SPARDATA is an expert appraiser of privately-owned companies and professional practices. Since 1990 we have written over 27,000 business valuations. We specialize in firms with sales between $1 million and $40 million. Initial business valuations cost $6,000. Typical delivery time is 8-12 weeks but "rush" orders are completed in just 3 weeks (extra charge applies).
How do appraisers value a business? For most situations there are up to three different ways to value a business; the appraiser's job is to decide which approach or combination of approaches is most appropriate to value the business in question. A useful discussion of these approaches is given in Revenue Ruling 59-60, promulgated back in 1959. Rev. Rul. 59-60 remains one of the most important guides for professional appraisers.
Market Approach . This approach involves comparing the entity being valued to counterparts engaged in the same or similar lines of business whose shares are publicly traded. For reliable results, the comparables must be similar to the entity being valued in (i) size, (ii) methods of operation, (iii) markets and customers served, (iv) accounting methods employed, and (v) projected growth in sales and earnings.
To apply the market approach, comparable company values measures are based on stock prices. This value is then divided by two earnings parameters (i.e. sales and net income) and a balance sheet parameter (i.e. book value). The resulting multiples are then applied to the subject company to estimate its value.
The market approach is commonly used by investment bankers. However, to the extent a company is exceptional, the value as indicated by the market approach will differ from its true fair market value.
The market approach is based on the third-party nature of verifiable or "arms length" transactions. Successful usage of this approach requires that the analyst have access to a universe of arms-length transactions involving companies similar to the subject company. Information on sales of comparable companies can be difficult to obtain for parties not privy to the transactions. When such data is publicly available, the market approach is the most credible and understandable approach of the three. However, this approach still may ignore or incorrectly include the potential combination benefits or synergies associated with a transaction. If a business is unusual, there may be few or no companies with which it can be compared, so the Market Approach does not work. Neither does the Market Approach work for valuing professional practices, or for companies whose future results are likely to differ from its past performance, or for companies whose assets consist of intellectual property or patents.
Income Approach . The income approach estimates the Company's value based on its ability to generate income. This estimate may be calculated by (i) projecting cash flows into the future and discounting them back to present at a stipulated rate of return or (ii) capitalizing a free cash flow base at an appropriate rate of return. The free cash flows used in this valuation methodology are defined as cash available to debt and equity holders after investment.
Of the two sub-approaches, the discounted cash flow (or "DCF") methodology is ideal when valuing companies whose future performance is projected to be materially different from its past performance. DCF requires explicit identification of the future cash flow streams that anticipated business plans will generate. For this reason, the DCF approach is also useful when valuing companies that: i) operate in niches which are uninhabited by comparable companies or ii) face unique circumstances or operating environments.
Asset Approach . The third approach is called the Asset Approach (sometimes referred to as the Replacement Cost Approach). Appraisers use it to value tangible assets such as an office building, drilling equipment, trucks and so forth.
Different businesses require different valuation approaches. The appraiser's job is to pick the approach or approaches appropriate to value the business in question.
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