Most business valuators in the US, UK, Australia and Canada are neglecting “fair market value” in their business valuations as demanded by tax law. These deficient valuations should always be challenged.
FAIR MARKET VALUE DEFINITION:
The price expressed in money that a knowledgeable buyer and seller would agree upon with both parties having reasonable knowledge of the facts; acting in their own interests, and neither being under any pressure to buy or to sell.
ASSET APPROACH TO BUSINESS VALUATION.
FAILURE TO IDENTIFY THE INTANGIBLE ASSETS.
In most private company business valuations is that the valuator does not have a methodology to value the 60% to 90% intangible asset value found in most businesses today.
Upon showing the court documented evidence of the intangible asset component in a subject business, a competent lawyer could put the valuator in a “uncomfortable” spot trying to explain why his valuation methodology was not “identifying”, “measuring”, “weighting”, and placing an estimate of value on ALL of the tangible and and intangible assets in a business as required by law.
How could a valuation from 2020 onward be compliant with the law without identifying, measuring, weighting, or placing a value on all of the assets both tangible and intangible.
MARKET APPROACH TO BUSINESS VALUATION
Smoke/Mirrors/Deception/and Non Compliance with Tax Law.
Private business sale price data comparables in my 25 years of experience are almost always flawed. “Fair market Value” as determined by tax law states explicitly that “neither party be under pressure to buy or sell” No data that I have ever seen in 25 years suggested they considered if there was pressure to sell as in issues of death, divorce, debt, illness. I never saw “in depth” sale financing details disclosed so that a reader could see if the “comparable sale data” was truly “comparable”.
WORSE is the comparing of private company to public company sale price data: The industry 3-5x EBITDA estimate for private companies should never be compared to 20 to 25 P/E ratios of public companies because the EBITDA multiple is based on earnings before interest, taxes, depreciation, and amortization, while the P/E ratio in public companies is based on net income, which is after these items.
Using public company PE data to compare to a EBITDA multiple or a business valuation where a “Normalized Net Income” multiple is used; is deceptive and we don't believe compliant with the tax law governing business valuation in western countries.
A MULTIPLE RANGE between private and public companies OF 3X TO 25X is too large to ever be considered legitimate.
INCOME APPROACH TO BUSINESS VALUATION
Without having a methodology to identify, measure, weight, and place an estimate of value on the intangible assets of a company; how could one provide a legitimate multiple of NORMALIZED NET INCOME.
NO PROOF OF CONCEPT.
A valuation you can believe in will include a “real world” actionable business sale plan from an experienced valuation specialist with a proven methodology.
REGARDLESS OF WHETHER THE BUSINESS IS FOR SALE OR NOT.
Eric Jordan, CPPA
1-800-606-0310
pindotca@gmail.com