Frequently Asked Questions
[vc_row content_placement=”middle” height=”medium” color_scheme=”primary”][vc_column][us_post_title align=”center” tag=”h1″ migration_add_content=”1″ css=”%7B%22default%22%3A%7B%22margin-bottom%22%3A0%7D%7D”][/vc_column][/vc_row][vc_row][vc_column width=”2/3″][vc_tta_accordion toggle=”1″][vc_tta_section icon=”fas|question-circle” title=”What are common reasons for business valuation?”][vc_row_inner][vc_column_inner width=”1/2″][vc_column_text]
- Income tax transactions
- Estate planning
- Structuring shareholder agreements and assisting in shareholder disputes
- Minority shareholder actions
- Business restructuring
- Matrimonial law matters
- Employee share ownership plans and stock options
- Purchase price allocations
- Goodwill impairment testing
- Mergers, acquisitions, and divestitures
- Quantification of economic losses
- Going public/going private transactions
- Transfer pricing
- Fairness opinions
[/vc_column_text][/vc_column_inner][/vc_row_inner][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”What is fair market value?”][vc_column_text]The concept of “fair market value” is the cornerstone of business valuation theory. It is the highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.[/vc_column_text][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”What are typical valuation reports?”][vc_column_text]There are three types of valuation reports (Comprehensive, Estimate, Calculation) which are distinguished by the valuator’s scope of review, the amount of disclosure provided, as well as the level of assurance being provided in the conclusion.
Comprehensive Valuation Report
A Comprehensive Valuation Report contains a conclusion as to the value of shares, assets or an interest in a business that is based on a comprehensive review and analysis of the business, its industry and all other relevant factors, adequately corroborated and generally set out in a detailed valuation report.
Estimate Valuation Report
An Estimate Valuation Report contains a conclusion as to the value of shares, assets or an interest in a business that is based on limited review, analysis and corroboration of relevant information and is set out in a less detailed valuation report.
Calculation Valuation Report
A Calculation Valuation Report contains a conclusion as to the value of shares, assets or an interest in a business that is based on minimal review and analysis economic and little or no corroboration of relevant information, and generally set out in a brief valuation report.[/vc_column_text][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”What are common approaches to determining the value of business interest?”][vc_column_text]There are three basic generally-accepted approaches to valuing a business which include the income approach, asset approach and market approach. The value of the business will vary based on the type of company, approach adopted, timing and risk associated with the business, industry, and investment. Valuation requires objectivity and independence. [/vc_column_text][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”What is the Income Approach to business valuation?”][vc_column_text]Valuators typically use the following income-based methods as a primary approach:
- Capitalization of maintainable earnings
- Capitalization of maintainable cash flows
- Discounted cash flows
The capitalization of maintainable earnings method involves dividing after-tax normalized earnings from operations by a capitalization rate (or alternatively, multiplying the after-tax normalized earnings from operations by a multiple derived from the capitalization rate). This method may be appropriate for:
- A business with unreliable or unavailable forecasts.
- A mature business with relatively consistent earnings that is expected to be relatively stable into the future.
- A business that does not require a significant investment in fixed assets each year, or where depreciation (for accounting purposes) and actual capital spending are approximately equal.
- A business that is expected to continue for the foreseeable future and where average earnings can be reasonably estimated.
The capitalization of maintainable cash flows method has many of the same conceptual and mechanical aspects as the capitalization of earnings method. However, the cash flow method has certain refinements, as the valuator concentrates on cash inflows and outlays rather than accounting-based earnings. The use of a cash flow-based method rather than an accounting earnings-based valuation method is generally preferable where any of the following conditions exist:
- The business is capital intensive, at least moderately.
- Accounting depreciation is not representative of annual capital reinvestment requirements.
The discounted cash flow method involves estimating future net discretionary cash flow on a year-by-year basis and discounting the cash flow estimates to their present value using an appropriate rate of return. In other words, the discounted cash flow approach is a present value calculation of the future cash flows expected to accrue to a given business interest.[/vc_column_text][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”What is the Asset Approach to business valuation?”][vc_column_text]Asset-based techniques calculate a value based solely on the value of the net assets of the
business without consideration of its future earnings capacity. The asset-based approach can be used for valuing both businesses which are going concerns and those which are not. However, the approach is used differently depending on whether or not the business is a going concern.
Asset-based techniques include:
- Adjusted net book value.
- Liquidation value.
- Tangible asset backing.
