How to Prepare Your Business for a Valuation Audit
Quick Answer: How Do You Prepare Your Business for a Valuation?
To prepare your business for a valuation, organise accurate financial statements, tax records, asset registers, contracts, ownership information and supporting documentation before the valuation begins. You should also identify non-recurring income and expenses, document intangible assets, review financial forecasts and ensure the valuer understands any significant risks or opportunities affecting the business. Clear, complete and consistent information can make the valuation process more efficient and help the valuer form a well-supported assessment. Preparation should focus on providing reliable evidence rather than attempting to artificially increase the valuation outcome.
What Does Preparing a Business for Valuation Involve?
A professional business valuation involves more than reviewing the company’s annual profit.
Depending on the purpose and scope of the engagement, the valuer may consider:
- Historical financial performance
- Current financial position
- Maintainable earnings
- Cash flow
- Assets and liabilities
- Intangible assets
- Business risks
- Customer concentration
- Supplier dependencies
- Management structure
- Market position
- Industry conditions
- Future growth prospects
The information required will depend on the individual business and why the valuation is being undertaken.
Taking time to prepare your business for a valuation helps ensure relevant information is readily available and reduces unnecessary delays or requests for clarification.
Why Is Preparation Important Before a Business Valuation?
The quality of information available can materially affect the valuation process.
Incomplete, inconsistent or poorly organised records can make it more difficult for a valuer to understand the underlying financial performance of the business.
Good preparation can help:
- Reduce delays
- Clarify financial performance
- Identify unusual transactions
- Explain business risks
- Document important assets
- Support financial forecasts
- Improve communication with the valuer
Preparation does not guarantee a particular valuation result.
Instead, the objective is to ensure the valuer has sufficient, reliable information to assess the business appropriately for the required valuation purpose.
When Might You Need a Business Valuation?
There are many circumstances in which an independent business valuation may be required.
These can include:
- Selling a business
- Buying a business
- Mergers and acquisitions
- Shareholder transactions
- Partnership changes
- Succession planning
- Taxation matters
- Financial reporting
- Family law matters
- Litigation
- Business restructuring
The purpose of the valuation can influence the information required and the methodology applied.
When you prepare your business for a valuation, make sure the valuer understands why the assessment is being commissioned and how the valuation will be used.
What Financial Records Should You Prepare?
Financial information is a fundamental component of most business valuations.
Depending on the engagement, the valuer may request several years of:
- Profit and loss statements
- Balance sheets
- Cash flow statements
- Tax returns
- Management accounts
- Budgets
- Financial forecasts
Additional information may include:
- General ledger records
- Accounts receivable
- Accounts payable
- Bank statements
- Payroll records
- Loan documentation
The objective is to provide a clear picture of historical and current financial performance.
Records should be internally consistent and any significant differences between management accounts, financial statements and tax returns should be capable of explanation.
How Many Years of Financial Statements Are Needed?
There is no universal requirement that applies to every business valuation.
However, valuers commonly review multiple years of historical financial information to identify:
- Revenue trends
- Profitability
- Margins
- Expense patterns
- Growth
- Volatility
Historical information can help determine whether recent performance is representative of the business’s underlying operations.
If the company has experienced unusual circumstances during a particular period, provide supporting explanations.
For example, a temporary shutdown, major customer loss, business acquisition or one-off event may have materially affected financial results.
When you prepare your business for a valuation, context can be as important as the numbers themselves.
Why Is Financial Record Accuracy Important?
Valuation conclusions depend heavily on the reliability of the underlying information.
Before providing records, consider whether:
- Accounts have been reconciled
- Financial statements are complete
- Transactions are correctly classified
- Significant adjustments are documented
- Related-party transactions are identifiable
The valuer may need to understand apparent inconsistencies or unusual movements.
Providing organised and accurate information from the beginning can reduce unnecessary questions and improve the efficiency of the valuation process.
What Are Normalisation Adjustments in Business Valuation?
Normalisation adjustments are used to help identify the underlying economic performance of a business.
