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Private Company Valuation

Conducting a private company valuation when seeking to sell the business is not a simple process. In this article, you’ll have the opportunity to explore all the reasons to obtain and use a private company valuation. Selling a business is one of the most advantageous situations to utilize a private company valuation. It is a vital step in an owner obtaining a fair price for their business.

The business valuation experts consider every aspect of a business in detail and analyze its market worth and value compared to other potential investment opportunities.

When a business owner takes on this process, they will often miss or exclude some of their most important assets or high-value factors. Your business may have highly-valuable intellectual property, an exceptionally talented management team, or assets that don’t appear on annual financial documents. Experts go looking for these value-driving factors and ensure that they’re accurately represented in a valuation report.

Gain Support from Business Valuation Experts

It should always be an expert that conducts a business valuation. Not only do these valuations for private companies require extensive, and not frequently used, accounting formulas and knowledge of the market. A qualified and credentialed professional would have an intimate working knowledge of the current and probable future state of the market and how it can affect selling your business.

Valuation experts have the unique ability to conduct a private company valuation without bias. Typically, a potential buyer will bring in an accountant or other professional to breakdown the valuation or contest the proposed sale price. An owner of a private company should have a defensible valuation that can withstand those attacks.

Experts can also present the market worth analysis and present that as a benchmark compared to other potential investments. Through a private company valuation, an owner can show that their business is the better, safe, or more profitable investment opportunity. Then they can use that to attract ideal buyers and improve negotiations during the sale of their business.

There is also the matter of rate of return, risk, and economic conditions. The support that a business owner should obtain from a private company valuation includes access to their knowledge and unique skill set. These experts work with expected rates of returns and risks across a variety of different industries, business sizes, and other factors that impact returns and risk. Most business owners do not monitor or work within the market closely enough to handle this valuation element.

When evaluating the business value, an expert will give fair weight to economic conditions, buyer activity, and the current demand for acquisitions. Economic conditions have historically shown that mergers and acquisitions often put the seller in a compromised position. Without a proper valuation and reasonable or calculated assessment of economic conditions and demand, the owner may sell for much less than what their business is worth.

Adapt Your Mindset for a Business Sale

Many owners sell because they are retiring, no longer wish to run the business, or don’t have the resources to keep the company running. The mindset attached to these reasons often pushes owners to sell the company for less than it’s worth. Through a private company valuation, you can gain a more realistic understanding of your position as a seller.

As the owner, you have invested time, energy, effort, and money into your business. Selling your business is when you should receive the return for those investments. You deserve the best price possible.

To obtain the best price possible, you will need a complete and defensible private company valuation. These valuations can help you in the months or years leading up to a sale as well. For example, if you receive a valuation report that doesn’t hit the figure you’re hoping to achieve through a sale then you can use that information to boost value. With the support of a business valuation expert, you can take actionable steps from the valuation report or move forward into the market with a strong stance on your company’s value.

The Market Approach Valuation

When calculating a Market Approach Valuation, the valuation expert will consider more than just profits. This type of valuation approach includes reviewing the business’s resources, competition, assets, industry position or strength, branding, processes, physical assets, intellectual property, and more. Although this valuation approach will begin with your standard annual financial documents, the research and adjustments go far beyond what you showcase on your balance sheet.

The Market Approach Valuation will provide a fair indication of where your business stands compared to similar companies in your market. Anyone looking to sell or buy a business seriously needs to consider obtaining an accurate and defensible business valuation.

When you’re selling a business, the valuation consultant will present and convey how to evaluate your business for sale. They will help you create a reliable and defensible private company valuation that will serve to achieve a fair market price for the business. Likewise, when you’re acquiring a business, the business valuation serves a similar purpose. The buyer can ensure that they’re not overpaying for a company or that the business’s price also represents issues or concerns associated with risk.

Utilizing a Private Company Valuation in a Business Sale

The primary consideration of the seller is to gather the proper details regarding the business financials and company assets. Ideally, a private company valuation will represent the actual market value of the business. It should deliver a detailed picture of the quality of the processes in place and verify that it meets the necessary standards.

