A Key Component Used in Business Valuation For valuation purposes, net working capital involves a more comprehensive analysis than the straightforward traditional accounting definition of current assets minus current liabilities. This article examines the concept of net working capital and highlights its significance in business valuation. Net working capital represents a vital aspect of business valuation, as it influences a company’s enterprise value through projected cash flows, as well as its equity value based on excess or deficient net working capital at the valuation date. For valuation purposes, net working capital involves a more comprehensive analysis than the straightforward traditional…
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In Small Business Valuations In a recent joint business valuation review engagement, the author and a fellow appraiser discussed whether one should use market value of invested capital (MVIC) or enterprise value (EV) when applying an income approach in business valuation. In this article, the author discusses these two concepts and sheds some light on why one might use one over the other. A recent joint business valuation review engagement sparked hours-long discussion between myself and a fellow appraiser about whether we should use market value of invested capital (MVIC) or enterprise value (EV) when applying an income approach in…
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Indications for 2023 After a record year in 2021 transactional activity, where healthcare mergers and acquisitions (M&A) were up by 56 percent, the market continued to thrive in 2022. Preliminary results revealed that 2022 M&A deals hit a record high of 2,409 deals; 150 transactions over what was observed in 2021. Despite economic challenges (e.g., rising interest rates and borrowing costs, inflation, and labor costs), the healthcare transactional market has remained active. This article will review the U.S. healthcare industry’s M&A activity in 2022, and discuss what these trends may mean for 2023. After a record year in 2021 transactional…
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Tread Carefully Using this Market-Approach In valuation theory, the market-based approach, being one of the three main valuation approaches, can rely on the guideline private comparable transactions method, suggesting that the results obtained in that way should be treated equally with other valuation approaches and methods. However, the disadvantages of the guideline private comparable transactions method are so consequential that its reliability should be strongly questioned, and the results based on it should be taken with significant caution. This article justifies this opinion by stating the most important weaknesses of the mentioned method. In valuation theory, the market-based approach, being…
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Communicating Value “Comparing apples to oranges” refers to contrasting two or more items that are similar, but that have important differences. While apples and oranges are both fruits, they have different flavors, colors, textures, etc. In a business valuation, comparing enterprise value to equity value is like comparing apples to oranges. Both measure the value of a business, but the results can differ significantly, depending on the cash and debt balances on a company’s books as of the valuation date. Not understanding the different types of value utilized in a valuation or transaction analysis may lead to disagreements on the…
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Changing Assignments from Fairness Opinion to Business Valuation Commercial damages matters can be challenging and require a flexible mind when “wrapping your brain” around the issues and facts of a particular case. Beginning in the first quarter of 2019 and running through October 2020, I had an assignment which began with a simple fairness opinion letter and ended with my testifying at trial to defend my valuation of the business. This article will review the changes in my assignment, the decision to value the business, the Daubert challenge brought by the opposing side, and testifying via Zoom at the trial.…
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to Business Valuation for Attorneys Investors who hold publicly traded securities have the luxury of knowing the value of their investment at virtually any time. An internet connection and a few clicks of a mouse are all it takes to get an up-to-date stock quote. Of all U.S. companies, however, less than 1 percent are publicly traded, meaning that most companies are privately held. Investors in privately held companies do not have such a readily available value for their ownership interests. How are the values of privately held businesses determined when a couple’s assets are being divided in a divorce,…
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It is all Based on Your Perspective In this article, the author presents three common ways that a single purchase price may be calculated and presented. With football season on the horizon, I cannot help but think about September 24, 2013—a night that many football fans will not soon forget. The Seattle Seahawks were playing the Green Bay Packers on Monday Night Football. The game was going down to the wire and Seattle trailing 12-7 with only a few seconds remaining. With time expiring, Seattle quarterback Russell Wilson heaved a 24-yard pass to receiver Golden Tate in the endzone. Green…
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Understanding Terms and Bridging a Potential Valuation Gap It is not uncommon for litigation to stem from disagreements over the value of privately held companies and ownership interests in those entities. In those situations, many different values are often discussed as the parties attempt to reach a resolution. It is important to make sure that the parties are speaking the same language as far as the type of value being considered—equity value, enterprise value or invested capital value. While these three types of value are related, there are significant differences between them and understanding those differences is important in reaching…
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and its Application to Enterprise Valuation The value of a firm must equal the value of the claims on its assets. In practice, this is generally expressed as the value FIRM = value DEBT + value EQUITY. Similarly, in a balance sheet prepared in accordance with generally accepted accounting principles (GAAP), assets = liabilities and equity. By comparison, an economic balance sheet is constructed using market values rather than amounts reported in accordance with GAAP, items included are classified as operating, non-operating, debt or equity-related rather than current or long-term, asset or liability, and it includes economic assets and liabilities…
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What is the difference between a company’s total capital value and enterprise value? The difference between these two concepts is the treatment of cash. In the following post, Z. Christopher Mercer, founder and CEO of Mercer Capital, examines the effect of cash on the relative valuation multiples of three public companies. To read the full article in Mercer Capital’s Financial Reporting Blog, click: Market Value of Total Capital and Enterprise Value: Cash Creates Potential Differences in Total Capital Multiples. This article is republished from Mercer Capital’s Financial Reporting Blog. It is reprinted with permission. To subscribe to the blog, visit:…
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Some very interesting implications can be noted comparing two different companies using EBITDA. Z. Christopher Mercer, Founder and CEO of Mercer Capital, looks at how relying on EBITDA as a measure of cash flow can impact the valuation analysis conclusion if other measures are not considered. Read more about the results of this report in the Mercer Capital’s Financial Reporting article, Public Market Views of EBITDA: Exxon Mobil and Apple. This article is republished from Mercer Capital’s Financial Reporting Blog. It is reprinted with permission. To subscribe to the blog, visit http://mercercapital.com/category/financialreportingblog/.
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Can private companies really increase their value 80-100 percent by limiting unsystematic (controllable) risks? The November/December 2013 issue of The Value Examiner featured Ken Sanginario’s article entitled, “The Valuation Business: A Strategic Road Map for Success.” In this article, Sanginario answers questions raised by skeptics to make the case that value doubling for private companies is possible.
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A Premium Multiple is Hard to Come By and Harder to Keep; Owners Should Worry More About Improving Performance Susan Nolen Foushee, Tim Koller, and Anand Mehta make the case in McKinsey Quarterly that executives considering company value often worry too much about their company’s multiple (e.g., a P/E ratio, or EV/EBIDTA, etc.) instead of focusing on company growth. It isn’t that multiples aren’t legitimate data to consider. But multiples can vary widely if a company is comparing itself to the wrong set of competitors. Multiples legitimately vary considerably based on the leverage a company is currently using and…