How Appraisals, BOVs, Audits, and Quality of Earnings Reports Affect Your Business Valuations

In the intricate world of mergers and acquisitions, it’s important to understand the value of your company. When you’re looking to sell, it’s good to get a clear grasp of your company’s worth so that you can position it to sell for more and find better offers. 

 

But how do you determine that value?

 

In this comprehensive quick guide, we’re going to look at four key valuation methods: 

By exploring their purpose, scope, audience, detail, and outcomes, we aim to equip you with the knowledge needed to make informed decisions about your company’s future and better position your business to sell for more money.

 

The one hitch is that sometimes it can be tricky to know the similarities and differences between these value metrics. Here’s a comparison of Appraisals, Broker’s Opinions of Value (BOVs), Audits, and Quality of Earnings (QofE) reports, structured across five key aspects, so that you can see how they stack up:

 

1. Purpose and Focus:

Appraisal: Determines the value of an asset, business, or property using objective measures and standardized methods. Focuses on fair market value.

BOV: Provides an estimated value of a property or business, often less formal than an appraisal and used for preliminary decision-making.

Audit: Ensures financial statements accurately reflect the company’s financial status according to accounting standards, mainly for compliance and reporting.

QofE Report: Analyzes the quality and sustainability of earnings, focusing on underlying business performance and future earnings potential.

 

2. Scope and Depth:

Appraisal: In-depth and highly detailed, focusing on comprehensive value assessment based on various methodologies like cost, market, and income approaches.

BOV: Generally less detailed than an appraisal; provides a quick, market-based perspective that might not involve extensive use of formal valuation techniques.

Audit: Standardized and thorough, focusing on historical financial data to verify accuracy and compliance with accounting standards.

QofE Report: Tailored and detailed, often diving deep into financial adjustments, operational metrics, and future earnings forecasts.

 

3. Intended Audience:

Appraisal: Useful for lenders, investors, insurance companies, and regulatory bodies requiring a precise valuation for financing, litigation, or insurance purposes.

BOV: Targeted towards sellers or buyers in preliminary stages of property or business transactions who need a quick valuation to inform negotiation strategies.

Audit: Essential for external stakeholders like investors, financial institutions, and regulators who rely on the integrity of financial reports.

QofE Report: Aimed at potential buyers or investors looking to get a deeper understanding of a company’s financial health and the sustainability of its earnings.

 

4. Detail and Customization:

Appraisal: Highly detailed with limited customization; follows strict guidelines and methodologies to determine value.

BOV: Less detailed and somewhat customizable, often based on the broker’s experience and market knowledge.

Audit: Limited in customization due to the need to adhere to strict auditing standards and maintain auditor independence.

QofE Report: Highly customizable, focusing on specific areas of interest to the client, and adaptable to various transactional or strategic needs.

 

5. Outcome and Usage:

Appraisal: Produces a comprehensive valuation report used in financial reporting, legal proceedings, or insurance claims.

BOV: Results in a broker-provided estimate that informs pricing strategies or initial offers in business transactions.

Audit: Culminates in an audit report with an opinion on the financial statements’ fairness and accuracy.

QofE Report: Provides a detailed analysis that supports decision-making in mergers, acquisitions, or investments by highlighting financial and operational insights.

 

Finding the true value of your company isn’t a matter of choosing one of these metrics over another, but making sure that they all play one harmonious role in positioning your company to show buyers the value they’re getting for the price they’re willing to pay. 

 

Each of these tools plays a unique role in business and financial contexts, offering different levels of detail, scope, and usefulness depending on the specific requirements of the stakeholders involved.

 

Ready to sell your company? Book a discovery call to get more insight from the M&A Experts.