American Fortune Business Valuation Services

Business valuations have long been considered an important step in selling or acquiring a business. In general, valuations of companies are done by qualified and well credentialed professionals. The business valuation experts look into every aspect of a business in detail and analyze the market worth and value in comparison to other investment opportunities. In calculating Business Valuations it does not mean that only profits are considered, a thorough business valuation includes a review and consideration of the business’s resources, assets, competition, industry strength, brand identity, processes, intellectual property, physical possessions, and so on.

Business Valuations give a fair indication about where a business stands in comparison to similar businesses in the market. This is why anyone wishing to sell or buy a business needs to seriously consider the use of accurate and defensible business valuations. When selling a business a solid business valuation will help in obtaining a fair market price for the business. Likewise the use of a business valuation in a acquisition of a business, the buyer can be assured of not over paying for a business but obtaining a fair market price.

Why Should a Seller Obtain Business Valuations From Expert and Credentialed Valuation Companies?
Here are some reasons for obtaining business valuations prior to selling a business:

  • You have given a lot to this company in terms of time, money and effort. You deserve to get a great price for it and without accurate and defensible business valuations; the price you get may fall short of your expectations.
  • You learn where your company stands in comparison to other similar businesses. By knowing your position in the market, you can become proactive in strengthening your business and its value.
  • You are in a strong negotiating position to defend the selling price. You also posses the confidence that you are not leaving money on the table, and at the same time you are assured that you are not setting an unrealistic price for the sale of your business.
  • Other hidden advantages of obtaining business valuations for companies help identify weakness and value drivers to so that management can make improvements in the business which will result in increasing business value.
  • At times, selling a business may not be the best course of action. You may get an opportunity to trade the business in exchange to other assets like shares, stocks or another business unit. In such scenarios, business valuations can render fair opinion in exchange deals.
  • When business valuations of companies are performed, the valuation is useful identifying profit centers and loss centers within the business. This will help streamline the overall business thus increasing its value.

Why Should a Business Buyer Obtain a Business Valuation?
Here are few points for you, as a business buyer, when you consider business valuations:

  • The first and foremost consideration is that you will have the proper details regarding all the business financials and the assets of the company for sale and their true market value. You should also obtain a detailed picture about the quality of the processes that are in place and verify if all the necessary standards are being followed by the company.
  • When you want to acquire a business, you cannot do so having only one option in your mind. You need to look out for various choices in the market and then chose the one that fits your criteria and goals and one that has the greatest value (return on your investment). The best way to test these factors is to obtain a credible business valuation. Business Valuations will enable you to perform a comparative analysis and deduce the option that yields the highest return.
  • When you obtain a business valuation, you are not just getting a price tag for a business; rather you are getting to know market value of the business being purchased and how the business compares to other investments. This means that you can accurately know what the market is like in your industry category and business size.
  • There are many companies in the market place that are placed for sale because they are not performing well.. The sellers will try to cover up the problems and may not easily divulge the many negatives about a under performing business. This is why business valuations help reveal and identify issues and problems in the businesses for sale.

Last, but not the least, you can also plan better with the aid of business valuations companies. Business Valuations do not always have to be utilized for selling and buying businesses; many people use business valuations for business improvement, maximizing value and growth of businesses. You can also obtain a clearer picture of the strengths and weaknesses of a business by having a business valuation performed. This will help you strategize your approaches, capitalize on the strengths and work on the weaknesses. Prior to purchasing a business, you can lay out a plan to make the acquisition venture a success. Since there is probably a working business model in place, with use of a business valuation report you will be able to incorporate principles from the business valuation to improve the existing business model. Thus business valuations don’t just define business value they also enable you to identify strengths and weaknesses in a business allowing you to correct, strengthen, preserve and grow business value.

Valuations For Mergers and Acquisitions
Brian S. Mazar, MBA, CBI
mazar@fortunebta.com
502-244-0480 ext. 24

https://www.businessvaluation.bz

 

 

 

Posted in: Blog.
Tagged: Valuations For Mergers and Acquisitions.
Last Modified: March 16, 2015

Purpose Of Business Valuations

A business valuation is a process taken to establish a value for an entire or partial interest in a closely held business or professional practice , taking into account both quantitative and qualitative tangible and intangible factors associated with the specific business being valued.

Definition : The act or process of determining the value of a business, business ownership interest, security, or intangible asset (as defined in the International Glossary of Business Valuation Terms).

Business Valuations need to be performed by qualified and experienced valuation firm under the following conditions:

a)The firm represents itself to the public as an appraiser or performs appraisals on a regular basis
b)The appraiser is qualified to value the type of property
c)The appraiser is not a related party.

Some Of The Common Purpose Of Business Valuations Are Expanded In The Following Paragraphs.

