Business Valuation

2ic Strategy Group (2ic) provides business valuation reports and transaction advisory services to clients. Our approach to valuation meets two tests. First, we reach an accurate value conclusion. Second, we clearly and convincingly establish how the conclusion was reached. 2ic goes beyond merely the numbers. We also utilize transaction databases and other secondary research sources that reinforce the future value of enterprise growth opportunities.

Purpose of a Valuation

Some practical reasons for obtaining a business valuation include the following:

Standard of Value

The standard of value must be matched to the purpose of the valuation in order for a reasonable conclusion of value to be reached. Businesses have different values for different purposes and/or under different standards of value. Various assumptions, guidelines, methodologies, regulations, tax rulings and case law will have a greater or lesser impact depending on these critical factors. Depending on the purpose of the valuation, or the context within a valuation, one definition of “value” may be more appropriate than another. The standard of value answers the following general but very basic questions:

  1. Value to whom?
  2. Valued how?
  3. Under what circumstances?

Value to Whom?

Can be generally defined by four different standards:

Fair Market Value The price a willing buyer would pay to a willing seller, assuming neither party is under a compulsion to transact and both parties have reasonable knowledge of the relevant facts.
Fair Value The price that fairly compensates an owner who was involuntarily deprived of the benefit of an ownership interest where there is neither a willing buyer nor a willing seller.
Investment Value The price that a buyer would be expected to pay with consideration given to any unique benefits or synergies that the buyer is purchasing. This value is appropriate in business purchase or sale transactions where the buyers and sellers are likely to know each other and in fact, may be cooperating through the due diligence process.
Intrinsic Value Analytical judgment of value based on the perceived characteristics of an investment, without regard to the identity or characteristics of a particular investor. It represents the "true" or "real" value of an asset. Security analysts compare the intrinsic value of a stock with its current trading price to assess buying and selling opportunities.

Valued How?

Primarily a function of the approach used to value a business and the methods that are appropriate for the business being valued:

Book Value The accounting term that represents the "accounting value" of assets minus liabilities as at a specific date. Because balance sheets are normally prepared in accordance with generally accepted accounting principles (GAAP), the book value of a company does not consider the fair market value of its underlying net assets nor its economic earnings capacity.
Adjusted Book Value An indication of value developed by adjusting the reported book values to their actual or estimated fair market value. The “assets” referred to in this definition are tangible assets, such as accounts receivable, inventory, fixed assets and occasionally identifiable intangible assets such as non-compete agreements or patents. Intangible assets such as goodwill, are generally not considered. However, any off-balance sheet and/or contingent assets and liabilities would be included at their actual or estimated fair market values.
Accumulation Value Adjusted book value, plus the value of all the other intangible assets such as going concern value (e.g., the company name, in-place work force and customer list) and goodwill. These intangible assets can be valued by using any combination of the cost, income or market approaches to valuation.
Enterprise Value The value of 100% of the equity, plus the market value of any interest-bearing debt. The invested capital value is normally derived from a weighted average cost of capital applied to cash flows or when guideline public company metrics (price-to-revenue, price-to-EBIT or price-to-EBITDA multiples) are applied.
Equity Value Value of all tangible and intangible assets of an enterprise, less its liabilities. Represents the stockholders’ claim on the net assets of the company. This value is normally derived when an equity cost of capital is applied to cash flows or when guideline public company metrics (price-to-book or price-to-earnings multiples) are applied to similar measures of the subject company.

Under What Circumstances?

Assumption about what is going to happen to the business and the level of value of the business interest that is the subject of the report:

Going Concern Value Assumes that the business was operating yesterday, is operating today and will be operating tomorrow. Value is best determined by the earnings or cash flow it generates for the benefit of its investors.
Liquidation Value Liquidation value assumes that the business is worth more broken up, its assets sold in an orderly or forced manner. If the holder of the appraised interest can force such an action to occur, the liquidation value of assets less liabilities could be an appropriate measure of value.
Control Value Represents the additional value inherent in a greater than 50% interest, reflecting the power of a shareholder over the business. Different levels of control value are possible depending on the rights and restrictions that are associated with a particular sized block of stock.
Lack of Control Value Generally refers to the value of two 50% interests or the value of any non-voting interest, e.g., non-voting stock or limited partnership interests.
Minority Value The value reflecting an ownership position of less than 50% and the associated inability to make decisions that affect corporate policy. Different levels of minority value are possible, e.g., a minority interest that is the largest equity interest due to fractionalization of ownership and a minority interest with swing vote attributes.
Marketable Value The value of a debt or equity interest assuming an existing market where that debt or equity can be exchanged. Active public markets, such as listed exchanges are examples where a debt or equity holder can receive a known amount of proceeds with minimal transaction costs and waiting time.
Private Company Value This method incorporates a discount from the marketable value owing to the lack of a ready market of buyers and sellers for closely-held stock.

The Valuation Report

A valuation report can provide one of three types of conclusion: opinion, estimate or indication of value. These reports are differentiated by the level of assurance they provide and the amount of analysis, investigation and independant corroboration required to support each type of conclusion. Our valuation reports are written in accordance with the guidelines established by the Canadian Institute of Chartered Business Valuators.

Types of Valuation Reports
Report Type Opinion Estimate Indication
Credibility Highest Moderate Rough ballpark
Assurance Highest Well considered No assurance
Level of analysis, investigation and independent corroboration Extensive Moderate Limited
Best Use Appropriate in situations that involve public securities, high risks, important or contentious issues or when there are legal proceedings. Ideal for preliminary negotiations, succession planning and situations involving important issues subject to budget constraints. Provides an approximate valuation for initial planning.
Approximate Cost $10,000 to $15,000 Corporate enterprise $3500 to $8000

Small business enterprise $1500 to $3000		 $500 to $1500