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MARYLAND BAR JOURNAL | ISSUE 3 2019 23

FOR YOUR PRACTICE | N U T S A N D B O LT S

Business Valuation Basics

What is Business Valuation? Business valuation is defined as the act or process of determining the value of a business enterprise or ownership interest therein. This can be a 100% or a lessor ownership interest. In addition, the valuation date should be established.

A decision to be made at the beginning of the valuation process is what standard of value applies to the matter at hand. Typically, in Maryland, the standards of value used include fair market value and fair value. Fair market value is used in marital dissolution matters and is defined by the AICPA 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.”

Fair value is used for shareholder disputes, it is defined by state law and is similar to fair market value without the reduction of value for a discount for lack of control, if applicable and a discount for lack of marketability.

Approaches to Business Valuation There are three overall business valuation approaches: asset-based, market and income. Within each approach, there are various valuation methods. The following represents a summary of some of the most prevalent methods under each approach:

Asset-based Approach

• Adjusted Net Asset Value Method: This method focuses on the balance sheet of the company being valued. Assets and liabilities are adjusted to fair market value. In addition, off-balance sheet liabilities and contingent liabilities are accounted for.

Market Approach

• Guideline Public Company Method: Market multiples are derived from market prices of stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market.

• Merger and Acquisition Method (also known as the Guideline Transaction Method): Pricing multiples are derived from transac- tions of significant interests in companies engaged in the same or similar lines of business.

• Transactions in the Company’s Stock: As the name implies, prior transactions in the Company’s stock can represent an indication of value for the Company if the transactions represent “arms- length” transactions.

Income Approach

• Capitalization of Earnings Method or Capitalized Cash Flow Method: Economic benefits for a representative single period are converted to value through division by a capitalization rate.

• Discounted Cash Flow Method: The present value of future ex- pected economic benefits is calculated using a discount rate.

The valuation analyst will review the values produced by the methods utilized. The analyst will determine how much weight will be placed on each method based on their judgment.

Finally, a discount for lack of control, if applicable, and a discount for lack of marketability will be applied to determine the final conclusion of value.

As a market leader in dispute consulting, business valuation and forensic accounting service, the team at Vallit Advisors can provide extensive Business Valuation services to support your case. To learn more about how our dedicated team can assist your firm with these services, contact VALLIT ADVISORS today.

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