Business Valuation

6 Key excerpts on "Business Valuation"

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  eBook - ePub

  Business Valuation and Bankruptcy

  • Ian Ratner, Grant T. Stein, John C. Weitnauer(Authors)
  • 2009(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 3

  The Basics of Business Valuation

  THE PURPOSE OF THE VALUATION

  Any discussion of Business Valuation begins with one basic question: “What is the purpose of the valuation?” Valuations are required for countless reasons and from different perspectives in the business world as they provide interested parties, including the courts, with valuable information necessary to the decision-making process. For example, a lender may require a valuation of a business to support loan-underwriting decisions, whereas the owner-manager of a business may require a valuation for tax and estate planning purposes. Some other instances in which a Business Valuation would be required are

  • Reorganizations and recapitalizations • Due diligence related to acquisitions and divestitures • Litigation support in which the value of a business or business interest is in dispute, such as buy/sell or partnership disputes

  As discussed in more detail in this book, although the basic financial and valuation analyses remain the same, Business Valuations performed in the context of a bankruptcy or reorganization come with a unique set of challenges. For the most part, courts direct valuation professionals to use the same valuation approaches and methods they use in other contexts. As will be seen in Chapter 8, however, sometimes a bankruptcy court has suggested methods or particular applications of the methods that are unique to the particular case or the requirements of bankruptcy law.

  That said, the bankruptcy process is a fluid one with substantial interaction and negotiation between the parties; therefore, although decisions are based upon information provided by the valuation, the resulting outcome may not be driven solely by the valuation conclusions of the experts retained by the interested parties.

  Value often differs depending on the purpose, standard of value, and key assumptions. For example, the value of a business unit on a standalone basis could be different than the value of a business unit included as part of the overall corporation. The difference may be a result of several factors, such as the ultimate cash flows being valued. As a standalone entity a business unit may not receive the benefit of certain shared expenses with the parent such that cash flows could be lower. There could also be higher perceived risk to the operation of a business unit on a standalone basis, which would drive the value lower. Or, there could be other sales and operating synergies that are not available to the standalone business unit that could be obtained while part of the larger entity.

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  Business Valuation

  Theory and Practice

  • Marco Fazzini(Author)
  • 2018(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  This mechanism is easy to find in contemporary art auctions. Given an objective value, based on previous auctions, expert judgment, quality of the work, and so on, the results may differ significantly, reaching amounts that have little to do with the characteristics of the work or with the prices attained in previous auctions.

  Business Valuations work in the same way. There is an objective component of value, based on valuations methods, and a subjective one, based on the valuer’s experience and ability to capture reality.

  This means that two equally knowledgeable persons, with similar sensitivity, will hardly get the same result, although they start from the same assumptions and quantitative inputs. To make a comparison, think of two chefs who are given the same ingredients to prepare a certain dish. The result may appear similar, but the different combination of timing, cooking processes, doses, creativity, experience, and dish presentation will lead to different outcomes.

  In this book, we will deal with the objective component, which is how we determine the value of a business based on generally accepted valuation methods. What does it mean to value a business? We can respond that valuation is the act of estimating or setting the potential value of a business by considering both internal and external variables.

  The internal variables look at the results a firm has achieved in the past; for example, the debt-to-equity ratio, EBITDA (earnings before interest, tax, depreciation, and amortization), revenues, and cash flow provide us with an understanding of what characterizes the business and constitute a basis for determining its value. The external variables look at the environment in which the company conducts its business and include, for example, market features, the company’s competitive positioning, distribution channels, or consumers’ tastes. In short, it is necessary to develop a comprehensive opinion that encompasses in one single model both the theoretical business value and the value that considers the environment where that business develops and performs its activity.

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  Business Valuation For Dummies

  • Lisa Holton, Jim Bates(Authors)
  • 2009(Publication Date)
  • For Dummies

    (Publisher)

  Part I What Business Valuation Means In this part. . . Many people think that Business Valuation is all about getting to a price for a business, and that’s certainly a big part of it. But we think that valuation is the central concept of what makes a business a business — and that very few people really understand it. In this part, we discuss the reasons valuation happens in a business, and we introduce the accounting concepts in the process. Most importantly, we discuss valuing business ideas. Chapter 1 The Value of Understanding Business Valuation In This Chapter Why the price of a business is only half the story The importance of planning in valuation Basic due diligence Why families are so important in the process You’re here for one of two big reasons: You have a business that you want to sell, or you want to buy a business. Very likely, the business in question is a small business (with less than $3 million in annual sales), and it may be the first and only business you ever own. Before we go further, we want to pay you a compliment. Right now, you’re doing something that painfully few entrepreneurs do: thinking about what a company is actually worth before you make a major decision or take a major action. You’re already ahead of the game. And because you’re reading this book, you obviously know that Business Valuation is an important part of that game. Business Valuation For Dummies is for people who want to understand value. This book can help you get your arms around the many tasks and variables involved in effective valuation of a company and help you decide what kind of help you should enlist to complete a deal. In this chapter, we discuss the importance of valuation, talk about doing research and calculating value, and include some notes on valuation experts and intellectual property

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  Measuring Business Interruption Losses and Other Commercial Damages

  An Economic Approach

  • Patrick A. Gaughan(Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Exhibit 8.1 . The remaining part of this chapter takes the reader through the steps in the valuation process.