Depending on the circumstances, historical financial statements may contain items that are not representative of normal ongoing operations.
Potential examples include:
- One-off legal costs
- Unusual restructuring expenses
- Non-recurring income
- Exceptional gains or losses
- Certain owner-related expenses
- Related-party arrangements
Adjustments should not simply be made to produce a higher valuation.
Each adjustment should have a reasonable basis and be supported by evidence.
Professional valuers assess whether proposed adjustments are appropriate when determining maintainable earnings or cash flow.
How Should You Document One-Off Expenses?
When you prepare your business for a valuation, identify significant expenses that genuinely may not recur as part of normal operations.
For each item, consider providing:
- Amount
- Date
- Description
- Reason incurred
- Supporting documentation
- Explanation of why it is considered non-recurring
For example, a genuine one-off relocation expense may warrant consideration differently from an ordinary operating cost that is likely to continue.
Clear documentation allows the valuer to assess the nature of the expense independently.
What Is Maintainable Earnings?
Maintainable earnings represent an assessment of the level of earnings that may reasonably be considered sustainable under relevant assumptions.
Determining maintainable earnings can involve reviewing:
- Historical performance
- Recent trading
- Non-recurring items
- Owner remuneration
- Related-party transactions
- Business trends
- Future expectations
Maintainable earnings may be relevant where an earnings-based valuation methodology is used.
The appropriate treatment depends on the individual business and valuation purpose.
Business owners should provide complete information rather than attempting to determine the final maintainable earnings figure themselves.
Should You Prepare Financial Forecasts?
Forecasts can be important where future financial performance is relevant to the valuation methodology.
Useful forecasts may include:
- Revenue
- Gross profit
- Operating expenses
- EBITDA
- Cash flow
- Capital expenditure
- Working capital
Forecasts should be realistic and based on supportable assumptions.
Supporting evidence might include:
- Existing contracts
- Sales pipeline
- Historical growth
- Confirmed expansion plans
- Market research
Overly optimistic projections without supporting evidence may receive limited weight.
When you prepare your business for a valuation, ensure management can explain the assumptions behind forecasts and why they are considered achievable.
How Should You Prepare Your Asset Register?
For businesses with material tangible assets, an accurate asset register can be an important source of information.
The register may include:
- Plant
- Machinery
- Equipment
- Vehicles
- Furniture
- Property
- Other significant tangible assets
Relevant information may include:
- Asset description
- Acquisition date
- Original cost
- Depreciation
- Location
- Current condition
Accounting book value and market value are not necessarily the same.
Where specialised or significant assets are material to the valuation, separate professional asset valuations may be required.
Should You Include Assets That Are Fully Depreciated?
Potentially, yes.
An asset can have a zero or low accounting book value while remaining operational and economically useful.
For example, machinery that has been fully depreciated for accounting purposes may still have:
- Market value
- Replacement value
- Operational importance
When you prepare your business for a valuation, ensure the asset register accurately reflects assets still owned and used by the business.
The valuer can then determine their relevance to the valuation.
How Should You Document Intangible Assets?
Intangible assets can contribute significantly to business value, particularly in businesses that rely heavily on intellectual property, customer relationships or proprietary systems.
Potential intangible assets include:
- Trademarks
- Patents
- Copyright
- Software
- Proprietary technology
- Customer relationships
- Contracts
- Licences
- Brands
Provide documentation showing:
- Ownership
- Registration
- Contractual rights
- Remaining terms
- Restrictions
The existence of an intangible asset does not automatically mean it has a separately identifiable value.
Its relevance depends on the business, valuation methodology and purpose of the engagement.
How Is Goodwill Considered in a Business Valuation?
Goodwill can represent value associated with elements of a business that contribute to its ability to generate earnings but are not necessarily identifiable physical assets.
These may include:
- Reputation
- Customer loyalty
- Business systems
- Workforce
- Supplier relationships
- Market position
An important consideration is transferability.
If a business depends heavily on the personal relationships, skills or reputation of one owner, some of that value may not transfer easily to another party.
