The valuation of a business, business ownership interests or intangible assets may be performed for a wide variety of purposes including:
1) Transactions such as acquisitions, mergers, buyouts, employee stock ownership plans, partner or shareholder buy-ins or buyouts, and stock redemptions.
2) Litigation relating to matters such as marital dissolution, bankruptcy, contractual disputes, owner disputes, dissenting shareholder cases, employment disputes, and intellectual property disputes.
3) Tax compliance such as corporate reorganizations, S corporation conversions, estate and gift tax, purchase price allocations, and charitable contributions.
4) Tax planning for income estate and gift tax, and personal financial planning.
The Assumptions and Limiting Conditions Included in the Report Define the Business Valuation
The business valuation report will include a number of assumptions and limiting conditions under which the valuation was prepared. These assumptions and limiting conditions define the business valuation.
Conclusion of Value Limited to the Stated Purpose
1) The conclusion of value is valid only for the stated purpose as of the date of the valuation.
2) Stated purpose is very specific:
- A particular transaction:
- Acquisitions and mergers.
- Marital dissolution.
- Contractual disputes.
- Tax compliance:
- S corporation conversions.
- Estate and gift tax returns.
- Purchase price allocations
- Charitable contributions.
- Tax planning:
- Income tax.
- Estate and gift tax.
- Personal financial planning.
Reliance on Financial Statements and Other Information
1) Financial statements and other related information are provided by the business or its representatives to the firm performing the valuation.
2) These financial statements and other related information are accepted without any verification as fully and correctly reflecting the subject company’s business conditions and operating results.
3) The firm performing the valuation will not have audited, reviewed, or compiled the financial information provided to them.
Public Information and Industry and Statistical Information
1) The firm performing the valuation obtains public information and industry and statistical information from sources that it believes to be reliable.
2) No representations as to the completeness or accuracy of the public information and industry and statistical information are made by the firm performing the valuation.
3) No procedures have been performed by the firm performing the valuation to corroborate the public information and industry and statistical information.
Achievability of Forecasted Results
1) Forecasts are frequently used in the calculation of value.
2) A forecast is a prediction or estimate of some future event or trend.
3) The firm performing the valuation provides no assurance as to the achievability of any forecasted results.
4) Events and circumstances frequently do not occur as expected and differences between actual and expected results may be significant.
5) Achievement of forecasted results depends on the actions, plans, and assumptions of management.
Management Expertise and Effectiveness
1) The conclusion of value is based on the assumption that the current level of management expertise and effectiveness would continue to be maintained.
2) The conclusion of value also assumes that the character and integrity of the subject business would not be significantly changed by any sale, reorganization, or exchange of the business, or by the diminution of the owners’ participation.
Use of the Valuation Report
1) The valuation report and conclusion of value are for the exclusive use of the subject business or its representatives for the sole and specific purposes as noted in the report.
2) The valuation report is not authorized to be used for any other purpose other than as noted in the report.
3) The valuation report is not authorized to not be used by any other party, other than the subject business or its representatives, for any purpose.
4) The report and conclusion of value are not intended to be investment advice in any manner. The conclusion of value represents the considered opinion for the firm performing the valuation, based on information provided by the subject company and other sources.
Dissemination to the Public
1) No part of the valuation report it intended to be disseminated to the public by any means of communication. Any exception to this limitation would require the prior written consent and approval of the firm performing the valuation.
2) Dissemination to the public would include such communications as advertising media, public relations, news media, sales media, mail, and direct transmittal.
Testimony or Attendance in Court
1) Future services with respect to the subject matter of the valuation report, such as providing testimony or attendance in court, are not required of the firm performing the valuation.
2) Additional services from the firm performing the valuation, such as providing testimony or attendance in court, would be available upon request and by separate arrangement.
1) The firm performing the valuation is not an environmental consultant or auditor, and bears no responsibility for any actual or potential environmental liabilities.
2) Those persons who need to know whether any actual or potential environmental liabilities exist, or the scope and effect of such liabilities on the value of the subject company, should obtain a professional environmental assessment.
Reliance on Environmental Reports
1) In the case of reports provided by the subject company, or by an environmental consultant working for the subject company, of any present or future liability relating to environmental matters, for inclusion in the valuation report and conclusion of value, the firm performing the valuation may rely on those environmental reports without verification.
2) The firm performing the valuation offers no warranty or representation as to the accuracy or completeness of any such environmental reports.
Americans With Disabilities Act
1) The firm performing the valuation does not provide a compliance survey or analysis to determine compliance with the Americans with Disabilities Act of 1990.
2) The valuation will not consider the effect, if any, of noncompliance with the Americans with Disabilities Act of 1990.
1) The firm performing the valuation makes no determination as to the possible effect on the subject business due to future Federal, state, or local legislation.
2) The valuation would not consider the effect, if any, of any future Federal, state, or local legislation.
Prospective Financial Information
1) Any prospective financial information provided by the subject company has not been examined or compiled by the firm performing the valuation.
2) The firm performing the valuation does not express an opinion or other form of assurance on the prospective financial information or the related assumptions.
3) Usually there will be differences between prospective financial information and actual results because events and circumstances frequently do not occur as expected. These differences may be significant.
The Valuation Engagement
This is an engagement to estimate value in which a valuation analyst determines an estimate of the value of a subject interest by performing appropriate valuation procedures, and is free to apply the valuation approaches and methods they deem appropriate in the circumstances. The valuation analyst expresses the results of the valuation engagement as a conclusion of value, which may be either a single amount or a range of amounts.
Standard of Value
The standard of value used is “fair market value”. Fair market value is the price, in terms of cash or equivalent, that a buyer could reasonably be expected to pay, and a seller could reasonably be expected to accept, if the business were exposed for sale on the open market for a reasonable period of time, with both buyer and seller being in possession of the pertinent facts and neither being under any compulsion to act.
1) The asset approach is generally considered to yield the minimum benchmark of value for an operating enterprise. The most common methods within this approach are net asset value and liquidation value.
2) Net asset value represents net equity of the business after assets and liabilities have been adjusted to their fair market values, assuming a hypothetical sale of its net assets as part of a going concern.
3) The liquidation value of the business represents the present value of the estimated net proceeds from liquidating the company’s assets in a quick and orderly piecemeal sale and paying off its liabilities.
1) The income approach serves to estimate value by considering the income (benefits) generated by an asset over a period of time. This approach is based on the fundamental valuation principle that the value of a business is equal to the present worth of the future benefits of ownership. The term income does not necessarily refer to income in the accounting sense but to future benefits accruing to the owner. The most common methods under this approach are capitalization of earnings and discounted future earnings.
2) Under the capitalization of earnings method, normalized historic earnings are capitalized at a rate that reflects the risk inherent in the expected future growth in those earnings.
3) The discounted future earnings method discounts projected future earnings back to present value at a rate that reflects the risk inherent in the projected earnings.
1) The market approach compares the subject company to the prices of similar companies operating in the same industry that are either publicly traded or, if privately-owned, have been sold recently.
2) A common problem for privately owned businesses is a lack of publicly available comparable data.