Business valuations serve many purposes. They can be used for internal understanding of business worth for management, investors and equity holders. More importantly, they are used to assess viable businesses looking for strategic merger & acquisition opportunities. A well-produced business valuation can provide a 30,000 foot view of how the business operates. It also provides a granular look at the financial standing of the company. There is no silver bullet for performing a business valuation. Acquirers and internal managers alike have different methods they like to use for valuing businesses and business assets. For that reason, we take a multi-faceted approach to business appraisals and business valuations by using the following methods.
Regardless of the type of business you operate, there are many differing nuances that need to be taken into account when valuing the company as a going concern. When it comes time to value your business or perform any business planning function relative to company valuations and appraisals, please give us a call.
Valuations Service Types
- Real Estate Valuations
- Comparable Valuations
- ESOP Valuations
- 409(a) Valuations
- IP Valuations
- M&A Valuations
- VC Valuations
- NPV Valuations
- APV Valuations
MERGER, ACQUISITION OR BUSINESS SALE
SHAREHOLDER BUY-SELL AGREEMENT
SPOUSE ISSUES, INCLUDING DIVORCE
ESTATE PLANNING & TAX ISSUES
LIFE INSURANCE CLAIMS
LITIGATION & BANKRUPTCY
BUYOUTS, SELLOUTS, SPIN-OFFS & SPLIT-OFFS
PURCHASE PRICE ALLOCATION
INTERNAL MANAGEMENT REPORTING
Rely on our Business Valuation Expertise
Expert Investment Bankers & Business Valuation Professionals
Enterprise business valuations are necessary for both internal and external business planning, assessment and analysis. Moreover, a properly valued corporation can also set proper expectations for shareholders when it comes time to liquidate business assets or perform any M&A activity.
Multiple methods of professional valuation exist for understanding the intrinsic value of a business as a going concern. Each respective valuation method can help to represent business value from an entirely different perspective. In some cases, depending on the industry, customer landscape and overall business structure, one method is keenly favored above others as a more “representative” view of the business worth. When performing a valuation on any business, we provide a view from as many as six different methods, using various “rules of thumb” and benchmarks to ensure shareholders obtain a more holistic view of valuation. In addition, proper audits by ourselves or other outside consultants ensure various aspects of the business are properly represented.
For business buyers, a valuation is an essential component of the buying process. The quote by investment magnate Warren Buffett fits well:
Price is what you pay, value is what you get.
Overpaying is one of the greatest risks investors face when viewing other business as targets for acquisition. Valuations can help to at least mildly mitigate such risk. Here are a few of the valuation methods we utilize in our consulting and assessment work.
VALUATIONS & APPRAISALS
As a core competency and complement to our M&A business, Deal Capital Partners, LLC provides business valuation services, including intangible asset and financial security valuations for a M&A, financial reporting and tax purposes.
With a network of certified valuation experts, you’ll receive an unparalleled level of expertise when it comes to valuing your company. Our expert guidance allows us to provide a level of customer service that is unmatched. Our network includes expert compliance personnel with the expertise to complete your valuation project in a way that is tailored to your individual needs and goals.
What is your business potentially worth? Don’t go into negotiations unprepared. Our business valuations give you an accurate view of your business by looking at its value from several angles. Our business appraisals include Comparables, Net Present Value, Adjusted Present Value, and Venture Capital methodologies.
A Professional Business Valuation Process
A time-tested process for corporate business valuations
Not only does our network team of valuation professionals provide clients with the best in service and support, our firm also works with clients to not only get the best value for their businesses, but also to meet their individual business goals.
How Does a Business Valuation Work?
Our firm understands the importance in securing both book and fair market value for businesses and business-related assets. This is also why it’s important for our clients to work with a network team of professionals that give options and remain unbiased between parties to ensure that a proper and fair value is determined.
Why is a Business Valuation Needed?
There are various reasons why a business valuation may be needed. Our firm takes the time and provides clients with the support needed to determine whether a business requires a valuation. Here are a few occasions where a valuation may be helpful:
Business Valuation Report
This type of report is most apparent and common in non-litigation situations, such as determining a selling price for a particular business or assisting businesses in buyer and seller transactions.
Business Appraisal ReportThis type of report is more appropriate for IRS and litigation situations, such as in a court of law. A Business Appraisal Report includes information detailing applicable value of a particular business, but also provides a list or detailed summary of how a particular value is determined.
