NEW YORK, NY--(Marketwire - March 16, 2010) - Business owners and Private Equity managers
who want businesses valued correctly should buck conventional wisdom and
take a more comprehensive approach to valuation.
That's the advice of a specialist on valuations who believes that private
equity firms and bankers who think mainly in terms of transactions can
overlook elements that better determine the true value of an enterprise.
"The private equity world sometimes arrives at valuations by using standard
Wall Street back-of-the-envelope assumptions," says
Donald M. May, Ph.D., CPA, a director in the
Litigation and Corporate Financial Advisory Services Group at New York
accounting firm
Marks Paneth & Shron
LLP.
"But Wall Street assumptions are very quick and very general -- they're
designed for a transaction environment and often don't take into account
the realities of operating a business,"
Dr. May explains. "A
business-savvy financial economist can look at a business in more detail --
and by making more assumptions, he or she can actually be more accurate in
valuing a business as a going concern."
Dr. May is available for interviews, and can also author a bylined
article that discusses:
- Why Wall Street valuations are often wrong: "Wall Street
assumptions are biased toward transaction value and that's often different
from operational value: financial economists are often closer to what it
means to run a business," Dr. May says. "Wall Street assumptions
can be biased in order to derive the optimal value for either a buyer or
seller in a given transaction. But operational assumptions can create a
more objective valuation which ultimately will benefit both the buyer and
the seller and not one at the expense of the other. For example, a Wall
Street banker might make assumptions about how a business will grow, but
doesn't factor in the capital or inventory it needs to make that target.
They focus on the top line instead of on the business as a whole and how it
will operate as its current environment changes."
- Why it's better to make many small assumptions instead of a few big
ones. "Wall Street often uses quick, rule-of-thumb calculations --
multiples of earnings and operating costs -- that often aren't applicable,
particularly in the current environment," Dr. May explains. "It's
rare to find a real-world company that's identical to the model. A banker
might say, 'Use a revenue multiple of two.' I would prefer to say, 'Let's
look at a more sophisticated model. Let's project out cash flows,
understand if there are any potential imbedded options, work out the
assumptions and see if they make sense. If sales growth is off, let's look
at the industry forecast, and use third-party data to test the assumptions.
Let's take the rule of thumb as a guideline and then do a deeper analysis
-- breaking it down into smaller more tangible pieces instead of making one
big assumption.'"
- The argument for making many assumptions and being subjective:
"Normally you'd say that making more assumptions is bad, because it's more
subjective," Dr. May continues. "But the positive side is that you
can see what the assumptions are and test them: One big assumption doesn't
affect all your other calculations, and you can prevent big distortions
from impacting your valuation. More research brings more objectivity to
subjective assumptions -- and that's a good thing.
"We've noticed that private equity firms sometimes don't realize how
imperfect their assumptions are. Big assumptions may not reflect the
reality of the business. You may know that your valuation is way off the
mark but you can't pinpoint what the specific problem is. Using many small
ones, you can find measurements that are closer to reality and if they are
not you will understand why and be able to adjust accordingly. The
multiple approach unless it mimics a specific peer that is identical to the
company you are valuing will not allow you to pinpoint areas of distortion
and examine the potential range of values under alternative scenarios and
assumptions."
For more information, to schedule an interview or arrange a bylined
article, contact Itay Engelman of Sommerfield Communications at
(212) 255-8386 or itay@sommerfield.com.
About Marks Paneth & Shron
Marks Paneth & Shron LLP is an accounting firm with nearly 475 people, of
whom 64 are partners and principals. The firm provides businesses with a
full range of auditing, accounting, tax, bankruptcy and restructuring
services as well as litigation and corporate financial advisory services to
domestic and international clients. The firm also specializes in providing
tax advisory and consulting for high-net-worth individuals and their
families, as well as a wide range of services for international, real
estate, media, entertainment, nonprofit, professional and financial
services and energy clients. Visit
www.markspaneth.com for more
information.
About Dr. Donald M. May
Donald M. May, Ph.D., CPA, is a valuation specialist with nearly
twenty years of experience in industry, academia and public accounting and
deep expertise in litigation and strategic consulting.
Previous to his role at MP&S, Dr. May was with leading global consulting
and accounting firms including a Big Four firm and most recently
Experts-on-Experts LLC, a New York-based litigation support firm where he
served as Managing Partner and economic advisor to law firm clients across
various industries on
valuation, lost profits, opposing expert
reports and deposition and trial preparation.
Earlier in his career, Dr. May was an Assistant Professor in the Sloan
School of Management at the Massachusetts Institute of Technology where he
published research and taught MBA and Ph.D. level classes in economics,
accounting, financial statement analysis and statistics.
Contact Information: Itay Engelman
Sommerfield Communications
(212) 255-8386
itay@sommerfield.com