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Tools for Asset Valuation

Disclaimer: In almost all cases, it is safer for you to use an expert (usually a certified financial analyst or investment advisor) for complex asset valuation. Despite this fact, this article should provide some insight into how various assets, including small businesses, are valued. Regardless of whether or not you have any experience in finance, the information provided in this article will be a good starting point for any practitioner trying to value assets.

What type of asset are you trying to value?

Depending on the type of asset you are valuing, the process of determining an appropriate valuation will vary in difficulty. For example, stock and mutual fund values can readily be found in the daily Wall Street Journal. However, the values for various bonds, annuities, or other types of assets may not be readily found in the newspaper so you will probably have to consult with an investment advisor whom you trust. They will have access to more sophisticated valuation tools that will allow them to value these complicated assets.

What about small business valuation?

Small business valuation can be an art form in and of itself. As a result, it is best to hire an expert financial analyst who can conduct a thorough financial and operational analysis of the business and its operations. There are several ways that such an expert will value a business, and each method begins with looking at the financial statements. (Those readers who don’t like math can stop right here and just hire the expert!)

An expert financial analyst will take a two-step approach to valuing a business. The first step is to look at the financial statements and begin the not-so-simple task of crunching numbers.

Three main techniques can be used to analyze financial statements:

  • Discounted cash flow analysis: The analyst will look at the company’s current cash flow, project (estimate) what the future cash flows will be, and discount those numbers back to a present value.
  • Appraisal of current assets: The analyst will determine what the company’s property, plant and equipment are worth.
  • Comparative analysis: The analyst will compare the business being analyzed to the selling price of other similar companies that recently sold.

Each of these methods will yield a slightly different picture of what the company is worth, and combined they will provide a rough estimate of what the company as a whole is worth.

In the second step of the analysis, the financial analyst will assess the company’s market value. In this part of the process, the analyst will consider various economic and market conditions, which may include: the length of time the company has been in business, determining who the company’s competitors are, and evaluating the strength of the company’s customer base, among other market-based factors. The analyst should also conduct a thorough due diligence review of the overall operations of the company. Once this extensive review is complete, the analyst will issue a formal valuation opinion and report.

What tools can help?

CFO.com provides numerous free online tools to a family law practitioner that can be used to help provide some guidance and financial estimates prior to hiring a professional financial analyst. These online tools include calculators to help determine the value of a business, or calculate the price of bonds, options, or futures.

Additionally, a number of companies sell business valuation software. Simply Google “business valuation software,” and a variety of websites will pop up.

Bottom Line

Regardless of the valuation you are contemplating, it is in your client’s best interest to hire an independent, expert financial analyst to assess the value of complicated financial and business assets. When choosing an expert, be sure to look at their track record of testimony, and ask them for the names of attorneys who have used them in the past. Ask to see copies of expert reports that they have prepared, and determine whether or not they can transfer their information into a format that can easily be presented to a judge. Make sure they can present their findings in plain language that can easily be understood by a judge. Although there are countless technology tools that can be used to help in asset valuation, there is simply no substitute for a competent expert who will make a favorable impression at a hearing or in a deposition.

James Hart is a family law lawyer practicing in Orlando. For more information on his practice, please contact Mr. Hart.

©2008 Law Offices of James W. Hart, All Rights Reserved, Reproduced with Permission
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