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ALP Ltd. is pleased to offer Most Probable Selling Price evaluations for businesses. These valuations can be used for the purpose of selling a company as a going concern, estate needs, planning tools or for dispute settlement. .
Most Probable Selling Price - Overview
Developing The Most Probable Selling Price for a business is a very complex and detailed process that involves using multiple comparative methods of evaluation and then employing a weighted average process to identify the most accurate and appropriate figure possible.
Our proprietary methodologies employ multiple complex calculations and algorithms based on contemporary practices developed by the International Business Brokers Association. When reference data and comparable business types are considered, we use the very best databases and most up-to-date industry information available from multiple sources to select the most appropriate benchmarks.
The following is a synopsis of our process. There are literally hundreds of calculations involved in each step of this process which we accomplish with extraordinary accuracy and precision through proprietary software tools and processes.
Pricing, Pro-forma and Projection Data
The information used in all financial calculations for an evaluation have been provided by the company’s accountants. The pro-forma projections employed are based on our opinion of your company’s realistic potential for growth, taking into account the industry type and the currently foreseeable market conditions.
Factors taken into account in the various methodologies employed in this evaluation include: what the company earns, what the company owns, and what its discretionary cash flow can support. The following figures are used in our projection.
-Forward looking growth has been calculated using the estimations of the owner.
-5 Year forward view
Valuation Variables
As a going concern, the day-to-day operations of the company create fluctuations in all of the financial statistics employed in this valuation process. As such, specific details of value, especially inventory, will fluctuate between valuation and time of sale.
To the extent inventory value will be increased (if substantial), the Most Probable selling Price could be increased, or, to the extent inventory value will be decreased (if substantial), the Most Probable Selling Price could be decreased.
It is not anticipated that during the time it takes to sell the company that the business fundamentals upon which this projection is based will change materially. It is none-the-less important to note that despite the very best attempt to identify the true value of the business, when a business is for sale, the ultimate price paid for sale of the company will ultimately be market driven and therefore determined only by the compulsion and the willingness of both the buyer and the seller to complete the sales transaction.
Valuation Approaches Employed
The following methodologies will be employed in the analysis of our Most Probable Selling Price.
Market and Asset Approach
- This methodology is based on the principle of substitution. It postulates that a buyer will pay no more than the price required to purchase an equally desirable substitute. In this methodology, we have assessed comparable opportunities in similar industries, recognizing variables such as markets, trends, niches etc. Multiples of earnings are calculated and compared based on industry-specific standards and adjusted for relevance; taking into account rules of thumb for industry, market, historical trends and cost to create.
Income Approach
- The Income Approach is based on the principle of economic value reflecting anticipated future benefits. This methodology has several components including market capitalization analysis which takes into account financial ratios and statistics including seller’s discretionary earnings, (SDE), discounted cash flow (DCF), and future earnings.
- The company’s most recent year’s cash flow is usually the best indicator of the current business performance. However, in order to create the most accurate and realistic projection we created a weighted figure for the SDE and EBITDA based on the past 3 years. We also reviewed industry specific formulas and have taken industry performance metrics into account in these calculations.
Other Methods
- We have also employed the ROI and DCF methodologies for comparison purposes. The theory of DCF requires that the DCF method be applied to the actual investor cash flow. In practice, traditional methods substitute earnings or free cash flow as a proxy for actual cash flow. And, even then, such earnings or free cash flow are determined using seller’s capital structure or an assumed capital structure for the buyer, rather than using buyer’s actual capital structure.
- Determination of actual investor cash flow requires knowing the buyer’s post-acquisition capital structure, but buyer’s post-acquisition capital structure cannot be known until one knows the value; and one does not know the value until one knows the actual investor cash flow. This is a circular problem that can only be solved through iterations as done by sophisticated software using Iterative DCF methods (Iterative Discounted Cash Flow).
- In addition, such methodologies simultaneously satisfy the “willing seller” objective of maximum value and “willing buyer” objective of achieving the targeted ROI.
- The program calculates investor’s actual cash flow based on actual post-acquisition capital structure, not based on assumed debt/equity structure or based on seller’s capital structure. Cash flow is net income plus non-cash expenses minus principal amount of debt service, minus working capital change (net of new borrowing), and minus capital expenditure (net of new borrowing).
- Net Income is calculated after deducting interest on actual debt, goodwill, amortization, and personal goodwill amortization, depreciation on price allocated to the fixed assets and based on chosen depreciation method, non-compete amortization, interest on new borrowings and depreciation on new capital assets purchase. Cash flow calculations were adjusted for an asset sale in this analysis.
Normalization of Financial Statements (Recasting)
Because privately owned companies tend to keep reported profits and thus taxes as low as possible, financial recasting is an important element to understanding the earning capacity of a business.
Recasting allows meaningful comparisons with other investment opportunities. Financial recasting eliminates such items as excessive and discretionary expenses and non-recurring revenues and expenses from the historical financial presentation. Also, debt and interest expense are eliminated since they reflect the financing decision of the current owner and may not represent financing preferences of a new owner.
ALP uses the strict recasting methodologies as outlined by the International Business Broker’s Association guidelines.
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