About Professional Business Valuations
In the last issue (#53), we discussed the Purposes of a Business Valuation. In this issue we will provide information About Professional Business Valuations.
A Favorite Famous Quote
"In theory there is no difference between theory
and practice. In practice there is." Yogi Berra
About Professional Business Valuations
Whereas business brokers and merger and acquisition (M&A) intermediaries primarily utilize a company's recent historical earnings to develop an informal opinion of value, the requirements of a professional business appraiser are much more complex. They have professional standards that must be incorporated and adhered to in their business valuation reports.
A professional business appraiser will utilize three methods of valuation: 1) an asset approach; 2) a market approach; and 3) an income approach.
Asset-based business valuation
The asset approach may consider multiple types of values - the company's book value, replacement cost value, the appraised value of the assets and a method called excess earnings, which is a combination of an asset approach and an income approach.
Market-based business valuation
The market approach attempts to analyze comparable transactions. Unfortunately, because most small businesses are privately held, the availability and reliability of comparable transactions may be limited.
Income-based business valuation
The income approach may include 1) the capitalized earnings method; 2) the excess earnings method; and 3) the discounted cash flow method. Assumptions for numbers 1 and 2 include determination of the earnings to be capitalized and a capitalization rate. The discounted cash flow method relies on assumptions regarding; 1) projected future cash flows; 2) a discount rate called the weighted average cost of capital; and 3) a terminal value.
Providing more details to explain professional business valuations is beyond the scope of this newsletter. We are simply highlighting the complexities of the professional business appraisal vs. the opinion of value that business brokers or M&A intermediaries can provide for internal planning purposes. If you have not already, now would be a good time to read this article: Issue #6 - How Businesses are Valued Based on Seller's Discretionary Earnings (SDE).
Professional Business Appraiser Accrediting Organizations
To aid in the understanding of the alphabet soup of professional business appraiser accreditations, following are the four primary organizations and the professional designations they provide in business valuation, as well as an estimate of the number of designees as of the 3rd quarter of 2010 (source: chart from NACVA website, specifically located at http://www.nacva.com/pdf/08_1stQtr_chart_x1a.pdf):
American Institute of Certified Public Accountants (AICPA)
- ABV - Accredited in Business Valuation (approximately 2,600 designees)
American Society of Appraisers (ASA)
- AM - Accredited Member (approximately 100 designees)
- ASA - Accredited Senior Appraiser (approximately 1,200 designees)
Institute of Business Appraisers (IBA)
- CBA - Certified Business Appraiser (approximately 400 designees)
- BVAL - Business Valuator Accredited for Litigation (approximately 80 designees)
- ABAR - Accredited in Business Appraisal Review (approximately 70 designees)
- AIBA - Accredited by Institute of Business Appraisers (no designee estimate available)
- MCBA - Master Certified Business Appraiser (no designee estimate available)
- FIBA - Fellow of the Institute of Business Appraisers(no designee estimate available)
National Association of Certified Valuation Analysts (NACVA)
- CVA - Certified Valuation Analyst (approximately 5,100 designees)
- AVA - Accredited Valuation Analyst (must be a CPA) (approximately 700 designees)
- CFFA - Certified Forensic Financial Analyst (approximately 300 designees)
As discussed in .....