For the first time, the International Valuation Standards (IVS) include guidance for valuers whose engagements require that the entire enterprise value be allocated across various classes of economic or control rights. The overview of possible methods is provided in sections 130.5-8 of the IVS 200 Asset Standards, which become effective 15 January 2020:

130.5. For complex capital structures, being those that include a form of equity other than just common stock, valuers may use any reasonable method to determine the value of equity or a particular class of equity. In such cases, typically the enterprise value of the business is determined and then that value is allocated between the various classes of debt and equity. Three methods that valuers could utilise in such instances are discussed in this section, including:

(a)  current value method (CVM);

(b) option pricing method (OPM); and

(c) probability-weighted expected return method (PWERM).

130.6. While the CVM is not forward looking, both the OPM and PWERM estimate values assuming various future outcomes. The PWERM relies on discrete assumptions for future events and the OPM estimates the future distribution of outcomes using a lognormal distribution around the current value.

130.7. A valuer should consider any potential differences between a “pre-money” and “post-money” valuation, particularly for early stage companies with complex capital structures. For example, an infusion of cash (i.e., “post-money valuation”) for such companies may impact the overall risk profile of the enterprise as well as the relative value allocation between share classes.

130.8. A valuer should consider recent transactions in the subject equity or a particular class of equity, and ensure the assumptions used in the subject valuation are updated as necessary to reflect changes in the investment structure and changes in market conditions.

The new Section 130 goes on to offer further description of the CVM, OPM, and PWERM and their potential uses (and risks), making it the first part of the IVS that recommends specific valuation methods for specific facts and circumstances.

Valuing assets with complex capital structures has largely been the domain of the international firms, but these additions confirm—and in fact require—that any ‘valuer must determine and consider the different rights and preferences associated with each class of debt and equity.’