Valuation Calculation for Potential Sale

Background

A software development company with a niche focus was solely owned and managed. The company operated with minimal overhead expenses and without employees. The owner was approached by a larger company with interest in acquisition, which is when FAZ Forensics was contacted to determine what price would be considered “fair.”

FAZ Forensics was formally engaged to prepare a calculation of value for the business owner. In a calculation engagement, the valuation analyst and client agree on valuation approaches, methods, and procedures to be used. A calculation of value does not include all the procedures required in a valuation engagement (conclusion of value) as defined in the Statement on Standards for Valuation Services (SSVS) of the American Institute of Certified Public Accountants (AICPA). Calculated values are commonly used for planning purposes, as they do not result in an opinion or conclusion of value, however, they provide insight into potential business value considering certain assumptions.

Analysis

When calculating the value of a company, FAZ Forensics must evaluate Generally Accepted Accounting Principles (GAAP), non-operating/discretionary, and non-recurring items. Numerous financial statement adjustments were made, with the largest being an adjustment to salary expenses to reflect a fair market value.

In a potential sale scenario, FAZ Forensics must also consider potential synergies between the two companies involved. FAZ Forensics evaluated the synergies between the company being valued, and the potential acquiring company. Numerous synergies were identified and adjusted through normalized Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for valuation purposes.

Conclusion

Given the greater depth of existing resources of the potential acquiring company, it was the owner’s expectation that revenue, as well as some direct expenses, would increase by some amount. FAZ Forensics prepared five separate scenarios: 0% growth, 25% growth, 50% growth, 75% growth, and 100% growth, for some periods following the valuation date.

The exact performance of the company upon transfer to new ownership was unknown as of the valuation date, however, FAZ Forensics prepared and delivered a range of calculated values based on certain assumptions, which were available to assist the business owner with price negotiation in the transaction.