What is the Business Valuation Process for Tax Reporting and Compliance? A Step-by-Step Breakdown

You’ve already taken the first step and decided on the best business valuation firm for your situation. Well done. But what happens now? What will your advisor do, and when? And what will s/he require from you? How much time will you have to put in?

In this article, we’ll do our best to answer all of these questions and provide some ways to make the process easier for you and your advisor. And that usually means a quicker, more cost-effective engagement.

Yes, this article is long overdue, but it’s finally time to reveal what’s behind the wizard’s curtain. After years and years of answering this exact question in one-on-one conversations, we’ve decided to provide a quick behind-the-scenes glimpse into the process for tax reporting and compliance valuations. So, let’s get to it.

Step1The Engagement Letter

Once you provide your valuation advisor with the signed engagement letter, retainer fee, and financial information (at least what’s requested with the engagement letter), s/he can get started on your valuation. But you’ll need to supply some more information in order for them to complete the valuation, so it’s probably a good idea to have that information handy.

Don’t be surprised if your advisor requests some of the information ahead of offering a quote or preparing the engagement letter. Valuation advisors typically want to review the recent financial statements and ownership table, and maybe even the business plan or shareholder agreement prior to scoping and quoting the engagement. This can help immensely in conceptualizing the work plan and establishing the appropriate fees and timeline, which vary considerably depending on the complexity of the valuation project.

Step2Gathering Documentation for Tax Reporting and Compliance Valuations

You’ll need to gather the remaining requested documents and supply them back to your advisor as soon as possible. Your advisor may request some or all of the following documents to complete your valuation:

  • 5 years of historical fiscal year financial statements or from inception if less than 5 years
  • 3 years of tax returns
  • Income statement for the most recent trailing 12-month period ended as of the valuation date
  • Balance sheet as of the valuation date
  • Capitalization table—List of shareholders with ownership percentage of each
  • List of outstanding common stock options
  • Articles of incorporation or operating agreement; other shareholder agreements
  • Financial projections prepared by management detailing sales goals, profit goals, capital expenditure requirements, etc.
  • Owner/Officer compensation schedule
  • Fixed asset listing
  • Investor presentation or business plan, if applicable
  • Any company promotional materials, advertisements, brochures, etc.
  • Any prior appraisals performed for the company, including tangible assets, capital stock, goodwill, etc.
  • Any other significant items including off balance sheet liabilities, tax issues, litigation, etc.

Step3Business Questions for Tax Reporting and Compliance

After receiving all of the necessary financial information, your advisory team will review the data and develop a list of business and financial questions to help them complete the valuation schedules and narrative report. The type of questions will differ depending on your unique business and situation, but may include some of the following:

  • History of the company; major lines of business; markets served
  • Strengths, weaknesses, opportunities, threats (SWOT analysis)
  • Description of recent key developments in the industry
  • Competitors and public companies in the industry
  • Discussion of owner discretionary expenses and non-recurring expenses
  • Explanation of revenue, gross profit, and expense trends
  • Working capital needs, and planned capital expenditures
  • Capital raising and exit plans

Step4A Meeting of the Minds

A management meeting or conference call is scheduled to go over the questions from Step 3. This meeting ensures all parties are on the same page and have all the necessary information to move forward. Oftentimes, this meeting will include the following parties:

  • Valuation Advisor and other team members
  • CEO, President, or Founder
  • CFO or Controller
  • Operations manager or technical executive for technology-based companies

Step5Drafting Valuation Schedules and Quality Control

Then next step is complete a draft of the valuation analysis, which usually starts with presentation of the analysis in the form of tabular valuation schedules. You should expect the analysis to undergo a rigorous internal review and QC process, so you first see a clean, client-ready version. That process looks something like this:

  • Advisor and team produce valuation schedules
  • Handoff to internal expert for quality control (QC)
  • QC expert hands back to advisor for edits
  • Advisor revises based on edits
  • Advisor and QC expert review the schedules together
  • Final revised valuation schedules are sent (If no pending issues)

Step6Creating the Business Valuation Narrative Report

Once the client reviews the draft analysis and has the opportunity to ask questions and provide comments, a draft of the written narrative report is completed and sent to the client for review. Sometimes the entire analysis (valuation schedules and narrative report) are delivered together, depending on the client’s preference and timing needs.

Step7 Delivering the Final Valuation Report

Once the client and its advisory team (CPA, attorney, etc.) have all had an opportunity to review the draft and have their questions and comments addressed, the final valuation report is delivered.

How Long Does the Business Valuation Process Take?

The entire business valuation process typically takes about 30 days from the time the engagement letter, retainer and initial documents are received. If there are delays in obtaining the requested information, the process could take longer.

The biggest delays are usually caused by the client not sending the initial documents in a timely manner. Most advisors will often quote a 30-day turnaround time based on receiving the data quickly, but then not receive the core data until two or even three weeks after the time of engagement. And of course, this will definitely impact the timeline!

If you’re looking for more information on tax reporting and compliance valuations or just need some advice, contact us today.

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What is the cost of tax reporting and compliance valuations for operating companies? Find out here.

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