Valuing Your Business for an SEC Filing

This article aims to guide you on valuing business for SEC filing.

The New Jersey-based cryptocurrency lender BlockFi was valued at $5 billion in 2021 following a capital round, having been valued at $3 billion only a few months earlier in the same year. A year later, in 2022, the company’s $1 billion valuation had fallen by 80%. Imagine the implications this must have had on investor perceptions.

These scenarios are why an accurate business valuation is important for investor confidence. Investors and financing institutions usually rely on SEC filings before making investment decisions. According to the Securities and Exchange Commission’s regulations, public companies, similar organizations, and intermediaries must file financial records and other information regularly.

When you have a comprehensive business valuation, filing these documents becomes easy and reliable for the investors. It also plays a significant role in many business activities, such as initial public offerings (IPOs), mergers, and acquisitions.

It might be overwhelming to immediately grasp the importance of business valuation for SEC filings. This article aims to guide you on valuing business for SEC filing.

Business valuation SEC filing

The Securities and Exchange Commission, a governmental agency, was established in the United States during the Great Depression to oversee the financial markets. It protects investors, markets, and securities stakeholders by encouraging transparency and accurate data generation. Let’s learn the role of the SEC in further detail.

What is SEC filing?

SEC filings are official documents that public companies, broker-dealers, and insiders must submit to the U.S. Securities and Exchange Commission. These filings provide important financial statements, periodic reports, and other formal documents. The main purpose is to uphold market transparency. This, in turn, aids investors and the public to make informed decisions.

What is SEC filing?

Except for a few forms, all the documents are subsequently available through the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR). Sharing relevant information with shareholders and investors will enable them to make informed judgments.

How to get ready for your SEC filing?

You must be involved in careful planning and accuracy to prepare for an SEC filing, especially when it includes challenging tasks like business valuation. The significance of business valuation lies in its ability to influence investor views and regulatory compliance, especially in events such as initial public offerings (IPOs) and acquisitions.

By using the expert valuation services provided by Eqvista, you can effectively ensure accuracy in your business valuation for SEC filing. Our expertise speeds up the procedure, guaranteeing that all financial disclosures satisfy SEC requirements and fairly depict the worth of your business. So, there is no possibility of non-compliance or misrepresentation.

Methods of business valuation for SEC filing

Many factors can affect the value of a closely held business, such as its size, type, growth, and structure. However, there are three main ways to determine its value: income, asset, and market. When a valuator applies these strategies and carefully chooses the best approach, it leads to a solid business valuation outcome.

Income Approach

According to the method used, the Income Approach determines worth by discounting or capitalizing a company’s free cash flow. The free cash flow metric considers capital expenditures, tax incentives, taxes, and changes in networking capital.

The second essential element of the Income Approach, after free cash flow, is the discount rate – a metric of risk and return. When calculating a discount rate, one may utilize either the cost of equity (COE) or the weighted average cost of capital (WACC).

Example for Income Approach of SEC Filing

This approach values the firm based on the present value of its expected future earnings. Let’s go under this with the example of Ease Manufacturing Co. whose future cash flows are:

Forecast Future Cash Flows:

  • Year 1 – $700,000
  • Year 2 – $750,000
  • Year 3 – $800,000
  • Year 4 – $850,000
  • Year 5 – $900,000

Identify the Discount Rate:

Let’s use a discount rate of 12%, considering the risk profile and alternative investment opportunities.

Calculate Discounted Cash Flows:

  • Year 1 DCF – $700,000 / (1 + 0.12)^1 = $625,000
  • Year 2 DCF – $750,000 / (1 + 0.12)^2 = $597,895
  • Year 3 DCF – $800,000 / (1 + 0.12)^3 = $569,424
  • Year 4 DCF – $850,000 / (1 + 0.12)^4 = $540,190
  • Year 5 DCF – $900,000 / (1 + 0.12)^5 = $510,684

Estimate Terminal Value:

  • Terminal Value – $900,000 x (1 + 0.04) / (0.12 – 0.04) = $11,700,000
  • Discounted Terminal Value – $11,700,000 / (1 + 0.12)^5 = $6,638,894

Calculate Total Firm Value:

  • Total DCF for 5 years of $2,843,193
  • Total Value of Dawson and Associates – $2,843,193 + $6,638,894= $9,482,087

Therefore, Ease Manufacturing Co. is estimated to have an approximately $9.48 million valuation.

Market Approach

This approach determines the appraisal value of a company’s security, business, intangible asset, or ownership interest by analyzing the market prices of recently sold or remaining comparable assets or businesses.

It typically uses price-related metrics such as price-to-earnings, book values, and sales. The Market Approach uses the reasoning that a company will sell for around the same multiple (of profits) to other businesses of comparable size and industry.

Example for Market Approach of SEC Filing

Consider a company, “Ease Manufacturing Co.” for the purpose of business valuation. To use the market approach, Identify a few similar businesses in size, industry, and market. Let’s assume that the valuator identifies three comparable businesses. The financial details of these businesses are as follows:

  • Business A – Sold for $5,000,000 with annual revenues of $2,500,000
  • Business B – Sold for $4,000,000 with annual revenues of $2,000,000
  • Business C – Sold for $6,000,000 with annual revenues of $3,000,000

Calculate the valuation multiples (Price-to-Revenue ratio) for each comparable company.