When you prepare your business for a valuation, provide information that helps explain how the business operates independently of individual owners or key employees.
Why Does Owner Dependency Matter?
A business that relies heavily on one owner may present greater risk to a potential purchaser or investor.
Owner dependency may arise where the owner personally controls:
- Major customer relationships
- Sales
- Technical expertise
- Supplier relationships
- Operational decisions
If the owner leaves, the business may face disruption.
Documenting management structures, processes and succession arrangements can help the valuer understand the extent of this dependency.
This does not mean every owner-operated business is inherently less valuable.
The significance depends on how transferable the business’s operations and relationships are.
How Should You Document Customer Concentration?
Customer concentration refers to the proportion of revenue generated by a small number of customers.
Prepare information showing:
- Major customers
- Percentage of revenue
- Length of relationship
- Contract terms
- Renewal arrangements
A business heavily dependent on one customer may face increased risk if that relationship ends.
Conversely, long-term contractual arrangements may provide greater revenue visibility.
Providing accurate customer concentration information allows the valuer to assess the associated risk rather than making assumptions.
Why Are Supplier Relationships Important?
Supplier dependencies can also affect business risk.
Provide information about:
- Major suppliers
- Supply agreements
- Pricing arrangements
- Contract duration
- Alternative suppliers
- Supply chain risks
A business dependent on a single supplier for a critical product may have a different risk profile from one with multiple alternatives.
When you prepare your business for a valuation, documenting these relationships can help demonstrate the resilience or vulnerability of the business model.
What Contracts Should You Prepare?
Significant contracts can provide important information about the business’s obligations, revenue and future operations.
Relevant agreements may include:
- Customer contracts
- Supplier contracts
- Property leases
- Equipment leases
- Franchise agreements
- Distribution agreements
- Licensing arrangements
- Finance agreements
The valuer may need to understand:
- Contract duration
- Renewal rights
- Termination provisions
- Pricing arrangements
- Assignment restrictions
Contract terms can influence both risk and future earnings.
What Legal Documents May Be Required?
Depending on the valuation purpose, relevant legal and corporate documentation may include:
- Company registration details
- Shareholder agreements
- Partnership agreements
- Trust documentation
- Ownership records
- Loan agreements
- Intellectual property registrations
- Litigation information
Any significant legal disputes or contingent liabilities should be disclosed where relevant.
Attempting to conceal material risks can undermine the reliability of the valuation information and create complications later.
How Should You Prepare Tax Information?
Tax documentation can provide additional support for the financial information supplied.
Depending on the engagement, relevant records may include:
- Income tax returns
- Business Activity Statements
- Depreciation schedules
- Payroll tax records
- Other relevant taxation information
If the valuation itself is required for a taxation purpose, the applicable requirements may affect the scope and valuation date.
Business owners should confirm requirements with their accountant, tax adviser or other appropriate professional where necessary.
How Do Related-Party Transactions Affect a Business Valuation?
Related-party transactions may require consideration where they do not reflect normal commercial terms.
Examples can include:
- Rent paid to an associated entity
- Loans between related parties
- Management fees
- Purchases from associated businesses
- Owner remuneration
The valuer may assess whether these arrangements are representative of market conditions.
When you prepare your business for a valuation, identify related-party transactions clearly and provide relevant agreements or supporting information.
Transparency helps the valuer understand the economic position of the business.
Why Is Working Capital Important?
Working capital can influence the financial requirements and operating performance of a business.
Relevant information may include:
- Inventory
- Accounts receivable
- Accounts payable
- Cash requirements
A business requiring substantial working capital to support growth may have different cash flow characteristics from a business with limited working capital needs.
Providing accurate working capital information is particularly important where cash flow-based valuation methodologies are being considered.
How Should You Prepare Information About Business Debt?
Prepare a clear schedule of financial obligations.
This may include:
- Bank loans
- Equipment finance
- Leases
- Shareholder loans
- Other borrowings
For each facility, consider providing:
- Outstanding balance
- Interest rate
- Repayment terms
- Security arrangements
Depending on the basis of valuation, debt may need to be considered separately from the underlying enterprise value.
