Going concern or otherwise, the valuation methodology must suit on the nature of the business

Valuation methodologies that may apply

Mark Lipson says “If it’s a business that is a going concern, I initially look to value that business on an earnings basis. There are a number of variants on an earning methodology that I could adopt. I use an EBIT (earnings before interest and taxes) definition of earnings or an EBITDA (earnings before interest tax depreciation and amortisation) depending on the facts. Under some circumstance, I will adopt a discounted cash flow basis, again depending on the nature of the business that is being valued.

“If the business is running at a loss, or if there is considerable likelihood that there is no going concern for this business, or if the business makes a bare profit, a small profit, or a thin profit, then I would probably look towards an asset-based valuation.

“The last thing that I would use – and I would only use it if it is appropriate as a secondary valuation to support our primary valuation – is the rule of thumb. Certain industries have certain rules of thumb. I don’t adopt that valuation method as the primary valuation method, but I will look at them in order to support the orthodox approach using one of the earning valuations methodologies.”

Talk about this with our team, contact Hall Chadwick Forensics 03 9820 6400 or email forensics@hallchadwickmelb.com.au.