Business Valuation 101 will help you to dispel the magic of business valuations and understand the art and science used to conclude a credible and reliable value conclusion. There are three steps to understanding and validating business valuations.
Step 1: Dispel the Magic - Ascertain quickly whether the valuation was professionally prepared. This high level ‘smell test’ is critical because if the valuation is improperly prepared, you likely won’t get very far with Steps 2 and 3. Like any magic trick, improperly prepared business valuations tend to rely on deception and distraction rather than facts and logic. To properly validate a business valuation, you’ll need facts and logic.
Step 2: Distinguish Art from Science - Critique key areas of of professional judgment used by the appraiser. Assuming that the business valuation is professionally-prepared, the second step is to recognize that ‘art’ is used in every business valuation in the form of reasoning and professional judgment. In order to test the validity of a business valuation, you need to understand how, when, and why professional judgment is applied. This section will identify and explore the following three main areas of professional judgment in a business valuation: selecting the appropriate valuation methods, actually implementing the selected methods, and then reconciling the value conclusion from each method into an overall conclusion of value.
Step 3) Understand the Science - Validate the 'science' used in the business valuation. Once you’ve eliminated the magic and you’ve distinguished art from science, then all you need to understand are the very basics of valuation science. The good news is that the science of valuation can be boiled down to ONE simple math formula called the Gordon Growth Formula (“GGF”). This section will break down the mechanics of the GGF and reveal the five key metrics that need to be validated to assist you in determining if a value conclusion is reliable.