Business Valuations For Mergers and Acquisition

Whenever a company merges with another company, is acquired by another company, or sold, a valuation is necessary. In a merger situation, a professional may be asked to establish an “exchange value” of the companies involved. The valuator may be engaged to establish the value for either or both of the companies. Ina sale or divestiture of a company or of an interest in a company, the seller may engage a professional’s services to establish a range of values of the business that will assist the seller in negotiating a sales price. Conversely, a person or company may engage a professional to perform a valuation of a company they want to acquire. When businesses are acquired, they are often acquired for a flat or lump-sum amount. For accounting and tax reasons, the lump-sum purchase price must be allocated among the various classes of tangible and intangible assets of the business.

Business Valuations For Legal Support

For a variety of reasons, an attorney involved in a pending lawsuit might need to determine the value of a closely held business. The professional, as the expert, will be asked to give expert testimony regarding the conclusions. The need for litigation support4 relative to business valuations can arise in divorces, partner disputes, dissenting shareholder actions, insurance claims or wrongful death and injury cases.

Business Valuations For Regulatory Matters – FAS 141 and 142

The FASB now requires that independent business valuations be made to establish the purchase value of all intangibles included in a business combination. Similarly, FAS 142 requires an annual review of the values of intangible assets in order to measure whether or not any impairment of the original or carrying value has occurred. Under Sarbanes-Oxley, an independent auditor is explicitly forbidden to provide “appraisal or valuation services, fairness opinions, or contribution-in-kind reports” for any of its audit clients.

Business Valuations For Buy- Sell Agreements

All closely held businesses should adopt a buy-sell agreement among the partners or shareholders. Much protracted litigation could be avoided if, in the beginning, the business owners would address the issue of a buy-sell agreement in their partnership or shareholders agreements. A buy-sell agreement is an agreement that establishes the methodology to be followed by the parties regarding the ultimate disposition of a departing or a deceased owner’s interest in a closely held business. The process of determining the value of the business is directed by the buy-sell agreement and there are many alternative procedures for doing so. Some buy-sell agreements provide for the determination of value merely by agreeing to a value at the beginning of each year. Some agreements are based on a predetermined or prescribed formula, whereas other agreements require that an independent business valuation be performed periodically. Regardless of the alternative selected by the owners, a professional may be asked to assist in the business valuation process.

There are two basic types of buy-sell agreements: the stock-repurchase and cross-purchase agreements. Under a stock-repurchase agreement, the company agrees to purchase the interest of a departing owner. A cross-purchase agreement allows the remaining owners to purchase the departing owner’s stock.

An appropriately constructed buy-sell agreement will address several important items, including:

What events (e.g. death, disability, etc.) trigger the buyout?
How will the buyout be funded: insurance, financing, or something else?
How soon will the buyout occur, in 30 days, 60 days, or longer?
How is the interest to be valued, i.e., based on a fixed value, formula, or a valuation?

When preparing a business valuation report, one should always review the existing buy-sell agreements for restrictions, valuation methodology, terms of purchases, etc.

Business Valuations For Estate, Gift and Income Taxes

In many cases, the value of an interest in a closely held business is an individual’s primary asset. The value of the closely held business must be ascertained to adequately perform a thorough and comprehensive estate or financial plan. It may also be necessary to establish the value of an interest in a closely held business to properly prepare estate or gift tax returns and to establish the basis of inherited stock in the hands of an heir to an estate.

Age demographics, as previously stated, will involve parents wanting to retire who will have to properly deal with the value that has accumulated in their closely held businesses. There are various ways a business owner can transfer the value that has accumulated in a closely held business. These include giving •the business to the heirs, selling the business to the heirs or to third parties, or giving the business to a charity. Regardless of how the business is transferred, an independent business valuation of the business interest is imperative.

If parents die before making transfer arrangements for the business, a value will have to be established for reporting on an estate tax return.

The universal standard of value for gift, estate, and inheritance taxes is “fair market value.” Fair Market Value is defined in Revenue Ruling 59-60 as.”the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.”

Revenue Ruling 59-60 also outlines a number of valuation methods and techniques which have become generally accepted and which must be considered in each case. However, as previously mentioned, valuation is as much an art as a science. The final determination of value under the regulatory standard will depend upon the facts and circumstances of the particular valuation.

Business Valuations for Employee Stock Ownership Plans (ESOPS)

An ESOP is a type of employee benefit plan. It is considered a defined contribution plan and is intended to invest primarily in the employer’s stock. The ESOP is a mechanism by which employees become beneficial owners of stock in their company. Generally, any non-publicly traded company with an ESOP must obtain a valuation of its stock on an annual basis. One significant advantage of an ESOP is that shareholders of a closely-held corporation can defer taxation on the gain resulting from their sale of company stock to an ESOP, provided the ESOP owns 30% or more of a company’s shares after the sale. In order to defer the gain, the seller must reinvest sale proceeds in qualified replacement property (QRP) consisting of stock or bonds in operating companies in the US.

