Volume 10, Issue 1 -

The significant failure rates observed in mergers and acquisitions (M&A) indicate structural deficiencies in business transactions. This paper identifies serious weaknesses in common valuation methods that play a key role in poor transaction practice. Common valuation methods are in particular discounted cash flow (DCF) methods. DCF methods are usually based on neo-classical theories that assume the existence of a perfect and complete capital market. As will be demonstrated, the underlying theoretical patchwork is contradictory and lacks utility. Therefore, utilizing DCF methods to value a business and deduce economic decisions from such a valuation is decision-making built on sand. Following a normative-deductive methodology, this paper seeks an alternative theoretical concept to build a business valuation theory on solid ground. Such an alternative is found in the Austrian School of thought. The resulting valuation concept, subjective business valuation theory , is based on the theory of marginal utility proposed by Gossen, which was rediscovered and refined by the scholars of the early Austrian School. Contrary to highly restrictive neo-classical valuation, subjective business valuation approaches reality and is therefore well-suited for practical implementation.

It isa fact that the uncertainty about a firm’s future has to be measured and incorporated into a company’s valuation throughout the explicit analysis period – in the continuing or terminal value within valuation models. One of the concerns that can influence the continuing value of enterprises, which is not explicitly considered in traditional valuation models, is a firm’s average life expectancy. Although the literature has studied the life cycle of a firm, there is still a considerable lack of references on this topic. If we ignore the period during which a company has the ability to produce future cash flows, the valuations can fall into irreversible errors, leading to results markedly different from market values. This paper aims to provide a contribution in this area. Its main objective is to construct a mortality table for non-listed Portuguese enterprises, showing that the use of a terminal value through a mathematical expression of perpetuity of free cash flows is not adequate. We provide the use of an appropriate coefficient to perceive the number of years in which the company will continue to operate until its theoretical extinction. If well addressed regarding valuation models, this issue can be used to reduce or even to eliminate one of the main problems that cause distortions in contemporary enterprise valuation models: the premise of an enterprise’s unlimited existence in time. Besides studying the companies involved in it, from their existence to their demise, our study intends to push knowledge forward by providing a consistent life and mortality expectancy table for each age of the company, presenting models with an explicitly and different survival rate for each year. Moreover, we show that, after reaching a certain age, firms can reinvent their business, acquiring maturity and consequently postponing their mortality through an additional life period.

This study examines the impact of the market participant on prices paid for private companies in the Pratt’s Stats database. We examine approximately 4,200 transactions over the period of 2000–2011 for companies with sales of $1 million or more. We find that public buyers pay more after controlling for the target’s size, industry, age, estimated growth rate, and profitability, as well as the time of the transaction. We also find that smaller companies and C-corporations sell at higher multiples. Our results are consistent with the hypothesis that the price paid for a company is related to whether the market participant is private or public. Further, our results provide additional insights to users of the Pratt’s Stats database regarding the characteristics of the transactions in this well-known and often-used database.

The importance of knowledge and other intangible activities for the success of an enterprise have been broadly recognized over the last few years. In this paper a tutorial is illustrated on the valuation of a patent through the real options approach (ROA), since the use of the discounted cash flow (DCF) methods, such as the net present value (NPV), seems to show issues when evaluating opportunities, such as the ones offered by intangible activities. The logic underlying ROA is tightly based on financial options and, in this sense, uncertainty can be seen as an opportunity, and not necessarily as a threat and its effect on the value of an activity can become positive. The patent analysed (registered in 2009) is a patent by the Alfa Group (this is not the real name of the firm but is used here for privacy reasons), which is a worldwide leader in the production of Getters, metallic elements that, through a chemical absorption process, keep the devices in which they are embedded in vacuum status. Such equipment is used in lightning systems, monitor screens, flat screen TVs, etc. In this tutorial, an ROA has been developed in order to demonstrate how the value of intangible assets can be estimated by using an Italian case study that can be useful for further studies and uses.