Preparing for a business valuation often begins with a practical question:

What information will the valuation professional need?

Most business valuations require historical financial statements, tax returns, ownership information, and details about the company’s operations. However, the exact information requested depends on the purpose of the valuation, the type of report being prepared, and the size and complexity of the business.

An informational valuation prepared for internal planning may require less documentation than a certified valuation for litigation, an ownership dispute, estate and gift tax reporting, or another matter involving significant third-party reliance.

The goal is not to collect documents simply for the sake of collecting them. Each item should help the valuation professional understand the company’s historical performance, ongoing earning potential, assets and liabilities, ownership structure, operations, and risks.

At BizWorth, financial records are supplemented by business intake forms and an owner or management interview. These steps provide important context that may not be apparent from the numbers alone.

Why Is Financial Information Important?

A business valuation is largely based on the future economic benefits the company is expected to generate. Historical financial information provides evidence of its ability to produce those benefits.

Valuation professionals commonly analyze several years of financial performance to identify trends in:

• Revenue
• Gross profit
• Operating expenses
• Owner compensation
• Net income
• EBITDA
• Seller's discretionary earnings
• Cash flow
• Working capital
• Capital expenditures
• Debt

Reviewing multiple periods helps determine whether recent results reflect sustainable operations or temporary circumstances.

For example, unusually high earnings may have resulted from a large, nonrecurring contract. Reduced profitability may have been affected by a temporary closure, an extraordinary repair, a key employee departure, or a one-time legal expense.

The financial records show what occurred. The intake process and management interview help explain why it occurred and whether similar results are expected in the future.

Core Financial Documents

Although requirements vary, most business valuations begin with several core financial documents.

Business Tax Returns

Valuation professionals commonly request three to five years of federal business tax returns.

Tax returns provide an independently filed record of the company’s reported financial results. They also help identify the company’s tax structure and provide information about revenue, expenses, depreciation, officer compensation, interest expense, assets, and liabilities.

Depending on the business structure, the applicable filings may include Form 1120, 1120-S, 1065, Schedule C, or another business return.

Tax returns are particularly important when a valuation relates to a potential sale because buyers and lenders frequently rely on them when evaluating historical performance.

Profit and Loss Statements

Profit and loss statements, also called income statements, show the company’s revenue, expenses, and earnings over a specific period.

The valuation professional may request:

• Annual statements for historical periods
• The most recent year-to-date statement
• Monthly statements when seasonality or recent changes are important
• Separate statements for individual locations, divisions, or related entities, when applicable

The most recent financial statements should generally be provided even if the corresponding tax return has not yet been filed.

Balance Sheets

A balance sheet reports the company’s assets, liabilities, and equity as of a particular date. It may include cash, accounts receivable, inventory, machinery and equipment, real estate, accounts payable, lines of credit, and other loans.

Balance sheets help the valuation professional evaluate the company’s financial position and identify items that may require further analysis, such as excess cash, non-operating assets, interest-bearing debt, or assets recorded at amounts that differ from their fair market values.

Current Financial Information

Because a business valuation reflects value as of a specific date, the most recently completed tax year may not fully represent the company’s current performance.

Interim financial statements may reveal recent growth or decline, changes in profitability, new locations, customer losses, increased debt, staffing changes, or other developments since the last tax filing.

If the interim period coversless than a full year, the valuation professional may compare it with the same period from the prior year or consider whether annualizing the results is reasonable.

Information Supporting Financial Adjustments

Reported accounting income does not always reflect the company’s ongoing economic earnings.

Privately held businesses may incur personal, discretionary, nonbusiness, unusual, or nonrecurring expenses that affect reported profitability. Owners and management are generally in the best position to identify these transactions because they understand why the expenses were incurred and whether they are expected to continue.

Potential adjustments may include:

• Owner compensation above or below market levels
• Personal or discretionary expenses
• Compensation paid to family members
• One-time legal or professional fees
• Extraordinary repairs
• Insurance proceeds
• Gains or losses from asset sales
• Related-party rent above or below market levels
• Expenses associated with non-operating assets
• Other income or expenses that are not expected to continue

The business should provide the amount, applicable period, description, and reason for each proposed adjustment. Depending on the nature and materiality of the item, the valuation professional may request invoices, payroll reports, lease agreements, settlement documents, or other supporting information.

The valuation professional generally does not search through every transaction to identify potential adjustments on the company’s behalf. Owners and management are responsible for identifying the items they believe should be considered.

Identifying an expense as personal, discretionary, or nonrecurring does not automatically mean it will be adjusted. The valuation professional must determine whether the proposed adjustment is reasonable, supportable, and appropriate for the purpose of the valuation.