To learn more about the purpose of business valuations contact American Business Valuation Services at 502-244-0480 ext. 24; info@fortunebta.com
https://www.businessvaluation.bz

American Fortune Business Valuation Services

Business Valuation

ABC Company

Prepared for:

John R. Smith, Owner

Prepared by:

Brian S. Mazar, CBI, MBA, AVA

The business valuation contained in this report is confidential and is intended for the exclusive use of the person(s) or company for whom it was prepared. Reproduction, publication or dissemination of all or portions hereof may not be made without prior approval from American Fortune Business Valuations or the person(s) or company for whom it was prepared.

Mr. John R. Smith, Owner ABC Company
1111 First Street
Sacramento, CA 95816 Dear Mr. Smith:
VALUATION OF ABC COMPANY
Sample Business Valuation Report
At your request, we have prepared an opinion of the Fair Market Value of 100% of ABC Company as of 3/31/2014.

The standard of value used in this Business Valuation of ABC Company is Fair Market Value. Fair Market Value is the price (in terms of cash or equivalent) that a buyer could reasonably be expected to pay and a seller could reasonably be expected to accept if the business were offered for sale on the open market for a reasonable period of time with both buyer and seller being in possession of the pertinent facts and neither being under any compulsion to act. If used in the sale of this business, the business valuation premise assumes an Asset Sale of a debt free business and is not inclusive of cash or receivables held by this company.

As a norm in valuation methodology, a 5-4-3-2-1 Weighted Average of Discretionary Earnings is normally taken by the Valuator.

In this Sample Business Valuation Report we have considered income, market and asset approaches. Based on the results of these business valuation approaches and methods and considering other relevant data, we have estimated the Fair Market Value of 100% of ABC Company as of 3/31/2013 to be $2,875,491. The opinions expressed in this business valuation are contingent upon the conditions set forth in the Appraisal Procedures section and the Statement of Assumptions and Limiting Conditions that are a part of this report.

On a personal note, I sincerely appreciate this opportunity to do business with you and trust this business valuation will meet your needs. Please contact me in the future should your business needs change.

Respectfully submitted,

Brian S. Mazar, CBI, MBA, AVA
American Fortune Business Valuation Services
Business Valuation Factors

When considering the factors for a valuation of a business it’s important to understand the risk / cash flow relationship will always be the main consideration of a business’s value. Depending on the size of the company, Seller’s Discretionary Earnings (SDE), Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) or Earnings Before Interest and Taxes (EBIT) are all standard levels of adjusted cash flow that potential buyers will look at as the basis for determining business value.

Ultimately, it’s the present value of future cash flow that a potential buyer is purchasing. The buyer also has to assess the risk associated with the company’s ability to generate that future cash flow. To determine cash flow, the Income Statement should be normalized by adjusting for discretionary (personal), non-recurring, and non-business related expenses. These items are often referred to as add-backs or adjustments. Traditionally, larger companies usually have very few “adjustments” during the normalization process, whereas smaller companies generally are the opposite.

It is easy to mistakenly make the assumption that the more cash flow, the more valuable the business. This is not necessarily true. For example, if you have a company with a declining sales trend and a variety of “personal adjustments”, such as auto, travel, entertainment expenses and non-operating salaries, to their Income Statement, this would indicate a significant financial risk. The business would likely be valued lower than another company with cleaner financial records (fewer “adjustments”).

As a business owner, it is important to understand that risk will impact your company’s value. Risk can come in many forms such as financial risk, management risk, technological risk and industry risk to name a few. But wherever risk can be identified, the severity of that risk will have an effect on the company’s value in one way or another. Since profitability and resulting cash flow is the most significant driver of a company’s value, it is important to eliminate as much risk associated with the company’s cash flow as possible in advance of selling your company.

SCOPE OF SERVICE

The purpose of this business valuation is informational. This Sample Business Valuation Report is prepared for ABC Company and should not be used by others.

Our opinion of Fair Market Value relied on a “value in use” or “going concern” premise. This premise assumes that the Company is an ongoing business enterprise with management operating in a rational way with a goal of maximizing shareholder value.

Our analysis considers those facts and circumstances present at the Company at the Business Valuation Date.

