Fall 2014 issue of Horizons

FEATURE

Figure 2

MIDDLE MARKET M&A TRANSACTIONS

Source: S&P Capital IQ

the period of liquidation, represent the liquidation value of the business.

reflect differences between book value and known or estimated market values.

In liquidation, assets are typically sold for less than the value determined on a going concern basis. While the liquidation value is not applicable in many cases, it is often used to determine the minimum value of a business. Factors That Can Increase Value Regardless of the approach used, there are several factors that can cause an increase in the resulting value of a company: Growth – Companies that have consistently achieved higher growth or are expected to achieve higher growth will typically enjoy a premium valuation. Profitability – Companies that enjoy higher profitability will also achieve a higher valuation. Size – Larger companies will typically receive higher valuations as larger size tends to be correlated with lower risk.

Adjustments are also made for assets and liabilities that may, for one reason or another, not be recorded on the company’s books.

Under this approach, assets can be valued under two fundamental bases:

∙ Going concern value

∙ Liquidation value

Going concern value assumes the company remains in business and is able to realize the full fair market value of its assets in the normal course of business. Going concern value is based on the cost concept (i.e., the cost of replacing the individual assets and liabilities of the business given their age, condition, and use). Liquidation value assumes that all assets are sold off individually or in bulk in an orderly liquidation. The net proceeds available after the payment of all liabilities and expenses of sale, including administrative costs during

page 18 | horizons Fall 2014