  Theoretical Value of a Business

  The value of a business should be a function of the future benefits that will accrue to the owners of the business. For publicly held businesses, these benefits may come from future dividends and increases in the price of the stock. For closely held businesses, these benefits can be derived in different ways from publicly held firms. Whichever the case, the valuation exercise involves defining the benefits and projecting them into the future. The higher the value of such benefits, the greater the value of the business. The identification and analysis of such benefits is the subject of the valuation process.

  EXHIBIT 8.1 Pathway to valuation.

  Source: Robert Trout, “Business Valuations,” in Measuring Commercial Damages (New York: John Wiley & Sons, 2000), p. 237. This material is used by permission of John Wiley & Sons, Inc.

  Methods of Business Valuation

  In a Business Valuation, an analyst assigns a value to a financial asset for which there is often either no market or only a limited one available to value it. Businesses whose equity or debt securities are actively traded on securities exchanges are regularly valued on a daily basis. Such companies are known as publicly held companies based on the “public” ownership of their equity. For bigger companies, the ownership is usually held by a large number of stockholders. Issuing companies have to adhere to Securities and Exchange Commission (SEC) filing and disclosure requirements as well as other state regulations.

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  eBook - ePub

  Buyouts

  Success for Owners, Management, PEGs, ESOPs and Mergers and Acquisitions

  • Scott D. Miller(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  There are a myriad of methods and methodologies to determine the “consideration” being paid for the company. I have specifically avoided using the term “price” because that suggests there is a single amount to be paid in cash, or cash equivalents. Today transactions that are being completed are accompanied by a wide range of additional factors that are integral to the “deal.” For our purposes these factors are generally referred to as the “terms” of the transaction. Clearly, few transactions will be completed with the buyer paying all cash at the closing. Transactions are typically subject to a range of contingent covenants and conditions, the terms. A few of the more common terms are escrow accounts, seller financing, contingent payments or earn-outs, management and consulting agreements, and personal guarantees. This leads me to conclude that with today's economic environment in particular, the value of the business will be a function of the price and the terms. The more generous the terms extended by the seller, the more likely the total consideration will be higher.

  We will first examine a number of fundamental concepts regarding valuations before becoming more specific on valuation methods and commonly encountered terms.

  This chapter is intended to provide insights and vocabulary regarding the Business Valuation discipline. There are too many valuable books that consider a thorough analysis of how to conduct and complete valuations without repeating that understanding here.

  PURPOSE OF THE VALUATION

  The first appropriate question to ask regarding valuation is, “What is the purpose of the valuation assignment?” Immediately establishing a valid purpose for the valuation will typically imply many other facets of information required to complete the analysis. Often, the purpose of the valuation will lead to a determination of the “standard of value,” which often suggests appropriate valuation approaches and methods.

  There are many purposes for a valuation assignment. The following non-comprehensive list illustrates many of the common reasons for a valuation.

  • Selling a business to a third party
  • Transferring ownership to family members via gifting
  • Litigation between shareholders
  • Divorce action between husband and wife
  • Establishing value for estate tax determination
  • Installing an Employee Stock Ownership Plan and Trust (ESOP)
  • Acquiring a business

  In addition to the valuation purpose, it often is significant who initiates the assignment. Consider the case of a highly contentious divorce: The overall parameter of the valuation assignment is almost certainly affected by the party bringing the initial complaint. This situation stands in sharp contrast to a transaction that is predicated on parties that are friendly and wish to conclude a successful result.

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  eBook - ePub

  Litigation Services Handbook

  The Role of the Financial Expert

  • Roman L. Weil, Daniel G. Lentz, Elizabeth A. Evans(Authors)
  • 2017(Publication Date)
  • Wiley

    (Publisher)

  1 This chapter focuses primarily on quantitative approaches used by experts in litigation.

  11.2 Business Valuation STANDARDS

  Several membership organizations and the Appraisal Foundation, an organization of appraisal groups, have promoted Business Valuation standards for many years. The American Society of Appraisers (ASA),

  2 the Appraisal Foundation, 3 the National Association of Certified Valuators and Analysts (NACVA), 4 the Institute of Business Appraisers, 5 the American Institute of Certified Public Accountants (AICPA), 6 and the Canadian Institute of Chartered Business Valuators 7

  have all issued Business Valuation standards. The Business Valuation standards of these organizations consist of developmental standards (criteria necessary to arrive at a value conclusion) and reporting standards (disclosures for reporting on the conclusion).

  Members in valuation organizations typically must adhere to their organization’s valuation standards, although some organizations, such as the AICPA, have special provisions in their standards for valuations that relate to litigation. Accredited members of the ASA, conversely, are bound by the ASA’s Business Valuation Standards as well as the Uniform Standards of Professional Appraisal Practice (USPAP), promulgated by the Appraisal Standards Board, an independent board of the Appraisal Foundation. USPAP contains specific guidelines such as requiring that followers consider all valuation approaches and explain why they used or did not use each of them, though this may seem overly burdensome in a litigation context.

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