To arrive at a conclusion of Fair Market Value, we performed the following Procedures:

1. Collected the Company’s relevant historic financial statements.
2. Analyzed the historic financial statements by calculating financial ratios and common- size financial statements for each historic year in order to identify trends.
3. Compared the Company’s financial ratios and common-size financial statements to industry guideline data to identify any significant variances.
4. Developed risk-adjusted Capitalization and Discount Rates to apply to the Company’s historic and projected earnings, respectively.
5. Collected and analyzed transactional data from comparable companies within the same industry.
6. Adjusted historic earnings to eliminate the effects of excess and discretionary expenses, non-operating revenues and expenses, and non-transferable revenue streams.
7. Utilized Income, Market, Asset and Other valuation approaches to determine an estimate of Total Entity Value. The following methods were considered under each approach:
a. Income Approach
Capitalization of Earnings and Discounted Future Earnings.
b. Market Approach
Price to Earnings, Price to Revenue, Price to Gross Cash Flow, Price to Cash Flow from Operations, Price to Seller’s Discretionary Cash Flow, Price to Dividends, Price to Book Value, Price to Total Assets and Price to Stockholders’ Equity.
c. Asset & Other
Capitalization of Excess Earnings & Multiple of Discretionary Earnings.
8. Selected the most reasonable Total Entity Value from the range of values established in the business valuation methods and then applied any appropriate discounts to arrive at our conclusion of the estimated Fair Market Value of the interest.

Recasting the Income Statement

The income figures from the tax return will accurately represent revenue from all sources. However, the expenses taken make the tax return unsuitable for presentation elsewhere. Items such as depreciation, discretionary spending, owner’s perks and pensions lower the net profit figures, sometimes past zero on tax returns. Presenting a buyer or a bank with a financial statement showing a small or no profit is simply unacceptable when selling a business or applying for credit or a mortgage. Buyers are not likely to purchase a business that has minimum profit or losses on a tax return. Banks will lend borrower money with adverse information only in limited situations.

The result of recasting the income in this scenario is that the re-casted income statement will show a true representation of the business, more than likely with more favorable numbers for the seller, buyer and lender. In order to recast financial statements, the following items should be adjusted to reflect reality: owner salaries, nonrecurring expenses and income, investments and non-operating expenses, interest payments, depreciation expense, rent expense, discretionary expenses, and pensions. The result will be a more accurate and reliable presentation of income that a bank or buyers can use to gauge the activity of the business and that an owner can use to make better business decisions

Calculation Of EBIDTA

Information Source Tax Return
1 Sales
2 Cost of Sales
3 Operating Expenses
4 Net Income / Unadjusted Pre-Tax Profit$
5 Depreciation $ -
6 Amortization
7 Interest on loans to business from all lenders
8 EBITDA (Total of Lines 4+5+6+7) $
9 Officer / Owner’s salary
10 Adjusted EBITDA (Total of Lines 8+9) $

Calculation Of EBIDTA & Discretionary Earnings

11 Wages or payments to family members (non-working)
12 Auto for owner’s and/or spouse personal use
13 Auto insurance for owner’s benefit
14 Auto repairs & maintenance owner’s personal use
15 Contributions and donations
16 Fair market rent adjustment
17 Insurance premiums for owner’s health, life, etc.
18 Professional services (legal / accounting) non-recurring
19 Retirement plan contributions
20 Meals & entertainment (personal)
21 Travel (personal)
22 One time expenses or (income)
23 Other benefits
24 Bank penalties
25 Personal credit cards pd by business
26 Non-essential memberships
27 Other:
28 Total Owner Discretionary Add-Backs $
29 Adjusted EBITDA (line 10 above) $
30 Equals Total Seller Discretionary Earnings $

Financial Rules of Thumb

ABC Company

Financial Summary

2008 2009 2010 2011 2012

Total Discretionary Cash Flow 747,360 773,468 566,954 578,375 715,290

Weight 1,2,3,4,5

Indicator
747,360
1,546,936
1,700,862
2,313,500
3,576,450

Sum of Indicators
9,885,108

Sum of Weights
15

Weighted Cash Flow
659,007
Adjustments 0

Available Cash Flow
659,007

Capitalization Rate

Highly Marketable
Rate

17%
Multiple

5.88
Very Marketable 20% 5.00
Marketable 26% 3.85
Average Marketability 32% 3.13
Below Average Marketability 40% 2.50
Poor Marketability 44% 2.27

Enter Capitalization Rate
20%

Enter Total Tangible Assets 546,420

Financial Rules of Thumb

ABC Company

Rules of Thumb

Rule of Thumb 1

Weighted Available Cash Flow

659,007
Tangible Assets 546,420
Reasonable Rate of Return on Assets 15%
Reasonable Return on Assets 81,963

Excess Earnings
577,044
Capitalization Rate (plus 5% for intangible risk) 25%
Value of Intangible Assets 2,308,177
Add: Value of Tangible Assets 546,420
Total Business Value 2,854,597

