When a couple is divorcing in an equitable distribution or community property jurisdiction and their assets include ownership in a closely held company, the value of the business typically must be determined. Analyzing the company’s cashflow is imperative during such...
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Business Valuation Calculation Reports: Analyzing Assumptions in Cash Flow Forecast
During my over two decades of working in the valuation profession, I have valued several hundred entities and reviewed hundreds of valuation reports, including business valuation calculation reports, summary reports, and comprehensive valuation reports prepared by...
Business Valuation in Divorce Cases in a COVID-19 World, Part I: An Overview of Active Passive Appreciation Analysis
The impact of COVID-19 on the value of private company interests is being actively explored and discussed nationwide by business valuation professionals, their professional trade associations, and users of business valuations (e.g. attorneys). Because COVID-19 can...
Capital Expenditures, Depreciation and Amortization in a Cash Flow Forecast and the Impact of the New Tax Law
The US Tax Cuts and Jobs Act (“TCJA”) passed by Congress on December 20, 2017, will impact forecasts of a company’s cash flow and thereby will likely impact the valuation of a company. One of the forecast elements impacted is the forecast of capital expenditures,...
Active Passive Appreciation – Active Efforts of Individuals
As discussed previously, once it has been determined that a separate business interest appreciated in value during a marriage, learned treatises and case law often delineate the active passive analysis into the following elements: Identifying and quantifying market...
Active Passive Appreciation – Market Forces
As discussed previously, once it has been determined that a separate business interest appreciated in value during a marriage, learned treatises and case law often delineate the active passive analysis into the following elements: Identifying and quantifying market...
Active Passive Appreciation – Causation
The business appraiser performing an active passive appreciation analysis looks to their engaging legal counsel to define and interpret state law in the particular jurisdiction. An active passive analysis is performed when state divorce law requires a determination of...
Working Capital Changes in a Free Cash Flow Forecast– Part III
Part II of my working capital blog identified methods often used by business appraisers when forecasting working capital. In this installment, I will present some additional thoughts regarding this topic. Depending on the facts and circumstances, it is typically appropriate to consider the company’s historical working capital ratios and industry working capital metrics at the composite level (e.g. total working capital), as well as each separate component of working capital (e.g. accounts receivable, inventory, accounts payable, etc.).
Working Capital Changes in a Free Cash Flow Forecast– Part II
Part I of my working capital related blog addressed the impact on free cash flow of changes in current assets and changes in current liabilities, which are the two components that comprise working capital (calculated as current assets minus current liabilities). The combined impact of changes in current assets and changes in current liabilities equals the impact of changes in working capital on free cash flow. Part II of this blog identifies methods often used by business appraisers when forecasting working capital.
Working Capital Changes in a Free Cash Flow Forecast – Part I
In a business valuation income approach, the income stream being capitalized (in a capitalized income method) or discounted (in a discounted income method) is often the free cash flow generated by the entity being valued. Free cash flow is typically calculated on an...
Capital Expenditures, Depreciation and Amortization in a Cash Flow Forecast
When valuing a private operating company, an appraiser is likely to use an income approach, either as the main valuation method or in conjunction with another method. Whether the appraiser capitalizes cash flows in a capitalized cash flow (“CCF”) model or uses forecasts of future cash flows in a discounted cash flow (“DCF”) model, they have incorporated both explicit and implicit assumptions into the cash flows used in their model.
Analyzing Assumptions in a Cash Flow Forecast
Forecasts of future cash flows within the income approach to business valuation are loaded with assumptions. During my nearly two decades of business valuation experience, I have reviewed hundreds of valuation reports prepared by other experts that serve as a constant reminder that mathematical accuracy does not always equate to a reasonable value. I have seen erroneous assumptions made by business appraisers that range from illogical disconnects within the valuation to outright errors or unsubstantiated speculation.