Page 47 - JulAug2019_BarJournal

FAMILY LAW FEATURE

a relatively stable level of margins and growth to arrive at its equity value. Marketability – There are certain marketability
in the future — it effectively takes a single Guideline Public Company Method – differences between an ownership interest in a
benefit stream and assumes that it grows at a The Guideline Public Company Method privately-held company and an ownership interest
steady rate into perpetuity. The Capitalization values a business based on trading multiples in a publicly-traded company. An owner of
of Cash Flow Method is typically applied when derived from publicly traded companies publicly-traded securities can sell those holdings
valuing mature companies with modest future that are similar to the subject company. at a moment’s notice and receive the cash within
growth expectations. The steps taken in applying the Guideline several days. This would not be the case with an
Discounted Cash Flow Method – The Public Company Method include identifying ownership interest in a privately-held company,
Discounted Cash Flow method, on the comparable public companies, adjusting though. Consequently, liquidating a position in a
other hand, is more flexible than the the guideline public company multiples privately-held company is a more costly, uncertain
Capitalization of Cash Flow Method and for differences in the size and risk of these and time-consuming process than selling the
allows for variation in margins, growth companies compared to the subject company, stock of a publicly-traded entity. An investment in
rates, debt repayments and other items in and then applying the adjusted pricing which the owner can achieve liquidity in a timely
future years that may not remain static. The multiples from the representative companies. fashion is worth more than an investment in which
Discounted Cash Flow Method is used when Also similar to the Guideline Transaction the owner cannot sell the investment quickly.
future growth rates or margins are expected Method, the calculated multiples are Privately-held companies sell at a discount that
to vary from a company’s historical levels. often based on the enterprise values of the reflects the additional costs, increased uncertainty
guideline public companies, meaning that and longer time commitments associated with
Market Approach we arrive at an enterprise value of the subject selling these types of investments.
There are two market approaches that are company when using the Guideline Public The applicable lack of marketability
primarily used when valuing a business, Company Method. As a result, adjustments discounts are typically based on consideration
the Guideline Transaction Method and for a company’s debt and cash balances are of the following:
the Guideline Public Company Method. often necessary to arrive at an equity value. • Empirical studies (such as restricted stock
These methods are used to value a company studies and pre-IPO studies)
based on the pricing multiples observed Discounts for Lack of Control and Lack of • Option models
for similar companies that were sold or are Marketability • Qualitative factors (such as those
publicly-traded. Before a conclusion of value can be rendered, identified in Bernard Mandelbaum, et al. v.
Guideline Transaction Method – The the nature of the ownership interest being Commissioner).
Guideline Transaction Method values a valued must be considered. The value of an
business based on pricing multiples derived ownership interest is influenced by many of Conclusion
from the sale of companies that are similar to its characteristics, including marketability Valuing a privately-held company is much
the subject company. The steps taken in using and control, which can have a meaningful more involved than simply typing a ticker
the Guideline Transaction Method include impact on value. symbol into Yahoo! Finance. This article
finding transactions involving the purchase Control – Whether or not the ownership is meant to provide a high-level overview
of comparable companies, selecting the interest being valued has control over the of the valuation methods that are most
transactions that closely mirror the company’s subject company can impact on its value. frequently used in the valuation of privately-
operations and which occurred in similar Controlling owners have the ability to: held companies. It should be kept in mind
industry and economic conditions, and finally, • Elect directors or appoint management that there are additional nuances specific to
applying the indicated pricing multiples from • Set levels of management compensation each valuation that are not addressed here. At
the representative transactions. and other perks the end of the day, however, the valuation of
Valuation experts typically subscribe to • Determine cash dividends/distributions privately-held companies comes down to the
databases that allow them to perform searches • Set company policies or business course application of asset, income and market-based
for comparable transactions. Once a population • Purchase or sell assets valuation approaches.
of guideline transactions is identified, some • Determine when and how to sell the
valuation experts also analyze transaction company
subsets that focus on specific groups of The ownership of a non-controlling Sean Saari is a partner at Skoda
transactions such as companies of similar interest in a company does not have the Minotti and manages the firm’s
size, companies with similar margins, and ability to unilaterally direct the items above, Valuation & Litigation Advisory
transactions that have occurred most recently. which generally makes it less valuable than a Services group. He assists a diverse
It should be noted that the calculated controlling ownership interest. client base in valuations for litigated
transaction multiples are typically based on the The impact of lack of control on the value of matters, domestic disputes, shareholder disputes,
enterprise value of the purchased companies, an ownership interest is typically reflected in estate and gift tax planning, financial reporting and
meaning that we arrive at an enterprise one of the following two ways: strategic planning. In addition to being a CPA, Sean
value of the subject company when using the • Directly in benefit stream being used to is Accredited in Business Valuation (ABV) and is a
Guideline Transaction Method. Therefore, one value the subject company Certified Valuation Analyst (CVA). He became a
must subtract the subject company’s debt and • Through the application of a discount for CMBA member in 2015. He can be reached at (440)
add its cash to the calculated enterprise value lack of control 449-6800 or ssaari@skodaminotti.com.
JULY/AUGUST 2019 CLEVELAND METROPOLITAN BAR JOURNAL | 47