Business Valuation Review Volume 34: Issue 4

Hello Everyone,

The Advanced Business Valuation Conference in Las Vegas just ended. It was great to see some of you there. The Conference was well attended and feedback was positive. If you missed it, some of the sessions were recorded and available from the ASA. Please check the ASA website for information.

If you have an interest in presenting at next year’s conference, which will be at the Boca Raton Resort & Club in Boca Raton, Florida, September 11-14, 2016, please send proposals for presentations to: Gary Trugman, via email at: grtrugman@trugmanvaluation.com. If you have a presentation topic

Academics and practitioners in finance have long accepted the notion that small market capitalization stocks earn higher returns, after adjusting for risk, than large market capitalization stocks. They have often followed through by either investing in small cap stocks, hoping to earn these higher returns, or by augmenting the required returns (discount rates) for smaller companies with a “small cap premium” when valuing these companies. In this article I argue that these practices are misguided because the small cap premium is no longer supported by the historical data, does not seem to be priced in by investors in markets today, and is based on faulty intuition.

Terminal or continuing value (CV) is a key element in calculating the value of firm capital in any income-based valuation model. This paper focuses on calculating CV in the context of a firm operating as a going concern, highlighting some of the problems associated with the treatment of growth and inflation, which, although investigated in the literature, are not generally dealt with using sufficiently in-depth analysis. The effect of inflation on forecasted income and cash flows is examined, emphasizing issues that can have a significant impact on value, even in presence of a low inflation rate, such as that employed in CV estimation. Situations are introduced where the impact of inflation can be distinguished, and which therefore require different measures, followed by a discussion of their degree of realism. Simplified procedures within these situations are indicated that properly consider inflation and therefore lead to an internally consistent calculation of CV.

Our research focuses specifically on the methodology to be applied to improve the relevance of the multiples-based valuation method regarding the identification of the most relevant multiples (i.e., that reduce the relative absolute valuation error within any industry-based peer group). In line with prior empirical studies, our results confirm that Enterprise Value multiples based on EBIT and EBITDA perform better, compared to Sales and Capital Employed, and that multiples based on forward-looking EBIT and EBITDA are more relevant compared to corresponding actual earnings. In the absence of forward-looking earnings, available at the date of valuation, our study shows that EBITDA multiples provide better estimates than EBIT multiples do. Beyond these general results, the approach implemented in our research can be easily reproduced by practitioners (e.g., financial analysts, M&A advisors, independent appraisers) to identify case-by-case the multiples that are the most relevant within any industry-based peer group.

Editor’s Column

The Small Cap Premium: Where Is the Beef?

Terminal Value, Growth, and Inflation: Some Practical Solutions

Valuation Using Industry Multiples: How to Choose the Most Relevant Multiples

From the Chair of the Business Valuation Committee

Public Company Valuation Credential

Volume 34, No. 4 — Complete Issue

From the Chair

From the Editor

Delaware Valuation Decisions, 2021 to 2024

Volume 44, No. 1 — Complete Issue

Customer Concentration: Good, Bad, or Ugly?