in a Business Valuation
October 2024
In valuing a business, once the approaches to value are finished and each has a value conclusion, the question becomes “How should each approach be weighted in determining the final value conclusion?” Some guidance is provided in the standards for business valuations to which most business appraisers are subject.
Under the 2024 Uniform Standards for Professional Appraisal Practice (USPAP), Standard Rule 9-5, Reconciliation “In developing an appraisal of an interest in a business enterprise or intangible asset, an appraiser must: a) reconcile the quality and quantity of data available and analyzed within the approaches, methods, and procedures used; and b) reconcile the applicability and relevance of the approaches, methods and procedures used to arrive at the value conclusion(s)”.
Under the American Society of Appraisers (ASA) Business Valuation Standards (approved through 2022) BVS-VI Reaching a Conclusion of Value, Selection and weighting of methods: A) The selection of and reliance on appropriate methods and procedures depends on the judgment of the appraiser and not on any prescribed formula. One or more approaches may not be relevant to a particular situation, and more than one method under an approach may be relevant; B) The appraiser must use informed judgment when determining the relative weight to be accorded to indications of value reached on the basis of various methods, or whether an indication of value from a single method should be conclusive. The appraiser’s judgment may be presented either in general terms or in terms of mathematical weighting of the indicated values reflected in the conclusion. In any case, the appraiser should provide the rationale for the selection or weighting of the method or methods relied on in reaching the conclusion; and C) In assessing the relative importance of indications of value determined under each method, or whether an indication of value from a single method should dominate, the appraiser should consider factors such as: 1) The applicable standard of value; 2) The purpose and intended use of the valuation; 3) Whether the subject is an operating company, a real estate or investment holding company, or a company with substantial non-operating or excess assets; 4) The quality and reliability of data underlying the indication of value; and 5) Such other factors that, in the opinion of the appraiser, are appropriate for consideration.
As seen above, a business appraiser has a great deal of latitude in determining the weight to be applied to each approach to value. The weight applied is largely based on the quality and quantity of the data used in each approach to value.
Some people, including some business appraisers, believe that, when valuing 100%, or a controlling interest, of a business, the approaches to value should each produce the same or similar value. It is our opinion that each approach to value is independent from the other approaches to value. For example, take a business that produces minimal earnings but has a substantial net asset value. It is obvious that in this case the value under the income approach is much lower than the value under the net asset approach. If the approaches to value produce the same or similar values, it is a mere coincidence.
Although the approaches to value are independent from each other it doesn’t mean that data can’t affect more than one approach. In the above example, it is obvious that the business’ minimal earnings affect both the income and market approaches to value.
Relevant Court Cases
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Kasnetz v. Kasnetz,
Intermediate Court of Appeals of the State of Hawaii,
No. CAAP-20-0000043,
filed October 9, 2024
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Andrew W. Levenfeld & Associates, Ltd.
v. O’Brien,
Illinois Supreme Court,
2024 IL 129599,
filed September 19, 2024
Recent Business Valuation Articles
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“The NGDP Growth Derived Stock
Valuation Model: A Brief Introduction,”
by Michael Sandifer,
dated September 2, 2024
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“Investment Valuation of Public High-Growth
Companies in the Context of Global Economic Uncertainty,”
by Yulia A. Lukina,
posted October 14, 2024
Recent Engagements
- Valuation of the common stock of a
specialty retailer on a minority
interest basis for gift tax reporting
purposes.
- Valuation of the non-voting
member units of a mostly real
estate holding company on a
minority interest basis for
gift tax reporting purposes.
- Valuation of the common stock
of a niche retail company
on a minority interest basis
for estate tax reporting
purposes.
- Valuation of the common stock
of an automobile dealership
on a minority interest basis
for gift tax reporting/sale
purposes.
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