New Jersey Forensic Accounting Expert Explains the Valuation of a Business

Video Transcript 

My name is Robert Bonavito, New Jersey Forensic Accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only. If this was a litigated matter, I would take a different approach, have different conclusions, based on different facts and circumstances.

My name is Robert Bonavito, New Jersey Forensic Accountant. And in our firm we do a lot of valuations and I just want to give people an understanding of how you value a company, how companies have been valued since the beginning of time. And basically, this is an example we often use.

This here is a bag of Kennedy half dollars, okay? Let's say it's a $100 million of Kennedy dollars in here. How much you gonna give me for this if I give you this bag? It's $100 million of Kennedy half dollars, you're gonna give me 99 million? You're gonna give me 98? Well you should give me $100 million because that's what this is worth. It's $100 million. You don't believe me that they're in here? Look. What are you gonna give me for this, okay? You're gonna give me $100 million.

Now let me give you a little example of what I mean because business valuation, we make it so complex. But really what you're paying for is cash flow. Just like I gave you $100 million here, you're gonna give me $100 million. That's the fair market value, that's you're gonna pay for it. How do you calculate fair market value? It's cash. In this case, $100 million of Kennedy half dollars.

Let's do a quick example here. Let's say I was gonna give you $100 million of Kennedy half dollars at the end of year one, 100 million at year two, and 100 million at the end of year three. And I want you to give me 300 million for that. I mean, take a look at the money, it's right here. Are you gonna do that? Hopefully you said no. Why wouldn't you give me 300 million even though I'm gonna give you 300 million?

I just did an example where I said a 100 million was fair because I was gonna give you a 100 million and you were gonna give me a 100 million. But here because you're getting these cash flows at the end of the year, you would take a discount. I'm gonna use a 6 percent discount here. And I'm gonna discount this and I'm gonna discount this and I'm gonna discount this. All I'm doing is dividing it by 106 for year 1, 106 to the 2nd power, 106 to, you know, cubed. And when I add this up, I get like $250 million. So what you should probably pay for this cash flow is 250 million, you shouldn't pay 300 million. And that's all valuation is.

I mean, it's complex because you know, we've got to figure out the cash flows, we gotta figure out discounts. We're forecasting and time traveling and all kinds of crazy stuff to get these values. But in a nutshell, that's all it is. And when you look at a valuation, look at the cash flows. How much am I getting? You gonna buy a stock? What dividend am I gonna get? When am I gonna get the dividend? Am I gonna get the dividend 10 years from now? Well, I want dividend, okay? I could sell the stock maybe for a capital gain but you're really getting that cash flow.

It's pretty simple and I know that we fill textbook after textbook after textbook up on this stuff because we make it so complicated. But in a nutshell, this is business valuation. I'm Robert Bonavito. If you have any questions concerning this video, please feel free to email me.