How can two expert business valuators reach eifferent conclusions of value for the same company?
On the surface, the concept of business valuation may seem simple. After all, it’s a mathematical value; numbers are supposed to be constant and infallible. So why, in certain cases, are valuations of the same business significantly different?
A thorough business valuation is generally anything but straightforward. There are a great number of moving parts in any business, and two equally qualified Chartered Business Valuators can, and often do, reach varying conclusions when conducting valuations on the same business.
In this blog post, we will give a quick summary of six of the variables that will impact value, each of which we will explore in detail in future posts.
The Definition of ‘Value’
There are a number of different ways to gauge value. After all, the term ‘value’ can be meant to represent profitability, the value of assets and holdings, or the value for which one is willing to pay in the market.
Within the context of business valuation, ‘value’ can also have several different meanings. Three commonly used terms are as follows:
Going Concern Value is the value of a business enterprise that is expected to continue to operate into the future. This is the enterprise value of the business which includes both interest bearing debt and equity components (i.e., the value of the business in its entirety – including both the debt holders’ and equity holders’ interests).
Fair Market Value is the highest price expressed in terms of cash, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s-length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.
Fair Value is an important value in the context of a shareholder dispute and is generally considered to be the shareholder’s pro-rata share of the fair market value of a business (i.e., without reduction for a minority discount).
While most valuations are premised on the going concern value, different definitions are used in different contexts, and many components of these definitions of value are open to interpretation. As such, the definition of value matters.
Minority Shareholder Oppression
Minority Shareholder Oppression regulations are in place to ensure that a company acts in the best interests of its shareholders.
If the majority shareholder is acting against the interests of a minority shareholder, the courts may reduce or altogether remove minority shareholder discounts when the oppressed shareholders are ordered to be bought-out by the majority shareholder.
The date at which a business is valuated can have a drastic impact on the final valuation, particularly if the prospects of the business have changed (and is expected to change). For example, value could be significantly different before and after a “rain-making” shareholder departs from the business.
Type of Valuation Report
There are three different types of valuation reports of varying depth and detail, ranging from calculations, to estimates, to comprehensive valuations. Each of these reports provide varying degrees of assurance.
There are several income, market, and asset approaches that can be used to estimate the value of a company. The most appropriate methodology will vary on a case-by-case basis and is left to the experience and judgment of the professional valuators.
A shareholder agreement will generally impact the way in which shares are sold. In a litigation context, shareholder agreements may not always be the final determinant of how the business is sold and at what price.
For more information on Fuller Landau’s objective and independent Business Valuation services, contact us today.