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What Information Is Needed For a Business Valuation?

Jeff Baxter Jr.

Sellers Seller Articles Seller FAQ

So, your broker wants to target strategic buyers.

Are you planning to sell your business and want to make sure you are prepared for what a broker may request? 

Selling your company can be uncharted territory, especially if it is your first time selling a business. 

You may fear getting a bad valuation or it taking too long and slowing down the process.

If you are trying to sell your business quickly, the best way to reduce the amount of time it takes is to come prepared. 

In our 20+ years of working with business owners, we have noticed one of the common roadblocks in listing a business is not getting the valuation materials promptly. 

To help you prepare for a valuation, we have compiled a list of the documents you will need to provide your broker. Having them on hand at the start can speed up the process and ensure you get an accurate price.

What Documents Do You Need to Provide Your Broker for a Valuation?

When you have a merger and acquisition (M&A) advisor do a business valuation for you, they will generally request the following documents: 

1. Complete business tax returns from the past 3 years
2. Business profit and loss statements from the past 3 years
3. Company balance sheets from the past 3 years
4. A year-to-date income statement with a comparison to last year 
5. A balance sheet as of the most recent month-end
6. An estimate of your company’s current inventory at cost

1. Complete Business Tax Returns (From The Past 3 Years)

In some cases, business owners will mistakenly send only the first page of their business tax returns. This will not provide your broker with an in-depth picture of your financials. 

Your broker will need a full business tax return for each year that includes details like depreciation schedules, K-1’s, and shareholder information. 

Tax returns are valuable since they have been sent to the IRS and are usually considered accurate. Tax returns will also serve an important role in helping your future buyer obtain financing approval from a lender.

MIDSTREET TIP

You speak to a broker about doing an evaluation on August 18, 2021. They need 3 complete years of your company's tax returns. The broker would need your federal tax returns for 2020, 2019, and 2018.

2. Business Income Statements (From The Past 3 Years)

Just like your tax returns play a key role in your business valuation and business sale, so do your income statements. A business income statement, also commonly known as a profit and loss statement (P&L), will offer a more granular look at your financials. 

If your future buyer applies for financing through the small business administration (SBA), the SBA will need to review both the tax returns and the P&Ls. These two documents do not have to match exactly, but they will need to be in the same ballpark as one another. 

If your P&Ls don’t match your tax returns, it is probably because the adjusting entries your accountant made on your tax returns are not reflected in your P&Ls.  

As long as your accounting is thorough, it should be fairly simple to make these adjustments to ensure the P&Ls and tax returns match.

MIDSTREET TIP

Your broker begins your valuation on August 18, 2021, and they need income statements from the previous 3 years. The income statements you would need to give them include 2020, 2019, and 2018.

3. Company Balance Sheets (From The Past 3 Years)

Providing 3 years of balance sheets will allow M&A advisors to take an even closer look at your financials. 

They will be able to see how much you have in accounts receivable as well as how much inventory you have. 

The M&A advisor will be able to take these details from the balance sheet and form a more accurate picture of your company’s value. 

MIDSTREET TIP

If your valuation begins on August 18, 2021, the 3 years of balance sheets you will need to provide are 2020, 2019, and 2018.

4. A Year-to-Date Income Statement With a Comparison to Last Year

A year-to-date income statement with a comparison to last year

This provides your broker with a view of your most recent income statement in comparison to the same period from the previous year.

The M&A advisor will be able to use these numbers from your year-to-date income statement to compare the current year to the previous year and to spot any trends or revenue fluctuations.

The comparison income statement might not be necessary if it is quarter 1 of a new year. If your business is growing quickly you’ll want to provide the broker with the most update-to-date income statement you have available.

MIDSTREET TIP

On August 18, 2021, your broker requests a year-to-date income statement with a comparison to last year. You will give them income statements between 1/1/2020 to 7/31/2020 and 1/1/2021 to 7/31/2021.

5. A Balance Sheet as of the Most Recent Month End

When your broker looks at your most recent month-end balance sheet, they can view your accounts receivable and inventory as it stands right now. This is helpful because year-end figures might be months out-of-date.

MIDSTREET TIP

On August 18, 2021, your broker asks for your balance sheet as of the most recent month-end. You will provide them with balance sheets from 1/1/2021 to 7/31/2021.

6. Estimate of Your Company’s Current inventory at Cost

This document will show your company’s inventory and what you paid your vendor for it. From this information, your valuation analyst will use this to factor the value of your inventory into the estimated sale price of your business. 

MIDSTREET TIP

Say you own a retail store that sells widgets. You buy the widgets in bulk for .25 cents each from your vendor and sell them at a retail price of .75 cents in your store. The .25 cents value is what you multiply your current inventory count by to get current inventory at cost.

Documents M&A Advisors May Also Request For a Valuation

Based on the firm you are working with or your company’s situation, you may need to provide: 

  • Details of major contracts
  • Equipment lists
  • Depreciation schedules
  • Equipment leases
  • Details of pending litigation
  • Forecasts and projections
  • Business plans
  • A payroll report 
  • A list of intellectual property
  • Real estate or property lease information 

Intellectual property can include things like patents, copyrights, trademarks, and goodwill. If you own the property, you will need to provide an appraisal. If you lease the property, you will need to give them a copy of the lease.

How Long Does a Business Valuation Take?

In general, you should expect to receive your valuation back within 2-6 weeks after you have provided all of the information to the broker. 

There will typically be a few questions on the items in your financials for the broker to fully understand each item in your financial report.

At MidStreet Mergers & Acquisitions, our turn-around time for valuations is two weeks once all of the information has been received. 

How Long Does a Business Valuation Last?

The amount of time your valuation lasts can vary depending on a few factors. The two things that affect the value the most are your company’s performance and the market.

If your company’s performance dips after the valuation is completed, the valuation will no longer be accurate. However, the same goes for if your company’s performance drastically increases. A fluctuation in the market can also cause your valuation to expire. 

MIDSTREET TIP

You get a valuation of the restaurant you own in 2019. Then the global pandemic hits in 2020 and changes the entire nature and frequency of eat-in dining. The drastic change in the industry and the market will have made that previous valuation irrelevant in a matter of a couple of months.

Since the factors that affect how long your valuation lasts fluctuate, there is not an exact number of months or years your valuation is good for. Instead, it is reviewed on a case-by-case basis. 

The only time you could be sure your valuation remained accurate for more than a year is if you were in the movie Groundhog Day.

Prepare For Your Valuation and Sell Your Business on Time

Having your documents prepared for a business valuation is like packing ahead of time for a trip. 

You won’t have to worry about missing your flight - or not selling your business as quickly as you would like. 

Now that you know what to expect for a valuation, you can check internally to make sure you have all of the necessary documents prepared. 

Learn more about the process of selling your business or contact us. To get a free valuation today, fill out our form below. 

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