Guide
What a business valuation report must contain
Updated
For most purposes a valuation report's contents are a matter of professional standards; for two of them they are set out in black letter.
The IRS reporting standard
A report that misses an item does not become compliant by being excellent everywhere else.
The IRS Business Valuation Guidelines require reports to be sufficiently detailed that readers achieve a clear understanding of the valuation analyses and can see how the conclusions were reached.
Each report carries a signed certification, including a statement that the reported analyses, opinions and conclusions are limited only by the reported assumptions and limiting conditions. That is a specification for the document you are buying, and a one page letter with a multiple on it does not meet it.
Consider all three approaches
The guidelines instruct that consideration should be given to the asset-based approach, the market approach and the income approach. Consideration is not the same as application: a report may reasonably apply one and explain why the others were rejected.
What it may not do is ignore two of them silently. The reconciliation between the approaches is the part of the report a sceptical reader turns to first.
The qualified appraisal list
For a charitable contribution, 26 CFR 1.170A-17 prescribes the contents. They are a description of the property, the valuation effective date and the fair market value, the terms of any agreement affecting use or disposition, and the date of contribution.
They also include the appraiser's name, address and taxpayer identification number, their qualifications including education and experience, and their signature and the date. Add a declaration acknowledging the penalty under section 6695A and a statement that the appraisal was prepared for income tax purposes. Last come the method of valuation used and the specific basis for the valuation.
Method and specific basis are the two most often thin. A report that names the income approach without stating the discount rate and how it was built has given the method and withheld the basis.
Adjusting the financials, and saying so
The IRS guidelines state that historical financial statements should, if necessary, be analysed and, if necessary, adjusted for consistency with the methodology selected.
The words that matter there are for consistency with the methodology. Adjustments are not a licence to improve the picture; they exist so that the earnings figure and the multiple or the discount rate belong to each other. Every adjustment belongs in the report with its reason.