Valuation Issues in M&A

In Anticipation of Going to Market

Valuations performed for mergers and acquisitions are different than most of the traditional valuation work. The author of this article shares the standard of value used in these engagements, the due diligence conducted, and merits of preparing a calculation report in anticipation of going to market.

Valuations performed for mergers and acquisitions (M&A) are different than most of the traditional valuation work we handle on a day-to-day basis. One of the biggest differences is the standard of value used. Typically, the valuation professional will use investment value rather than fair market value. NACVA’s definition of investment value is “the value to a particular investor based on individual investment requirements and expectations.” The definition of investment value from the International Domestic Glossary of Appraisal/Valuation Terms is “A Standard of Value considered to represent the value of an asset or business to a particular owner or prospective owner for individual investment or operational objectives.” Fair market value, on the other hand, is defined as “The price, expressed in terms of cash equivalents, 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.”

Investment value considers the potential synergies and strategic value for a potential buyer. For example, there might be potential cost savings due to duplicate positions, purchasing power for materials due to increases in volume, the addition of new product lines and services to customers, and the expansion into new territories or regions. These benefits may be considered when performing valuations under the investment value standard of value.

It can be challenging to identify the possible premium for strategic buyers in the marketplace. We might not understand or know why buyers want something. One of the best examples of this is the value of sports franchises, particularly the increased value over the past 10 years. An article on CNN.com by Chris Isidore and Matt Egan (June 21, 2025) states “Sports franchises have long been considered trophy assets, like luxury properties in short supply … Cord-cutting, streaming and DVRs have made it more difficult for advertisers to reach viewers, meaning live sports programming has become more important.” Sometimes, buyers will just want something and will pay whatever it takes to acquire it!

NACVA Standards cover the reporting requirements for our valuation engagements. One approach in valuations for M&A is to do a calculation engagement. This allows for different calculation procedures based on various assumptions. For example, you could consider the impact of staffing reductions of 15%, 25%, and 35% with corresponding calculated values from these assumptions. You can also produce a range of values based on assumptions, which will give your client an idea of the impact on certain changes to the overall value. You might also have a range of values based on different market multiples observed in the industry, particularly if there are fluctuations between benefit streams (EBIT vs. EBITDA, for example).

You can also do different calculated values based on the impact of various growth rates. We had an engagement where the client was expecting significant sales growth after their product would be endorsed by a celebrity. Due to the uncertainty surrounding the impact of the endorsement, we used different future growth rates to calculate the value and show the differences between the assumptions used.

Valuation professionals may also be involved in performing due diligence. There are typically three major categories of buyers: private equity, corporate acquirers, and strategic partners. The end product to be delivered as part of due diligence is a quality of earnings analysis. This can be performed for both buyers and sellers.

For buyer diligence, it is important to understand the difference between audited financial statements and financial diligence performed. A financial audit is balance sheet focused, while financial diligence is income statement focused. The due diligence process works to identify deal drivers, including the quality of the earnings as well as the quality of the assets purchased (including working capital).

The quality of earnings analysis is extremely important (and time consuming) and helps to identify normal historical EBITDA as well as key balance sheet items. Some of the main areas in the quality of earnings analysis include: non-recurring revenue and expenses; revenue and profitability by product, customer, and geography; detailed analysis of selling, general and administrative expenses; and key reserves that might impact out-of-period costs. The analysis may also include an assessment of the management team, the internal control environment, and the systems environment of the seller.

Sell-side diligence is also important, and the best practice is to start as part of pre-sale planning. This will help get the sellers prepared so they can work directly with investment bankers to sell their business. Sometimes buyers believe they can just rely on the work performed by the buyers. However, this mindset can lead to significant reductions in transaction value or failed transactions and lost time. Tax diligence might also be important to identify any potential tax issues, including sales tax liabilities for non-filing. The sellers should surround themselves with a team of transactional specialists who can help in the process, including legal. Attorneys can assist with reviewing or drafting documents including contracts, confirming intellectual property to be included, and research for pending or threatened litigation. Legal counsel can also be helpful in researching employment issues and laws.

Selling a business is also a very emotional decision for business owners. It is helpful to discuss how this sale is part of their succession planning process. You might also need to control the process to make sure things stay on track. Sellers will also want to understand the process, so setting and managing expectations is critical to the success of the diligence process.

Many times, the work will help bridge the gap between buyers and sellers, helping with a smooth transition. Seller diligence will not necessarily eliminate the need for buyer diligence, but it will help explain things like key customers and normalizing adjustments that impact historical results. Typically, the report includes normalized EBITDA as many buyers view this as a measure of cash flow. However, an analysis of the impact of capital expenditures might be necessary so the buyer understands expected cash flows available.

My experience has been there is a great need for sellers of businesses that might have a hard time justifying the time and cost to perform due diligence. Finding a deliverable that works for them can be challenging, but with the use of a calculation engagement and various transaction databases, you can provide them with valuable information. This might include research and analysis of the information provided in the transaction databases, including whether the sales are for stock or assets and whether real estate was included. It is our job to help support the “story” of their business and why it has value.

At the NACVA BVFL Super Conference in September, I discussed the potential deliverables that can be provided to sellers in lieu of a detailed quality of earnings analysis. Some of the attendees have modified their valuation reports to include key items that can impact the value of a business, including key employees, customer concentration, and main suppliers.

Each industry has distinct value drivers, making it important to understand these concepts and their effects on business value. For example, software-as-a-service (SaaS) companies are typically valued based on the monthly recurring revenue, which can be converted to annual recurring revenue. While it is difficult to become an industry expert in a short period of time, you can discuss industry drivers with your clients and research the important factors specific to their industry and business outside of traditional valuation models.

It is also important to walk a potential seller through the valuation process and what they might expect after a sale. A seller might also want to know the impact of income taxes on a potential sale and how much cash they can expect (after taxes). Sellers might also need assistance in finding potential buyers, so relationships with brokers and other professionals are important.

In summary, investment value reflects the worth to a specific buyer rather than the traditional hypothetical willing buyer, willing seller. Strategic buyers might pay more for a business due to cost savings, increased buying power, and expanded products and services. A calculation report can be a valuable tool in assisting clients when they are considering selling their business, including modeling long-term growth assumptions and the impact of various multiples on value. Due diligence can also be performed, either for buyers or for sellers. Ideally, the sooner the better when assisting sellers as they get their business sale ready. It is also important to understand key drivers of value in different industries when preparing a business for a sale.

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Kent D. Pummel, CPA, ABV, CVA, is a Shareholder for Clark Schaefer Hackett Business Advisors, leading the Business Valuation group for the firm. He received his valuation certification from NACVA in 2001. He has experience valuing businesses for mergers and acquisitions, estate and gift tax purposes, phantom stock plans, 409A compliance, disgruntled shareholder suits, buy-sell arrangements, and divorce. Mr. Pummel currently serves on NACVA’s Standards Board.

Mr. Pummel can be contacted at (877) 671-7100 or by e-mail to KDPummel@cshco.com.