Business Appraisal Report (Individual)
The other type of Business Appraisal Report is the individual type. This type of appraisal report is used for the IRS and litigation support in a court of law. This type of report also includes information detailing applicable value of a particular business, but also provides a list or detailed summary of how a particular value is determined. Further, this report also includes a detailed financial analysis, which include forecasts, expenses, expenditures, ratio analysis, as well as working capital.
Our firm understands the importance of updating and keeping track of information. This is why we work with business owners and clients to ensure that all data and information is properly updated every several years. Our team ensures that all Business Valuation Reports are current and are based on the latest financial data and information on a particular company.
CUSTOM VALUATION DELIVERABLES
WE DELIVER CUSTOM COMPANY APPRAISALS TO FIT THE NEEDS OF OUR CLIENTS.
BUSINESS VALUATION REPORT
A Business Valuation Report is most often used for non-litigation scenarios, including use by internal management. Most frequently such value reports are used to determine selling price of the business or assisting in establishing a buy-sell between party shareholders. It is not used for IRS or court-order corporate valuation assistance.
BUSINESS APPRAISAL REPORT
Suited for the IRS and litigation support in a court of law, a Business Appraisal Report includes applicable value, but also will show step-by-step of how such value is derived.
STAND-ALONE BUSINESS APPRAISAL REPORT
Suited for the IRS and litigation support in a court of law, a Business Appraisal Report includes applicable value, but also will show step-by-step of how such value is derived. This report will also include a thorough financial analysis, including financial forecasts, common-size financials, ratio analysis, working capital and expenditure analysis and industry comparable inclusions. Discounts can also be applied, depending on the project, for lack of control and/or marketability.
UPDATED ANNUAL REPORT
Every few years we work with owners and management to update previously-drafted Business Valuation Reports based on the latest financial data, financial conditions and market information on the company. This report will include macro changes and report of general economic outlook.
VALUATIONS ALWAYS MELD ART WITH SCIENCE. YOUR VALUATION MAY VARY GREATLY DEPENDING ON THE EXPECTED AUDIENCE AND ITS INTENDED USE.
Our primary services include valuations for mergers and acquisitions, including financial and strategic valuations for pre and post merger integration as well as buy-side M&A due diligence. We use multiple generally accepted methodologies to establish a viable value range, giving expert understanding and insight to your corporate value. We also provide expert valuations and appraisals for the following.
- Spin-offs and split-offs
- Fairness opinions
- Stock buy-back and repurchase analysis
- Restructuring, reorganization, distressed sales and bankruptcy proceedings
- Life insurance funding needs
- Employee Stock Ownership Plans (ESOPs)
- IRC Section 409a
- Section 482 transfer pricing
- Tax-related issues
- Technology, intellectual property and intangible asset (including domain name and digital asset) valuation
ADJUSTED BOOK VALUE METHOD
The adjusted book value method is probably one of the most rudimentary means for valuing a business and its assets. It is a simple book value of the net worth of the assets of the business. It takes into account depreciation of assets over time and what remains on the business books that could be purchased in an asset sale. Because asset sales are treated differently than stock sales, this method is important to perform if for no other reason than fully understanding what your tax liability might be in the event of a business sale. An annual assessment of your business value via this method is also helpful for management to understand what the business is ultimately worth.
Hence, the assumption aspect of this type of valuation is open to large degrees of interpretation. In many cases, acquirers will want to baseline internal assumptions with their own assumptions for future growth and profitability. In other words, performing a discounted cash flow is great when you’re assumptions are undeniably accurate. If not, they’ll need to be justified within the spreadsheet and available for adjustment based on differences in interpretation.
CAPITALIZED ADJUSTED EARNINGS
It is customary to utilize business cash flows to help determine the value of any business. When it comes to an acquisition scenario, such cash flows generally need adjusting given that new management will most likely be required make changes to company management by either making hiring decisions or downgrading key employees. In the event of an acquisition of an entrepreneurial founded business, most of the adjustments end up being add backs for expenses the business owner tends to run through his/her business. Once add-backs have been taken into consideration, a weighted average of historical earnings is considered and discounted using a pre-determined discount rate. This method is helpful as a useful benchmark from previous periods, but is generally one of many determinants in the true value of a business and its operations.
