Business Valuation

12 Key excerpts on "Business Valuation"

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  eBook - ePub

  Financial Economics

  Empowering Wealth, a Journey Into Financial Economics

  • Fouad Sabry(Author)
  • 2023(Publication Date)
  • One Billion Knowledgeable

    (Publisher)

  Chapter 12: Business Valuation

  A process and set of procedures used to estimate the economic value of an owner's interest in a business. Financial market participants use a variety of valuation techniques to determine the price they are willing to pay or receive for a business sale. In addition to estimating the selling price of a business, business appraisers frequently use the same valuation tools to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and for a variety of other business and legal purposes, such as in shareholders deadlock, divorce litigation, and estate contests.

  These professionals may be referred to as business valuators; their credentials include the Chartered Business Valuator (CBV) from the CBV Institute, the ASA and CEIV from the American Society of Appraisers, and the CVA from the National Association of Certified Valuators and Analysts. In certain instances, the court will appoint a forensic accountant as a co-expert in Business Valuation. Here, attorneys must always be prepared to defend their expert's report against cross-examination and criticism.

  Business Valuation differs from stock valuation, which involves calculating the theoretical value of listed companies and their stocks for the purposes of share trading and investment management. This distinction extends to how the results are utilized: A stock investor seeks to profit from price fluctuations, whereas a business owner focuses on the enterprise as a whole.

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  Engineering Economics

  Engineering Economics, Maximizing Value in a Complex World

  • Fouad Sabry(Author)
  • 2023(Publication Date)
  • One Billion Knowledgeable

    (Publisher)

  Chapter 13: Business Valuation

  A process and set of procedures used to estimate the economic value of an owner's interest in a business. Financial market participants use a variety of valuation techniques to determine the price they are willing to pay or receive for a business sale. In addition to estimating the selling price of a business, business appraisers frequently use the same valuation tools to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners' ownership interest for buy-sell agreements, and for a variety of other business and legal purposes, such as in shareholders deadlock, divorce litigation, and estate contests.

  These professionals may be referred to as business valuators; their credentials include the Chartered Business Valuator (CBV) from the CBV Institute, the ASA and CEIV from the American Society of Appraisers, and the CVA from the National Association of Certified Valuators and Analysts. In certain instances, the court will appoint a forensic accountant as a co-expert in Business Valuation. Here, attorneys must always be prepared to defend their expert's report against cross-examination and criticism.

  Business Valuation differs from stock valuation, which involves calculating the theoretical value of listed companies and their stocks for the purposes of share trading and investment management. This distinction extends to how the results are utilized: A stock investor seeks to profit from price fluctuations, whereas a business owner focuses on the enterprise as a whole.

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  Know All About Mergers and Acquisitions in Business

  • (Author)
  • 2014(Publication Date)
  • Orange Apple

    (Publisher)

  ____________________ WORLD TECHNOLOGIES ____________________ Chapter- 2 Business Valuation The five most common ways to valuate a business are • asset valuation, • historical earnings valuation, • future maintainable earnings valuation, • relative valuation (comparable company & comparable transactions), • discounted cash flow (DCF) valuation Professionals who valuate businesses generally do not use just one of these methods but a combination of some of them, as well as possibly others that are not mentioned above, in order to obtain a more accurate value. The information in the balance sheet or income statement is obtained by one of three accounting measures: a Notice to Reader, a Review Engagement or an Audit. Accurate Business Valuation is one of the most important aspects of M&A as valuations like these will have a major impact on the price that a business will be sold for. Most often this information is expressed in a Letter of Opinion of Value (LOV) when the business is being valuated for interest's sake. There are other, more detailed ways of expressing the value of a business. While these reports generally get more detailed and expensive as the size of a company increases, this is not always the case as there are many complicated industries which require more attention to detail, regardless of size. Valuation In finance, valuation is the process of estimating the potential market value of a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., Bonds issued by a company). Valuations are required in many contexts including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.

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  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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  Fundamentals of Corporate Finance

  • Robert Parrino, David S. Kidwell, Thomas Bates, Stuart L. Gillan(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  This knowledge is also crucial when making financing 18.3 Valuing a Business 18-12 CHAPTER 18 Business Formation, Growth, and Valuation decisions. In Chapters 16 and 17, we also saw how a firm’s value is affected by capital structure and payout policies. Decision makers must understand Business Valuation concepts in order to be able to identify the optimal capital structure and payout policy. In this section, we discuss fundamental Business Valuation concepts. You will see that financial analysts apply many of the concepts that have already been discussed in this book when they value a business. The reason is that a business is really just a bundle of related projects, and the value of the business equals the total value of this bundle. In other words, the value of a business is determined by the magnitude of the cash flows that it is expected to produce, the timing of those cash flows, and the likelihood that the cash flows will be realized. Fundamental Business Valuation Principles Before we discuss the specific ways in which businesses are valued, you should be aware of two important valuation principles. The First Valuation Principle: The first valuation principle is that the value of a busi- ness changes over time. Changes in general economic and industry conditions, and decisions made by managers, all affect the value of the cash flows that a business is expected to gener- ate in the future. For example, changes in interest rates affect the firm’s cost of capital and, therefore, the present value of future cash flows. A change in interest rates can also affect the demand for a firm’s products if customers typically finance the purchases of those products with loans, as they often do for big-ticket items such as automobiles and houses. Similarly, competitors enter and exit industries, introduce new products, change prices, and so forth. These actions also affect the value of a business by altering its cash flows or risk.

