Business Valuation Report and Valuation Documentation

Narendra Kumar

14 Dec, 2021

Valuation Report exercise is based on the observation, inspection, analysis, and calculation. During this process, the value goes through various documents, records his observation, makes relevant calculation and records these calculation and analysis results. In this process, many documents are generated which forms the basis of his conclusion on the valuation of the subject matter. It is very necessary for him to preserve all such records so that these documents may help him to substantiate his conclusion on valuation. Moreover, all these documents also become the matter of reference in near future.

Objectives of Documentation in Valuation Exercise

Documentation is “an essential element” of Valuation quality. Valuation documentation provides the principal written record to support the following:

• The Valuer’s report assertion that the valuation exercise was performed with due diligence and in accordance with generally accepted valuation principles; &
• The Valuers’ conclusions about Valuation of a subject matter of the Valuation exercise & other related aspects of valuation. Valuation documentation must undoubtedly demonstrate that Valuation exercise was in fact performed in the compliance with generally accepted valuation principles & applicable standards. It must also provide the clear link to valuation conclusions & also must contain sufficient information, in sufficient detail, for the clear understanding of following:

The Nature, Timing, and Extent of the valuation exercise

• The work performed;
• The purpose of the valuation
• The source of an information analyzed & supporting evidential matter obtained, examined, & evaluated; &
• The conclusions reached. The following are the more specific purposes of documentation in Valuation exercise:
• Assisting Valuer to plan and perform the Valuation Exercise
• Assisting those responsible to direct, supervise, and review the work performed;
• Providing and demonstrating the accountability of those performing the work (i.e., compliance with applicable standards);
• Assisting quality-control reviewers to understand and assess how the engagement team reached and supported significant conclusions;
• Enabling internal and external inspection teams and peer reviewers to assess compliance with professional, legal, and regulatory standards and requirements; &
• Assisting successor Valuer Inadequate documentation makes it difficult or impossible to determine if the Valuation exercise was actually done.

List of Documents

During a course of Valuation exercise, the valuation expert collects and prepares numerous documents. The documents so obtained or so prepared may differ from one assignment to another assignment but an indicative list of all the documents to be maintained as given below  List of Documents pertaining to the Basic information of client entity i.e. Details about Company Promoters, Key Management professional of the Company, Memorandum of Association, Article of Association, Prospectus, prior three years financial statements. A Copy of the valuation engagement with Clients

• A Copy of the previous valuation report of a subject matter of valuation exercise, if any.
• Required Documents which are pertaining to such assumptions & limiting the conditions in valuation assignment.
• Information gathered & analyzed to obtain the understanding of matters that may affect the value of the subject interest.
• Documents pertaining to the selection of a Valuation approach used in valuation assignment containing the rationale & support for their own use.
• Any restriction or limitation on scope of a Valuer’s work or the data available for the analysis
• The Basis for using the valuation assumption during the valuation engagement.
• the Documents pertaining to any rule of the thumb used in valuation, source(s) of the data used, as well as how the rule of thumb was applied.

Any Other documentation measured relevant to engagement by a Valuer.

What is a Purpose of a Valuation Report?

A valuation report differs significantly from the survey & advises on a value of the property rather than a condition. The evaluation will normally be on a basis of present-day value although the retrospective date of valuation can also be used, particularly if this is appropriate for the taxation or the separation purposes.

What should be the Content of the Valuation Report for Corporate Strategies?

An expert group of Ministry of Corporate Affairs (the Department of Company Affairs), suggests the following coverage in case of the Valuation Report for Corporate Strategies.

Contents of Summarized Valuation Report

Considering the shareholders interest plus the need for the transparency & upholding corporate governance principles as well as after taking into consideration aspects of minority interest, transparency & corporate governance the Expert Group recommends that the following matters should compulsorily be covered in summarized Valuation Report, in a straight, unambiguous & non-misleading manner, consistent with a need to maintain confidentiality.

• Background Information
• Purpose of Valuation & Appointing Authority
• Identity of a valuer & any other experts involved in a valuation
• Disclosure of valuer Interest or Conflict, if any
• Date of such an Appointment, the Valuation Date as well as the Date of Report
• The Sources of the Information
• The Procedures to be adopted in carrying out the Valuation
• The Valuation Methodology
• Major Factors influencing a Valuation.

Details Covered in Valuation Report

• Brief particulars of company or business which is the valuation subject
• Proposed Transaction
• Key historical financials
• Capital structure of the company, if relevant, and any changes as a result of the proposed transaction
• Shareholding pattern, any significant changes (Promoters/FIs), and any changes as a result of the transaction (Note – a table of before and after shareholding patterns ought to be disclosed)
• High/low/average market volumes/price for last six months, where applicable
• A Related party issue with respect to such transaction.

Procedures Adopted in Carrying out the Valuation

The Procedures adopted in carrying out the valuation may differ with the circumstances, nature & purpose of the valuation as well as information and time available.

The main procedures actually adopted by valuer in carrying out such valuation should be set out briefly in a report.

Such procedures may typically include:

• Review of Past Financials
• Review and Analysis of Financial Projections
• Industry Analysis
• SWOT Analysis
• Comparison with similar transactions
• Comparison with other similar listed companies
• Discussions with Management
• Review of principal agreements/documents etc.

A valuer should also include in his report:

• An affirmative statement that information provided & assumptions used by the Management or Others in developing projections have been appropriately reviewed, inquiries made regarding basis of key assumptions in context of analysis of the business being valued & the industry/economy; &
• An affirmative statement on the adequacy of information and time for carrying out the valuations; with such modifications as may be appropriate and warranted.

The affirmative statement shall not negate a professional liability for expertise applied in determining the value & if the degree of inadequacy of the information is severe, fundamental questions & information as assessed by the valuer as key for the appropriate stage of valuation needs to be disclosed.