An owner has many good reasons to utilize a private company valuation report, but so does a buyer. Even the purpose of a buyer relying on a formal valuation will ultimately serve the seller if the valuation is fair and accurate.

As a seller, you have the opportunity to use a valuation to identify where your company stands in your industry and to strengthen your business. It also provides you with a stronger negotiating position to defend your ideal selling price. When working with a valuation expert, you may establish multiple price points that are reasonable and still strive to obtain your ideal price.

Ultimately, the valuation gives the owner the information for identifying profit centers, loss centers, focusing the business’s streamline, and determining if it’s a good time to sell. Owners may receive a business valuation report then spend the next two or three years, improving its value and correcting internal weaknesses that lowered the business’s value.

The Buyers Point of View

From the buyer’s perspective, anyone looking to acquire a business should consider multiple investment options. A buyer should not merely look at one investment opportunity, and that means that sellers must make their business ideal for the right kind of buyer. A buyer should look through investment options on the market that fits their criteria, goals, skillset, and offers value. The best way to showcase and test these factors is to put the private company through a comprehensive valuation. A Market approach Valuation will support all parties involved. It will allow buyers to conduct a comparative analysis and determine the best option that yields the highest return.

Many companies are on the market because they are not performing well. Some sellers will work to cover up specific problems or negatives about the underperforming business. Buyers may request a formal valuation to ensure that they have all the information they need to make an informed decision about purchasing the business.

Why is this important to a seller? A private company valuation will often expose unknown elements of operational and financial management. The buyer should have a complete picture of what they’re getting when they invest or buy the business. However, a seller should know all the factors affecting the sale. From the buyer’s stance, it may seem as though the seller was not disclosing information, when in truth, the seller may not have known about some negative impacting factors. The use of a Market Approach Valuation can serve all parties involved in the sale of a private company.

Securing Your Private Company Valuation Before Listing Your Business

Evaluating a business for sales and planning with the support of a business valuation expert should provide useful information to everyone involved. A valuation expert may not always use the Market Approach Valuation method. Many people may choose to use smaller reports to boost the value or mitigate risk in the years leading up to selling the business.

You can obtain a clearer picture of the strengths and weaknesses of your business by obtaining a private company valuation report. This report will help you strategize your approaches, capitalize on strengths, and correct any weaknesses.

Before purchasing or selling a business, the person must assess what they hope to obtain through the transactions. In the business valuation report, you can showcase or evaluate the working business model and explore the company’s incorporated principles. It’s possible that buyers can use the report to identify how they will improve the existing business model. At the same time, sellers can defend their processes and use the valuation to represent the value of their staff.

Business valuations don’t simply define the value of the company but instead enable all parties to identify strengths, weaknesses, opportunities, and more. Contact American Fortune now to start discussing your private company valuation today. Our experts are happy to assist you!

Market Valuation Approach For Mergers and Acquisitions, Buyouts, Business Acquisition, IRS, Exit Planning
Brian S. Mazar, MBA, CBI
mazar@fortunebta.com
800-248-0615

Company Worth

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Assessing Company Worth in a Business Valuation

As a general rule, large publicly held companies must formally determine the business’ worth when placing the company on a stock exchange. Entering the stock exchange is a massive milestone for many growing companies. Following through on that milestone is not simple, and it is one of the primary reasons that a business might need a full assessment of its company worth.

There are many reasons to assess a company’s worth, including seeking out investors or access loans. Closely held companies and publicly traded companies have different methods and reasons for obtaining a business valuation.

Complying with Generally Accepted Accounting Principles

Those companies present their financial statements created in compliance with Generally Accepted Accounting Principles or GAAP. The reports circulate among the public and banks to acquire investors or obtain loans. Those statements are typically part of the larger picture of developing a cohesive business valuation before entering a stock exchange. Not every company needs to go through this same public process.

