Business Valuations: Going-Concern, Liquidation, and Orderly Disposition
There are three primary bases for valuing a company: Going-Concern, Liquidation, and Orderly Disposition. A Going-Concern valuation refers to a company that has the resources to continue operations indefinitely; a Liquidation valuation refers to the value of a company if operations are ceased and the assets are sold off separately and an Orderly Disposition valuation assesses the value at which the asset or assets are sold over a reasonable period of time to maximize the proceeds received. The basis for conducting the valuation will impact the weighting of the three approaches.
The three approaches that must be considered by a valuation analyst when valuing a Going-Concern include:
The Income Approach uses the historical and/or future cash flow stream generated by the subject company to determine its value. The valuation analyst may determine an appropriate capitalization rate and capitalize a single historical period, or a weighted average of several historical periods, to get a value estimate. The valuation analyst may also establish an appropriate discount rate and discount a future benefit stream of the subject company as forecasted by the valuation analyst. This discounted approach assumes that the subject company is worth the present value of a series of income streams as determined by a multi-period forecast.
The Market Approach utilizes valuation multiples from publicly traded and privately held companies in the same, or similar, industry as the subject company. The valuation analyst can use the current trading multiples of comparable companies to determine the applicable multiples for the subject company. The other variation to this approach is to utilize previous sales of companies in the same, or similar, industry as the subject company. The valuation analyst can then apply the transaction multiples of comparable companies to the subject company and determine a value estimate.
There are several methods within each of the three approaches that a valuation analyst can utilize to determine the value of the subject company. However, it is up to the valuation analyst to use professional judgment in determining how to weight each of the approaches when preparing a detailed report.
Our Valuation process includes:
- Collection of historical financial statements, tax returns and other various financial information
- Collection of a variety of other information about the company that is needed to complete the assessment
- Valuation professional will conduct industry and economic analyses, as well as a comprehensive financial analysis of the company to come up with a preliminary value, then determine if a discount for lack of marketability or lack of control should be applied
- Consultant will present valuation reports to client