What is Value?

A few years back I returned from an annual conference many thoughts, concerns and Ideas are running through my mind. Certainly the field of “exit planning” is fairly “young” searching for its place among the business owners and advisors. It had moved from unknown to understood to possible commoditized (that’s for another post).

At this particular conference, one of the featured discussions was a debate on valuation. Thankfully, there were two outstanding speakers (debaters) with Robert Stutz of Western Reserve Valuation Services, LLC and Mike Adhikari of Adhikari International, Inc. Both speakers are very highly regarded in their fields and considered thought leaders in our profession. Stutz’s practice performs valuations in the traditional sense (fairness opinions, tax and estate, legal, etc.). These valuations must follow specific guidelines regarding their purpose, methods, etc.  Most methods (DCF, Asset, Public Company guidelines, etc.) and views have been utilized for several decades. Adhikari comes from an M&A background and always felt something was missing when discussing value in private businesses. AS such he developed a model which we use in our transaction and planning practices. 

Adhikari believes and illustrates quite effectively, that traditional valuation misses some very important aspects of a business value. The two most glaring is the buyer’s capital structure (availability, costs, ROE) of the specific transaction and the basic fact that any seller wants the highest price achievable. 

It is these two distinct views create the conflict, not only in theory but in reality. To answer that question two others should be asked; value to whom? And for what purpose? 

A formal valuation could be done for a buy-sell agreement, gift and estate taxes, divorce, etc. In some cases each concerned party will want that value higher or lower depending on their position. For taxes or gifting we want the value down, for divorce one spouse wants that number high. Either way the appraiser will have guidelines driven by tax code and legal rulings. 

In my world the discussion is focused on the value to the owner (and their family) and typically for the potential or future sale of the business.  What we are looking for is the highest, predictable value. In other words we are seeking a potential transaction value.  Adhikari’s view and models try to define this value. After all aren’t most owners concerned about what they could sell for? 

While formal valuations are certainly needed for business and many purposes, they don’t always reflect what business is worth to an outside buyer.  Your planning should begin with that third party buyer value or transaction value.  What could your business really sell for if needed or wanted? With that information you can then assess the overall value to your various exit options (selling, keeping, family succession, etc.) and plan for your chosen route.