The sixth edition of Understanding Business Valuation is now available for purchase and download. This essential guide to everything business valuation covers a plethora of topics from the fundamental to the highly technical. In this preview, we will explore one of these fundamental yet essential topics: Why businesses are valued?
WHY ARE BUSINESSES VALUED?
Business valuation assignments will vary depending on their purpose. Therefore, it is imperative that the valuation analyst understand the purpose of the assignment before the process can begin. More often than not, the purpose will influence
the standard of value, the methodologies used, the level of research performed, and possibly the date of the valuation. This does not mean that the valuation analyst takes shortcuts or aims for a high or low value. Examples of how these items
can affect the assignment can be demonstrated by understanding that specific sets of rules, such as state statutes, IRS regulations, or Department of Labor (DOL) regulations, guide certain types of business valuations, or, if a minority interest is being valued, certain adjustments may not be made to the company’s financial statements because the minority interest cannot legally effectuate such adjustments. Valuations performed for divorce purposes may have case law restrictions that must be considered (for example, separating personal or professional goodwill from the goodwill of the enterprise). Business valuations of closely held companies will fall into one of three categories: (1) as part of an arm’s-length negotiated sale or acquisition of a company; (2) as part of a statutory or legal action, such as a dissenting shareholder suit, fairness opinion, or marital dissolution; and (3) as part of a hypothetical sale, when no actual transaction takes place (such as fair market value for income, gift, and estate tax purposes and fair value reporting for financial reporting purposes). If you have never performed a business valuation, this stuff probably has you wondering what I am talking about. Be patient, this will start to make more sense as we proceed.
MERGERS, ACQUISITIONS, REORGANIZATIONS, SPIN-OFFS, LIQUIDATIONS, AND BANKRUPTCY
Business valuations are frequently performed when one company acquires another company, when a company is targeted for an acquisition, when a company’s capital structure is reorganized, when a company splits up, or when a company enters bankruptcy in liquidation or reorganization. The transactions may include entire or partial acquisitions, divestitures, liquidation, or recapitalization. Mergers will generally require both companies to be valued, whereas an acquisition may require only a single valuation. The terms of the transaction generally include cash, notes, stock, or a combination of these forms of payment. Sometimes, the valuation analyst must calculate the cash equivalent value of the payment terms when the terms include payments in stock or notes that may not reflect market rates. This will be further explained in Chapter 10. In bankruptcy, in addition to the involvement of the different classes of creditors and the owners, the approval of the bankruptcy court is usually required. Closely held companies with two definable divisions or more may be split up.
This preview is just the tip of the iceberg with topics covering developing forecasts for business valuations, the market approach, valuing intangible assets, and an online supplement featuring a comprehensive repository of supplemental materials. This text will be your go-to reference guide for all things business valuation! You can order your copy of this publication in either print or digital format here.