Accurate information helps prevent confusion between enterprise value and equity value.
What Is the Difference Between Enterprise Value and Equity Value?
Enterprise value and equity value are related but different concepts.
In simplified terms, enterprise value generally relates to the value of the business operations before considering certain financing arrangements.
Equity value relates to the value attributable to the owners after relevant adjustments.
The precise relationship can depend on factors such as:
- Debt
- Cash
- Surplus assets
- Other financial items
Understanding this distinction is important when interpreting a business valuation.
A headline valuation figure should always be considered in the context of what is actually being valued.
How Should You Prepare Operational Information?
Financial statements tell only part of the story.
A valuer may also need to understand how the business operates.
Useful information can include:
- Organisational charts
- Number of employees
- Management responsibilities
- Business processes
- Operating locations
- Key systems
- Production capacity
- Sales channels
This information can help identify:
- Key-person risk
- Operational dependencies
- Scalability
- Management depth
When you prepare your business for a valuation, provide concise information that explains how the business generates revenue and delivers its products or services.
Should You Document Business Systems and Processes?
Yes, where they are relevant to the business’s ability to operate efficiently and independently.
Documented systems may include:
- Standard operating procedures
- Customer management systems
- Financial controls
- Quality assurance processes
- Inventory management
- IT systems
Strong systems can demonstrate that knowledge is embedded within the organisation rather than existing only with individual employees.
The valuer will determine how these factors influence the overall assessment.
Why Is Management Structure Important?
A capable management team can reduce reliance on the owner and support business continuity.
Provide information about:
- Key managers
- Roles
- Responsibilities
- Experience
- Length of service
Where relevant, identify succession arrangements for important positions.
Management depth can be particularly relevant when the valuation relates to a potential business sale or succession planning.
What Market and Industry Information Should You Provide?
A valuer conducts independent research, but business owners can provide useful context.
Relevant information may include:
- Industry reports
- Market share information
- Competitor analysis
- Customer trends
- Regulatory developments
- Growth opportunities
Avoid presenting promotional claims as objective facts.
Where possible, support market information with reliable evidence.
The valuer will independently determine the weight given to the information.
How Should You Document Business Risks?
Every business has risks.
Relevant risks may include:
- Customer concentration
- Supplier dependency
- Key-person reliance
- Regulatory exposure
- Technology disruption
- Competition
- Litigation
- Cybersecurity
- Debt obligations
Preparing a clear explanation of significant risks can improve the valuer’s understanding of the business.
It is generally better to provide accurate information about risks and any mitigation strategies than to leave the valuer to discover them without context.
Should You Highlight Growth Opportunities?
Yes, but growth opportunities should be realistic and supported by evidence.
Potential opportunities may include:
- New products
- New locations
- Additional markets
- Expansion capacity
- Existing contracts
- Sales pipeline
A possible opportunity is not automatically equivalent to current business value.
The valuer will consider factors such as probability, timing, required investment and associated risk.
When you prepare your business for a valuation, distinguish clearly between established performance and future potential.
What Happens During a Business Valuation Site Visit?
Not every business valuation requires the same type of physical inspection, but a site visit may be appropriate in some circumstances.
The valuer may observe:
- Business premises
- Plant and equipment
- Inventory
- Operational processes
- Physical condition
The visit may also provide an opportunity to discuss business operations with management.
Before the visit:
- Ensure relevant areas are accessible
- Identify key personnel
- Make important documents available
- Prepare information about significant assets
The objective is to allow the valuer to understand the business efficiently.
Who Should Be Involved in the Valuation Process?
The people involved depend on the business and valuation purpose.
Potential participants include:
- Business owner
- Finance manager
- Accountant
- Senior management
- Legal adviser
- Tax adviser
It is useful to nominate a primary contact who can coordinate requests and provide accurate information.
Too many different sources of information can sometimes create inconsistencies, so centralising communication may improve efficiency.
Should You Create a Central Valuation File?