Rule of Thumb 2

Available Cash Flow
659,007
Valuation Multiple 5.00
Total Business Value 3,295,036

Rule of Thumb 3

Last Year’s Discretionary Cash Flow
715,290
Cash Flow Multiplier (between 1 and 3) 2.70
Intangible Value 1,931,283
Add: Tangible Assets 546,420
Total Business Value 2,477,703

Summary

Value W eight Extens ion

Rule of Thumb 1 2,854,597 33% 951,437

Rule of Thumb 2 3,295,036 33% 1,098,235

Rule of Thumb 3 2,477,703 33% 825,818

Value of Business  $2,875,491

Financial Rules of Thumb

ABC Company

Price Justification

Pricing Scenarios

Price and Terms 1, 2, 3
Price 2,875,491 2,875,491 2,875,491
Equity Injection % 25% 25% 25%
Equity Injection 718,873 718,873 718,873
Balance Financed 2,156,618 2,156,618 2,156,618
Annual Interest Rate 7.00% 8.00% 9.00%
Years Financed 5 7 10

Debt Service

Amount Financed
2,156,618
2,156,618
2,156,618
Monthly Payment 42,704 33,614 27,319

Principal (year 1)
361,480
230,833
133,734
Interest (year 1) 150,963 172,529 194,096
Total Annual Payment 512,444 403,362 327,830

Investment Analysis

Weighted Available Cash Flow
659,007
659,007
659,007
Less: Annual Payment (512,444) (403,362) (327,830)
Return on Investment 146,564 255,645 331,178

Return on Down Payment
20%
36%
46%

Average Last 2 Years Cash Flow Coverage
Should be equal or better than 1.25
1.26
1.60
1.97

Valuation Multiples

Value Selected

2,875,491

Price to Discretionary Cash Flow (last full year)
4.02
Price to Discretionary Cash Flow (last two years) 4.45
Price to EBITDA (last full year) 4.02
Price to EBITDA (weighted) 4.36
Intangible Price to Discretionary Cash Flow (last full year) 3.26
Intangible Price to Discretionary Cash Flow (average last 2 years) 3.60

ASSUMPTIONS AND LIMITING CONDITIONS

This business valuation is subject to the following assumptions and limiting conditions:

Information, estimates, and opinions contained in this report are obtained from sources considered to be reliable. However, we assume no liability for such sources. The Company and its representatives warranted to us that the information they supplied was complete and accurate to the best of their knowledge and that the financial statement information reflects the Company’s results of operations and financial condition in accordance with generally accepted accounting principles, unless otherwise noted. Information supplied by management has been accepted as correct without further verification (and we express no opinion on that information). Possession of this report, or a copy thereof, does not carry with it the right of publication of all or part of it, nor may it be used for any purpose by anyone but the client without the previous written consent of the client or us and, in any event, only with proper attribution.  We are not required to give testimony in court or be in attendance during any hearings or depositions with reference to the company being valued unless previous arrangements have been made.  The various estimates of value presented in this report apply to this business valuation only and may not be used out of the context presented herein. This valuation is valid only for the purpose or purposes specified herein.  This Sample Business Valuation Report assumes that the Company will continue to operate as a going concern, and that the character of its present business will remain intact. The business valuation contemplates facts and conditions existing as of the valuation date. Events and conditions occurring after that date have not been considered and we have no obligation to update our report for such events and conditions.  We have assumed that there is full compliance with all applicable federal, state, and local regulations and laws unless otherwise specified in this report.

This Sample Business Valuation Report was prepared under the direction of Brian S. Mazar, CBI, MBA. Neither the professionals who worked on this engagement nor American Fortune have any present or contemplated future interest in ABC Company and any personal interest, with respect to the parties involved or any other interest that might prevent us from performing an unbiased business valuation. Our compensation is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of, this report.

BUSINESS VALUATION METHODOLOGY

The Income Approach serves to estimate value by considering the income (benefits) generated by the asset over a period of time. This approach is based on the fundamental business valuation principle that the value of a business is equal to the present worth of the future benefits of ownership. The term” income” does not necessarily refer to income in the accounting sense but to future benefits accruing to the owner. The most common methods under this approach are Capitalization of Earnings and Discounted Future Earnings. Under the Capitalization of Earnings method, normalized historic earnings are capitalized at a rate that reflects the risk inherent in the expected future growth in those earnings. The Discounted Future Earnings method discounts projected future earnings back to present value at a rate that reflects the risk inherent in the projected earnings.

The Market Approach compares the Company to the prices of similar companies operating in the same industry that are either publicly traded or, if privately-owned, have been sold recently. A common problem for privately owned businesses is a lack of publicly available comparable data.

