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

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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.”

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Reproduced with permission from Inside Family Law: Conversations from the Coalface, by Zoë Durand, 2018  published by Longueville Media.