Business valuation experts will usually provide formal written reports that explain how they arrived at their conclusions. Asking seven questions can help you determine whether an expert’s report is comprehensive and on-point. (1) Did the expert properly define the engagement? Most valuation reports start with a detailed description of the assignment. Beyond the name of the subject company, the definition includes: The size of the interest (the ownership percentage of the number of shares or units), Effective date of the valuation, Intended uses of the report, The standard of value (for example, fair market value, fair value or strategic value), and The basis of value (minority vs. controlling basis and marketable vs. nonmarketable basis). If the expert applied discounts for lack of control or marketability, a substantial...

Historical financial results are only relevant in a valuation to the extent that the business expects to achieve similar results in the coming years. When projecting future economic benefits, it’s important to consider expected changes to a subject company’s internal and external conditions. Challenging the status quo The last three to five years of financial statements are usually on the list of documents experts use to value a business. With some companies, it’s possible to simply take historical financial statements and apply an assumed growth rate into perpetuity. But experienced valuation professionals know that future performance can’t always be expected to mirror the past. One key reason is capacity constraints. To achieve an expected growth rate, a larger facility or additional equipment may be needed over the long...