Business valuation is the process of determining the economic value of a business. RICS Business Valuation Services registered valuers use a variety of methods such as the market approach, income approach, and asset-based approach to determine the value of a business. The market approach uses market data to determine the value of a business, the income approach looks at the future economic benefits that a business is expected to generate and the asset-based approach is based on the value of the assets of a business.
The Royal Institution of Chartered Surveyors (RICS) provides guidelines and standards for business valuation through its Red Book, formally known as RICS Property Valuation – Global Standards. The Red Book sets out the standards that RICS members must adhere to when carrying out business valuations. It provides guidance on the principles, procedures, and practice of business valuation, covering a wide range of topics including the purpose and scope of business valuation, ethical and professional conduct, and the process of valuing different types of businesses.
EDS RICS Business Valuation Services registered valuers are able to provide valuations for a wide range of purposes, including mergers and acquisitions, tax, probate, and matrimonial matters, as well as for financial reporting and accountancy purposes. RICS members who provide business valuation services are known as RICS Registered Valuers, who are bound by the RICS regulations, codes of conduct, and professional guidance as outlined in the RICS Red Book. These professionals are qualified, experienced, and knowledgeable in the field of business valuation and have demonstrated their competence through rigorous assessment and ongoing professional development.
EDS RICS Valuation Services Expert Witnesses, having prevailed at trial and Alternative Dispute Resolution in multiple multi-billion dollar matters, are highly-trained—highly skilled—highly credentialed multidisciplinary appraisal review instructors with decades of courtroom experience who master the facts and are able to present clear, objective, and compelling findings to judges and juries.
EDS Exec. Managing Director Steven N. Siegler, ASA, FRICS is the only RICS-Accredited Business Valuation Expert Witness in the United States of America—and all of The Americas—one of only a handful of such expert witnesses in the world holding the much-coveted RICS Expert Witness Accreditation Service (EWAS) and Dispute Resolution Service (DRS) Certifications.
Royal Institution of Chartered Surveyors (RICS) Business Valuation requires highly-specialized international Business Valuation experts specifically trained, accredited, and certified to provide RICS Business Valuation services in the Americas.
EDS Exec. Managing Director Steven N. Siegler, ASA, FRICS is the only RICS-Accredited Business Valuation Expert Witness in the United States of America—and all of The Americas—one of only a handful of such expert witnesses in the world holding the much-coveted RICS Expert Witness Accreditation Service (EWAS) and Dispute Resolution Service (DRS) Certifications.
Business valuation is the process of determining the economic value of a business. RICS Business Valuation Services registered valuers use a variety of methods such as the market approach, income approach and asset-based approach to determine the value of a business. The market approach uses market data to determine the value of a business, the income approach looks at the future economic benefits that a business is expected to generate and the asset-based approach is based on the value of the assets of a business.
The Royal Institution of Chartered Surveyors (RICS) provides guidelines and standards for business valuation through its Red Book, formally known as RICS Property Valuation – Global Standards. The Red Book sets out the standards that RICS members must adhere to when carrying out business valuations. It provides guidance on the principles, procedures, and practice of business valuation, covering a wide range of topics including the purpose and scope of business valuation, ethical and professional conduct, and the process of valuing different types of businesses.
EDS RICS registered valuers are able to provide valuations for a wide range of purposes, including mergers and acquisitions, tax, probate, and matrimonial matters, as well as for financial reporting and accountancy purposes. RICS members who provide business valuation services are known as RICS Registered Valuers, who are bound by the RICS regulations, codes of conduct, and professional guidance as outlined in the RICS Red Book. These professionals are qualified, experienced, and knowledgeable in the field of business valuation and have demonstrated their competence through rigorous assessment and ongoing professional development.
