A business valuation is a critical component of securing a company’s future. Whether it’s done as part of a business sale, merger agreement, litigation proceedings, investment negotiation, succession planning, estate planning, or in compliance with financial regulations, a company valuation gives all included parties reliable information about a business’s financial worth and risk level to aid in strategic decision-making.
While the specifics of the business will clearly determine its calculated value at the conclusion of the process, one person is instrumental in helping the company to arrive at that final number. An experienced CFO plays a key role in any business valuation by leveraging their financial expertise to offer strategic insights along the way and ensure an accurate final assessment of the company’s value.
A CFO will undertake critical activities, such as:
- Selecting the Right Methodology
An organization’s CFO will help to select an appropriate valuation method, whether that is an asset-based, income-based, or market-based valuation methodology. They will ensure that the valuation method aligns with the company’s strategic growth and profitability goals and is also appropriate for the nature of the business and industry standards, taking business-specific circumstances into account where applicable.
Once the methodology is determined, a CFO will apply the valuation method while ensuring the financial assumptions are reasonable and the subsequent calculations are accurate.
- Financial Preparation and Analysis
As the head of accounting and finance the CFO will also ensure data accuracy as financial preparation work is done leading up to and during the valuation. They will prepare key financial reports like income statements, balance sheets, and cash flow statements and organize historical financial data, making the necessary adjustments to clean up and standardize reporting for added clarity. These reports will be vital in understanding the company’s past performance. The CFO will conduct a thorough financial analysis of the data, offering strategic industry and market insights to give these business numbers context.
A CFO will use financial reports in conjunction with trend analysis to prepare future financial projections around things like revenue, expense, working capital needs, and so forth. As these projections are developed the CFO will ensure that they are based on realistic assumptions and reflect external conditions. This is one area where a CFO’s experience is integral to the valuation process because they will provide essential insight into market trends, the competitive landscape, and industry benchmarks that is necessary for reasonable projections.
- Risk Management
As the overseer of internal accounting controls, the CFO will work to identify risk areas and implement the protocols and safeguards necessary to mitigate risk as much as possible. This may be as simple as doing a data access review or as complicated as integrating new technology to reduce the likelihood of fraudulent transactions.
A CFO’s risk view will cover many forms of financial risk, including:
- Business operations
- Credit/lending/banking
- Industry/market
- Compliance/regulatory
Mitigating risk can help a CFO positively affect the company’s valuation, as well as shorten the time required to do due diligence for a business sale or merger.
- Regulatory Compliance
Compliance needs to be a top priority throughout any valuation process. While a company’s financials should already utilize Generally Accepted Accounting Principles (GAAP), a CFO will also ensure adherence to regulatory compliance across all applicable professional standards, such as the Financial Accounting Standards Board (FASB) or International Financial Reporting Standards (IFRS). Where additional regulations are required by industry, region, or business-type, a CFO will maintain the organization’s compliance with those added standards as well.
- Strategic Communication
To tie it all together, a CFO will present information related to financial analyses, risk management, and compliance to key stakeholders. They will act as the face of the organization throughout the process, communicating with stakeholders to:
- Provide additional information, as requested
- Justify assumptions and calculations with supporting evidence
- Defend and negotiate the valuation, if needed
When you are undergoing a business valuation, lean on the expertise of an experienced CFO to guide your company through it. Our team of consulting CFOs can come alongside your organization to provide the support you need to get the outcome you desire. Find out more about our short-term and part-time CFO services today! When you are ready to start a conversation, reach out to us for a complimentary consultation to discuss your business valuation.
