A&C performs valuation of all levels of business interests, intellectual property, personal property, and complex securities. An independent appraiser considers the three approaches to determine the value of the underlying interest: the income approach, the market approach, and the asset approach.
In a perfect world, income approach makes perfect sense. The present value of the future free cash flow represents the value of the interest being transacted. In reality, appraisers must decide how reliable the future free cash flow is. Endorsement by management alone does not make projections unquestionable. Uncertainties and risks associated with the projection have to be reasonably estimated and quantified.
The financial history is critical to the financial projection, but that’s not all of it. A trusted and experienced appraiser considers various drivers including but not limited to national and local economy, industry trends, advantages and disadvantages compared to peers. Normalization of earnings such as non-recurring or non-operating income and expenses requires careful assessments by appropriate experts.
Developing cash flow projections can more challenging for businesses that do not have sufficient history of earnings or cash flow, such as early stage or startup companies. Optionality and probabilities come into play if most measures are not mature enough to indicate the value of the business.
In the market approach, EBITDA multiples are probably the most often used measure to compare how much similar types of businesses are paid for. This measure is not one size for all and may not be the best measures for all types of businesses. Database-generated comparable companies and transactions are quick and easy but without a human eye the comparability is often overlooked. Sufficient market studies by qualified experts can greatly enhance the reliability of an analysis.
The asset approach does not always capture the intangible value of the business. It is more often considered and utilized in the valuation for asset holding entities and developing technology.
An expert must consider all three approaches and appropriate methods under each approach in the determination of valuation conclusion. A&C possesses the critical experience required in valuations for businesses and intangible assets, calculations of economic damages, and other financial advisory services across numerous industries for shareholder transactions, financial reporting, tax compliance, dispute consulting, and litigation support.
Need assistance with valuations? Contact our specialists at (469) 467-4660.