The Asset & Other methods consist of valuation methods that cannot be classified into one of the previously discussed approaches. The methods utilized in the Other Approach are Capitalization of Excess Earnings and Multiple of Discretionary Earnings. Commonly referred to as the “formula method,” the Capitalization of Excess Earnings method determines the value of tangible and intangible assets separately and combines these component values for an indication of total entity value. Under the Multiple of Discretionary Earnings method, the entity is valued based on a multiple of “discretionary earnings,” i.e., earnings available to the owner (who is also a manager). Both of these methods are normally used to value small businesses and professional practices.

MULTIPLE OF DISCRETIONARY EARNINGS BUSINESS VALUATION METHOD

The multiple of discretionary earnings method is best suited to businesses where the salary and perquisites of an owner represent a significant portion of the total benefits generated by the business and/or the business is typically run by an owner/manager. Discretionary earnings is equal to the Company’s earnings before: income taxes, non-operating income and expenses, non-recurring income and expenses, depreciation and amortization, interest income or expense, and owners’ total compensation for services that could be provided by an owner/manager. Buyers and sellers of very small closely held businesses tend to think in terms of income to replace their previous paycheck or income to support their family. They look at the total discretionary earnings to see if it is sufficient to pay all the operating expenses of the business, carry the debt structure necessary to buy and/or operate the business, and provide an adequate wage.

REPRESENTATIONS

The following factors guided our work during this engagement:

The analyses, opinions, and conclusions of this Sample Business Valuation Report are subject to the assumptions and limiting conditions specified in this report and they are American Fortune’s personal analyses, opinions, and conclusion of value. The economic and industry data included in this report were obtained from sources that we believed to be reliable. We have not performed any corroborating procedures to substantiate that data.  This engagement was performed in accordance with the American Institute of Certified Public Accountants Statement on Standards for Business Valuation Services.  We have previously identified the parties for whom this information and report have been prepared. This business valuation report is not intended to be, and should not be, used by anyone other than those parties.

CONCLUSIONS OF VALUE

Based on our analysis as described within this Sample Business Valuation Report, the estimate of value of 100% of ABC Company as of 3/31/2013 was $2,875,491. This business valuation does not include cash or receivables in the company and it does not include debt obligations by the company. If used in the sale of the Company, the valuation assumes an Asset Sale of a debt free business and is not inclusive of cash or receivables held by this company. This conclusion is subject to the Statement of Assumptions and Limiting Conditions and to the Representations, both presented earlier in this business valuation report.

This business valuation engagement was conducted in accordance with the Statement on Standards for Business Valuation Services (SSVS). The estimate of value that results from a valuation engagement is expressed as a conclusion of value.

To inquire about business valuation services contact American Fortune Business Valuation Services at 502-244-0480; info@fortunebta.com

Recasting Financial Statements For Company Worth and Valuation.

The rule for large, publicly held companies is clear. If you are going to list your stock on a stock exchange, your company must present financial statements that are created in compliance with Generally Accepted Accounting Principles (GAAP). These statements are presented to the public and banks to get investors to invest or obtain loans. If your company is a small, privately held company, there is no such rule. All a closely held company is required to do is to prepare tax returns on an annual basis.

The Issue with Tax Returns & Company Worth and Valuation
The problem with most tax returns is that they are prepared in accordance with the Internal Revenue Code. The goal of these documents is simple; reduce tax liability within the letter of the law. As a consequence, the data presented to the government contains numbers that are formulated to show as low of a profit as possible. Obtaining credit or finding a buyer for your business becomes impossible to achieve when you are using documents prepared with the specific purpose of reducing tax liability.

Recasting the Income Statement For Company Worth and Valuation
The income figures from the tax return will accurately represent revenue from all sources. However, the expenses taken make the tax return unsuitable for presentation elsewhere. Items such as depreciation, discretionary spending, owner’s perks and pensions lower the net profit figures, sometimes past zero on tax returns. Presenting a buyer or a bank with a financial statement showing a small or no profit is simply unacceptable when selling a business or applying for credit or a mortgage. Buyers are not likely to purchase a business that has minimum profit or losses on a tax return. Banks will lend borrower money with adverse information only in limited situations.

The benefit of recasting the income in this scenario is that the re-casted income statement will show a better representation of the business, more than likely with more favorable numbers for the seller, buyer and lender. In order to recast financial statements, the following items should be adjusted to reflect reality: owner salaries, nonrecurring expenses and income, investments and non-operating expenses, interest payments, depreciation expense, rent expense, discretionary expenses, and pensions. The result will be a more accurate and reliable presentation of income that a bank or buyers can use to gauge the activity of the business and that an owner can use to make better business decisions.

