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Accuracy of a business appraisal

post #1 of 12
7/7/09 at 5:25pm
Thread Starter 
What are your qualifiers of an accurate business appraisal, all things considered. What do you look for specifically when considering. My question specifically revolves around adjustment of price for risk, risk factors and how you qualify the accuracy of those risk factors.
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post #2 of 12
7/7/09 at 5:27pm
you are progressing well through your styleforum MBA
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post #3 of 12
7/7/09 at 7:03pm
Are you talking private or public? The whole risk factor thing can be very arbitrary for a private company - it's more about valuing cash flow, book/asset value, and using the right comparables.
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post #4 of 12
7/7/09 at 7:20pm
Thread Starter 
Quote:
Originally Posted by Flambeur View Post
Are you talking private or public?

The whole risk factor thing can be very arbitrary for a private company - it's more about valuing cash flow, book/asset value, and using the right comparables.

I understand all that, i'm just asking what factors in your opinion/experience would make one valuation more accurate then another.
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post #5 of 12
7/7/09 at 7:22pm
Quote:
Originally Posted by SkinnyGoomba View Post
I understand all that, i'm just asking what factors in your opinion/experience would make one valuation more accurate then another.

i guess attention to detail and depth of analysis when it comes to the cash flow and balance sheet adjustment, as well as justification and diligence in picking the right multiples/comparables. Also perhaps providing an expanded forecast and scenario analysis.
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post #6 of 12
7/7/09 at 7:31pm
Thread Starter 
Thats what I'm wondering, like for instance Value-Line uses a formula for Beta adjustment into the future. Since you're basing your analysis of future cashflows on historical information, they use a factor for it.

So when dealing with private company, where you dont have a beta, or market, what do you use to develop a discount rate.

Sorry if i'm appearing to be achieving a SF MBA, but i just thought it alright to tap into the resources of the forum, some of the posters do this for a living, or at least when required.
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post #7 of 12
7/7/09 at 7:34pm
I've been through the sale of several companies and have never put much stock in any third-party business appraisals. It is just to easy for them to rely upon formulas and not elements that I value in a business such as, reputation, quality, sun-rise opportunities, health of the industry. The appraisers are quite satisfied with taking common industry information which is like following lemmings of the cliff IMO.
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post #8 of 12
7/7/09 at 7:38pm
Quote:
Originally Posted by SkinnyGoomba View Post
So when dealing with private company, where you dont have a beta, or market, what do you use to develop a discount rate.
a. there are ways to produce and utilize a beta for a private company, for whatever it's worth. b. you use your judgement, comparable companies and adjustments - i know it sounds vague but it actually sort of is - that's why the best analysts are the ones that can synthesize certain factors, adjust accordingly, etc. Also, in every industry there are some customary factors and adjustments, and some apply throughout financial theory overall - I'm talking control premiums, size/cap adjustments, leverage/risk adjustments (although I guess you should deleverage if you are going to compare public-private and betas and all that since levered beta is obviously different from an unlevered one), etc. It's not really an exact science, and a lot less complicated than it seems at first.
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post #9 of 12
7/7/09 at 7:40pm
Quote:
Originally Posted by pocketsquareguy View Post
I've been through the sale of several companies and have never put much stock in any third-party business appraisals. It is just to easy for them to rely upon formulas and not elements that I value in a business such as, reputation, quality, sun-rise opportunities, health of the industry. The appraisers are quite satisfied with taking common industry information which is like following lemmings of the cliff IMO.

also true.. but all those indirect factors are hard to quantify and you need numbers for forecasts, lenders, investors, etc. But all of it is especially difficult with the small companies.

At the end it comes down to comparables/multiples, BV, and CF
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post #10 of 12
7/7/09 at 8:23pm
Quote:
Originally Posted by SkinnyGoomba View Post
Thats what I'm wondering, like for instance Value-Line uses a formula for Beta adjustment into the future. Since you're basing your analysis of future cashflows on historical information, they use a factor for it.

So when dealing with private company, where you dont have a beta, or market, what do you use to develop a discount rate.

Sorry if i'm appearing to be achieving a SF MBA, but i just thought it alright to tap into the resources of the forum, some of the posters do this for a living, or at least when required.
http://pages.stern.nyu.edu/~adamodar...ile/Betas.html
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post #11 of 12
7/7/09 at 9:16pm
Quote:
Originally Posted by SkinnyGoomba View Post
Thats what I'm wondering, like for instance Value-Line uses a formula for Beta adjustment into the future. Since you're basing your analysis of future cashflows on historical information, they use a factor for it.

I have seen research on forward looking betas. I believe they are estimated from the implied volatilities of options quoted on the stock, but cannot be sure. This would seem to make sense though to the extent you feel the only relevant risks are those that cannot be diversified away, and to the extent you view risk as being captured in the second moment (i.e. variance) of the distribution of returns.

Quote:
Originally Posted by SkinnyGoomba View Post
So when dealing with private company, where you dont have a beta, or market, what do you use to develop a discount rate.

Comps. Just be sure the makeup of the comps in terms of what lines of business they are active in, where their major markets are, etc. are roughly equivalent to the private business you are studying. If the private business is a pure play, you may have a hard time since most public companies tend to be fairly well diversified. Doesn't mean it's impossible but if you are developing a risk adjusted discount rate for a business that manufactures ethanol, don't rely solely on a group of comps that also produce oil and gas, since their betas will likely more heavily reflect the risks of these larger businesses.
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post #12 of 12
7/8/09 at 2:23am
Thread Starter 
thanks guys, awesome advice.
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