How to Prepare Your Business for a Valuation

Start 12-18 Months Before

If you know a valuation is coming, whether for a potential sale, partner buyout, or estate planning, start preparing 12-18 months in advance. This timeline allows you to address issues that could negatively impact value, build financial trends that strengthen your position, and assemble documentation without the pressure of an imminent deadline.

Financial Preparation

Clean financials are the foundation of a credible valuation. Ensure your records reflect:

• Accurate financial statements: Ideally reviewed or compiled by an independent CPA for the past 3 years
• Consistent accounting methods: No switching between cash and accrual basis
• Clear separation of personal and business expenses: Remove personal expenses from business financials
• Documented add-backs: Prepare a schedule of owner perks and non-recurring expenses with supporting documentation
• Current accounts receivable: Collect outstanding invoices and write off uncollectible accounts
• Accurate inventory counts: Physical inventory reconciled with book records

Operational Clean-Up

Operational factors directly impact valuation. Address these areas:

• Customer contracts: Formalize handshake agreements into written contracts where possible
• Lease agreements: Secure lease extensions or renewals before the valuation
• Employee documentation: Current employment agreements, non-competes, and organizational charts
• Vendor agreements: Document key supplier relationships and terms
• Insurance coverage: Ensure all policies are current and adequate
• Regulatory compliance: Resolve any outstanding compliance issues

Documentation Assembly

Prepare a comprehensive data package that a valuator will need:

• Three years of tax returns and financial statements
• Current year-to-date financial statements
• Customer list with revenue by customer (for concentration analysis)
• Equipment list with age, condition, and estimated market value
• Lease agreements and property information
• Insurance policies summary
• Organizational chart with compensation data
• Marketing materials and competitive analysis

Selecting a Valuator

Choose a credentialed business appraiser with relevant industry experience. Key credentials include ASA (American Society of Appraisers), ABV (Accredited in Business Valuation from AICPA), or CVA (Certified Valuation Analyst). Ask about their experience with businesses of your size and type, their methodology, timeline, and fees. A quality business valuation typically costs $5,000-$25,000 depending on complexity and purpose.

Managing Expectations

Understand that a valuation opinion is exactly that: an opinion based on available data and professional judgment. Two qualified appraisers can reach different conclusions. The purpose of the valuation (tax, litigation, transaction) affects the standard of value used and therefore the result. Discuss the purpose upfront to ensure the valuator applies the appropriate standard.