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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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  Business Economics and Finance with MATLAB, GIS, and Simulation Models

  • Patrick L. Anderson(Author)
  • 2004(Publication Date)
  • Chapman and Hall/CRC

    (Publisher)

  11 Business Valuation and Damages Estimation

  Economics, Finance, and Valuation

  The previous chapter introduced the economics of the firm. Using a firm’s earnings and a discount rate, we introduced a model for the value of a financial asset such as stock in a company.

  In this chapter we examine a subset of finance—the practice of valuing a particular asset, namely a business. There are numerous books on valuation, most of which are written from the point of view of an accountant or a professional appraiser.205 Some of these are quite detailed in the topics they cover. However, their focus is often on standard valuation equations and discount factors rather than on the fundamental economics of the firm. Conversely, for a reader with a strong economics background, the emphasis here on understanding the underlying industry and business prospects of the firm will seem obvious.

  Here, we approach valuation as an application of economics, and therefore treat carefully and systematically the actual generation of value rather than the evaluation of accounting statements. With such a grounding, we then present a quantitative methods to estimate the value of a firm.

  Use of This Chapter by Readers of Different Backgrounds

  For those using this book as an introduction to valuation, the material presented in this and the previous chapter will provide a firm grounding in the methodology of valuing a financial asset. For a practitioner, however, other references will be needed to properly complete a business appraisal or assess damages. For practitioners and other readers familiar with the finance and accounting references in valuation, this book will introduce certain rigorous quantitative methods to forecast earnings and estimate business value.

  What Is To Be Valued?

  In business economics, the asset to be valued is often a business enterprise, a line of business within a larger firm, or a security such as a stock, bond, or option. However, valuation is hardly restricted to economists. Indeed, it is so common that virtually all adults practice it and most become quite good at it.

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  Navigating the Business Loan

  Guidelines for Financiers, Small-Business Owners, and Entrepreneurs

  • Morton Glantz(Author)
  • 2014(Publication Date)
  • Academic Press

    (Publisher)

  Valuation and McKinsey’s CD-ROM package stand out, having been hailed by financial professionals worldwide as the single best valuation guide of its kind. In this chapter, we will explore the basis of Business Valuation and introduce a detailed small-business appraisal template.

  With all the talk about economic recovery and government efforts to unfreeze credit, economists warn that we are only about halfway through this credit crisis. This is not good for small businesses that struggle to acquire funding. Available credit to small businesses and consumers has tapered down by trillions of dollars since the recession. Small-business loans are hard to find, and credit card facilities, a major funding source to small businesses, have been cut considerably since 2013. This means you must stay ahead of the game. When the economy finally peaks and lenders start looking for friends, you will stay at the head of the line by understanding your business inside and out. If you have a good creditworthy business deserving of low loan rates, prove it!

  While valuation appraisals help determine creditworthiness, they serve other purposes as well: lending, equity financing, acquisitions, divestitures, and restructurings. Valuation appraisals establish a reasonable asking or offering price. Business units are valued as stand-alone entities and are then valued as if combined using anticipated synergies from acquisitions and restructurings. Valuation appraisals help entrepreneurs and dealmakers determine financing and fair market prices. Partnership/shareholder agreements and buy–sell agreements should be based on appraisals.

  Valuations are finalized when shareholders buy into or exit businesses. Employee stock ownership plans (ESOPs) transfer a portion or all of the ownership of a business to employees. When dealing with an ESOP, independent business appraisers value stock annually. Litigation issues involving economic and financial reparations often require valuation appraisals to decide economic damages. In these cases, businesses are usually valued twice, both before and after actions that sparked damages. The spread between before and after Business Valuation typically points to economic damages. Liquidation versus restructuring decisions regarding divesting a business unit are quantified by determining differences between market and liquidation values. Why is a low ratio significant? It means a firm is likely to achieve more value selling off unproductive cash trap assets rather than trying to remain afloat in quicksand.

