If you’re pursuing financing or M&A, needing to resolve partner/shareholder disputes, or planning your succession strategy, a business valuation will be critical in helping you arrive at a solution. An experienced business succession planning attorney from Merlino & Gonzalez can walk you through the valuation process. Our firm has decades of experience guiding business owners and managers as they make critical decisions about their company’s future and protecting the success they’ve worked so hard to achieve. Contact us today for an initial case evaluation to discuss how we can help with your business valuation needs.
Understanding Business Valuation
A business valuation estimates a company’s economic or fair market value. Parties may rely on financial professionals or expert business valuators to provide an opinion on a company’s value. Business valuations can help drive negotiations or legal planning for a company or its owners. Experts or professionals perform a business valuation by gathering information about the business and economic/market conditions, analyzing the company’s financial statements, and reviewing that data in the context of the chosen valuation method.
Standard Methods of Business Valuation
Here are some of the most frequently used methods to determine a business’s valuation.
Asset-Based Approach
Under the asset-based approach to business valuation, an expert business valuator totals the fair market value of a company’s assets and then deducts the company’s total liabilities. The remaining figure represents the business’s value under the asset-based approach. A company’s assets include physical assets like real estate, machinery/equipment, inventory, accounts receivable, and intangible assets, such as intellectual property and goodwill.
The asset-based approach may work best for an asset-heavy business that owns significant real estate, equipment, and inventory. However, the approach has significant limitations and drawbacks. For example, valuation experts may disagree significantly over assigning value to intangible assets. Furthermore, the asset-based approach fails to capture a company’s value in its earnings or growth potential; a business with significant current debts may have little value under the asset-based approach but would still appear extremely valuable as a going concern.
Market-Based Approach
Under the market-based approach, a business valuator will determine a company’s value based on the price or value assigned to other businesses with similar risks, returns, or growth. For example, valuators may look at the valuations assigned to similar businesses that have recently sold to competitors or strategic partners or undergone a financing round, IPO, or stock offering. Thus, the approach seeks to base a company’s value on what the market has recently paid for similar businesses, giving it the benefit of deriving a value based on market-driven data. However, using the market-based approach may become impractical or impossible if a business valuator has few or no comparable businesses that can provide data points.
Income-Based Approach
The income-based approach calculates a company’s value by converting its anticipated financial performance into present value. Under this approach, a business valuator estimates the company’s future cash flow or net income based on numerous factors, such as current financial performance, growth plans, and expected future economic or market conditions. The approach then seeks to discount this future cash flow or net income to the present value of money.
The income-based approach works best for a mature company not expected to undergo rapid growth over the near term with stable, predictable net income.
When Might You Need a Business Valuation?
A company may undertake a business valuation as preparation for or part of various transactions for the business or its ownership, such as:
- Mergers and acquisitions: Companies frequently undertake business valuations during mergers and acquisitions to understand the parties’ respective worths and calculate the deal price.
- Debt or equity financing: Business valuations can help determine the terms of debt or equity financing, including the interest rate or secured lien for debt or the share price offered to investors in an equity round.
- Estate and succession planning: A business owner may need to understand their company’s value in the context of estate and succession planning, especially when determining the tax implications of an estate plan.
- Partnership disputes: Companies may undertake valuations to calculate a partner’s buy-out price to resolve partnership disputes.
- Divorce proceedings: A divorcing spouse who owns a business or a partnership interest may need a business valuation to determine their ex’s share of the business interest under equitable division.
- Shareholder litigation: When a minority shareholder challenges a transaction such as a merger or acquisition, they may seek to value their shares in court, requiring an appraisal of the business’s value.
- Bankruptcy and restructuring: Bankruptcy may require a company to undertake a business valuation to determine its insolvency and how much of a shortfall exists between the total value of its assets and liabilities.
Challenges of Business Valuations
Business valuations may involve various issues or complexities, such as:
- Subjectivity of valuation experts: Discrepancies between experts’ valuations may occur due to the subjective differences in each expert’s valuation method, even when experts use the same overarching methods like market-based or income-based valuation.
- Economic/market fluctuations: Even minor macroeconomic or market fluctuations from valuators’ assumptions can render business valuations wildly inaccurate.
- Valuation of intangible assets: Expert valuations may vary wildly due to difficulties assigning fair market value to intangible assets.
- Discrepancies caused by erroneous, inadequate, or fraudulent financials: Insufficient, incorrect, or fraudulent financial data from a business may undermine the reliability of a valuation or make it challenging or impossible for an expert to derive a company’s fair market value.
How Can Our Law Firm Help with Your Business Valuation?
The legal team at Merlino & Gonzalez can guide you through every step of the business valuation process to ensure you arrive at a figure that can help you make informed decisions for your business transaction, estate plan, or litigation. Let us assist your business by:
- Collaborating with financial professionals and valuation experts to oversee the process on your business’s behalf
- Advising your company with legal and regulatory compliance issues
- Protecting your interests during transaction negotiations involving business valuations
- Providing legal advice and advocacy during legal disputes or litigation arising from business valuations
Contact Us Today for Legal Assistance with Your Business Valuation Process
If you need to perform a business valuation for your company, contact Merlino & Gonzalez today for an initial consultation with a business law attorney. We can explain business valuations and how they can benefit your company at critical stages of its life cycle.