This week, I am discussing (a business valuation report that has used a weighted average of the market, income and asset approaches). In my opinion the analysis was inaccurate and indicates bias by determining an artificially low value.
Initial Business Valuation Conclusion
The expert has performed the Asset, Market and Income Approach to determine a conclusion of value. A summary of the analysis and conclusion of value is presented in Exhibit 1 below.
There are a couple of issues that need to be considered on Exhibit. First the total weight for each of the three methods is 33%. These do not total 100%. The Adjusted Net Asset Method does not consider the earnings capacity and a hypothetical buyer is interested in the future cash flows of the company. Leaving the Adjusted Net Asset’s lower value in the calculation will lower the total value of the company. The total value of $2,135,760 is lower than the unweighted Guideline Public Company and Discounted Cash Flow Methods.
Revenue Ruling 59-60, Section 7 states: “…no useful purpose is served by taking an average of several factors (for example, book value, capitalized earnings and capitalized dividends) and basing the valuation on the result. Such a process excludes active consideration of other pertinent factors, and the end result cannot be supported by a realistic application of the significant facts in the case except by mere chance.”
Removing the Adjusted Net Assets
The assets have been considered in the revenues they can produce. I have been doing business valuations for closely held companies since 1985. Most of the business valuation associates I know that have the same experience level, agree that the Adjusted Net Asset Method is not meaningful for most operating companies. In my opinion, it should have been removed. By removing the Adjusted Net Asset Method, and adjusting the weighting to 50% for the Guideline Public Company’s and the Discounted Cash Flow methods, the value of the business would increase by $864,240.
A summary of the analysis and conclusion of removing the Adjusted Net Asset Method’s value is presented in Exhibit 2 below.
Adjusting the Weighting
The business valuation expert used a weighting of 33% for each of the three approaches. If this methodology is to be used, it is a generally accepted business valuation practice to assign a weight based on the methods importance. This was not indicated by the business valuation expert. If the importance were indicated by the conclusion of value, the Guideline Public Company Method’s would indicate 37.5% of the total value and the Discounted Cash Flow would indicate 62.5% of the total value. This would increase the total value from the business valuation experts initial value by $1,051,740.
A summary of the analysis and conclusion of indicating the methods weight based on their importance. This analysis in presented in Exhibit 3 below.
The original exhibit of the business valuation expert appears to be reasonable. However, the reasoning and math does not support a reasonable conclusion for the value of the company.
Why should I care?
The business valuation or damages expert has not performed the work correctly.
The business valuation or damages expert may not have relied on sufficient facts or data.
The business valuation or damages expert may not have relied on generally recognized principles and methods to perform the work product.
The business valuation or damages expert has determined an incorrect value or damage claim for the company.
The incorrect value may be to the detriment of your client.
If the client is not informed of these issues and they are not corrected and the client learns of this at a later date, the client could potentially harm your reputation.
I provide a realistic supportable business valuation or damage claim report.
What value do we deliver?
I provide a more through analysis in a report so it will withstand scrutiny.
I provide calculations for most analysis instead of just stating a result.
I have earned the most difficult business valuation designations for valuations of closely held companies.
I have earned a Master’s Degree in Business Valuations and apply those skills to my every day business valuations.
Because you as the attorney need to detect the deficiencies in business valuation (damages reports).
And the better informed you are, the better the outcome of your cases…for you and your clients!
Richard Claywell has been valuing closely held companies since 1985. He Has earned two of the highest designations in the business valuation field , the Certified Business Appraiser (“CBA”) and Accredited Senior Appraiser (“ASA”), Richard is a Certified Public Accountant, has a Masters in Business Valuation and holds the ASA, CBA, ABV, ICVS, CVA, MAFF, CFD, CVGA, ICVS-A credentials.
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