The determination of fair value and fair market value is one of the most important activities in a market economy. It serves as the foundation of important business and economic decisions. It determines the fair price for the purchase of a media, technology, or telecommunications business. It provides the basis for lending and investment decisions. And finally, it is essential in preparing tax returns and financial statements to ensure that investors and regulators have reasonable and documented information upon which to review comparable companies and make informed decisions.
Although the wording may vary in the appraisal field, fair market value is often defined as,
…the price at which property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.
The phrase “fair value” is often used synonymously with “fair market value” but may have a different connotation in accounting or judicial contexts. For example, the fair market value of a minority stock interest in a company may reflect discounts for lack of marketability or control if the goal is to determine what the shares could actually sell for in the open market. The “fair value” of the same shares in a judicial matter may not reflect those discounts if the objective is to ensure that a minority shareholder is treated no better and no worse than a controlling shareholder.
An important initial step in any Bond & Pecaro appraisal is to ensure that the proper definition of value is employed, be it fair value, fair market value, liquidation value, hypothetical value, or other definitions that may be appropriate for a given assignment.
Fair market valuations provide an authoritative estimate of the value of the assets or stock of a company. Such estimates are important to acquisitions, financing, investments, management decisions, compensation, mergers and joint ventures, estate administration and planning, and litigation. Bond & Pecaro fair market valuations provide clients with essential information as a part of the value determination. The firm’s appraisal reports contain detailed descriptions of competitive conditions, market growth characteristics, financial forecasts, demographic trends, and current market conditions. Each valuation is detailed enough to be meaningful to industry specialists, yet accessible enough to make it useful for generalists
A Bond & Pecaro fair market valuation typically employs at least two methodologies which can be used to confirm each other or reconcile to a value conclusion. The income approach analyzes the potential for the subject business to generate cash for its owners. The market approach analyzes the values of similar businesses, based upon actual marketplace transactions and the performance of similar publicly-traded businesses.
In addition to providing a valuation conclusion, a Bond & Pecaro fair market valuation provides additional useful information to the client. The report works its way from the general to the specific, starting with an overview of national economic trends and the impact that factors such as interest rate, lending, unemployment, income, and retail sales trends will have on the marketplace for business mergers and acquisitions.
Next, an analysis of the specific market served by the subject business addresses additional questions that are important to a valuation. Is the market growing or shrinking? What is the level of current and anticipated competition? Does the business’ current competitive position provide opportunities for improvement? How does the company’s performance benchmark against its peers?
Finally, an analysis of the business itself examines its historical performance and operating trends. Its growth and profitability are compared with industry norms to assess the upside potential and downside risks.
All of this macroeconomic, market, and business-specific information serves as the foundation for the financial forecasts. A technique known as the discounted cash flow approach allows the appraiser to develop a detailed picture of the business’ financial future The future cash flows of the business are projected and then ”discounted” to present value based upon a weighted average cost of capital to provide a determination of the fair value.
The market approach is also considered in the valuation procedure. Typically, the value of a business can be articulated as a multiple to facilitate comparability among transactions. In media, technology, and telecommunications, a company’s value may be expressed as a multiple of population; households; susbcribers, users, page views, revenues; earnings before interest, taxes, depreciation and amortization (“EBITDA”); net income, and free cash flow, to name a few.
Bond & Pecaro carefully weighs the results of the different approaches to arrive at a valuation conclusion that reflects both the financial potential for the subject business, as well as the constraints and value indications of the current marketplace.
Bond & Pecaro routinely performs fair market valuations for companies of all sizes in a variety of industries. For example, the firm was retained by a creditor’s committee to determine the fair market value of wireless businesses in connection with a bankruptcy. The firm’s valuation opinion was adopted by the Court and served as the basis for the successful resolution of the matter.
Bond & Pecaro also provided ongoing valuation over several years to a national cable television MSO in connection with its impairment measurements and eventual divestiture. The aggregate value of these properties was between $15 billion and $17 billion. Bond & Pecaro’s valuations, in addition to holding up under the scrutiny of an intense audit and litigation process, facilitated the divestiture of the company diverse profit centers.
Recently, Bond & Pecaro established the fair value of a media company’s reporting units and their constituent assets in connection with post-bankruptcy Fresh Start Accounting. The assets included tangible assets such as press equipment, technology assets, studio equipement, towers, and transmitter equipment and, more importantly, valuable intangible assets such as customer and subscriber bases, printing income agreements, mastheads, FCC licenses, brands, and favorable leases. The valuation of these assets passed a detailed audit process in a volatile and uncertain market and served as the basis for the company’s restated financial statements.
For over 25 years Bond & Pecaro has been applying its experience and resources to conduct thorough valuations of media, technology, and telecommunications companies. A principal of the form would be pleased to discuss how this experience can be brought to bear to support your company’s growth, decision-making, and reporting requirements.