This video post asks business owners and advisers two questions: 1) Is your company’s (or your clients’ companies for advisers) dividend policy a good one that is meeting the needs of its owners for current income versus capital appreciation? And 2) If not, do you need to be working on your dividend policy to improve its effectiveness?
The WACC, or Weighted Average Cost of Capital, is an enterprise level discount rate used in capitalizing debt-free income measures and in terminal value calculations for DCF methods. There is virtually no readily available market evidence regarding WACC. On the other hand, there is substantial relative and comparative information available regarding EBITDA multiples. This video post discusses how to convert a WACC, which most market participants and appraisers know little about, into an EBITDA multiple for a company based on its own unique circumstances. And, as promised, we do so in three easy steps.
I have read too many buy-sell agreements to count. The typical valuation process in them (for appraisals following trigger events) range from 150 words to perhaps 300-400 words. That simply is not enough “wordage” to describe or define any valuation process, much less an appraisal. I started focusing on the seven defining elements over the years as I experienced problems with each and every one of them in troubled or litigated valuation processes where I was either an appraiser or a consultant. Do your clients’ buy-sell agreements adequately define the seven elements? Or does your company’s agreement do the same? If they are not clear in an agreement, future trouble is almost certainly lurking.
The standard of value of fair market value is very familiar to attorneys and appraisers and often the subject of apparent disagreement. This post looks at the standard definition of fair market value and then breaks it down into its component parts as they relate to hypothetical willing buyers and sellers. Fair market value occurs at the intersection of negotiations between these two sets of hypothetical parties. First, we must understand the meaning of fair market value. Next, we must ask the follow-up question: the fair market value of what? We investigate the relationship of the definition of fair market value and the asset(s) to which the definition pertains.
What adjustments are necessary to appropriately value a company? We normalize for non-recurring and unusual items and for discretionary expenses of owners. These are necessary to achieve marketable minority/financial control value. Then, if strategic control is desired, we adjust cash flows for synergistic or strategic cash flow benefits. It is important to understand the critical differences between normalizing and control adjustments.
At the core of every business valuation, whether of an entire business or an interest in a business, lie three key elements that must be examined and understood. This is true regardless of the seeming complexity or simplicity of any valuation situation. The elements are expectations for cash flow, the expected growth in cash flow, and the risks associated with achieving the cash flow. In this short video post, we Keep It Simple, Sally or Stewart and will elaborate on the concepts in the near future.