The Asset Approach is based on the
premise that an informed purchaser
would pay no more than the cost of
producing a substitute property with
the same utility as the subject property.
It considers that the maximum value
of a property to a knowledgeable
buyer would be the amount currently
required to construct or purchase
a new asset of equal utility.
downward. The ultimate value is
usually a compromise that occurs
when the parties agree to a common
understanding of the assumptions.
This approach is sometimes used
when future benefits associated with
the ownership of an individual asset
are difficult or impossible to quantify.
It is also used when an investor
determines that the individual assets,
in aggregate, are worth more than
the company as a going concern.
Current Market Challenges
Today’s market provides especially
difficult challenges to arriving at an
accurate valuation of a target company.
Not only has the economic and
political environment taken a toll on
businesses’ operational, financial, and
strategic initiatives, but many other
factors contribute to the complexity
of valuing a target company as well.
Publicly traded companies are
generally easier to value because of
the higher quality and quantity of
available information for the company.
Independent research and anaylses
completed by stock analysts can be
used for valuation purposes, and a
company’s stock price can be used
as an independent basis of value.
The economic rebound that began in
mid-2009 has continued through 2012,
although at a considerably slower pace
than recoveries from past recessions.
Additionally, the near future is beginning
to look even more grim. Concerns
are mounting that the nascent U.S.
recovery is fizzling, with some observers
declaring that the U.S. economy may be
undergoing a “pause” or may even be
on the verge of a double-dip recession.
There are, however, several additional
factors to consider. Will the target
require a significant premium over
its current valuation, or is the market
fairly valuing the entity and its future
prospects? Will the target welcome
an offer from a potential suitor, or
will the situation be hostile? Can
cost synergies be extracted from the
target to produce additional value?
Regardless of which method is used,
it is very important to scrutinize the
quality, relevancy, and accuracy of
the underlying assumptions in a
distressed M&A valuation. A formula
and its inputs can be manipulated to
provide any result that is desired.
Lesser quality and quantities of
information for analysis is typical of
privately held companies. A private
company’s capital structure also may be
more complex, with various classes of
equity and debt securities to consider.
A true valuation not only follows the
guideline methodologies, but also
uses valid assumptions to produce
realistic findings. For example, when
the Guideline Publicly Traded Company
Method is used, knowing that suitable
comparables have been selected is
just as important as understanding
the financial fundamentals and
terms that are being applied.
These economic conditions have
created a tremendous amount of stress
on current operations and results.
Companies face severe liquidity
concerns, unpredictable consumer
demand, and challenges to supplier
relationships, resulting in significant
uncertainty and unpredictability
regarding current performance, as well as
future projections. As a result, accurately
valuing an entity as a going concern
is an extremely challenging exercise.
In addition, the final value of a closely
held private business may differ
from the value calculated using the
established methods of appraisal
because various types of discounts or
premiums to the basic valuation must
be considered. For example, control
shares are normally more valuable than
minority shares because they contain
a bundle of rights that minority shares
do not enjoy, such as the ability to:
In addition, the Income Approach:
Discounted Cash Flow Method
includes several assumptions—such
as the weighted average cost of capital
(WACC)—that have material effects on
the resulting value. A true valuation
expert understands and measures the
sensitivity of the WACC to properly and
realistically value a target company.
Also, having an accurate and realistic
understanding of asset values, both
tangible and intangible, not only
provides an investor with well-founded
valuation expectations, but also provides
a strategy to purchase the company
as a going concern or an asset sale.
But just as in good economic times,
many factors beyond financial results
must be analyzed when valuing a
target company in today’s market. Is
the target a public or private company?
Is the industry growing, contracting,
or at a plateau? Is the industry global,
domestic, or regional? How competitive
are the industry and its participants?
Is the business subject to significant
regulation or compliance requirements?
1 Participate in the appointment or change of operational
management and members of the
board of directors
2 Determine management compensation and prerequisites
3 Set operational and strategic policies and change the course
of the business
4 Negotiate and consummate mergers and transactions
5 Liquidate, dissolve, sell out, or ecapitalize the company
6 Declare and pay cash and/or stock dividends
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2013
Journal of
Corporate
Renewal
14
Assumptions must also be reviewed in
consideration of the use of the valuation
(i.e., buy-side versus sell-side). Because
sellers always look to receive maximum
value for their assets, they will adjust
the inputs in their favor. Buyers, in
turn, challenge those assumptions,
hoping to drive expectations
How experienced is the management
team, and is it capable of taking the
company to the next level? Does
the target company have strong
relationships with its suppliers,
vendors, and distributors? Does the
business have intellectual property
and, if so, is it properly protected
from infringement? What is the value
of the intellectual property, and is it
transferable upon a change of control?
These are just a few of the major
issues to address when attempting to
accurately value a target company.
7 Change articles of incorporation or bylaws
8 Block any or all of these actions
