Information Request FAQ – Part 2: Corporate and Other Relevant Documents for Valuation Engagements

In Part 1 of this blog series, we outlined 8 specific financial documents required for valuation engagements. While financial documentation is often the bread and butter of any valuation report, it is also important to consider corporate documents and other information – such as appraisals and forecasts – when compiling a comprehensive information request. In Part 2 of this FAQ, we focus on corporate documents required for valuation engagements.

1. Articles of Incorporation, Amendment, and Amalgamation

Articles of Incorporation are important to consider when performing a valuation because they outline the date the company commenced operations, as well as the characteristics of the different share classes issued. The latter is particularly key when allocating the value of the business between common and preferred shareholders.

If any major changes are made to the business, such as the corporate name or share structure, the business will file Articles of Amendment, which should also be requested.

2. Shareholder Register

An updated Shareholder Register is a key corporate document that should be requested in order to understand who the shareholders are, as well as the type and quantity of shares they hold at the valuation date.

3. Shareholder/Partnership Agreements

While not mandatory, some business owners will elect to create a shareholder/partnership agreement. If available, it is important to request and review any agreements to determine whether the shareholders have previously agreed on a formula pertaining to how the business should be valued.

4. Forecasts, Projections, and Budgets

It is important to remember that a valuation is meant to be forward-looking. Therefore, if available, forecasts, projections, or budgets should be requested and relied upon. This is particularly critical if you are using a discounted cash flow approach, which we discuss in more detail in our blog “Valuation Approaches: The Income Approach.”

5. Appraisals of Capital Assets

When performing any type of valuation, capital assets – including land, buildings, and equipment – must be adjusted from net book value to fair market value. While management may provide their own estimates, official reports from third-party appraisers are the gold standard, particularly for assets that typically appreciate in value such as real estate. Appraisal reports, as well as lease agreements, can also help valuators determine fair market value rent, a common adjustment discussed in our recent blog “Understanding Valuation Earnings Adjustments.”

6. Investment Statements

Similar to capital assets, short and long-term investments must be adjusted from net book value to fair market value during a valuation. These statements help valuators determine the nature of the investments, which is a key factor when deciding whether an investment is redundant to the operations of the business.

7. Copies of Previous Business Valuations

If previous valuations have been conducted, it is important for the valuator to review the corresponding reports as they may contain key details regarding the business’ operations, the appropriate valuation approach, and the approximate historical value of the business.

8. Corporate Organizational Structure

An organizational chart is a powerful tool that provides the reader with a visual snapshot of the focal business’ shareholders and related parties. Not only does this assist the valuator with allocating the value of the business to the shareholders, but it also helps identify potential related party transactions, which should be adjusted to fair market value.

9. Corporate Loan Agreements

If the company’s financial statements are at a Notice to Reader level, corporate loan agreements can provide useful information that may not be included in the financial statements. For example, a business’ current portion of the debt, bank covenants, and interest rates.

10. Key Person Life Insurance Policy Statements

Unless required by the bank, life insurance is a common discretionary expense that should be added back to income. In addition, whole life insurance policies typically include a cash surrender value, which should be adjusted to fair value.

If you have further questions or are in need of an expert, give the professionals at Davis Martindale a call. We have numerous experiences preparing disclosure requests for various valuation and litigation engagements.