Valuation Process

Valuing a closely-held business is a time-consuming, technically demanding challenge. The key steps in the process, which typically take 6-8 weeks, are summarized in the flowchart below. SPARDATA can keep the owner and the owner's advisors informed via email throughout the valuation process. For details see the Expectations Letter.

The process begins when the owner (or the owner's advisor) signs and returns a contract, along with payment. (SPARDATA requires payment in advance.) Upon getting the contract SPARDATA immediately sends a short Questionnaire used to describe the business being valued: what it sells, who it sells to, who the competition is, etcetera. (It usually takes less than 20 minutes to complete the Questionnaire.)

The Questionnaire is returned to SPARDATA along with the business' 3 most recent sets of financial statements. (Sometimes we may end up needing more than 3 years' worth but we start with that.) At this point the job gets assigned to a SPARDATA analyst.

Your Analyst starts by reviewing the information you provided. Invariably he or she will have questions, and (depending on how SPARDATA was instructed to communicate with the information source) will by email, phone or letter seek additional information from the owner or whomever the owner designates like his CFO or CPA. The Analyst will say something like "I read through the materials, very interesting, now help me understand, what about A? What about B? C? D?" It may be one long discussion or many short conversations over several days, but at some point the analyst will say "OK, I now have a good enough understanding of this business so I feel competent putting together a 1st draft of the report". The Analyst prepares the report first draft. After subjecting it to internal review and editing, we print out a copy, staple it and stamp it all over with red ink "draft" so that nobody could possibly think this is the final version of the report, because it is not.

Next SPARDATA solicits feedback from the owner and anyone else the owner specified when placing the order such as a CPA, attorney or financial advisor. One thing we've learned (having valued 25,000-plus businesses) is that every business is unique. No matter how carefully the owner completes the Questionnaire, no matter how many questions the Analyst asks, there is always a possibility we may have overlooked something important about the business. And the person most likely to catch any oversight is the owner or his advisors.

Typically providing the 1st draft results in the owner saying "darn it, I forgot to mention X, Y and Z". More information gets sent to SPARDATA that we incorporate into the next version of the report. And so the process continues, draft after draft, until finally everyone agrees (1) that everything material about the business has been taken into account; and (2) everyone is comfortable with the value conclusion. (Obviously the value conclusion is SPARDATA's; that is why we were hired in the first place. But we make certain we do not form a final conclusion until we are confident every relevant aspect of the business has been taken into account.) At this point we prepare the final report; with charts, graphs, a handsome cover and binding, the final report is as substantial as a copy of the Encyclopedia Brittanica.

Unless the owner instructs otherwise, SPARDATA's practice is to furnish to completed valuation to the advisor rather than the owner, because the report will be the foundation for the advisor's recommendations to the owner. (Of course by the time the advisor presents the finished valuation to the owner, the owner already knows what the number is - because the owner has been communicating with the SPARDATA Analyst frequently throughout the valuation process.)

A final observation. When somebody hires us, we believe we have two jobs to do. The first is to prepare a technically first-rate valuation that accurately captures the value of the business and meets all the requirements of the law. But the second is just as important -- if not more important. Oftentimes we must be educators too. Most owners who hire us have never had their businesses professionally valued before. Our job is not just to come up with a number, but to make sure the owner understands where that number came from and what assumptions were made to arrive at that conclusion. Most importantly, our job is to make sure the owner believes in the number. At the end of the day, the valuation is just the first step in a process, whether the goal is to sell the business form the foundation for an estate plan or whatever. So unless the owner believes in the number, the whole exercise is a big waste of time. So until the owner believes in the number with all his or her heart, we do not believe our work is done.