Yes, it is possible for a valuation estimate to be negative based on the financial data provided.
A negative valuation results when either:
Both of the following are true:
- The Maintainable Cash Flows of the business are calculated to be below $0.
This is a calculation that estimates the amount of cash the business can generate on an ongoing basis considering all of the financial history provided.
This may be addressed within the Accuracy Check feature by identifying any expense normalizations that are required to more accurately represent the amount of cash the business can produce.
If, for example, the business is overpaying Shareholder Compensation (beyond what would be required in the market), the Maintainable Cash Flows figure may be adjusted such that the calculation is no longer below $0.
and
- The total amount of operating liabilities (which excludes amounts owing to Shareholders or Related Parties) exceeds the Adjusted Net Book Value of the Assets, including estimates for disposition costs.
This may be addressed within the Accuracy Check questionnaire by identifying a discrepancy in the actual Fair Market Value of any of the Assets relative to what is indicated on the Financial Statements.
If, for example, the business owns Real Estate that is worth more than what is showing on the Balance Sheet, an adjustment would occur and the Tangible Asset Backing may be adjusted such that the calculation is no longer below $0.
OR:
The business’ working capital position is a deficit that requires a Notional Cash Injection in an amount that exceeds the value determined on the basis of the business’ positive cashflows.