Steps Involved in the Valuation Process
Business Appraisal Services, LLC will establish a narrow range of fair market values and will determine a mid-range value for your company. Several steps will be followed in conducting an independent appraisal of your company:
We review information about your company, including its background, website information, historical financial information, information contained in its current business plan, financial projections (if available), and other promotional literature.
Calculating a range of equity values
BAS calculates a narrow range of fair market values for the equity of your company, based on independent market data considering the following economic and financial investment concerns:
- Sales of economically similar privately-owned companies, with adjustments for differences in financial investment risk between your company and its peers.
- Prices paid for publicly-traded stocks in the industry in which your company operates, with appropriate adjustment for differences in the level of risk between your company and the public stocks.
- Review the operating history of the Company and historic trends in true operating cash flow. We will analyse the recent history of the Company (typically the last five years), and work with you to determine what historic trends the Company has faced and understand how those trends will impact our assumptions of the future.
- The present value of the future cash flows that your company is reasonably expected to generate. We will work with management to determine realistic assumptions regarding revenue growth, gross profit margins and operating expense rations when constructing a multi-year financial forecast.
A multiple of representative earnings and cash flows based on your company's historical earnings and its current trends.
Discounts Applicable to Minority Ownership Interests and Other Valuation Adjustments
Depending on the purpose of the valuation and the ownership percentage being valued, various valuation discounts can come into play when we are valuing a minority ownership interest:
- Once your company's enterprise value (equal to the market value of the company's invested capital) is determined, based on the representative level of earnings and cash flows, we will subtract the outstanding debt to calculate the market value of your company's equity.
- We will also analyze your company's balance sheet to determine if any nonoperating assets exist. We will also analyze the company's balance sheet ratios in comparison to typical industry ratios to determine whether any excess working capital balances exist. (The value of any nonoperating assets will be separately added in each valuation method when calculating your company's equity value.)
- We will also apply valuation discounts for lack of control and lack of marketability consistent with the stock being valued. These discounts will be supported by an analysis of the relevant market data supporting them. For privately-held companies, the combined discounts for lack of control and lack of marketability can be 50% or greater.
Senior management input
Where possible and useful, we visit your company's facilities and have conversations with company management to gain an understanding of the key strengths, weaknesses, risks, and opportunities of the company, further helping us narrow the range of values.
The final report
The range of preliminary values will be independently determined by BAS and communicated to our client for the engagement. This comprehensive report discusses the valuation methods utilized, states key assumptions, and presents the market data we relied upon in the valuation. After considering relevant feedback, BAS will issue the final valuation report.