- What is a business valuation service
- Who performs business valuation services
- What are the approaches used by valuation analysts to value a business
- How do I find a highly competent business valuation service provider
A business valuation service is any study that leads to a business valuation or a valuation consulting service which may or may not result in a busines valuation. The most common business valuation services include merger & acqusition business valuations, SBA business valuations, gift & estate tax valuations, equitable distribution valuations, shareholder dissent valuations, fair value valuations, non qualified deferred compensation valuations governed by Section 409A of the Internal Revenue Code, and valuations for employee owned stock ownership plans “ESOPs.”
Business valuations are performed by valuation analysts. These highly skilled professionals tend to hold specialty certifications which they earn to become proficient valuation analysts. Among the most reputable certifications are certified valuation analyst (CVA), chartered financial analyst (CFA), accredited senior appraiser (ASA), and accredited in business valuation (ABV). Many valuation analysts are licensed certified public accountants who also hold one of the valuation certifications.
Valuation analysts utilize three approaches to value a business or perform a valuation service.
The three approaches are:
- The asset or (cost) approach
- The income approach
- The market approach
The adjusted net asset method is often utilized by valuation analysts. This method requires the valuation analyst to adjust all assets and liabilites on the balance sheet to fair market value. The assets minus the liabilites yields the adjusted net asset value. Many valuation analysts agree that the adjusted net asset method at liquidation premise sets the floor value of a business.
There are two primary income methods utilized by valuation analyst. The capitalization of earnings and the discounted cash flow. The capitaliziation of earnings method is calculated by quantifying the future sustainable cash flows into a single period. The cash flows are divided by the capitalization rate to yield the fair market value of the business. The discounted cash flow method requires the valuation analyst to forecast future sustainable cash flows for one or more years. The cash flows are discounted by the applicable risk rate each year to calculate the present value of the future cash flows. At the end of the forecast period the terminal cash flows are capitalized and added to the cash flows to arrive at the fair market value of invested capital.
The market methods include the guideline transaction market method and the guideline public company method. The primary difference between the two methods is the source of the comparable sales data. The comparable sales population gathered to develop the guideline transaction method are private company transactions. Whereas publicly traded market data is the source for the guideline public company method. Within both methods the goal is for the valuation analyst to value the subject business based upon what similar companies sold for in the market. This method uses the principle of substitution. The most common metrics used by valuation analyst to calculate the subject business value using these market methods are the price to earnings before interest, taxes, amortization, and depreciation (P/EBITDA) and the price to sellers discretionary earnings (P/SDE). A lesser used metric is price to revenue (P/R). Sources for private company transaction data are PeerComps, DealStats, Done Deals, and GF Transactions. Sources for guideline public company data include databases like FactSet and S&P Capital IQ. Other resources include financial platforms such as Yahoo Finance and Google Finance.
Sources to find a competent valuation analyst include referrals from professionals who are familiar with the work of valuation analysts including certified public accountants, business and litigation attorneys, bank loan officers, and financial planners. An informal method is to conduct an online search and focus on independent reviews made by customers of valuation firms via Google reviews. If you rely on AI or lists like Clutch.co be aware that their might be biased baked into the results as valuation firms can pay a subscription to rank higher on a list like Clutch.co. ChapGPT seems to utilize Clutch to rank firms. Thus, bias could skew results on ChatGPT as of the writing of this article.