Yes. A centralised information file can make the valuation process substantially easier.
Consider organising documents into categories such as:
- Financial statements
- Tax records
- Asset registers
- Contracts
- Corporate documents
- Intellectual property
- Employee information
- Forecasts
- Market information
Digital documents should be clearly named and organised.
Sensitive information should be shared through appropriate secure channels.
When you prepare your business for a valuation, good document management can reduce unnecessary administrative work for both management and the valuer.
What Are Common Mistakes When Preparing for a Business Valuation?
Common mistakes include:
- Providing incomplete financial records
- Using unrealistic forecasts
- Failing to explain unusual expenses
- Ignoring intangible assets
- Hiding business risks
- Providing inconsistent financial information
- Failing to identify related-party transactions
- Confusing book value with market value
- Assuming every dollar spent creates equivalent value
- Waiting until the last minute to organise documents
Effective preparation focuses on accuracy, transparency and relevance.
Can Preparation Increase the Value of Your Business?
Preparation itself does not automatically increase the economic value of a business.
However, well-organised records can help ensure the valuer has sufficient information to understand the business accurately.
Longer-term business improvements may influence value where they genuinely strengthen the company’s:
- Earnings
- Cash flow
- Customer diversification
- Management depth
- Systems
- Competitive position
These improvements generally require time to establish.
Attempting to make superficial changes immediately before a valuation is unlikely to substitute for sustainable business performance.
How Far in Advance Should You Prepare for a Business Valuation?
If a valuation is planned, begin organising information as early as practical.
Businesses preparing for a potential sale or succession event may benefit from improving financial reporting and documentation well in advance.
For an immediate valuation requirement, focus first on:
- Financial records
- Asset information
- Contracts
- Ownership structure
- Tax documentation
Ask the valuer for an information request list early in the process so you can prioritise the documents relevant to the engagement.
Frequently Asked Questions About Preparing for a Business Valuation
How do I prepare my business for a valuation?
To prepare your business for a valuation, organise accurate financial statements, tax records, asset registers, contracts, forecasts and supporting documentation. Clearly identify significant risks, unusual transactions and intangible assets.
How many years of financial records do I need?
The requirements depend on the valuation, but multiple years of historical financial information are commonly reviewed to assess trends and sustainable performance.
Should I adjust my financial statements before providing them?
Provide accurate underlying records and separately identify potential normalisation adjustments with supporting explanations. The valuer should determine their appropriate treatment.
Do I need a forecast for a business valuation?
Not always. Forecasts may be particularly relevant where future cash flow or earnings are important to the valuation methodology.
Are intangible assets included in business valuations?
They can be. Intellectual property, customer relationships, contracts, brands and goodwill may be relevant depending on the business and valuation purpose.
Should I disclose business risks?
Yes. Material risks should be disclosed accurately. Providing context and information about mitigation strategies can help the valuer understand them appropriately.
Can I prepare my own business valuation?
Business owners can estimate value for internal planning, but a professional independent valuation may be required for taxation, financial reporting, legal or other formal purposes.
Will better financial records increase my valuation?
Better records do not automatically increase value, but they can help the valuer assess the business with greater clarity and reduce uncertainty.
Does a business valuation include the company’s assets?
It may. The treatment of assets depends on the business, valuation methodology and basis of value.
How long does a business valuation take?
The timeframe varies according to the size and complexity of the business, valuation purpose, information availability and scope of work.
Prepare Your Business for a Professional Valuation
Taking time to prepare your business for a valuation can make the assessment more efficient and ensure relevant financial, operational and commercial information is available when required.
Focus on providing accurate records, realistic forecasts, clear documentation and transparent information about both opportunities and risks.
The objective is not to manufacture a preferred valuation outcome. It is to give the valuer sufficient reliable evidence to form a well-supported professional opinion.
Asset Valuations Group provides independent business valuations for business sales, acquisitions, taxation, financial reporting, succession planning and other professional requirements.
Learn more about our Business Valuation Services or contact Asset Valuations Group to discuss your business valuation requirements.
