Reviewing Business Valuation Reports
A comprehensive guide for CPAs reviewing third-party business valuation reports. Learn essential quality control procedures, key elements to evaluate, and red flags to identify when assessing valuation work for your clients.
Essential Report Components
Should clearly state the purpose, valuation conclusion, key assumptions, and limiting conditions. Look for concise, defensible summary of key findings.
Comprehensive description of business operations, industry analysis, competitive position, and financial performance trends over 3-5 years.
Clear explanation of valuation approaches used, why others were rejected, key assumptions, and how the final conclusion was reached.
Critical Review Areas
Verify the appraiser's credentials and experience:
- • Professional valuation designations (ASA, ABV, CVA)
- • Years of valuation experience
- • Industry-specific experience
- • Independence from subject company
- • Professional liability insurance
- • Compliance with professional standards
Assess the reliability and completeness of information used:
- • Financial statements - audited vs. compiled/reviewed
- • Management interviews and representations
- • Industry and economic data sources
- • Comparable company/transaction data
- • Market research and industry reports
- • Site visits and operational observations
Financial Analysis Review
Common Adjustments to Review
- • Owner compensation adjustments
- • Personal expenses elimination
- • Non-recurring items
- • Related party transactions
- • Depreciation method normalization
- • Working capital adjustments
Red Flags to Watch For
- • Excessive owner compensation adjustments
- • Inadequate documentation of adjustments
- • Cherry-picking favorable periods
- • Inconsistent treatment across years
- • Failure to consider tax implications
- • Unrealistic expense categorizations
Profitability Ratios
- • Gross profit margins
- • EBITDA margins
- • Net profit margins
- • Return on assets/equity
Liquidity Ratios
- • Current ratio
- • Quick ratio
- • Working capital trends
- • Cash conversion cycle
Leverage Ratios
- • Debt-to-equity
- • Interest coverage
- • Debt service coverage
- • Capital structure analysis
Valuation Methodology Assessment
Key elements to evaluate in income-based methods:
- • Cash Flow Projections: Realistic growth assumptions
- • Discount Rate: Appropriate risk assessment and beta selection
- • Terminal Value: Reasonable long-term growth rates
- • Tax Considerations: Proper treatment of tax benefits
- • Capital Expenditures: Adequate maintenance capex
- • Working Capital: Realistic working capital needs
- • Normalization Adjustments: Proper treatment of non-recurring items
Critical factors in market-based valuations:
- • Comparability: Truly comparable companies/transactions
- • Data Quality: Recent, reliable transaction data
- • Multiple Selection: Appropriate multiples for business type
- • Size Adjustments: Proper consideration of size differences
- • Control Premium: Appropriate control adjustments
- • Market Conditions: Timing of comparable data
Discount and Premium Analysis
Marketability Discounts
Review factors supporting marketability discounts:
- • Size of subject company
- • Financial performance and stability
- • Management depth and succession
- • Industry characteristics
- • Transfer restrictions
- • Distribution policies
Typical ranges: 10-40% for minority interests
*Actual discounts vary significantly based on specific facts and circumstances
Minority Interest Discounts
Assess minority position considerations:
- • Voting rights and control
- • Board representation
- • Ability to influence decisions
- • Access to financial information
- • Distribution control
- • Exit strategy limitations
Typical ranges: 10-30% for non-controlling interests
*Actual discounts vary significantly based on specific facts and circumstances
Red Flags and Warning Signs
- • Single approach used without justification
- • Outdated or inappropriate comparable data
- • Excessive reliance on rules of thumb
- • Unjustified weighting of approaches
- • Circular reasoning in discount calculations
- • Lack of sensitivity analysis
- • Inconsistent treatment of similar factors
- • Use of dated valuation standards or guidance
- • Missing or inadequate source citations
- • Insufficient detail on key assumptions
- • Lack of industry or economic analysis
- • No discussion of limiting conditions
- • Absent or cursory risk analysis
- • Incomplete comparable company details
- • Mathematical errors or inconsistencies
CPA Review Checklist
Initial Review
Verify purpose, standard of value, valuation date, and scope of work are clearly defined and appropriate.
Financial Data Review
Examine financial statements, normalization adjustments, and trend analysis for accuracy and reasonableness.
Methodology Assessment
Evaluate appropriateness of valuation approaches and whether conclusions are well-supported.
Reasonableness Testing
Compare results to industry benchmarks, prior valuations, and general reasonableness tests.
Appraiser Credentials
Verify appraiser qualifications, independence, and compliance with professional standards.
Discount Analysis
Review discount and premium calculations for appropriate application, empirical support, and magnitude relative to specific facts and circumstances.
Documentation Quality
Assess completeness of documentation, source citations, and clarity of presentation.
Final Conclusion
Determine if valuation conclusion is reasonable, defensible, and appropriate for intended use.
When to Seek Second Opinions
High-Stakes Situations
- • Large estate or gift tax exposure
- • Significant litigation matters
- • Major transaction decisions
- • IRS audit or controversy
- • Buy-sell agreement disputes
Quality Concerns
- • Unqualified or inexperienced appraiser
- • Inadequate documentation or analysis
- • Results seem unreasonable
- • Client questions the conclusion
- • Multiple red flags identified
Need Expert Review of a Business Valuation?
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