BUSINESS VALUATION SERVICES
- The economic value of a business or business unit is determined by business valuation.
- For a variety of purposes, including sale value, establishing partner ownership, taxation, and even divorce processes, company valuation can be used to evaluate the fair value of a business.
- There are several ways to value a company, including looking at its market size, earnings multipliers, or book value, among others.
WHAT IS A BUSINESS VALUATION?
The process of giving an economic value—that is, a financial amount—to your business is known as business valuation. This is useful to have if you’re considering your exit. If you’re preparing your estate or assessing valuations for a merger or acquisition, you might want to receive a company appraisal. If you’re converting your company to an ESOP, you’ll need to receive a valuation.
A business appraisal might comprise a range of evaluations and approaches, depending on why you need one. It also requires the evaluator’s judgment to estimate the value of your firm. This is usually done by calculating the value of your income stream (benefit stream) using projections or previous earnings.
In most circumstances, the buyer will evaluate your company based on its future earnings potential. In order to determine this, you must look beyond your company’s actual assets and consider intangibles such as customer relationships.
VALUATION OF BUSINESS INTERESTS
The provision of either a valuation opinion or valuation consulting services for the valuation of aggregate business interests or business enterprises is included in business valuation.
Analyses of this type are carried out for the following reasons:
Transaction Planning
Purchase or Sale of Business
General Business Purposes
Financial Statement or Tax Reporting Purposes
Collateral or Secured Financings or Refinancing
Litigation or Dispute Resolution Purposes
Typical illustrations include:
Intangible Asset Valuation
The provision of either a valuation opinion or valuation consulting services for individual or numerous intangible assets or liabilities, as well as intellectual property, is included in intangible asset appraisals.
Financial Statement or Tax Reporting Purposes
General Business Purposes
Transaction Planning
Purchase or Sale of Assets
- Licensing or Relicensing
Collateral or Secured Financings or Refinancing
Litigation or Dispute Resolution Purposes
The following are examples of common illusions:
Fairness Opinions
The provision of a report, generally to a Board of Directors, deliberating the purchase or sale of assets or company interests, is known as a fairness opinion. The Board of Directors is normally expected to depend on the fairness opinion when making decisions on whether or not to proceed with or complete a transaction. There’s also a chance that other third parties will need access to the fairness opinion report, or that a reference to the fairness opinion report will be required in public publications or filings.
Fair Value Studies
The term “fair value” refers to a broad category of valuation-based services that are typically provided in connection with requirements arising during the purchase, sale, or transfer of assets or interests, or as a result of contractual, governmental, regulatory, or statutory requirements such as financial statement disclosures as defined by the FASB and the International Accounting Standards Board (IASB), as well as national regulatory bodies. As a result, assets and obligations must be evaluated in terms of fair value.
Among the services offered are:
In combination with articles of association, by-laws, or other types of shareholders’ agreements, valuation evaluations or estimates of value are required.
Value estimates needed by contracts between parties or as a result of disputes between parties
Analyses of value in relation to tax mitigation and/or planning
Preparation of estimates, analysis, and reports on tax, financial, or accounting solvency issues that usually involve “balance sheet” examinations on the value of assets
Adequacy of compensation in relation with a specific transaction or occurrence, such as “contribution-in-kind” paid or received.
Valuation services performed in connection with fair value studies and fairness judgments are typically based on legal or statutory requirements, and may include unique or nonstandard valuation processes and/or the defining of the standard of value measurements. Providing services in response to these kinds of needs necessitates particular expertise and experience.
BUSINESS VALUATION REPORT
A final report, which might be about 100 pages long, is the result of a valuation. This report illustrates how the valuator arrived at the economic value of your company. It’s understandably intimidating if you aren’t a valuation specialist. However, it’s critical that you comprehend it so that you can trust your valuator’s assessment.
Here are the five most crucial items to look at in your valuation report to assist you better comprehend it.
Appraisal Summary or Reconciliation of Appraisal Value
This table, which is usually near the back of the report, contains the conclusion (i.e., the final value of your business). This table shows the valuation of your firm as well as the procedures utilized by your valuator to arrive at that figure. To arrive at a value conclusion, valuators may choose one approach or weigh numerous methods.
