Valuation & Litigation Advisory Blog

‘Tis the season… Whether it was Monte Kiffin of the famed “Tampa 2” defense or Buddy Ryan of the ’85 Bears, NFL defensive coordinators have strived to invent new ways to confuse opposing quarterbacks. Typically they utilize a “base” defensive formation and build upon it by constructing complicated blitzing schemes. While these blitzing schemes are often complex, the “base” defense still must be considered by the opponent. 

Within the valuation arena, much like blitzing schemes, complicated valuation methods are often used to determine a subject company’s value. However, since multiple valuation methods (discounted cash flow, capitalized earnings, private and public company market methods, adjusted net asset, etc.) are available to determine a company’s value, determining the appropriate methodology for an engagement can be confusing. One of the common oversights by parties to a valuation engagement is not considering a floor value when determining the value of a company.

In the event that a company is poorly performing, the present value of its future cash flows may indicate that it does not have much value from an income or market approach. In this event, a valuation analyst should consider whether an adjusted net asset approach would provide a more reliable measure of value. This method (a balance sheet approach) values a business based on the difference between the fair market values of the company’s assets, both tangible and intangible, and its liabilities. The company should not be worth less than the amount that would remain if all the assets were liquidated and the liabilities were satisfied. Therefore, the adjusted net asset method is considered to be a company’s floor value.

No matter how complicated the defensive blitzing scheme, the base defense should always be considered. The same holds true for valuation engagements.   No matter how complicated the valuation methodology may appear to be, the adjusted net asset approach should determine the subject company’s floor value. 

Looking for business valuation assistance in Cleveland or Akron? Contact our Business Valuation Group at 440-449-6800 for more information.