The ReCourses Valuation Model (RVM) is a sophisticated financial tool to give the buyer or seller a quantifiable, repeatable indication of the marketplace value of a firm, based on the sum total of their management decisions in the recent past.
The RVM is a proprietary method for establishing the value of a marketing firm. While valuation services are often coupled with equity transactions, they are also useful for estate planning to ensure liquidity and the proper titling of assets, divorce settlements, creating an ESOP that will hold some or all of your company's shares, determining proportionate value in a buy/sell agreement, funding a buy/sell agreement with life insurance, or dissolving a firm. And some business owners want a valuation of their business just out of curiosity, to measure their progress from year to year in a tangible way and to see how an outsider would evaluate the firm (giving them time to make changes to the weaker areas). Regardless of the reason, it can be a useful exercise in measuring what you are building beyond just salary (and perhaps distributions).
There are many sources for a valuation, but very few credible ones for independent firms in the marketing industry. Our own method took shape in early 1997 and since then more than 1,000 valuations have been crafted. All the common EBITDA calculations are made, of course, but beyond that there are 4 features that no other valuation incorporates (as a whole):
- Principal compensation is normalized with transparent formulas (including a provision for multiple partners) to ensure that the net profit is reliably reported. For instance, if a principal is withdrawing more than a normalized amount would call for, that action is artificially lowering the profit. And of course the opposite is true. Since principal compensation is such a significant percentage of AGI, this is a critical adjustment.
- There are 15 factors which we evaluate (see below). The common thread between all factors is this: none of them are necessarily reflected in standard accrual financial statements, yet each is material for the selling or buying of a firm. For example, no valuation formula has a published, transparent penalty ladder for client concentration. Ours does.
- The RVM is actually two methods in one. First there are all the EBITDA adjustments, the averaging weighted toward the present, and the compensation normalization. From there one method independently calculates a valuation using a standard multiple (based on recent consumated sales) of adjusted net profit. And then a second valuation method is employed, also independently, on the same adjusted financials. But in this case we use a resultant percentage of the AGI, calculated as an Inverse Multiple™© (patent pending) on the base foundation of a modest profit expectation.
- Finally, the two independent methods are averaged and then a simple standard deviation calculation is made to determine how far from the mean each result lies. In our experience, a standard deviation >30% is not reliable.
Here are the softer factors we adjust within a mathematical range in 15 factors spread across 5 categories:
Presence of Non-Competes
Level of Employee Turnover
Age of Accounts Receivable
Debt to Equity Ratio
Months of Cushion in Cash Equity
Number of Partners
Principal Days Taken Off
Principal Hours Worked Per Week
Age of Firm in Years
General Condition of the Industry
Proportionate Size of Clients
Discounts for lack of marketability and for lack of control are represented in the formulas.
This unique method has been run through the gauntlet of mergers, acquisitions, probate, divorce settlements, partner disputes, tax audits, cival lawsuits, and dissolutions.
Duration. One or two weeks from receipt of materials and fee.
Scheduling. At any point in the year.
Deliverable. PDF of adjusted financial data and applied formulas, as well as actual Excel spreadsheet to run scenarios or updates on your own. Verbal explanation post delivery for up to two hours.
Participation Requirements. A principal or controller from finance gathers materials for roughly two hours.
Cost. $5,000 fee (no expenses).
Payment Terms. Prepaid and non-refundable, sent with the materials we'll request.
References. None available for this unusually confidential service. There's a fuller explanation of our policy around references in the FAQ.
Finally, you are welcome to reference the RVM in your corporation's organization documents, for free. The widely published method can then be used to lessen disputes that add cost and time to resolutions.
Inverse Multiple™© is a trademark of ReCourses, Inc., and is Copyrighted, 1997-2014. All rights reserved. Process patent pending.