November 2023
Question: I was told that businesses
in my industry sell for 5 (or any other
number) times EBITDA. Can’t I just
apply this multiple to my company’s
last fiscal year EBITDA to value it?
Answer: Even if businesses in a
particular industry fairly consistently sell
at a particular average multiple of EBITDA,
a specific business is rarely
“average”. EBITDA of a
company can be below or above industry
levels, growth rates can vary greatly
within a particular industry, and a
multitude of other factors need to
be considered in deriving a reasonable
value. A business cannot accurately
be valued by a simplistic multiple of
EBITDA, or any other earnings
measure.
Question: How is net cash flow
calculated?
Answer: There is no one way to
calculate net cash flow
(“NCF”). NCF
can be calculated before or after taxes,
before or after capital expenditures,
including non-operating earnings or
not, or a myriad of other ways, depending
on the particular facts and
circumstances. In any case it is
important to match the way that NCF
is calculated to the appropriate discount
or capitalization rate when valuing a
business.
Question: Can’t I
just get a letter report rather than a
full business valuation report?
Answer: We can issue a
letter report, but it will be labeled
as a consulting report and there will
be a statement in it that neither the
letter nor its conclusions constitute
an “appraisal” as defined
by the Uniform Standards of Appraisal
Practice or the Business Valuation
Standards of the American Society of
Appraisers. In addition, a
letter report may not satisfy the
purpose of the valuation. For
instance, the IRS would not accept
a letter report for reporting the
value of a business for gift or
estate taxes. Likewise, a
letter report would likely not be
acceptable for ESOP purposes.
Question: I take out
most of my company’s earnings
in compensation. How do you
take that into consideration if
you are valuing my business for a
possible sale?
Answer: When we value a
business on a 100% controlling-interest
basis for a possible sale we normalize
owner/officer compensation to a level
that is commensurate with the services
provided by the officer/owner. Benchmarks
used to do this include salary surveys and
compensation data from governmental
entities.
Relevant Court Cases
-
Julie A. Su, Acting Secretary of Labor
U.S. Department of Labor v. Brian J.
Bowers, et al.,
U.S. Court of Appeals for the Ninth Circuit,
No. 22-15378,
filed October 25, 2023
-
Michael Stock v. Sustainable Energy
Technologies, Inc.,
Court of Chancery of Delaware, C.A.
No. 2023-0109-LM,
filed October 30, 2023
Recent Business Valuation Articles
-
“Patent Portfolios and Valuation
Uncertainty,”
by Thaddeus Neururer, Li Wang and
Yuxiang Zheng,
dated October 9, 2023
-
“Specifics of WACC for Sustainable
Projects,”
by Golib Kholjigitov,
dated October 5, 2023
Recent Engagements
- Valuation of the non-voting common
stock of a specialty transportation
company on a minority interest basis
for gift tax reporting purposes.
- Valuations of member interests in
mostly real estate holding companies
on controlling interest bases for
gift tax reporting/sale purposes.
- Valuation of 100% of the
common stock of a specialty distributor
on a controlling interest basis for
purchase/sale purposes.
- Valuation of the non-voting
common stock of a niche chemical
products firm on a minority interest
basis for stock option issuance and
purchase/sale purposes.
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