Setting Valuation Range to Steer Negotiation

Valuation work is as much an art as a science

An American business owner needed help in determining a market-equilibrium price for his privately-held financial services consultancy in advance of a prospective sale. The valuation analysis was obscured by a faltering regional economy and considerations tied to minority shareholders. Inappropriate appraisal standards had been used in the past, creating misinformation. The project included analysis of proprietary investment-account holdings and an assortment of real-estate assets, including lease commitments.

Project Design. We structured an arrangement in which we partnered with a local accounting firm, helping the client to economize on overall project costs. Our firm developed the work plan and undertook most of the first-round activity, such as interpreting industry-specific data. The accounting firm critiqued our financial-statement analysis. We maintained arms-length engagement with the project sponsor to ensure objectivity.

Summary Points

Project Execution. In conducting our study, we sought comparables within the region and elsewhere in the United States to use as a baseline valuation framework. The final assessment, however, relied most heavily on discounting cash-flow expectations over the future term of the business. Some positions in the firm’s proprietary investment account could not be priced at market value because the holdings were illiquid, requiring us to reach into our investor-client universe to understand secondary-market potential.

Follow-Through. The deliverable tied to the two-month assignment was a comprehensive review document, resulting in a target valuation range for the firm. Key components included a regional economic outlook and company profitability analysis. The bottom-line assessment was used by the project sponsor in pegging a more realistic market value for the firm in negotiations with the acquiring entity. Our work also put a foundation in place for responding efficiently to the buyer’s due-diligence questions.

Note: Some information in this illustration has been modified for confidentiality reasons.

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