A true test of accuracy and valuation is the price at which a company would willingly change hands in the marketplace. The valuation of a privately owned company is both science and art. Since no two companies are exactly alike – even within the same industry, trade, or service – there is no one formula or method that is all-inclusive. VR Mergers & Acquisitions uses a comprehensive, multi-method approach that considers relevant factors that are unique to a particular company, including: company history and longevity, future economic outlook, tangible asset value and industry ratios. Also considered are factors such as historical net cash flows, profitability, risk, competition, technological changes, ownership transition, owner non-compete and consulting agreements, and working capital requirements.
Value Goes By Many Names
“Value” is a worthless term by itself because it can mean so many different things. A value determined for one purpose may be entirely different than the value found for another. Relying on the wrong type of value can be an expensive mistake. Understanding the differences between standards of value can help you interpret their relative worth in your situation:
BOOK VALUE is not a standard of value at all. It is an accounting term for the total net assets minus total liabilities on the balance sheet. Intangible assets are usually excluded from book value.
FAIR MARKET VALUE is defined as “the price at which the business would change hands between a willing buyer and seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of relevant facts.” Fair market value is used for federal and state tax matters, including gift, estate, income and inheritance taxes.
LIQUIDATION VALUE is derived from the piecemeal sale of assets. The sale can be orderly or forced, which can affect the value. This value is typically at the low end of the value spectrum.
INTRINSIC VALUE (also known as “fundamental value”) is an analytical judgment of value based on the perceived characteristics inherent in the business, without regard to the identity or characteristics of a particular acquirer. It represents the “true” or “real” value of an asset.
INVESTMENT VALUE is the value to a particular acquirer considering his or her specific personal circumstances and knowledge of the transaction and potential synergies it will create. Investment value can be higher or lower than fair market value.
INVESTED CAPITAL VALUE / ENTERPRISE VALUE is the fair market value of 100% of the equity plus the market value of long-term debt.
EQUITY VALUE is the market value of all the assets of a business, including intangible assets, less liabilities.
MINORITY VALUE is the value reflecting an ownership position of less than 50% or the inability to make final decisions concerning the business. A 50% owner may have negative control since he or she is in a position to stop actions by the other owners.
NON-CONTROLLING VALUE is the value of a non-voting interest, such as limited partnership interests or non-voting stock.
CONTROL VALUE is the additional value inherent in a majority or otherwise controlling interest reflecting the power of control over the business.
A Valuation – Step by Step
The first step is to define what value you are seeking. If you don’t clearly define what value you are seeking, you may end up with a value that does not fit the purpose.
The following information will be gathered: historical and projected financial, operational and economic information about the business, including the company’s financial statements, tax returns, history of ownership changes and resumes of current management. Other required documentation can include articles of incorporation, vendor lists, officer’s compensation, notes payable, equipment appraisals, etc.
Which valuation method or methods will be determined to provide the most accurate value for the company as a whole? At this point, the value established for similar businesses, as well as the economic climate for the industry and region the company operates in, will be taken into consideration.
Adjust the Value
Consideration for the attributes that affect the specific shares in question is considered. These include their market-ability, their attached voting rights, whether they represent a controlling interest in the company, and any special circumstances relating to that company. Then, to reflect these factors, any discounts or premiums are applied if necessary.
Factors Affecting Value
Identifying and qualifying potential parties interested in acquiring your company is an essential element in a successful transaction. VR maintains an international database of interested parties looking for certain criteria for their acquisition strategy. There are three broad approaches to valuation: Income, Asset and Market. Within each approach there may be many different methods that must be considered. After careful consideration, the relevant factors and a reconciliation of the related approaches is performed to determine which approaches are most relevant to the purpose of the valuation assignment. In its simplest form, a business is an income-producing entity.
The Income approach places a value on the expected future income while compensating for risk. Risk takes many forms in mid-size business: size of company, depth of management, reliance on key personnel, company specific concerns, industry trends and, to a great extent, available return on alternative investments (equities, bonds, currencies etc.)
The Asset approach basically places a fair market value on the assets of the business. It is usually used in liquidation or with companies that are asset intensive but have poor financial results.
The Market approach uses information based on actual transactions of similar and relevant companies. When using VR Mergers & Acquisitions, you can rest assured that the valuation process will be handled professionally and confidentially.