Several different situations call for a need for the valuation of an existing operation or the potential value of a proposed business. New business inceptions, proposed sale/buy of exiting business, mergers, takeovers, liquidation, and legal matter may all call upon the proper valuation of an operation regardless of the size of the business.

Valuation of a business may be conducted utilizing various approaches; however, REcon’s approach typically focuses on the earning potential of a business in addition to the inclusion of the firm’s balance sheet. The exceptions are cases of liquidation when the assets and any offsetting liabilities become the focus of the valuation.

The true value of a business is reflected by its ability to generate income for its shareholders. While the value of inventory a business holds or the liabilities it carries on the balance sheet contribute to its overall valuation, its historic income and future earnings potential are much better gauges of its value. Income Capitalization Based Valuations (ICBV) correlates the value of a business to the future income stream that an operation can be expected to generate. This process of determining the value of a business relies upon a variety of assumptions about future operations and revenue generations. This type of valuation is suitable for large businesses that have reasonable expectations that their assumptions will be realized and is less useful for startup small businesses. For smaller businesses that have a track record, this method is coupled with Income Multiple Based Valuations (IMBV) to offer a more fundamental valuation of the business. IMBV applies a capitalization rate to income by utilizing actual preceding earning data and projecting future income based on historical data. As it may be apparent, the clear determination of earnings is the most paramount factor in the valuation of a business.

Earnings have a wide range of definitions including bottom line earnings (after tax), earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation, and amortization (EBITDA), and a host of other creative acronyms. The type of earnings used in valuing an operation is heavily dependent on the type and size of the business. A high-profile publicly traded firm that is subject to oversight by the Security’s and Exchange Commissions (SEC), a company board, a Chief Financial Officers (CFO), and accounting auditors is very likely to offer EBIT that truly reflect the firm’s performance and reconstructing earnings is unnecessary.

On the opposite end of the spectrum is a small business whose owner has total unrestricted control over income stream and expenditures with no oversight. In this instance, it is important to closely reexamine and reconstruct the earnings of the business to establish the true value of the business and potentially discover irregularities and/or inefficiencies in the financial reports. A common contributing factor to the over valuation of a small business is the owner’s (or 100% shareholder’s) lack of sufficient compensation. In many financial statements of small business, the owner(s) report insufficient incomes and lead to a valuation that fails to consider the underpaid contributions of a key member.

REcon’s Equity Research experience and Accountancy abilities provide powerful tools for the valuation of any size business. Our experience with publicly traded companies brings Wall Street expertise to any size business.