Strategic Performance Management and Business Valuation · Fundamentals of Business Valuation

Valuation Process and Steps in Business Valuation

Updated 11 October 2026 · Fact-checked

The business valuation process is a fixed sequence: define the engagement (purpose, standard and premise of value, date), gather information, analyse the business and industry, normalise financials, select and apply methods, reconcile results, and report. Answer exam questions by following this order and tying each step to the case facts.

Understand Valuation Process and Steps

A valuation is not just a calculation. It is an engagement with a purpose, a date and a standard of value. The same business can have different values for a sale, a tax filing or an insolvency case. So the first job is to fix what you are valuing and why.

The process moves from scope to evidence to numbers to conclusion. You define the purpose, the standard of value (for example fair value or market value), the premise (going concern or liquidation), the valuation date and the interest being valued (whole business, equity, or a minority stake). Then you collect information: financial statements, projections, contracts, industry data and management discussions.

Next you analyse the business and its industry, and then normalise the financials. Normalisation means adjusting reported numbers so they show the true recurring earning power. You remove one-off gains and losses, correct non-market owner salaries and related-party rents or prices, and separate non-operating assets and liabilities (such as surplus land or idle investments) from operations.

Only then do you choose methods from the asset, income and market approaches, based on the purpose and the data available. You apply them, compare the results, and reconcile them to one conclusion, often by weighting. Then you apply discounts or premiums where relevant, such as for lack of marketability or control. Finally you issue a report that states the scope, sources, assumptions, methods, limitations and conclusion, so a reader can follow and challenge it.

Key rules to remember

Normalised earnings: Normalised earnings = Reported profit ± non-recurring items ± non-market adjustments; Add back one-off losses and subtract one-off gains. Adjust owner pay and related-party items to market levels. Consider the tax effect if the question asks for post-tax figures.
Equity value from enterprise value: Equity value = Enterprise value − Debt + Surplus (non-operating) assets; Use cash and debt as at the valuation date. Add non-operating assets only if their income is excluded from the earnings you valued.
Reconciled value: Concluded value = Σ (value from each method × weight), where weights add up to 100%; Weights must be justified by purpose and data reliability.
Value after discount: Adjusted value = Base value × (1 − discount %); Apply a marketability or minority discount only to the interest it relates to, and only once.

How to solve Valuation Process and Steps questions

Use this order for any question on the valuation process or a case-based valuation.

1State the engagement terms: purpose, standard of value, premise, valuation date and the interest valued.
2List the information needed and its sources, and note any gaps or limits on access.
3Analyse the business, industry and economy, covering risks and growth outlook.
4Normalise the financials: remove non-recurring items, adjust non-market transactions, and separate non-operating assets and liabilities.
5Select methods from the asset, income and market approaches, giving a reason linked to the purpose and data.
6Apply the methods with clear workings, then reconcile results and apply discounts or premiums once.
7Close with the report: scope, sources, assumptions, methods, limitations and the concluded value.

Quickest way: Purpose-to-report checklist

When to use it: Use this for short theory questions or MCQs that ask for the order of steps or what a step involves.

Recall the chain: scope, information, analysis, normalise, methods, reconcile, report.
For any normalisation question, ask: is it one-off, non-market or non-operating?
For any method question, match purpose and data to the approach.
Write one line of case-specific reasoning per step.

Common mistakes in Valuation Process and Steps

Starting calculations before fixing the standard of value and valuation date.
Students treat valuation as a formula exercise.
Fix: Always open by stating purpose, standard, premise and date. Use balance sheet figures as at that date.
Adding back all expenses instead of only non-recurring ones.
Confusing normalisation with raising profit.
Fix: Adjust only items that will not recur or are not at market terms. Recurring costs stay.
Counting surplus assets twice, once in earnings and again as an addition.
Income from the asset stays in profit while the asset is also added.
Fix: If you add the asset's value, remove its income from the earnings used.
Applying a discount at every stage, such as in the method and again after reconciliation.
Mixing up the risk in the discount rate with marketability or minority discounts.
Fix: Apply each discount once, to the right interest, after reconciling.
Writing a report that lists only the final value.
Treating the report as a result rather than a record of the work.
Fix: Include scope, sources, assumptions, methods, limitations and the reasons for weights.

Worked examples

Example 1

Reported profit before tax of Sharma Engineering Pvt Ltd is ₹48,00,000. It includes a one-off gain of ₹6,00,000 from sale of a machine and is after a one-off legal settlement of ₹2,00,000. The owner-director draws ₹12,00,000 but a market salary for the role is ₹18,00,000. Compute normalised profit before tax.

Show the solution

Start with reported profit: ₹48,00,000.
Remove the one-off gain: 48,00,000 − 6,00,000 = ₹42,00,000.
Add back the one-off legal settlement: 42,00,000 + 2,00,000 = ₹44,00,000.
Raise the owner's pay to market: extra cost is 18,00,000 − 12,00,000 = ₹6,00,000, so 44,00,000 − 6,00,000 = ₹38,00,000.

Answer: Normalised profit before tax is ₹38,00,000.

Example 2

A valuer values Rao Textiles Ltd at ₹90,00,000 under the income approach and ₹70,00,000 under the market approach. Because the data for market comparables is thin, she gives weights of 70% and 30%. A 10% discount for lack of marketability applies to the reconciled value. Find the final value and name the process steps involved.

Show the solution

Reconcile: (90,00,000 × 0.70) + (70,00,000 × 0.30) = 63,00,000 + 21,00,000 = ₹84,00,000.
Apply the discount: 84,00,000 × (1 − 0.10) = ₹75,60,000.
Steps used: method application, reconciliation with justified weights, then adjustment for discount, followed by reporting the weights and reasons.

Answer: The final value is ₹75,60,000.

Exam tips

Write the steps in order and link each to the case facts. A bare list earns fewer marks.
In normalisation questions, show each adjustment on its own line with its sign, so partial marks are secured.
State the valuation date and standard of value early in any valuation answer.
For report-content questions, cover scope, sources, assumptions, methods, limitations, conclusion and signature.

Practice questions from Fundamentals of Business Valuation

Valuation Process and Steps in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Valuation Process and Steps: frequently asked questions

What are the main steps in the business valuation process?

Define the engagement, gather information, analyse the business and industry, normalise financials, select and apply methods, reconcile and adjust, then report. Each step feeds the next. Skipping the first step is the most common cause of wrong answers.

What is normalisation in business valuation?

It is adjusting reported financials to show the recurring, market-based earning power of the business. You remove one-off items, correct non-market transactions and separate non-operating assets. The aim is a fair base for the valuation.

What should a business valuation report contain?

It should state the purpose, standard and premise of value, valuation date, sources of information, assumptions, methods used and why, key workings, limitations and the conclusion. This lets a reader judge the reasoning.

Do I always use more than one method?

Not always, but using more than one gives a cross-check when data allows. If results differ, reconcile them with reasoned weights. Explain any method you rejected.