Business Valuation

CHAPTER 12Reconciliation and Sanity Checks

PYRAMID STEP 12 Validate consistency, reasonableness, and economic reality.

There is generally a nexus between the market and income approaches for valuing an operating company. An asset approach is generally used for holding companies that do not have goodwill or internally created intangible asset value. Once the indicated value(s) under each method have been appropriately adjusted (Step 11) and the results from all methods are on the same level of value required for the assignment (e.g., a noncontrolling, nonmarketable equity value), then the analyst must decide which method or methods to rely on if calculations were made under multiple methods. This step in the valuation process involves determining the merits of the method(s) used and justifying the concluded value(s). This reconciliation and justification can come in the form of application of rules of thumb, the use of justification of purchase price models, and comparability among the methods used. In addition, for most purposes, the analyst should identify subsequent events that may impact value and state whether these subsequent events were taken into account in the analyst’s estimate of value.

Learning Objectives

By the end of this chapter, readers should be able to:

• Distinguish the difference between reconciling values and performing sanity checks.
• List the steps to ...