DISCOUNTED CASH FLOW METHOD
Discounting expected future cash flows is considered one of the best methods for determining the value of a project, the opportunity of an investment or the time-considered payback of a acquisition opportunity. It uses the expected future cash flows and discounting them by the weighted-average-cost of capital (WACC) for the industry. Discounting future earnings is easy when you have an actual cost of capital pegged-down and have a fairly sure knowledge of the true future cash flows of a business. This process can actually be very difficult if the company isn’t large enough, doesn’t have a substantial track record and is in a new, uncharted business. Private company valuation in this way is difficult because it can be hard to fully grasp the true value of the WACC and the cash-flows represent expected future earnings on something that hasn’t yet occurred.
CASH FLOWS METHOD
This method comes at the cash flows from the other direction. Using an amortization table, this method assumes the valuation hinges off how much the cash flows can support given a particular interest rate. The interest rate generally used is derived from standard and reasonable market rates for financing of the business in question.
Another way to put this type of valuation is this: with the current and expected future cash flows, what type of debt load could I expect to be able to float?
GROSS MULTIPLIER METHOD
Differing industries have different assumptions on what drives the value for the particular business in question. Some industries value companies off varying benchmark industry multiples including gross profit, operating profit, earnings before interest and taxes, and earnings before interest, taxes, depreciation and amortization. Some industries actual value the business based on other non-monetary multiples such as number of subscribers, number of customers or some other metric. The important thing is to use the right benchmark “rule of thumb” to understand the true worth of a business in the eyes of competing and knowledgeable acquirers within the industry itself.
NPV BUSINESS VALUATION
Some of the best valuation methods involve a proper assessment of the current and potential cash flows the business regularly produces. The Net-Present Value or NPV method takes into account the weighted-average cost of the company’s capital and assumes predictable and consistent capital structure and tax rates looking into the future. Like other methods the NPV method also takes into account as much publicly-available information as possible to determine comps, company beta and current and expected growth rates. In performing such a valuation, we also take into account sensitivities for changes in interest rates, growth rates and other external factors. Doing so helps to provide a proper expected “range” for enterprise value of the business.
APV BUSINESS VALUATION
As another key standard in our valuation processes, we utilize the adjusted present value (APV) method to assess corporate value. Like the NPV method, the APV method utilizes adjusted cash flows. Unlike NPV method, the APV method is often considered a bit more representative of true value and is often more simple in its application. In cases of high debt, changing tax rates, consistent operating losses and changing capital structure the APV method can actually be more representative of core value. This methodology takes into account effective tax shields for debt and ongoing concerns and changes in capital structure over time.
COMPS & “RULES OF THUMB”
Using previous industry-specific transactions as a benchmark threshold in assessing business value can be extremely beneficial. For instance, previously completed deals in the same sector and on companies of the same size can help provide a “gut check” when values become skewed. For instance, some markets have traditionally valued businesses on the basis of clients while others baseline from a multiple of sales or EBITDA.
Market multiples and general “rules of thumb” help us to understand a particular business worth when taking it to market. This method is used in conjunction with calculating cash flows and discounting via the cost of capital and perhaps is the most widely recognized method for seeing value how the industry would see it.
VENTURE CAPITAL VALUATIONS
The VC method is most often used in the case of start-ups seeking venture capital. However, it can be an effective means of seeing value before it has been officially created. Discount rates in venture capital valuations are magnitudes larger than those provided to existing businesses. Most venture capitalists justify this given such ventures will often involve much larger amounts of risk. Certainly VC valuations involve more art than science, but in any “investment” business they can provide a key insight for investors and entrepreneurs, giving them a middle ground of agreement which includes assumptions for the trade-offs of risk and return.
TYPES OF BUSINESS VALUATIONS
Income Approach – We typically use a Discounted Cash Flow model to perform a single period capitalization method or a multiple period capitalization method. Cash flow from a specific business unit is used with accurate forecast assumptions of its sustainable life. Different methods must be considered when valuing intangibles as whether the patent is valued as an income stream or simply used for licensing purposes. Risks are factored-in and properly adjusted. In addition, an applicable discount rate is applied to each piece of IP. The income approach typically uses a discount of the assumed cash flows.
Adjusted Book Value Method – By adjusting the book value to match we can typically obtain a better grasp on value. This is frequently performed by using Excess Earnings.
Market Methods – Market comparables can be a great way to peg your business and its assets against recent industry-specific market trends. We use sources like Pratt Stats, Institute of Business Appraiser’s, MidMarketComps and Bizcomps databases to help determine specific and reliable comps and multiples for your company and its assets. In some cases, linear regression and other data modeling tools are used to help provide an enhanced view of the business.
