Business valuation
What the business is worth, and on what basis
A valuation opinion is only as durable as the reasoning behind it. Every engagement starts with two questions that determine everything downstream: what is being valued, and under what standard. An interest valued for a gift tax filing, a divorce, and a shareholder buyout can produce three different and defensible numbers, and confusing them is one of the most common defects we see in opposing reports.
Why the valuation is being prepared
- Litigation and disputes
- Shareholder and partnership disputes, oppression and buyout claims, breach of contract, and loss of business value as an element of damages.
- Marital estates
- Valuation of a closely held business or professional practice as part of the marital balance sheet. See divorce matters.
- Estate and gift tax
- Reporting-quality valuations of operating companies, holding companies, and family limited partnership interests. See non-litigation engagements.
- Employee stock ownership plans
- Valuations prepared for plan formation and for annual administration.
- Transactions
- Buy-side and sell-side valuation, buy-sell agreement pricing, and key-man insurance funding.
- Bankruptcy and restructuring
- Valuations for adequate protection, claims determination, recovery actions, plan confirmation and sale processes. See bankruptcy matters.
Standards, approaches, and adjustments
The standard of value is set by the purpose and, in litigation, by the jurisdiction: fair market value, fair value, investment value, or a statutory standard. The premise of value follows, as does whether the subject interest is a controlling or a minority one, and whether it is freely marketable.
- Income approach
- Discounted cash flow and capitalized cash flow methods, with normalization of owner compensation and non-recurring items, and the development of a commensurate cost of capital.
- Market approach
- Guideline public company and guideline transaction methods, with attention to whether the comparables are genuinely comparable, considering characteristics such as size, growth trajectory, liquidity, profitability, turnover, leverage, and macro-economic drivers.
- Asset approach
- Adjusted net asset value, used for holding companies, real estate entities, and businesses whose assets are worth more than the present value of their earnings stream.
- Discounts and premiums
- Discounts for lack of control and lack of marketability, quantified from empirical data with the reasoning shown.
- Goodwill
- Separation of personal from enterprise goodwill, which is decisive in professional practices and in marital estates (depending on the State).
What you receive
Depending on the purpose of the matter, the engagement produces a written report in detailed or summary format indicating our conclusion of value, or a calculation report indicating our calculation of value. Where an opposing appraisal already exists, we also perform critique and rebuttal work, which is often (but not always) the most efficient way to spend a valuation budget.