EDS RICS Business Valuation experts are American Society of Appraisers (ASA) and Royal Institution of Chartered Surveyors (RICS) business valuation instructors and reviewers—all well-published luminaries in the global valuation community. We specialize in providing RICS Business Valuation expert-witness services and we have prevailed in billions of dollars at issue in some of the world’s most important—high-profile—and valuable RICS Business Valuation-related litigation and Alternative Dispute Resolution (ADR).
Our RICS Business Valuation experts understand, develop, and report critical multi-disciplinary component value drivers and provide the insight, research, and professional opinions of value that are independent, objective and render credible findings that will withstand scrutiny and challenges from regulatory, judicial, and taxing authorities.
Overview of Business Valuation Methodology
Correctly valuing a business is central to any successful M&A transaction. As much art as science, valuation strives to quantify the financial benefits of owning the business today and in the future. Here are the core principles of valuation, components of business value, and the most common methods used to assess it.
Business Valuation Core Principles
Which will yield greater contribution to equity holders: liquidating the business’s assets, or operating it as a going concern? The answer lies in comparing (a) the value of the business based on the cash flows it is expected to generate discounted to reflect the associated risk, and (b) the estimated net proceeds that could be realized by selling the underlying assets and settling all liabilities.
This foundational question gives rise to the two most common valuation approaches income or cash flow-based, and asset-based. If a business is viable on a stand-alone basis, valuing it as a going concern based on its cash flows will generally be more appropriate and yield a higher value.
With this as a starting point, we look at some of the core principles of valuation which apply across private and open-market transactions, reflecting economic theory, common practice, and legal precedent[1]:
Components of Business Value
The enterprise value of a business is its total value, including both its interest-bearing debt and equity components. It is the total value of:
Business Valuation Methods
Cash Flow-Based
Because of their ability to reflect the future economic benefits of an ongoing business, cash flow methodologies are most commonly used in business valuation. There are various ways to estimate value based on cash flow – each with its unique benefits and limitations – including applying a multiple to an income number like EBITDA, capitalizing cash flows, and discounting cash flows. All of these methodologies require:
The art and judgment in this type of valuation lie mainly in determining prospective cash flows and the appropriate level of risk to apply. Note that the same enterprise value can be calculated using a conservative cash flow number and lower risk level or a more ambitious cash flow and a higher level of risk.
Asset-Based
We use asset-based valuation methodologies when a business is not viable as a going concern, where it is more practical for an owner to dissolve rather than sell a small company, or for capital-intensive businesses where the net asset value may exceed the present value of cash flows. The most common asset-based methodology calculates the liquidation value, though in some cases adjusted net book value or real estate valuation are used.
Liquidation can be either forced (e.g., when a failing company goes into receivership) or voluntary, and take place either immediately or over an extended period of time. Voluntary liquidation typically involves circumstances more favorable to the owner and yields a higher valuation. When liquidation takes place in a relatively short period of time, it is considered less risky and avoids prolonged overhead expenses, often resulting in a higher valuation than a more extended process.
Under the liquidation value methodology:
Industry or Business Model-Specific Asset Based
Occasionally a buyer will focus entirely on the acquisition of an industry or business model-specific asset, like nursing home beds or hot water tanks or subscriptions for a service or product. In particular, “The subscription business model is booming. Previously dominated by the likes of newspapers, magazines, gyms, utilities, and telecommunications firms, … business-to-consumer subscription businesses have attracted more than 11 million U.S. subscribers in 2017, and the industry as a whole has been growing at 200% annually since 2011.”
In a sense, these are both cash flow and asset-based valuations. Typically, we build revenue and profitability per asset unit, costs of acquisition, rates of turnover, etc. into our cash flow and risk assumptions. We also look at the multiples applied to the specific asset in comparable transactions.
Engaging the correct RICS Business valuation professional is critical. EDS’ unparalleled level of expertise is recognized and appreciated in boardrooms and courtrooms throughout the world, and our body of work has been cited by U.S. regulators as “The measure by which all business valuation reviews should be judged.”
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