Frequently Asked Questions
- What is a valuation?
- What kinds of businesses do you value?
- Why do closely held companies and their securities need to be valued?
- What is the valuation process?
- What approaches do you take when performing a valuation?
- How much does a valuation report cost?
- How do I get my business valued?
What is a valuation
A valuation is an estimate of what your company or it shares would sell for to a financially oriented buyer or to a strategic buyer. A valuation of your company will take into account current market and economic conditions for an enterprise in your line of business. It would also take into account the risk characteristics of your type of business and how risky your business is relative to others in your industry. In addition, the estimate of value would take into account your company’s expected growth rate and its normal or expected profitability and cash flows to the investor.
A valuation of the shares in your company would take into account all of the above plus such factors as to whether or not the block of shares to be sold or gifted represents a controlling interest or a minority interest in your company. Also taken into account is whether or not your shares are marketable on an organized exchange and, if not, how liquid are your shares. That is, are there restrictions on the sale or transfer of your company’s shares and is there any provision made for sale of the shares back to the Company or to other shareholders during the holder’s lifetime or upon his/her death?
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What kinds of businesses do you value?
We typically value small to medium sized businesses with revenues between $1 million to $500 million. We value all types of construction firms, manufacturers, wholesalers, and retailers. In addition we have extensive experience in valuing various kinds of service companies such as engineering, architectural, design, and marketing research firms, publishers and printers, advertising agencies, real estate brokers, real estate developers, equipment rental companies, and securities brokers.
For certain types of businesses such as real estate holding companies or Family Limited Partnerships holding real estate, we would need the real estate appraisal report of a qualified real estate appraiser to incorporate in our report on the value of the business or its shares. Other valuation assignments would involve qualified independent appraisals of machinery and equipment, engineer’s reports on oil, gas, or coal reserves, etc. BVI would then use those reports to value the enterprise that owns such assets.
Why do closely held companies and their securities need to be valued?
There are many reasons or situations that call for an appraisal of the business and of its shares. Among them are:
Business Valuations, Inc. or its principals perform valuations, analysis, studies, and/or fairness opinions for all of the above reasons and situations. We have performed valuations of most types of businesses in many different industries. Industry research is part of the valuation process.
- Controlling interest values
- Less discount for lack of control
- Less discount for lack of liquidity equals
- Minority interest values
- Voting stock value versus Non-voting stock value
- Stock option and warrant values
- Gift tax valuations
- Estate tax valuations
- Property settlements in a divorce
- Partnership buy/sell agreements
- Shareholder buy/sell agreements
- Family Limited Partnership unit values
- Limited Liability Corporation unit values
- Employee Stock Ownership Plans
- Stock purchase plans
- Stock option plans
- Stock bonus plans
- 401k plans
- Other retirement plans holding company stock
- Sale of the company
- Merger and Acquisition negotiations
- Tender offer analysis
- Fairness opinions
- Estate planning
- Life insurance planning
- Shareholder rights litigation
- Shareholder or partner disputes
- Purchase price allocation
- Tangible versus intangible values
- FASB 141, 142, and 144 goodwill impairment studies
- Solvency opinions
What is the valuation process?
The valuation process involves the collection of financial statements, budgets, and other data on the subject company, a study of the industry and its structure and trends, the competitive situation, and an analysis of the specific business risks of the subject company such as debt in relation to net worth, working capital adequacy, degree of dependence on a few customers or on a few key employees, degree of dependence on a key supplier, market share, etc. In addition, interviews with key management persons and others are held to gain an understanding of past performance and expected future performance.
The process typically takes from four to eight weeks subject to schedule interruptions beyond the control of the appraiser. During that time a preliminary value or range of values will be developed for discussion purposes. Finally a written report will be submitted to the client. The value will be subject to certain general and specific qualifications, but will be supportable and reasonable based on the assumptions agreed to and used in the report. Reports typically run from 60 to 100 pages or more.
What approaches do you take when performing a valuation?
In general, we have used professional business appraisal methods appropriate to the purpose of the valuation. We have followed the guidelines for seeking fair market value set forth in Revenue Ruling 59-60 and other relevant rulings on the Internal Revenue Code. We have also followed valuation and report guidelines and suggestions published by the Appraisal Foundation and the American Society of Appraisers.
Following standard practice, we analyze, adjust, and restate the financial statements of the company to reflect economic reality and to make the company comparable to other companies in the industry. We eliminate unusual and non-recurring items from earnings and restate earnings on a FIFO basis, where necessary. We also restate the financials of the public companies as appropriate.
In accordance with established industry guidelines, we consider three basic approaches to valuation: the market approach, the income approach, and the cost approach.
The Market Approach bases value on recent sales of comparable assets. The most widely applied variation of the market approach is the Market Price Guideline Approach, which is based on trading multiples of companies similar to the subject company. These multiples are calculated, adjusted for differences in risk and operating and financial performance, and used as guides in choosing multiples for the subject company.
The Income Approach considers value to be a function of earnings. There are two major forms of the income approach: capitalization of earnings and discounted cash flow. In the Capitalization of Earnings approach, the company's earnings are capitalized at rates which provide an investor with returns adequate to recover the initial investment and compensate for the risks of ownership. The capitalization rate is derived from rates demanded in the market for investments of comparable risk. In the Discounted Cash Flow (DCF) approach, future cash flows generated by the operations of the business are estimated and discounted at an appropriate, market-based, risk-adjusted rate.
The Cost Approach bases value on the cost of reproducing or replacing a company's assets, less an allowance for physical deterioration and obsolescence. The most widely used variation of the cost approach is the Adjusted Book Value method, in which assets and liabilities are restated to fair market value; the fair market value of the equity is the residual.
Any given valuation will use as many of these methods as are meaningful given the purpose of the valuation, the type of company, and the specific circumstances. In general, going concerns are valued more appropriately by the market approach and the income approach than by the cost approach. This is because the value stems from the earning capacity of the company, rather than from its assets, and appropriate rates of return are highly dependent on the industry and other circumstances peculiar to the company being valued. In addition, the cost approach may be inappropriate for valuing a minority interest when the minority owners have no power to liquidate the company and those in control have expressed no intent to do so.
How much does a valuation report cost?
The cost of a business valuation can vary widely dependeing on the purpose of the valuation, the complexity of the business, the number of business units that need to be valued, and other factors. Full valuations may cost from about $6,000 to $30,000 or more. Limited valuations for small companies may have fees at the lower end of that range or less depending again on the purpose and intended use of the report.
How do I get my business valued?
You may contact us for a free consultation on your valuation needs. Or you may have your attorney or accountant get in touch with us to explain the purpose of the valuation and the type of transaction being contemplated. Often it is your attorney who will contact us and sometimes engage us on your behalf. Most of the larger legal firms in Cincinnati plus many smaller law firms are familiar with our work as are many of the accounting firms in the Tri-state area. We can supply you with the names of attorneys experienced in handling the legal work for your particular situation whether it be for gift and estate taxes, employee stock ownership plans, stock option plans, divorce, sale of your company, etc. All communications and information is held in strict confidence.