2.01 Valuation methodologies and calculations
Some users are inclined to express wonder at the “magic” worked by CBVs in their calculations and methods. As all CBVs know, there is no magic, but there is the result of at least 3 years of specific education and training (more if you factor in that most valuators started out as accountants or financial planners).
Examining the value of a business from different angles increases the credibility of the conclusion. At MVI, most reports, other than the most basic, use more than one method in preparing a conclusion of value.
Using more than one valuation method in a report adds credibility to the conclusion.
A valuation report prepared by MVI for an operating business typically proceeds as follows:
- Guided by past results and prospective circumstances, a pro forma cashflow statement is prepared;
- An analysis of the strengths, weaknesses and risks in the business leads to a suitable capitalization rate;
- Using this information, a preliminary enterprise value is found, based on the capitalized cashflow method;
- An analysis of the past and present balance sheets leads to redundant assets being identified, fair market value adjustments for tangible assets, and the calculation of tax shields. This leads to a statement of the tangible asset backing, a key component of the adjusted net asset method;
- Enterprise value found via the capitalized cashflow method is compared to enterprise value found via the adjusted net asset method and goodwill, if any, is recognized;
- If there is no goodwill, the adjusted net asset method will prevail as it has provided the highest value. If there is a value for goodwill, the capitalized cashflow method will prevail;
- Reasonableness testing is carried out on the preliminary conclusion for enterprise value, including comparing valuation metrics for the client to data obtained by researching reported sale transactions for comparable businesses. The market method is used as a supporting methodology, especially as it allows the client business to be ranked against comparable data. Inconsistent results may require other methods to be re-examined;
- The equity value in the business is found by taking the enterprise value, adding redundant assets if any, and deducting term loans. The en-bloc equity value may need to be further analyzed to find values for different share classes. Consideration is also given to the need, if appropriate, for discounts for matters such as lack of control or lack of marketability.
Contact MVI to discuss valuation calculations and methodologies.