A Special Note for Smaller Companies

Smaller, privately-owned companies do not need to provide the public with any financial information. These companies only need to prepare tax returns annually. However, many factors of the generally accepted accounting principles could assist smaller businesses during a valuation.

There are Generally Accepted Accounting Principles for small businesses, or Small GAAP. Privately held companies still do not need to use GAAP or Small GAAP. However, private companies may choose to use GAAP-based financial reporting because of the credibility and conciseness of the financial information. Even when privately held companies adopt GAAP best practices, it does not ensure that any particular financial document would showcase the company’s value.

Why Businesses Can’t Rely on Tax Returns to Determine Company Worth Valuations

The income figures from a company’s tax return will accurately represent revenue from all sources. However, the expenses that appear on the returns make it unsuitable for use anywhere else. Items such as depreciation, discretionary spending, owner’s perks, and pensions lower the net profit figures. Sometimes tax returns can show net profit figures past zero.

Presenting a buyer or bank with a financial statement showing little or no profit is simply unacceptable. When selling a business or applying for credit, a small profit won’t benefit the owner.

Buyers will not likely purchase a business that has a minimum profit or losses on a tax return. It is also unlikely that banks would lend a borrower money unless there were special situations. Part of the complication of using income figures from tax returns is that the IRS code mainly encourages business owners to show as low a profit as possible. Tax returns, P&L statements, and other documents should accurately showcase revenues and expenses. None of those documents accurately represent company worth or value.

Businesses’ financial documents don’t represent:

Customer concentration
Product concentration
Industry concentration
Management team abilities and skill
Competitive advantage

These factors dramatically change the value or worth of a company. For example, a company that seems more financially stable than their competitor may only have a few customers making up 50% of their annual sales. If that owner sold the business, the business could lose those customers. Through evaluating the company’s worth and adjusting accordingly to show more than the simple numbers on a financial document, it’s possible that owners, potential buyers, and investors can all make better decisions.

What Critical Elements Help to Evaluate Company Worth

There are a variety of accounting methods and techniques used in evaluating a businesses’ value—some critical elements, including recasting the balance sheet or income statement. The purpose of recasting these documents is to expose factors of the company’s value that aren’t represented on paper. Assets and intangible assets may present more value to the company than the numbers representing them on paper.

Recasting the Balance Sheet

The figures on a company’s balance sheet attached to a tax return are so inaccurate that only the government finds them useful. Other parties, such as potential buyers and banks, require more accurate information to make their determinations. The balance sheet computed according to tax rules is outright inaccurate. Assets that undergo depreciation according to tax rules don’t showcase the true value of these assets to the company.

In reality, assets may present much more value to the business or even be vital to the company earning money in the future.

Another key issue with the balance sheet is that the inventory expressed on the balance sheet would represent a snapshot of the inventory, not necessarily the current inventory at the time when the company needs to establish its worth. Most private companies do not make an effort to maintain accurate inventory numbers.

To accurately adjust the balance sheet, the recasting would adjust real estate and other assets, obsolete inventory, accounts receivable, loans to the owner, equipment not on the books, and goodwill. The recast statement would give banks and investors a better idea of what the company actually owns and its realistic company worth.

Typical Adjustments

One of the most common ways to determine fair market value is to depreciate replacement costs of assets or to adjust liquid assets. Typical adjustments focus on liquid assets such as short-term investments and cash.

Experts will also work to adjust business liabilities. Any below-market interest debt would undergo adjustment to reflect current market value or assume that payments are under ideal conditions. These adjustments can effectively reduce the current value of the liability.

The primary adjustments that business owners want to draw attention to is the off-balance sheet adjustments. Those adjustments include intangible assets as well as contingent liabilities. Off-balance sheet assets can include compliance costs, intellectual property, the value of their teams, and more. There are many opportunities to build the company’s worth through intangible asset adjustments.