Business Intake Forms and Management Interviews

Financial statements show what happened, but they do not fully explain how the company operates or what influenced its results.

For this reason, BizWorth’s valuation process includes business intake forms and an owner or management interview.

The intake forms gather information about areas such as:

• Company history, products, and services
• Ownership and management
• Customers and suppliers
• Employees and owner responsibilities
• Competition and geographic markets
• Business risks and growth opportunities
• Recent operational changes
• Future expectations
• Proposed financial adjustments

The interview provides an opportunity to clarify the information submitted, discuss the company’s financial performance, and address questions that arise during the analysis.

Owners and management should be prepared to explain significant changes in revenue, profit margins, staffing, customers, locations, or operations. They may also be asked about the company’s dependence on particular owners, employees, customers, or suppliers.

This information helps the valuation professional understand the story behind the financial results and assess whether the company’s historical performance is likely to continue.

Ownership and Organizational Documents

Financial information alone does not reveal what ownership interest is being valued or which rights are attached to that interest.

Depending on the engagement, relevant documents may include:

• Articles of incorporation or organization
• Bylaws
• Operating or partnership agreements
• Shareholder or buy-sell agreements
• Ownership schedules or capitalization tables
• Amendments to governing documents
• Prior ownership transfer documents

These documents may clarify ownership percentages, voting and distribution rights, transfer restrictions, buyout provisions, different ownership classes, and rights of first refusal.

They are especially important when the valuation involves a partial ownership interest, partner withdrawal, shareholder dispute, divorce, estate and gift matter, or buy-sell agreement.

The valuation professional should also be informed of recent ownership transfers, pending transactions, offers to purchase the company, or previous sales of ownership interests.

Customers, Employees, and Owner Involvement

Certain information about the people and relationships supporting the business may materially affect its value.

Customers and Suppliers

A company that receives a significant percentage of its revenue from one customer may carry more risk than a business with a diversified customer base.

The valuation professional may ask about major customers, customer tenure, recurring revenue, contract terms, retention rates, and recent or anticipated customer gains or losses.

Supplier concentration may also be important if the company depends on a limited number of vendors for essential products, materials, or services.

Owners and Employees

The transferability of a business may depend heavily on the roles performed by its owners and key employees.

The valuation professional may ask about:

• Each owner's responsibilities and working hours
• Relationships tied to a particular owner
• Management depth
• Key employees
• Compensation and benefits
• Recent or expected departures
• Recuriting challenges
• Whether another pserson could assume the owner's duties

A business that can operate successfully without the owner’s constant involvement may be viewed as less risky and more transferable. Substantial owner dependence, however, may affect management replacement costs and future earning expectations.

Assets, Liabilities, and Working Capital

Additional information may be needed to understand the assets and obligations associated with the company.

Working Capital

Depending on the business, the valuation professional may request information about accounts receivable, inventory, accounts payable, accrued expenses, deferred revenue, customer deposits, and operating cash.

Accounts receivable aging and inventory reports can help identify uncollectible balances, obsolete inventory, or amounts beyond what the company needs for normal operations.

Working capital can be particularly important in a potential sale. Buyers and sellers may have different expectations about whether accounts receivable, inventory, accounts payable, or other balances will transfer with the business.

Debt

A debt schedule may include the lender, current balance, interest rate, monthly payment, maturity date, collateral, and purpose of each loan.

Certain valuation methods initially estimate the value of the company’s operating business before considering how it is financed. Interest-bearing debt may then be deducted when reconciling enterprise value to equity value.

The valuation professional may also need to distinguish operating obligations from personal, contingent, forgiven, or non-operating liabilities.

Real Estate and Equipment

If the company owns real estate, machinery, equipment, or vehicles, the valuation professional may request information about ownership, historical cost, net book value, condition, market value, and associated debt.

A separate real estate or machinery and equipment appraisal may be needed when those assets are significant, specialized, or central to the purpose of the valuation.

Business-owned real estate may also require separate analysis, particularly when it will not transfer with the operating company or when the business pays rent to a related party.

Forecasts and Future Expectations

Historical performance is important, but business value is forward-looking.

If management has prepared forecasts, budgets, or financial projections, the valuation professional may request them along with the supporting assumptions.

Relevant information may include expected revenue and profit margins, planned hiring, new locations, capital expenditures, signed contracts, customer losses, growth initiatives, regulatory changes, or expected changes in owner involvement.

Projections should reflect management’s reasonable expectations, not simply the result the owner would prefer the valuation to support.

