Two tools for valuing a business: initial document request and business history checklist

Business valuations are performed for companies and interests in companies of all sizes and types. The conceptual principles are the same for companies of different sizes, but very often, the manner in which these principles are applied varies greatly. The level of data available for the appraisal of small and mid-sized companies tends to be considerably lower than the amount of information that is available for larger businesses. When there is a lack of data available for the smaller companies, either certain methodologies cannot be used, or the result should be considered less reliable. The valuation analyst must be more careful in circumstances where less data is available because having less data creates a larger risk of not being able to interpret the existing data properly. The valuation analyst should understand the business valuation process from the large company, more theoretical basis, in order to adapt these concepts properly to its smaller counterparts. However, valuing smaller businesses can be extremely challenging because most of the empirical data that is regularly used by a valuation analyst applies to larger companies and only tangentially to smaller ones.

One of the early steps in a business valuation engagement is to request information from the client.  There are several schools of thought regarding the document request. Many valuation analysts send out a general request for information, such as the ones that appear in the attached checklists. Other valuation analysts make the initial request much smaller. Depending on the facts of the situation, all of these methodologies make sense.

CGMA designation holders might find the information in these checklists useful for incorporating into due diligence information requests for mergers and acquisitions.

The information in this CGMA tool was adapted from Understanding Business Valuation, Third Edition, Copyright © 2011 by American Institute of Certified Public Accountants, Inc.