Frequently Asked Questions

The Art of Valuations

Q. I am not looking to sale my company, why should I be concerned with its value?
A. Knowing the value of your company is important for buy sell arrangements as well as gift tax and estate tax issues. It is also important for raising new capital, protecting assets or admitting new owners.

Q. Is there a science to determining the value of my company?
A. At its best, valuation is an art. It is influenced by institutional, macroeconomic and personal factors. What may be valuable to one person may actually be considered detrimental to another. For example, an in-house design department may be considered by one owner to be a significant attribute because it can provide proprietary designs quickly and efficiently, while another owner may perceive it as a detriment because of its high fixed costs and limited flexibility.

Q. How does one value a company?
A. The financial community relies on several quantitative techniques to arrive at an estimation of fair market value for operating businesses, and subsequently refines the estimate to take qualitative factors into account. These qualitative factors constitute the art of valuation. While no one technique should be relied upon exclusively, a realistic range of fair market value can be determined by employing several methodologies. The four most common valuation techniques are: 1.) comparable company analysis or market multiple technique; 2.) comparable transaction analysis or transaction multiple technique; 3.) discounted cash flow; and liquidation analysis.

Q. What are some of the factors you consider when valuing a company?
A. The significance placed on qualitative characteristics cannot be discounted and must not be overlooked. Below is a sample of factors that can impact value but which are not directly taken into account with traditional quantitative approaches:

• Dominant market share
• Company size and critical mass
• Strength of competition
• Technological capability and expertise
• Size of backlog
• Location of operations
• Strength of customer-vendor relationships
• Competence of management

Q. There is a lot of consolidation of companies occurring in my industry. Could this be a reason I should have a valuation done?
A. Yes, the impact of the current merger and acquisition environment must also be taken into account when assessing fair market value. If your company is in a hot industry segment in terms of merger and acquisition activity, a significant premium may be offered by potential buyers. On the other hand, a profitable business in an industry not subject to much activity may actually carry a fair market value lower than that of an unprofitable company in a highly popular market.

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