Public Company Guideline Method – When valuing larger companies, we use larger datasets and often have access to better metrics. Typically these methods utilize some type of cash-flow discounting methodology with public data.
Because no two companies are the same, no two tailored approaches to obtain value entirely match. When we’re engaged to perform an in-depth corporate valuation, we like to assess every aspect of your business. Having a good 30,000 foot view of your company’s operations and financials, helps us ultimately make a better assessment of the business value.
Valuation of Intangibles
While similar to other valuation methods, there are some specific nuances to measuring the inherent value in intangible assets. Hence, we take a very disciplined and honed approach to valuing such assets. Today’s knowledge-based economy relies heaving on research and development for greatly enhancing their strategic advantage in the marketplace. Valuation methodologies differ depending on the motive and reason for their performance. Here are a few methods we use when valuing intangible assets.
- Income Approach
- Venture Capital Method
- Relief From Royalty
- Real Options Method (ROM)
- Market Comparables
- Historical Cost
- Replication Cost
Other generally accepted methods of valuation are used, depending on the type of business and asset being valued, the timing and the industry. For more information on our processes and methodologies, please contact us.
WHY PERFORM A BUSINESS VALUATION?
There are countless reasons a company may be in need of a professional business valuation service. Whether a business needs to understand value for internal purposes or external requirements–like to qualify for a loan or financing–there are solutions that fit the differing needs for a valuation. We’ve outlined a few of these below.
Valuations for Financing – Lenders are becoming increasingly stringent on their requirements to provide debt financing to privately-held businesses. In many cases, a third-part business valuation can act as a risk mitigating “gut check” for a third party lender.
Merger, Acquisition or Business Sale – Determining the fair market value of your company and/or its assets is an important first step for both buyers and sellers incident to a merger or acquisition. Addressing risk and value drivers for the business can help prepare the seller in better answering buyer questions about excess value, including areas that may justify paying for “goodwill.” In addition, buyers may require a third party valuation to justify paying a premium or to ensure they don’t pay more than the company is actually worth. Negotiators on both the buy and sell-sides of a transaction need to have as much informative information as they possibly can. M&A and corporate divestiture are one of the most common and most important uses for business valuations.
Litigation – Economic damages in business litigation will require a determination of the equitable value to be pegged on the business incident to the litigation.
Exit Planning–A formal business valuation with annual updates should be an integral piece in your exit plan. Waiting until a few months before you retire to find the value of your business may throw a kink in any retirement plan and could be eye-opening as to whether your business is at a level or size that is amicable to your retirement. Entrepreneurs looking to sell their company should have an annual assessment as to the fair market value of their business. Understanding this can also help in timing decisions on the exit.
Buy-Sell Agreements – Multiple shareholders requires a valuation and is required to determine fair market value. Value is used to determine equity distribution in the event triggers require a buy or sell of company stock. A valuation of the business also enables management to know how much life insurance may be needed in the event a death triggers the need for life insurance to purchase company stock.
Insurance – General corporate insurance and life insurance updates are increasingly requiring independent valuations on the company.
Gift and Estate Tax - As of the date of death, estate tax returns are required to include independent third party valuations of all portions of the deceased estate, including any business or business assets. Estate transfer or gifting requires an independent valuation of the company.
IP Valuation – Accurate valuation of your company’s intellectual property is essential in today’s rapidly changing and fluid business environment.
Corporate Conversion – Companies that convert from one type of corporation to another require a valuation at the time of change. If the business is sold prior to the 10 year holding period, build-in gain tax is due based on the value (performed by an independent valuation firm) pegged on the business at the time of conversion. This is used in calculating the built-in gain tax for the IRS when the business is eventually sold.
Employee Stock Ownership Plans – Qualified, independent valuation services are required for both financial and tax reporting for all Employee Stock Ownership Plans.
Foreclosures & Liquidations – Determining the fair market value of assets involved in a company that is in foreclosure or requires asset liquidation is necessary to appease creditors and lenders.
Divorce or Estate Settlements - Volunteer or court appointed business valuations are often included in divorce and estate settlements to ensure equitable distribution is made between both spouses.
Generally Accepted Accounting Principles (GAAP) has undergone significant transformations to its fair value reporting standards. Acquisitions are accounted for under purchase accounting rules for which acquired intangible assets are identified and valued separately. GAAP outlines five general categories of intangible assets. Intangible assets with an indefinite life and any remaining goodwill are not amortized, but rather are subject to periodic impairment testing. Goodwill impairment testing requires the valuation of a company’s reporting units.