  • Multiple for Comparable Company 1 – $5,000,000 / $2,500,000 = 2.0
  • Multiple for Comparable Company 2 – $4,000,000 / $2,000,000 = 2.0
  • Multiple for Comparable Company 3 – $6,000,000 / $3,000,000 = 2.0

Average Multiple = (2.0 + 2.0 + 2.0) / 3 = 2.0

Determine the revenue of the business being valued. For “Ease Manufacturing Co.”, let’s assume the annual revenue is $2,200,000.

  • Estimated Value = Revenue × Average Multiple
  • Estimated Value = $2,200,000 × 2.0 = $4,400,000

This valuation will be used as part of the financial considerations in the SEC filing

Asset Approach

Often used as a base value or “floor” for a business valuation, the asset approach is the sum of all the business assets (both tangible and intangible), excluding liabilities. Asset approach is suitable in situations like liquidation where the ongoing earnings potential of the business is less relevant than its component asset values.

Example for Asset Approach of SEC Filing

Let’s consider a business operating in real estate:

  • Calculate the Value of Assets: Determine the total value of the business’s assets. Let’s say the business owns properties, land, and equipment with a total value of $10,000,000.
  • Subtract Liabilities: Subtract any liabilities, such as loans or mortgages, from the total asset value. Let’s say the business has liabilities totaling $2,000,000.
  • Net Asset Value = Total Assets – Total Liabilities
    • Net Asset Value = $10,000,000 – $2,000,000
    • Net Asset Value = $8,000,000

So, in this example, the business’s valuation using the asset-based method would be $8,000,000.

How to value business for SEC filing?

Now that you know the importance and various approaches in valuing business for SEC filings, it would be helpful to understand the business valuation process.

How to value business for SEC filing?

  • Understand SEC filing requirements – Before starting a business valuation for SEC filing, it’s essential to be sure of the specific filing requirements. Different forms like the 10-K, 10-Q, and 8-K have distinct purposes and requirements. When you understand the details disclosed, such as financial performance and significant corporate events, you will know the depth and focus of your valuation efforts​.
  • Identify the valuation method – Choosing the right valuation method depends on the nature of the business and the purpose of the filing. As already mentioned, the three main approaches are the income approach, market approach, and asset approach. Each method has its own set of assumptions and applicability depending on your business’s operational and financial characteristics​.
  • Gather and analyze financial information – You must collect comprehensive financial data reflecting the company’s historical and forecasted future performance. This includes financial statements, revenue streams, expenses, and investments. It’s important to have accurate and detailed financial information as it forms the base of the valuation and subsequent SEC filings.
  • Assess industry trends and market conditions – When you understand the market and industry conditions, it helps in making informed assumptions for valuation. This includes analyzing current market trends, industry growth rates, and competitive positioning. This assessment aids in fine-tuning the valuation to reflect how external factors might impact the business​.
  • Value intangible assets – Intangible assets like patents, trademarks, and brand reputation can significantly impact a business’s value. To accurately value these assets, you must understand their current and potential future benefits to the business. This often requires specialized valuation techniques to ensure their worth is properly reflected in the overall business valuation​.
  • Engage a professional – Given the complexities of valuing business for SEC filings, it’s often important to engage a professional. This professional will perform all the steps mentioned above quickly and more accurately for your business. Experts from firms like Eqvista can provide the necessary expertise to ensure that the valuation is accurate and compliant with all relevant SEC regulations and standards​.

Benefits of engaging professional for business valuation for SEC filing

So, why should you engage a professional valuator to help you with your business valuation for SEC filing? Here, we have a list of benefits you must consider.

  • Expertise and knowledge – You need in-depth knowledge of valuation methodologies for accurate, credible business valuations. Professionals can help you pick the right ones because they understand the market dynamics, financial analysis, and valuation standards. Eqvista’s team of experts uses advanced tools and deep industry knowledge to offer precise business valuation for SEC filings. Over 14000 companies trust our valuation services.
  • Objectivity and impartiality – An independent valuator offers an unbiased perspective. This aspect is crucial for the credibility of the valuation in SEC filings and with stakeholders. Eqvista ensures objectivity in business valuations by adhering to standard methodologies and maintaining independence. This improves the trust investors and regulatory bodies place in financial disclosures.
  • Compliance with SEC regulations – You need specific industry expertise to understand the complexities of SEC regulations. Professionals are versed in these requirements, and their valuation reports usually comply with legal standards, avoiding potential legal issues. In this regard, Eqvista stays updated with the latest SEC regulations and integrates this knowledge into valuation processes. So, you can be sure that your filings are compliant and up to date with all regulatory changes​.
  • Time and Cost Savings – When you hire professionals, you also save significantly over time. They provide efficient and accurate valuations, which can prevent costly errors and reduce the time your team spends on these tasks. Eqvista can streamline the valuation process with our efficient methodologies,  reducing the time and cost associated with internal valuation efforts. This way, your company can allocate resources more effectively and focus on core business operations.

Partner with Eqvista for Expert Business Valuation!

Business valuation for SEC filings requires a thorough understanding of not just one’s own business but also external factors like market dynamics and industry potential. You can certainly perform business valuation for your company, but you should hire an expert considering the paperwork and calculations needed.

Eqvista’s valuation services stand out because we employ a tailored approach. We address general compliance needs and specialize in identifying and valuing intangible assets, a critical aspect often overlooked in standard valuations. Our use of advanced valuation models and deep market insight can significantly influence your business’s strategic decisions, particularly when looking to attract investors or consider future acquisitions.

Our approach includes standard valuation practices and incorporates the latest market data and industry trends to provide a comprehensive valuation report. If your company is preparing for an SEC filing and requires a reliable valuation, consider contacting Eqvista.

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