We prepare business valuations most commonly for marital or shareholder breakups, store and for purchase and sale of a business. We urge our clients to contact us early when any major events are happening in their lives. A well managed plan for dividing assets in a breakup, that includes your lawyers and accountants at the beginning stages, can save you thousands of dollars of fees in the long run.
Types of Reports
A Business Valuation report provides an independent conclusion as to the value of shares, order assets, prescription or an interest in a business. There are three types of reports available, the level of report required will depend on what you need it for.
A Calculation valuation report, sometimes prepared as a “draft” report, provides the lowest level of assurance and relies heavily on information provided by the client. This report is useful as a starting point where both parties are amenable to settling and there is no question as to the accuracy of the financial information being provided. These reports are also often used for tax transactions, or management buyouts where all parties understand the business well. A Calculation report can be subsequently upgraded to another type of report.
In preparing an Estimate valuation report the valuator undertakes a limited review and analysis of the information provided. Certain relevant information is corroborated by outside sources, and some detail with regards to the analysis is provided in the report.
A Comprehensive valuation report, formerly referred to as an “opinion” provides the highest level of assurance. A comprehensive review and analysis of the business and industry is performed, and all other relevant factors are corroborated. The report is detailed and is appropriate for court proceedings.
EARNINGS OR CASHFLOW APPROACH
This method is generally used to determine the value for an operating company. The terminology “multiple of earnings” used by analysts refers to a number which is multiplied by the earnings of the company to determine its value. The multiple is determined by market conditions and the strengths and risks of the industry and the specific company.
ASSET BASED APPROACH
The balance sheet of the company is restated to reflect the value of the properties held. This approach is appropriate where the income stream does not give a true indication of the underlying value of the company. No goodwill results from applying this methodology. A common application of an asset based approach is the valuation of a real estate holding company.
Goodwill is a residual number and is calculated as the excess of the value (price) of a business less the value of its assets and liabilities. Goodwill arises due to the benefits which accrue to a purchaser from buying an established company rather than starting one from the ground.
Examples of things that result in goodwill are:
- a solid customer base;
- a significant market share;
- a preferential location;
- an established infrastructure;
- and other factors which contribute to the profitability of the business.
Goodwill can be personal or commercial. Personal goodwill exists because of a specific person and is not transferable to an outside party, and as such it has very little value. Commercial goodwill accrues to the business itself, it is not affected by the owner or manager of the business, and as such it has value and can be sold.