Interpreting a business valuation can be complex.

It’s critical to understand each component that factors into the valuation. The technical language and the intricacies of the valuation itself can be overwhelming, to say the least.

The Business Valuation Team at PBMares put together a four-part series to help you navigate and better understand the valuation process.

This article highlights four key financial components that play a part in your business valuation, including:

  • Analyzing historical financial information
  • Normalized financial statements
  • Industry outlook
  • Economic outlook

Historical Financial Information

The valuation expert performing your business valuation will typically consider the previous three to five years of reliable financial statements and tax returns in order to:

  • Identify trends and outliers
  • Conduct an informed management interview to better understand the financial performance of the company
  • Ultimately generate “normalized’ financial statements

Normalized Financial Statements

Normalized financial statements have been adjusted to reflect current earnings that would enable someone at arm’s-length to reasonably anticipate future performance.

To properly identify items requiring adjustments and accurately normalize the financial statements generally requires an in-depth management interview and analyzing the financial statements with a skilled forensic lens.

Adjustments are made to:

  • Remove discretionary items, non-operating items, and non-recurring items like extraordinary income and expenses
  • Eliminate any accounting anomalies that have been identified
  • Provide a basis for comparison against similar-size entities in the industry
  • Appropriately reflect the earnings stream

Industry Outlook

During the interview with management, management will provide information about:

  • Company history and operations
  • Significant customers and vendors
  • The competitive landscape in the industry
  • How your company compares against industry benchmarks

This information will be analyzed to better understand trends, company risks, industry risks, opportunities, and potential long-term growth rate for the company.

Economic Outlook

The valuation expert conducting your business valuation will certainly rely on historical information, but another key element to consider is the national and regional economic outlook. The current economic climate and the future economic outlook — both nationally and regionally — can significantly impact the valuation of any company.

In light of the pandemic, the related government response to the pandemic, inflation and today’s interest rate environment, many organizations have reconfigured their ways of working to accommodate today’s “new normal.”

Gathering as much information as possible about economic factors that will impact the company plays a huge role in valuing any company. Doing so will enable you to more accurately quantify the specific risks and calculate long-term growth rates for your company.

Learn More

Valuation can be a controversial and complex process. Take action to make the process manageable.

PBMares’ Business Valuation Team provides clients with objective and independent analyses of value covering a broad spectrum of needs.

From financial and tax reporting to litigation support for complex valuation situations, leverage the extensive experience of our expert team to provide an accurate assessment of value for your business.