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  The Banker's Handbook on Credit Risk

  Implementing Basel II

  • Morton Glantz, Johnathan Mun(Authors)
  • 2008(Publication Date)
  • Academic Press

    (Publisher)

  CHAPTER | 11 Banker’s Guide: Valuation Appraisal of Business Clients 229 Valuation appraisals help bankers understand whether borrowers are creditworthy. Appraisals are used for many reasons—for determining acquisition prices of consoli-dated businesses made up of numerous, separate units; carrying out bankruptcy liqui-dations/restructurings; establishing values of stand-alone businesses; conducting cost studies; handling estate planning; comprehending borrowers’ strategic plans; comp-leting insurance loss settlement; performing finance mergers and acquisitions; and helping to settle taxation issues. Bank Loans and Other Financing When considering a commercial loan (involving mainly new clients), loan officers may ask for valuation appraisals. A methodical, competent valuation can make a dif-ference between obtaining a loan or being rejected. Financing Acquisitions, Divestitures, and Restructurings Bankers rely on valuation appraisals to establish a reasonable asking or offering price. Business units are valued as stand-alone entities and are then valued as if combined, using anticipated synergies from acquisitions, restructurings. Valuation appraisals help bankers determine financing and fair market price. 230 CHAPTER | 11 Banker’s Guide: Valuation Appraisal of Business Clients Partnership/Shareholder Agreements (Buy/Sell) Buy-sell agreements should be founded on business appraisals. Valuations are final-ized when shareholders buy into or exit businesses. Financing Employee Stock Ownership Plans (ESOPs) Employee Stock Ownership Plans (ESOPs) transfer a portion or all of the ownership of a business to employees. When dealing with an ESOP, stock must be valued by independent business appraisers annually. Litigation Issues involving Economic/Financial Reparations Such cases often require valuation appraisals to decide economic damages. Businesses are usually valued twice: both before and after actions that initiated damages.

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  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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  Harold Cecil Edey

  A Collection of Unpublished Material from a 20th Century Accounting Reformer

  • Martin E. Persson(Author)
  • 2019(Publication Date)
  • Emerald Publishing Limited

    (Publisher)

  41 CHAPTER 5 VALUATION * INTRODUCTION In this chapter, we shall consider the value to an owner (or potential owner) of the business as a whole: in the case of a company this will be reflected in the value of the company’s shares. This poses itself in practice as the problem of determin-ing the minimum price a potential seller should accept, or the maximum price a potential buyer should pay, in each case for a given holding of shares. The general lines of our approach to this problem have already been laid down in relation to the valuation of single assets; the extension of these ideas to the whole business raises, however, certain additional considerations. A SIMPLE CASE The complexity of the problem makes it desirable to study the factors that enter into the determination of the value of the business by a series of approxima-tions, taking first a very simple case and then moving to more complicated ones. We shall begin by considering the valuation of a sole trader’s business; that is, a non-corporate business with a single owner. The entity that is to be sold can then be defined as a given set of assets and liabilities, linked to a given collec-tion of employees, with various market connections with customers, suppliers, bankers, etc. We shall assume that it is possible to estimate the maximum amount of draw-ings that can be made annually by the owner, and maintained from year to year, on the assumption that this amount remains constant from year to year and is in fact withdrawn each year.

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  A Basic Guide for Valuing a Company

  • Wilbur M. Yegge(Author)
  • 2002(Publication Date)
  • Wiley

    (Publisher)

  From the consulting practice point of view, clients of lawyers and judges are my own most frequent clients for Business Valuation. Summary One could easily conclude from these overview descriptions that anyone who had combined unique professional educations and experiences, and specialized in Business Valuation practice, might also be the very best valu- ation expert . . . in fact, uniquely qualified. However, such a combination is not classically found. Therefore, valuation expertise is more likely to be discovered in the specialized profession where job loyalties serve no other purpose than that of estimating business values. ‘‘Fame and Success. Don’t confuse fame with success. Madonna is one and Helen Keller is the other.’’ Erma Bombeck ‘‘Character. Be more concerned with your character than with your reputation. Your character is what you really are while your reputation is merely what others think you are.’’ John Wooden 36 7 The Data Collection Process In many respects, the data necessary to the comprehensive business valu- ation task are quite similar to the information required by business plans. As such, many business owners may have already stockpiled much that will be needed. Purpose The purpose for conducting valuations should determine informational needs. In my consulting practice, buy/sell reasons account for less than 25% of valuation work. About 2% of these are conducted specifically for court litigation purposes. The lion’s share of work is for organizational restructure (converting into corporate or LLC formats), partnership an- nual valuation, to add new owners or change ownership interests, for es- tate purposes, and ‘‘because I’d just like to know’’ reasons. Each purpose adds or deletes bits of information that may be important to the overall project. The conditions under which ‘‘reported values’’ might be con- tested via differing interests lend possible other structures to information that must be collected, analyzed, and included.

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