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.
top of page
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.
top of page
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.
top of page