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FEATURE FAMILY LAW

THE QUICK

REFERENCE GUIDE

TO BUSINESS VALUATION FOR ATTORNEYS

BY SEAN SAARI

nvestors who hold publicly-traded securities Common valuation terms that relate to a Adjustments are made to the company’s
have the luxury of knowing the value of company’s capital structure are equity value historical balance sheet in order to present
their investment at virtually any time. An and enterprise value: each asset and liability item at its fair market
internet connection and a few clicks of a Equity Value – Equity value is the value of value. Examples of potential normalizing
I mouse are all it takes to get an up-to-date a company allocable to its equity investors. adjustments include:
stock quote. Of all U.S. companies, however, Equity value is the most commonly- • Adjusting fixed assets to their respective fair
fewer than 1% are publicly-traded, meaning that determined value as it represents the value of market values
the vast majority of companies are privately-held. an investor’s ownership interest in a company. • Reducing accounts receivable for potential
Investors in privately-held companies do not have Enterprise Value – Enterprise value is uncollectible balances
such a readily available value for their ownership the value of a company on a debt-free, cash- • Reflecting any unrecorded liabilities
interests. How are the values of privately-held free basis. In other words, enterprise value Consideration of the Adjusted Net Asset
businesses determined when a couple’s assets removes the impact of how much cash and Method is typically most appropriate when:
are being divided in a divorce, then? This article debt a company is carrying (which are simply • Valuing a holding company or a capital-
is meant to answer that question at a high level financing decisions). Enterprise value can be intensive company
and serve as a quick-reference guide for you when used to calculate an equity value (and vice • Losses are continually generated by the
dealing with the cases that involve the valuation versa) based on the formulas below: business
of privately-held companies. • Valuation methodologies based on a
Enterprise Value = Equity Value + Debt - Cash company’s net income or cash flow levels
Levels of Value Equity Value = Enterprise Value - Debt + Cash indicate a value lower than its adjusted net
All values are not created equal — for example asset value
a company’s “equity value” can be vastly It is critical to understand that these values One needs to keep in mind that when
different than its “enterprise value.” Therefore, measure different components of a com- income or market-based valuation approaches
before beginning any valuation analysis, it is pany’s capital structure, but that they are indicate values higher than the Adjusted
important to establish what type of value is interrelated. For example, when the market Net Asset Method, it is typically dismissed
being determined. approach is applied using revenue of EBIT- in reaching the concluded value of the
DA multiples, it typically produces in an company. This is because income and market-
enterprise value. Therefore, it is necessary based valuation approaches provide a much
Cleveland Mediation Center to adjust the resultant value for the interest- more accurate reflection of any goodwill or
a program of FrontLine Service bearing debt and cash of the company being intangible value that the company may have.
valued to arrive at its equity value.
Income Approach
Advanced Family & Divorce Asset Approach There are two income-based approaches that
Mediation Training The most commonly utilized asset-based are primarily used when valuing a business,

Learn the advanced skills necessary approach to valuation is the Adjusted Net the Capitalization of Cash Flow Method and
to mediate high conflict cases family Asset Method. This balance sheet-focused the Discounted Cash Flow Method. These
cases, like parenting plans and divorce. method is used to value a company based methods are used to value a company based
CLEs available for all trainings. on the difference between the fair market on the amount of income the company is
value of its assets and liabilities. Under expected to generate in the future.
October 7th - 11th, 2019 this method, the assets and liabilities of the Capitalization of Cash Flow Method – The
For more information visit company are adjusted from book value to Capitalization of Cash Flow Method is most
www.clevelandmediation.org/trainings their fair market value. often used when a company is expected to have

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