EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA earnings are used by many valuation professionals and financial analysts as a method to compare the cash earnings of a subject company with cash earnings of comparable companies. This method of earnings comparison is useful because it equalizes differences between or among companies in their capital structures, their depreciation methods and tax rates. This “equalization” allows the analyst to make informed judgments about earning capabilities of each company.
Sometimes people use the two terms interchangeably. However, for valuation purposes there may be a significant difference in the two terms. Enterprise value is often referred to as the value of the invested capital which includes the value of the equity and the value of the firm’s liabilities. This could represent the asset side of the balance sheet and would likely include the hard business assets (property, equipment, etc.), cash, receivables, inventory, and the goodwill of the business. Equity Value is the enterprise value LESS all liabilities of the business. As various professionals may define these levels of value differently, it is important to understand exactly what a definition of a level of value includes or excludes under specific circumstances delineated in the valuation report.
As an expert consultant, the valuation professional is engaged to develop information that will be used by the attorney in a variety of ways, including settlement negotiations with the opposing side. In these instances, the valuation professional is usually not expected to testify or to develop an opinion of value that will be entered into the court records. The documents created by the valuation professional may be protected by attorney-client privilege. In this situation, the valuation professional is working as the client’s advocate. Continue reading
Buy-sell agreements for privately-held companies provide the shareholders with a mechanism by which the interest of a deceased or withdrawing shareholder may be liquidated through a repurchase agreement, a cross-purchase agreement, or a hybrid agreement. Providing for how the value of the shares is established is critical for a successful buy-sell agreement. Generally, there are three methods through which the value of the shares may be established: 1) specific formula approach based on a financial metric such as book value, earnings, etc., 2) negotiation between the parties, 3) independent outside appraisals. While the value determined by a specific formula may be manipulated by the controlling shareholders who have some discretion over how the financial statements are reported and the negotiation between the parties may fail when the parties are unable to agree on terms, an independent outside valuation conducted as part of an annual valuation program provides a clear means of establishing the value of an interest over time.
Rules of Thumb are generally expressed as multipliers. A common example would be that some particular type of business will sell for .75 to 1.50 times annual revenues. Another popular multiple is a multiple of discretionary earnings. For example, a particular type of business is said to sell for X times Seller’s Discretionary Cash Flow (SDCF), or Owner’s Cash Flow (OCF). There may also be other rules of thumb relating to some measure of physical volume, such as X dollars times each keg of beer sold per month. Continue reading
An Accredited Valuation Analyst (AVA) is a valuation professional who has completed specialized advanced training in business valuations through the National Association of Certified Valuation Analysts (NACVA) and who has also completed a comprehensive examination and submitted a complete written valuation report to examiners. AVAs receive continuing education in valuations each year and observe the ethics, reporting standards, and practice standards of NACVA. Continue reading
Goodwill is defined as the intangible asset arising as a result of name, reputation, customer loyalty, location, products, and similar factors not separately identified. The notion of goodwill has existed since mankind first entered into commercial activity. In ancient Egyptian bazaars, merchants knew the location closest to the city gates would provide the best opportunity to sell goods. In theory, merchants with the best locations could sell their businesses for a higher price. Location is only one example of why an ongoing business is worth more than the sum total of its property or tangible assets. Other elements might include reputation for good products and service, established customers, profitable history, reliable workforce, etc. Tax courts have held that goodwill represents the price paid for a business in excess of the value of tangible assets. But in many cases, determining the value of goodwill is not cut and dried and great differences of opinion will exist as to the value of goodwill.