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Business Valuation Basics
The document provides an overview of business valuation, including key concepts, valuation approaches, and the importance of normalizing adjustments. Participants will learn to scope a valuation engagement, recognize different valuation methods, and reconcile values from multiple approaches. Key valuation methods discussed include the asset approach, income approach, and market approach, along with considerations for control and marketability.
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Business Valuation Basics
- 1. Sean Saari, CPA/ABV,CVA, MBA Dan Golish, CPA/ABV, CVA, CFF January 17, 2019 Business Valuation Basics
- 2. 2 Learning Objectives After completingthe 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 theDay “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 • Standardof 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 ReconcilingEquity Value to Enterprise Value
- 7. 7 Valuation Basics Furnishings House Value Debt Value Equity Value Total Value ofHome and Furnishings How the Value of Your Home is an Enterprise Value
- 8. 8 Valuation Basics • ValuationDate 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 • AssetApproach • 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 • FMVvs. 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 • Incorporatesmarket 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 ValuationMethodologies • 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 Aftercompleting 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 onlyhave 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