This course will take you through the process of a typical business valuation engagement, from scoping the work to ultimately arriving at a conclusion of value. Through a case study, we will address fundamental issues including valuation approaches (asset, income and market), normalizing analysis and valuation discounts.

1. Sean Saari, CPA/ABV, CVA, MBA
Dan Golish, CPA/ABV, CVA, CFF
January 17, 2019
Business Valuation Basics

2. 2
Learning Objectives
After completing the session,
participants will be able to…
• Understand the basic concepts that need
to be addressed in scoping a valuation
engagement
• Recognize the methods typically utilized
to value a business or ownership interest
and understand their basic application
• Identify normalizing adjustments and
assess their impact on value
• Reconcile values derived from multiple
valuation approaches
“In the long run, men hit only what they aim at.” – Henry David Thoreau

3. 3
Agenda
• Valuation Basics
• Case Study / Valuation Analysis
Valuation Approaches
‒ Asset Approach
‒ Income Approach
‒ Market Approach
‒ Rules of Thumb
Control and Marketability Considerations

4. 4
Quote of the Day
“There is no such thing as an absolute
value in this world. You can only estimate
what a thing is worth to you.”
Charles Dudley Warner 1829-1900, American Writer

5. 5
Valuation Basics
• Standard of Value
 Fair Market Value
 Fair Value
 Strategic / Investment Value
• Sales Price = Value?
• Type of Value
Equity Value = Value of Equity Ownership
Enterprise Value = Equity Value + Debt – Cash
Equity Value = Enterprise Value – Debt + Cash

6. 6
Valuation Basics
Cash
Enterprise
Value
Debt
Value
Equity
Value
Market
Value of
Invested
Capital
Reconciling Equity Value to Enterprise Value

7. 7
Valuation Basics
Furnishings
House
Value
Debt
Value
Equity
Value
Total Value
of Home
and
Furnishings
How the Value of Your Home is an
Enterprise Value

8. 8
Valuation Basics
• Valuation Date
 Valuation standards generally
indicate that only information that
was “known or knowable” as of the
valuation date can be considered
 Values can change materially based
on the valuation date used
• Purpose of Engagement
 Important to identify at outset, as the
purpose of an engagement often
drives the standard of value,
valuation date, etc.

9. 9
Valuation Approaches
• Asset Approach
• Income Approach
• Market Approach
• Rules of Thumb

10. 10
Asset Approach
Valuation Methodologies
• Adjusted net asset method
Basic Steps
• Adjust assets to fair market value
• Adjust liabilities to fair market value
Pros
• Provides “floor value” of the company
• Relatively simple analysis
Cons
• Often not indicative of value for healthy businesses
• May be necessary to obtain fixed asset and real
estate appraisals

11. 11
Income Approach
Valuation Methodologies
• Discounted cash flow method
• Capitalization of cash flow method
• Capitalization of earnings / Discounted future earnings
Basic Steps
• Determine benefit stream and make normalizing
adjustments as appropriate
• Determine cash flow adjustments
• Determine discount/capitalization rate
• Discount / capitalize cash flows
Pros
• Provides most “company-specific” value
• Can appropriately incorporate projected growth of the business
Cons
• Most involved of the valuation analyses
• May be disagreements over likelihood of meeting projections

12. 12
Normalizing Adjustments
• FMV vs. strategic normalizing adjustments
• Compensation
 Family members paid other than FMV
 Officers paid other than FMV
• Personal expenses
• Related party transactions other than FMV
• Non-operating income or expenses
• Non-recurring income or expenses
• Expense trends

13. 13
Market Approach
Valuation Methodologies
• Guideline transaction method
• Guideline public company method
Basic Steps
• Determine benefit stream and make normalizing adjustments as appropriate
• Find comparable transactions/guideline public companies
• Calculate valuation multiples and apply to subject company
• Make adjustments as necessary to arrive at equity value (if necessary)

14. 14
Market Approach
Pros
• Incorporates market conditions and prices
paid in recent relative transactions
• Easy to explain and apply
Cons
• Can be misleading if debt not appropriately
considered
 EBITDA multiples typically result in an
enterprise value, not an equity value
• In certain industries, there may be a lack of
comparable transactions or public companies

15. 15
Rule of Thumb
Valuation Methodologies
• Rule of thumb
Basic Steps
• Identify rule of thumb valuation metrics
• Apply rule of thumb to the subject company
Pros
• Simple application
Cons
• Can result in misleading values
• Often lacks support
• Not permitted to be used as a sole valuation
method by most valuation standards

16. 16
Control Considerations
Control Discounts / Premiums
• Two options
 Model in cash flows
 Discreet discount / premium
How Are Adjustments Supported?
• Mergerstat Control Premium Study
• Closed-end mutual fund data (for
investment holding companies)

17. 17
Marketability Considerations
Marketability Discounts
• Controlling ownership interest
• Non-controlling ownership interest
How are Adjustments Supported?
• Restricted stock studies
• Pre-IPO studies
• FMV opinions study
• Option-based models
• Qualitative analysis (e.g., Mandelbaum factors)

18. 18
Summing It Up
After completing the session,
participants will be able to…
• Understand the basic concepts that need
to be addressed in scoping a valuation
engagement
• Recognize the methods typically utilized to
value a business or ownership interest and
understand their basic application
• Identify normalizing adjustments and
assess their impact on value
• Reconcile values derived from multiple
valuation approaches

19. 19
Closing Quote
“Things only have the value that we
give them.”
Moliere 1622-1673, French Actor/Playwright

20. 20
Questions?
Sean Saari, CPA/ABV, CVA, MBA
Partner
Phone – (440) 449-6800 x7221
Email – ssaari@skodaminotti.com
Dan Golish, CPA/ABV, CVA, CFF
Partner
Phone – (440) 449-6800 x7307
Email – dgolish@skodaminotti.com