Even when formal projections have not been prepared, owners and management should be ready to discuss known changes that could materially affect the company’s future performance.

Does Every Valuation Require the Same Information?

No. The information needed for a business valuation depends on:

• The purpose of the valuation
• They type of report
• The size and complexity of the business
• The ownership interest being valued
• The company's legal structure
• The valuation date
• The parties expected to rely on the report

An informational valuation for a straightforward business may rely primarily on tax returns, current financial statements, completed intake forms, and a focused interview.

A certified valuation generally involves more extensive financial analysis, review of relevant ownership agreements, industry research, an owner or management interview, and additional supporting documentation based on the facts of the engagement.

A valuation for a potential sale may place greater emphasis on normalized earnings, working capital, debt, customer concentration, and transferability. A valuation of a partial ownership interest may require closer examination of ownership rights, transfer restrictions, prior transactions, and the applicable standard of value.

The information request should be tailored to the engagement rather than requiring every company to provide the same documents.

What If Some Records Are Missing?

Incomplete records do not always prevent a business valuation, but they can affect the scope, timing, and reliability of the analysis.

If requested information is unavailable, tell the valuation professional as early as possible. Depending on the circumstances, alternative information may include bank statements, payroll reports, accounting system reports, filed tax returns, third-party documents, or management explanations.

Significant gaps or inconsistencies may require additional investigation. In some cases, the scope may need to be revised, assumptions may need to be disclosed, or a reliable conclusion may not be possible without additional information.

Itis better to disclose that a document is unavailable than to provide an unsupported estimate without explanation.

How to Prepare for a Business Valuation

Owners and management can help keep the engagement on track by taking a few practical steps:

1. Explain the intended use: Identify why the valuation is needed and who is expected to rely on it.
2. Confirm the valuation date: Value is determined as of a specific date, so the applicable financial information and known circumstances matter.
3. Provide complete financial periods: Gather the requested tax returns, annual financial statements, and current interim results.
4. Explain inconsistencies: If tax returns and internal statements differ, provide the reason.
5. Identify proposed adjustments: List personal, discretionary, non business, unusual, and nonrecurring items, including the amount, period, and explanation for each.
6. Complete the intake forms carefully: Throrough responses help the valuation professional understand the business and reduce unncessary follow-up questions.
7. Prepare for the interview: Be ready to discuss financial trends, operational changes, owner responsibilities, risks, opportunities, and future expectations.
8. Provide clearly labeled documents: Complete and readable files are easier to review than partial screenshots or unidentified pages.
9. Respond promptly to questions: Timely answers can help prevent delays as the analysis progresses

Frequently Asked Questions

How many years of financial statements are needed?

Valuation professionals commonly request three to five years of historical financial information, along with the most recent year-to-date results. The appropriate period depends on the company, valuation date, and purpose of the engagement.

Are tax returns required?

Tax returns are commonly requested, particularly for valuations related to a potential sale or financing. Requirements vary, however, and some engagements may rely more heavily on reviewed, compiled, or audited financial statements.

Is a general ledger required?

A general ledger is not necessarily a standard requirement. Owners and management are generally responsible for identifying the personal, discretionary, nonbusiness, unusual, and nonrecurring transactions they want considered. Additional documentation maybe requested when needed to evaluate a material proposed adjustment.

Are financial projections required?

Not always. Projections can be helpful when the company expects significant changes or when a valuation method relies on future performance. When formal projections are unavailable, management may still be asked about expected changes in the business.

Does the owner need to participate in an interview?

BizWorth’s valuation process includes an owner or management interview. The interview helps the valuation professional understand the company’s operations, financial results, proposed adjustments, risks, opportunities, and future expectations.

Does every business need a separate equipment or real estate appraisal?

No. A separate appraisal may be appropriate when equipment or real estate is significant, reliable market values are unavailable, or the intended use of the valuation requires additional support.

Bringing It All Together

The information needed for a business valuation extends beyond revenue and earnings.

A credible analysis may require financial statements, tax returns, ownership documents, debt information, explanations of proposed adjustments, and details about the company’s operations and future expectations. However, not every engagement requires every document.

Owners and management also play an essential role. They are responsible for identifying the personal, discretionary, nonbusiness, unusual, and nonrecurring transactions they want considered. Business intake forms and management interviews then provide the operational context needed to understand the financial results.

At BizWorth, we tailor the information request to the type and purpose of each valuation. Our process includes detailed intake forms and an owner or management interview so we can understand what the company has earned, how it operates, what has influenced its performance, and which risks and opportunities may affect its future value.