A husband and wife were in the midst of a divorce. The parties were bitterly arguing over the value of the primary marital asset – the business. The business was a software company with steadily growing recurring revenue streams of $20 million on a trailing 12-month (“TTM”) basis. EBITDA for the period was $5 million, and EBITDA margins (i.e., EBITDA/Sales) were consistently 25% or more for the last 3 years. The husband’s attorney engaged a CPA firm to perform a valuation, which produced a report supporting value at $14 million. The wife’s attorney also hired a CPA firm to perform a valuation, only its report showed a value in the $60 million range. Both CPAs were professional experts hired to establish defendable valuation positions to the court on behalf of their clients, but they were $46 million apart! They were hired guns to provide professional justifications for their clients’ positions.
Since I had participated as an investment banker on multiple transactions within the industry, I was asked to provide a third valuation opinion designed to facilitate a settlement. I knew the business could likely be sold for at least 2X revenues if it had been presented to the market – a value in the $40 million range.
The parties finally reached a settlement where the husband conveyed 49% of the company’s equity to the wife on the condition that she not be employed or have any operating authority over the business. She would realize 49% of all earnings distributions and 49% of all net equity proceeds if the business was sold.
The business was sold two years later for $44 million, and the ex-wife and ex-husband both realized the real value, which was nowhere close to the opinions provided by their highly paid experts.
The point of the above illustration is simply that it is inappropriate for anyone to infer a realistic transaction value from appraisal reports created for non-transaction purposes. Only valuation reports created specifically for transaction purposes (a.k.a., buy/sell purposes) should be relied on for selling decisions.