The adjusted net book value technique involves adjusting the business’ tangible assets and liabilities to their current fair market values with the resultant net equity representing the going concern value of the business.
The liquidation approach is appropriate where:
- The operations of the business are not viable as a going concern.
- Liquidation value is higher than the going-concern value, even if the business is viable.
- The liquidation approach to value quantifies the net proceeds available to shareholders in the event of a liquidation of a business after the business’ assets are sold and the costs of liquidation are deducted.
Tangible asset backing is the value of the operating assets minus operating liabilities of a business. Thus, tangible asset backing does not include redundant assets or debt. Tangible asset backing (TAB) is not a primary valuation technique but rather it is generally used in conjunction with an income-based technique (e.g., capitalized earnings or cash flows) to assess risk. The value of the operating assets when calculating TAB is based on a going-concern assumption.[/vc_column_text][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”What is the Market Approach to business valuation?”][vc_column_text]A market approach that typically assumes a going-concern premise, comparable company multiples can provide insight into value, and may also be used for corroborative purposes against that of other valuation approaches as well.
Comparable company empirical data can be found in market-based valuation ratios of comparable companies that are engaged in the same or similar lines of business, and that are actively traded on a free and open market. Market approaches based on comparable company information can also provide objective, empirical data for developing valuation ratios for use in business valuation.
Considering comparable data about other companies — when it is adequate and relevant — can be a very useful tool in the valuation of businesses, business ownership interests and/or securities.
They can be classified into the following approaches:
- Public Company Multiples – An analysis of multiples based on the publicly traded equity prices for the securities (typically common shares) of a public company listed on a given stock exchange.
- Precedent Transaction Multiples
Multiples based on open market transactions (that are not based on stock exchange trading prices), whether public or private. The evaluator can use these market multiples as:
- A primary approach.
- A secondary approach to support the reasonability of the results of the multiples implied by a primary approach, such as the conclusions derived using a cash flow based methodology (such as the discounted cash flow approach).
- Not at all.
[/vc_column_text][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”How much does a business valuation cost?”][vc_column_text]The cost of a business valuation depends on the valuator’s time and expenses. Factors include:
- your intended use and users,
- the scope of analysis performed,
- the type of report required,
- the nature and complexity of the business and make up of its assets,
- the specific business interest being valued, and access to information and the quality of your records.
It takes many hours to compile information, fully analyze a company, develop a financial forecast, apply valuation methods within each required approach and make a final determination of value, and prepare a comprehensive valuation report.
When appropriate, I can provide limited scope value calculations for much lower cost. The appropriate level of service and fees can usually be determined after an initial contact.[/vc_column_text][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”How long does it take to conduct a business valuation?”][vc_column_text]A business valuation worth relying on requires thorough and careful analysis. Thus, a reliable valuation will take some time. Among other things, the time required will depend on the purpose of the valuation as well as the availability of information. A business valuation prepared by a competent professional will generally require 20 to 40 hours of the expert’s time (and sometimes more), but a consultation or calculation assignment may require significantly less.
Generally, once the valuator has received all the requested information, a reasonable expectation for delivery of the report is between 30 and 45 days. However, engagements requiring a quicker turn-around can sometimes be arranged.[/vc_column_text][/vc_tta_section][vc_tta_section icon=”fas|question-circle” title=”What are the biggest challenges in doing a business valuation?”][vc_row_inner][vc_column_inner width=”1/2″][vc_column_text]
- Whether forecast earnings and cash flows realistic and achievable
- Determination and calculation of the right discount rate/cost of capital (or internal rate of return)
- Sourcing and obtaining accurate historical information
- Obtain and do the necessary research on the business model and industry/sector
- Getting evidence to support the forecasts
- Selecting the right valuation method
[/vc_column_text][/vc_column_inner][/vc_row_inner][/vc_tta_section][/vc_tta_accordion][/vc_column][vc_column width=”1/3″][us_iconbox icon=”fas|bullhorn” style=”circle” title=”Contact Marek” type=”icon_top” link_url=”#” link_text=”Contact Support”]Send an email with your question about business valuations or strategic advisory and get reply directly.[/us_iconbox][us_separator][us_iconbox icon=”far|comments” style=”circle” title=”Ask Marek in comments” type=”icon_top” link_url=”#” link_text=”Go to Comments”]Write your questions regarding business valuations and strategic advisory. I will answer below in comments sections[/us_iconbox][/vc_column][/vc_row]