I am often asked to appraise multiple entities owned by the same individuals (usually family members) in exactly the same proportions, types of interests, rights, and so forth. As an example, Smith family members own two companies, “A” and “B”. “A” might be a manufacturing business that supplies “B”, the distributor; or “A” might be an operating business leasing real estate from “B”, and so forth. There are many legal and business reasons to establish multiple companies.
I always ask a basic question about the entities before I get too far into planning and pricing the valuation engagement: is it reasonable to assume (or do you intend) that the companies will continue to have identical ownership structures in all respects?
If the answer is no, then I will value each business (interest) separately. I will identify but not adjust for intercompany items (unless I am told that these arrangements will change). It could be that there are different discounts for lack of control and / or marketability for the separate businesses, different costs of capital, and so forth, when considering each business separately, although their interrelationships also have to be considered carefully. (For example, a marketing affiliate might be totally dependent on the manufacturing affiliate for product, and vice versa for customers, but unless there is going to be some change in their relationship, it is reasonable to assume that these dependencies will net out; that is, there is no risk of one company leaving the other high and dry because they themselves would be in the same position.)
If the answer is yes, then I will suggest that the businesses be combined for valuation purposes. I will ask for combining financial statements that eliminate intercompany items. (The company’s accountant will prepare these.) They will give a true picture of the financial position of the combined entities. I will determine the value of the combined entity, and then allocate it between “A” and “B” based on some metric like relative sales, earnings, cash flow, or net asset value. Remember, the assumption is that the businesses will continue to have identical ownerships, which means that if someone sells or gifts an interest, they will do the same thing with both entities. So at no point will the allocation of value between them really make a difference. (It just has to be explained in the appraisal.)
This is usually less work for me as an appraiser, and thus less expensive for the client, a big selling point. I have never had problems with other advisors or the IRS when taking this approach.