Noncompete agreements are used to smooth management transitions after a business sale. They are contractual agreements that restrict sellers from competing in the same industry for a given time period within a specific geographic area. This brief article explains how business valuation experts determine the value of noncompete agreements in mergers and acquisitions.
A recent Delaware case demonstrates how courts give substantial weight to business valuation provisions in owners’ agreements, especially when the experts maintain their independence and follow the terms of these agreements. This article explains the importance of drafting agreements between owners that cover all the value-related bases.
There’s a trade-off between risk and return in business valuation. Investors expect to receive a higher return as the company exposes them to greater risk. Industry-specific risk is an important consideration when estimating an investor’s expected return. This article explains how business valuation experts measure industry risks and factor them into their analyses. A sidebar highlights the importance of defining the subject industry correctly.
This article uses a 2012 case, In re Bachrach Clothing, to illustrate that the discounted cash flow (DCF) method is only as reliable as its underlying assumptions — and the objectivity of the experts performing the analyses. The article describes the background of this case and looks at the discrepancies between the two experts’ approaches. The experts both relied on the same cash flow projections and used the DCF method — but reached radically different conclusions. The article notes the importance of supporting valuation assumptions with objective, market-derived evidence to reach a well-reasoned valuation conclusion that can withstand court scrutiny.
When fraud strikes, it can have a major impact on a company’s value. An important part of the business valuation process is identifying potential fraud risks and gauging whether management has taken appropriate action to mitigate those risks. This article explains how valuation professionals conduct a fraud risk assessment that’s customized based on the subject company’s size and industry, as well as what to do when fraud risks materialize.
When one is valuing a business, historical results are only relevant to the extent that similar results are expected in the coming years. This article explains how business valuators handle major changes to a subject company’s internal and external market conditions, such as the U.S. Department of Labor’s (DOL’s) new overtime regulations. A sidebar highlights the perils of valuing a business based on oversimplified forecasts.
When the value of a business is based on the sales of comparable companies under the guideline merger and acquisition (M&A) method, it’s important to understand the cash-equivalent value of comparables. Creative deal terms can make a deal more (or less) valuable than it appears on the surface. This article lists three common reasons why selling price can be misleading: installment sales, earnouts and contractual agreements with sellers. Deals with such terms may require an adjustment to arrive at a cash-equivalent value. A sidebar demonstrates how deal structure can help bridge a bid-ask spread in an M&A transaction.
Financial statements, tax returns and marketing materials tell only part of the story. To get a comprehensive understanding of how a business runs, a valuation expert usually needs to see it — and talk to management — firsthand. This article explains the information that may be unearthed during site visits and the types of questions to expect during management interviews.
To create an accurate picture of a company’s finances, a valuator likely will need to make various adjustments to “normalize” earnings. But determining what’s normal involves detailed analysis, as well as an understanding of the company’s current and future operations. This article talks about how appraisers determine whether to make discretionary, discount-related, or other adjustments to better reflect the future cash flow a prospective buyer could generate from a company’s operations.
A company’s owners tend to get along when times are good, but economic downturns can bring out the worst in shareholder relations. This article uses a hypothetical case study to illustrate how valuators can serve as expert witnesses or consultants, helping settle shareholder disputes both in and out of court. Valuators are objective outsiders who can defuse emotions and help the remaining owners refocus their attention on building and preserving value.