Recasting the Balance Sheet For Company Worth and Valuation
The figures presented on the balance sheet attached to the tax return are so inaccurate that only the government finds them useful. Everyone else, business buyers and banks included, need more accurate numbers to work with and make decisions. The balance sheet computed per the tax rules is simply not accurate. Assets such as buildings and equipment are depreciated tax rules. However, in reality, this may not be the case. Another problem with the balance sheet is that inventory expressed on the tax return usually never reflects reality. The reason for this is because most private companies do not make the effort of maintaining accurate inventory numbers. To accurately adjust the balance sheet, the company recasting would adjust real estate and other assets, obsolete inventory, accounts receivable, loans to the owners, equipment not on the books, and goodwill as well. The recasted statement will give a bank or investor a better idea as to what is actually owned and owed by the company and what its true market business value is.

Conclusion
Privately held business owners are in a unique spot in the financial world. As business owners, they are not employees, so their income is not readily determinable by information from a W-2. Unlike those who own publicly traded stocks in companies such as General Electric, Coca-Cola, and Wal-Mart, privately held businesses do not have a ready market and their value to the owner cannot be assessed quickly. While privately held business owners may be credit worthy or their businesses may be attractive to them, showing it is simply not possible without professionally prepared documents such as recasted statements or a valuation prepared by experts to make decisions with the statements.
Recasting Financial Statements For Company Worth and Valuation Needs to be Performed by an Experienced and Qualified Business Valuations Professional.

For accurate, defensible and low cost Company Worth and Valuation Reports contact American Fortune Business Valuation Services at (800) – 248 – 0615.

Traditionally, the common choice of a professional to evaluate a business’s worth was an accountant, an accounting firm, or other financial professional. It seems reasonable to use an accountant because they are experienced in evaluating financial numbers, categorizing values, and reporting financial standings. In fact, at one time when there was no such thing as Business Valuation Firms, accountants were probably the best choice for the job of having a business valuation performed. Bank officers who issue credit to businesses might also seem like a reasonable choice for generating a Business Valuation report, because they are experienced in calculating collateral value, business plan viability and risk factors. Investment Brokers might seem like another good choice, because their profession rests on their daily efforts to make educated and calculated estimates about the current worth and future returns and growth potential of a range of businesses. However, as with most things, there are now more types of specialized financial and business professionals to choose from, and more factors for each type of professional to know about, so it can be very advantageous to select the right professional for the job. As businesses and wealth strategies have become more varied and more complex, there have emerged several growing financial specializations—the most relevant of which are Business Valuation Firms, Business Valuation Professionals, Merger and Acquisition Companies and Advisors, and Investment Bankers.

Sometimes Cheaper Is Also Better

An accurate and defensible Business Valuation report is a crucial document, but commissioning one from an accounting firm is likely to cost more money than necessary in more ways than one. Accountants charge for their financial, accounting and tax expertise, as well as general overhead costs to develop a valuation. However, accountants are typically not experienced in using the Uniform Standards of Professional Appraisal Practice authorized by the U.S. Congress as the source of appraisal standards and appraiser qualifications. Their strengths in financials are often not sufficient to make up for their lack of experience with standard appraisal practices. It is not uncommon for businesses to be either grossly overvalued or undervalued. The world of M&A is replete with horror stories of firms changing hands only for a former owner to learn that they could have received much more for their business had they hired a firm experienced in producing Business Valuations. This type of story is often heard in buyouts, divorce, estate planning and on and on. A Business Valuation created by someone who is not an expert in Business Valuations can be a painfully expensive one.

Business Valuation Firms, Business Valuation Professionals, and M&A Companies on the other hand, don’t need to be educated on the financial statements. Since Business Valuation Firms and M&A Companies are instead thoroughly knowledgeable on the uniform appraisal practices, Business Valuation Services are part of their daily activities, and they are experienced in understanding all the factors which play into the value of a business, as a result they are able to create a more reliable and accurate Business Valuation for a lower fee than many accountants could do. Additionally, an M&A Company experienced in researching, presenting, and closing deals can apply these real market experiences to producing more accurate and defensible Business Valuation reports.

Another reason not to rely on your own accountant or other familiar professional is that for a Business Valuation to be perceived as reliable, it needs to be objective. A good M&A Company that is well versed in the details and the strategies of business Exit Planning, Business Valuation, and business sale issues, will be able to look at the entirety of your business very knowledgeably but without the influence and bias to your company.

