned? Once in a deposition, the deposing attorney asked me what valuation tomes I relied upon. I stared blankly. Valuation texts, my attorney chimed in.

Some valuation analysts also like to throw in, just because, a lot of unnecessary, flowery language, which can make it difficult for the reader to follow what it is that the valuation analyst is trying to get across regarding the issue being discussed and they do this in never-ending sentences.

When I was getting started in business valuation, I used EBITDA in a report. An opposing expert pointed out to me that I needed to explain what EBITDA stood for. I have never liked acronyms. But sometimes, it gets cumbersome spelling them out, and sometimes on spreadsheets the spelled-out version just does not fit in the cell. But if you do use an acronym, make sure you explain it. Writing in plain language is something we should do in our reports and correspondence.

Minimalist Practice No. 3: Write in plain language and explain your acronyms.

“You must explain everything in your report.” This was the dogma I was taught in how to write a detail report. But not everything needs to be explained in your report. Some things can be footnoted on your supporting worksheets. Others need just a short explanation. What you need to focus on is those factors most important to your valuation conclusion. The areas I typically find most critical are:

• Normalization adjustments, especially reasonable compensation
• Company specific risk premium, when significant
• Discount for lack of marketability, when applicable
• Value of the assets if using the adjusted net book value
• Market approach, when relied upon
• Allocation of goodwill between enterprise and personal, when applicable

Too often, how the valuation analyst reached their conclusion in these areas is glossed over in their report.

Minimalist Practice No. 4: Do take time to explain that which is most significant to how you arrived at your conclusion of value.

What we do can be very technical. For example, I use the Black Scholes Stock Option Pricing model as one of the ways I estimate the discount for lack of marketability. In my report, I do not discuss the mathematics of the model. I do explain that the DLOM calculated by a model will be greater the higher the volatility of the subject company’s operating results and the longer the holding period. Getting into the mathematics will not add any value to the reader.

Minimalist Practice No. 5: Do not confuse the reader with highly technical explanations.

Finally, a word about the supporting worksheets showing the calculations to arrive at the conclusion of value. Annotate your worksheets. Some examples:

• Adjusted net asset value—use footnotes to explain each adjustment to the balance sheet. Include a note to show the roll forward of the unadjusted net book value to the adjusted net book value.
• Adjusted earnings—use footnotes to explain each adjustment and subsidiary calculations.
• Discount and capitalization rates—use footnotes to explain each component and its source.
• Weighted average cost of capital—use footnotes to show how you arrive at each component and cross reference your calculations.

Do make sure your report text is consistent with you supporting schedules.

Minimalist Practice No. 6: Annotate your supporting schedules. Even if you write a bare minimum summary report, the annotations will explain what you did.

Following this minimalist approach, my typical report is around 30–35 pages including the supporting schedules. No one has yet come forward and said the report was incomplete. When I sit down with the client to explain my report, the report helps us focus on what was most important to how I arrived at the value. Clients, attorneys, judges, appreciate this. What is more, when the client tells the attorney they appreciated my helping them understand the value, the attorney refers more clients to me.

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David H. Goodman, MBA, CPA, CVA, of Jesson, Oslin & Associates, LLP, in Boston, has 25 years of experience in performing business valuations and forensic accounting services for family law and business disputes; as well as tax and buy-sell purposes. Mr. Goodman has an MBA from the Tuck School of Business at Dartmouth College. He is a past president of NACVA’s Massachusetts State Chapter, past chair of the Massachusetts Society of Certified Public Accountants Litigation and BV committee, and a past board member and Treasurer of the Massachusetts Collaborative Law Council.

Mr. Godman can be contacted at (617) 698-3950 or by e-mail to dgoodman@joacpa.com.