Summary of Approaches and Value Indications
A valuation often entails a range of approaches for assessing value, each of which can yield a different result. This summary demonstrates how the value of your firm differs depending on the approach, and there is a commentary within the report to explain why one way is preferred over another. Examining it can assist you in comparing high and low prices and arriving at a final value determination.
Normalizing Entries
When working with a pdf, I we usually look for the word “normal” to see whether any “normalizing modifications” have been made. This information is usually presented in a narrative fashion in the report. These are one-time expenses associated to an unexpected event or nonrecurring income, such as the sale of a division, that can have a significant influence on the value of your organization. Additionally, the report may include adjustments for expenses that are not already at market rate, such as rent (if your company owns its building) or your personal salary.
Do you agree with normalizing adjustments if you find them? Is there anything the appraiser might have overlooked?
Discount Rate Summary
You should review this summary if the evaluator utilized the Discounted Cash Flow or Capitalized Income Method to assess the value of your company. The majority of the rates are indexed, but the level of company-specific risk is left to the valuator’s discretion. Be sure to look through the contract for an explanation of the amount mentioned—a typical risk premium is between 5 and 10%.
Note: If your company has received various valuations, you can compare the rates to see what has changed.
Business Valuation Summary
Normally, the evaluator arrives at an enterprise value or total value, but then adds or subtracts value for items on the balance sheet that increase or decrease the value. In other words, these are goods that the company does not require in order to function.
This table depicts the impact of assets and liabilities on the value of your company. Were any non-operating assets or liabilities taken into account by your appraiser? Do you concur with the valuator’s conclusion? Do you have any assets that aren’t reported (for example, a piece of land or extra cash)? Is there a deduction for lack of marketability or control that the valuator applied?
VALUATION METHODS
Market Capitalization
The most basic approach of valuing a company is to use market capitalization. It’s computed by dividing the company’s share price by the total number of outstanding shares. Microsoft Inc., for example, was trading at $86.35.2 on January 3, 2018. The corporation might be valued at $86.35 x 7.715 billion = $666.19 billion if there are 7.715 billion shares outstanding.
Times Revenue Method
A stream of revenues generated over a period of time is applied to a multiplier that relies on the industry and economic climate in the times revenue business valuation approach. A IT corporation, for example, can be valued at 3x revenue, whereas a service firm might be valued at 0.5x revenue.
Earnings Multiplier
The earnings multiplier, rather than the times revenue technique, can be used to acquire a more accurate representation of a company’s real value, because profits are a more reliable predictor of financial performance than sales revenue. The earnings multiplier compares future profits to cash flow that might be invested over the same time period at the present interest rate. To put it another way, it adjusts the current P/E ratio to take current interest rates into account.
Discounted Cash Flow (DCF) Method
The earnings multiplier is comparable to the DCF approach of business valuation. This strategy is based on future cash flow forecasts that are updated to determine the company’s current market value. The fundamental difference between the discounted cash flow approach and the profit multiplier method is that the discounted cash flow method calculates the present value after taking inflation into account.
Book Value
The worth of a company’s shareholders’ equity as represented on the balance sheet statement. A company’s book value is calculated by subtracting its total liabilities from its total assets.
Liquidation Value
The net cash that a company would get if its assets were liquidated and its liabilities were paid off today is known as liquidation value.
This is by no means a comprehensive list of current business valuation methodologies. Replacement value, breakup value, asset-based valuation, and many other approaches are available.
AICPA BUSINESS VALUATION STANDARDS
Statement on Standards for Valuation Services No. 1 (SSVS No. 1), “Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset,” was published by the Consulting Services Executive Committee of the American Institute of Certified Public Accountants (AICPA).
CPAs use the standards to produce value estimations and report on the outcomes. The standards applies to AICPA members who estimate the value of a business, business interest, security, or intangible asset for a variety of reasons, including sales transactions, financing, taxation, financial reporting, mergers and acquisitions, management and financial planning, and litigation.
The valuation standard was developed by the AICPA to improve the consistency and quality of practice among its members who execute engagements that estimate values for various reasons. Recent engagement by Congress, government agencies, and accounting authorities on appraisal concerns demonstrates the importance of valuation to the business community and individuals. With the growing number of CPAs now provide valuation services, t he standard encourages greater transparency and offers AICPA members with a set of principles for operating a CPA firm.
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