Comparing Business Valuations for Attorneys and Business Owners in Different Contexts
Understanding business valuations is crucial for both attorneys and business owners, as valuations play a significant role in legal disputes, financial decisions, and loan approvals. Depending on the purpose of the business valuation, the due diligence, methodology, and standard of value can vary, resulting in different valuation conclusions. By having active practices in investment banking, valuations for lending, and litigation support, LCG has a unique view into the different approaches and understands that business valuations are not “one size fits all.” By recognizing the differing priorities, regulations, and methods used across various contexts, business owners and attorneys are much better positioned to make informed decisions that fit their specific needs and circumstances. Let’s delve into an overview of business valuations within the realms of investment banking, lending, and litigation.
Investment Banking
Investment banking involves providing financial services, including advising on mergers and acquisitions (M&A), raising capital, and strategic financial planning. Business valuations in investment banking are primarily used to assess the worth of a company for M&A transactions or investment decisions.
Imagine you’re a business owner looking to sell your manufacturing company. An investment banker steps in to help you find the right buyer and determine how much your company is worth. The investment bankers dig deep into your financial records, analyze your projected earnings, and compare your business to similar companies that have been sold recently. This comprehensive approach helps them arrive at an estimated value or range of values that reflect your company’s growth potential and attractiveness to potential investors.
In investment banking, business valuations may lean toward a more optimistic view, factoring in potential future profits and strategic advantages. For example, a competing manufacturing business may be willing to pay a premium to purchase your company. Investment bankers focus on future possibilities to show potential buyers why your company is a great investment.
Lending
Valuations performed to facilitate lending aim to assess a business’s value, influencing the determination of loan eligibility and/or approval. Various valuation methods, including asset-based, income-based, and market-based approaches are employed.
Imagine you own a small manufacturing business seeking a loan to expand its operations. The evaluating entity conducts a thorough assessment of the business’s tangible assets and recent financial performance. This evaluation is crucial in determining the collateral value for the loan and assessing the business’s capacity to generate sufficient income for repayment.
These types of valuations tend to take a conservative approach, focusing on tangible assets, sustainable revenue streams, and historical financial performance.
Litigation
Business valuations are frequently employed in legal disputes, such as shareholder disputes, divorce proceedings, and breach of contract cases. Valuations in litigation are often used to determine the economic value of a business for the purpose of equitable distribution or assessing damages.
Suppose you’re an attorney representing a business owner in a partnership dispute. Business valuations become essential to figure out how much each partner’s share of the business is worth. An expert forensic accountant or business valuator is brought in to assess the business’s value impartially. The forensic accountant scrutinizes the company’s financial records, past earnings, and market trends. If the dispute is not resolved amicably through settlement negotiations, mediation, and/or arbitration, the forensic accountant may be called to testify in Court as an expert witness and opine on the value of the business, which requires supporting and defending their conclusions and professional work product to the trier of fact.
Forensic accountants preparing litigation valuations must be aware of and adhere to pertinent laws, rules, and standards, along with being aware of specific case law and statutes that vary across jurisdictions and Courts. Litigation valuations require rigorous due diligence and a deep knowledge of financial statements and industry trends, as well as applicable case law and statutes.
Conclusion
Business valuations in investment banking, lending, and litigation serve distinct purposes, each requiring tailored approaches. Investment banking valuations focus on potential future growth and investment returns, valuations performed to support lending emphasize loan repayment capacity, and litigation valuations seek to establish an impartial, realistic value for legal disputes. By recognizing the differing priorities and methods within these contexts, business owners and attorneys can make informed decisions that align with their specific goals and circumstances.
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LCG Advisors is one of the nation’s leading third-party due diligence and transaction advisory firms, performing over 1,000 engagements annually for top financial institutions. LCG offers a holistic view to our Business Valuation, Forensic Accounting & Litigation Support, and Investment Banking engagements with collaborative teams and deep breadth of knowledge.
For more information, contact:
Amanda Porupski, CPA, Managing Director of Forensic Accounting & Litigation Support
Jami Gold, Managing Director of Investment Banking
Jessica Greiwe, CPA, CVA, Director of Business Valuation