Things To Know When Commissioning a Business Valuation Report

The value of the shares of a corporation can be affected by many factors, including whether the business is closely held, owned by a large group of shareholders, or is publicly traded. It’s important to understand that when evaluating a portion of a business, there are at least three levels of potential value for any given amount of stock:

1. The value of the entire company is directly relevant to stock that has Controlling Interest, because the holders thereof can do as they wish with the company.
2. Market trends affect shares that represent Marketable Minority Interest, because they can be freely bought and sold among investors.
3. The only monetary value to Non marketable Minority Interest Stock is their potential for dividend pay off, or for sale back to the company at some point.

Business Valuation is not an exact science. Opinions play into it. Don’t expect an exact Valuation figure just by using one valuation method. To obtain a more precise and correct value for any given business; the evaluator will utilize at least three different valuation methods and will utilize a weighted average of all methods to arrive with a more reliable indication of a business value. As compared with an accountant or other professional who only performs a few Business Valuations occasionally, a firm who specializes in Business Valuation Services and routinely performs them, will have a better feel for how the market in general as well as specific buyers will pay for certain expected rates of returns in a open market.

A good Business Valuation Company can provide a sound business value to hold up to more than just the scrutiny of potential buyers but also their advisors. Buyers will put more stock in the opinion of an experienced evaluator whose previous valuations proved out to be fairly accurate in the long run. But even more important can be how well a business valuation will hold up if ever challenged in court, should there arise a dispute over the true value for tax purposes or concerning a buyer was fraudulently mislead.

Be sure to consider the credibility of the person or company who generated, or will generate, the Business Valuation report. Here are some of the types of relevant credentials, along with a summary of the requirements to obtain them:

• Accredited Senior Appraiser (ASA), granted by the American Society of Appraisers (ASA). An important note: ASA members may be appraisers in any of numerous fields, not just business valuation. Requirements:

o Five years full-time appraisal experience,
o Four-year college degree,
o Successfully pass four “Principles of Valuation” courses,
o Pass an ethics exam,
o Submit an appraisal report for evaluation.

Accredited in Business Valuation (ABV), granted by the American Institute of Certified Public Accountants (AICPA). Requirements:

o Have a valid state-issued CPA license,
o Pass an ABV Examination,
o Attest to having completed a minimum of either six business valuation engagements OR obtained 150 hours of business valuation experience,
o Complete 75 hours of valuation-related continuing professional education.

Certified Business Appraiser (CBA), granted by the Institute of Business Appraisers (IBA). Requirements:

o Four-year college degree,
o IBA membership,
o Successfully complete Business Valuation & Certification Training Center,
o Pass a five-hour exam,
o Successfully complete an IBA workshop,
o Submit two demonstration reports.

• Certified Valuation Analyst (CVA), granted by the National Association of Certified Valuation Analysts (NACVA). Requirements:

o Be a Practitioner member in good standing with NACVA,
o Submit a sample Case Study or an actual sanitized Fair Market Value (FMV) report,
o Pass a comprehensive five-hour multiple-choice proctored examination,
o Either hold a state-issued CPA license or hold a business degree from an accredited college and be able to demonstrate “substantial experience” in business valuation.

Chartered Financial Analyst (CFA), granted by the CFA Institute. Requirement:

o Pledge to adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct,
o Complete the CFA Program,
o Have four years of qualified investment work experience,
o Become a regular member of CFA Institute and apply for membership in a local CFA member society.

Another service which can be performed by a firm specializing in Business Valuations is producing a Fairness Opinion, which is a definitive “yes or no” finding on whether a particular business sale, purchase, or merger transaction is either fair or unfair from a financial point of view. Obtaining a Fairness Opinion can guide Boards of Directors as well as be used as legal evidence helping to protect them from stockholders who might otherwise charge Directors with negligence. It can also protect against hard feelings if the business transfer is between friends or family. To avoid conflict of interest problems, you would want one firm to provide your Fairness Opinion and a different firm to handle the actual preparation and sale of the business. However, a single Company could properly provide all of the following services without conflict of interest: a good and defensible Business Valuation, Exit Planning Advice, financial research and presentation preparation, and representation in the sale or merger, deal structuring and closure process.

In order to get the most experienced Business Valuation Service provider in combination with the best fee rate, choose a firm who typically handles businesses of the size in question. If the firm typically works on deals larger than yours, you might be paying top dollar for work done by a junior employee; if the firm is not used to valuing deals as large as yours, they may not be knowledgeable enough to give an accurate and reliable valuation opinion.

Remember, that while Business Valuation Firms are usually more informed and experienced in producing reliable valuation reports than accountants and other financial specialists, there are even greater potential advantages to choosing an M&A Company which is able to offer a complete array of services including Advisory, Exit Planning and Business Valuation. An M&A Company who chooses to become expert in all of those areas, and who performs them on a regular basis, has a broader range of experience and expertise to apply to the job of putting all the right pieces together into a reasonably accurate, reliable, and defensible report at the best possible price.