Recasting the Income Statement and Cash Flow

Recasting the income statement and cash flow is another critical method to accurately representing the company’s worth. It often provides more favorable numbers for the seller, buyer, and lender.

To recast financial statements, a valuation expert would adjust the following elements to reflect reality:

Owner salaries
Unrecorded expenses such as vacation time and bonus pay
Non-recurring expenses
Non-recurring income
Investments
Non-operating expenses
Interest payments
Depreciation expenses
Rent expenses
Discretionary expenses
Pensions

These elements can dramatically change during the recasting process. The process often involves finding expenses that impact the business but don’t typically appear on financial documents. After assessing these factors, a professional could access a clearer picture of the company’s income and cash flow.

After adjusting for these elements in financial statements will produce a more accurate and reliable presentation of income. Then, experts would use more reliable income information to calculate the company’s worth.

Potential buyers, investors, and banks can use the adjusted income statement to better gauge the activity of the business. Even business owners can benefit from the recast income statement by using it to make their business decisions.

The normalized net operating cash flow shows the adjusted income statement for certain items. Some specific items, such as non-cash related or unusual items.

The adjusted net cash flow will show the earnings before the interest, depreciation, and taxes. That means it includes the additions or subtractions for items, including one-time or one-off expenses.

The earnings recast is often necessary to show the real profitability and real income of the company. Those are two vital components to determining the company’s worth and presenting that information to sell the business, take it public, or find loans or investors.

Accessing Professional Help for Reliable and Accurate Company Worth Assessments

If your business is up for sale, if you’re trying to bring in investors, representing your business against the IRS, or acquiring a bank loan, then you need a formal review of your company’s worth. However, business owners should regularly review their company’s worth even without these situations. Privately owned businesses are in a unique position where their traditional accounting practices may not assist them in decision making throughout the year.

Undergoing regularly company worth assessments can certainly help the owner of a private business, big or small. However, it is often difficult and time-consuming to assess value or company worth.

Publicly traded companies may need regular company valuations for a variety of reasons. In the case of a publicly-traded company or a private business, it is vital to have a professional evaluate the company’s worth. There are a number of ways to calculate the company’s worth and assess the opportunities and liabilities, but they all require a professional to closely evaluate the company’s current financial documents.

To start determining your company’s worth, contact American Fortune, and speak with a business valuation expert. Our team of experts work with company worth evaluations daily and have an in-depth understanding of the market. Reach our office at (800) 248-0615.

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.

Valuation Reports

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Valuation Reports by American Fortune Valuation Services

The purpose of a valuation report business is 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.

A Common Purpose of Valuation Reports is 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.

Purpose of a Valuation Report in 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 support 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.

Purpose of a Valuation 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 is 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.

Purpose of a Valuation Report 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, the value will have to be established for reporting on an estate tax return.

The universal standard of value for a 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 a 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.

Purpose of Valuation Reports 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 small business valuation reports, contact American Business Valuation Services at 502-244-0480 ext. 24; info@fortunebta.com

Business Valuation Report

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Business Valuation Report Samples at (800)248-0615

Click on the following links for Business Valuation Report Samples

Business Value Estimate This report is specifically designed for business owners to provide a fast and easy estimate of value for a business. The report is based on a combination of eight valuation methodologies, a comparative data that help verify the estimate of value. This report is not a professional valuation of a business and is not suitable for use in estate planning, divorce proceedings, buy-sell agreements, ESOP’s, IRS issues, or legal proceedings. The report is 17-20 pages. Price: $1,250. To view a sample Summary Value Estimate – View Sample

Calculation Of Value Report A calculation of value is NOT a Valuation (Appraisal) because the appraiser is not coming to a “conclusion of value”, but merely a “calculation of value” complete valuation (appraisal) since it is based on a limited amount of investigation and due diligence. Although a Calculation of Value does not meet USPAP or IBA Standards, it can be a very valuable tool for business owners, professionals or other purposes. This value report takes basic value drivers to produce a semi-formal valuation. It utilizes four to five valuation methodologies. This type of value report yields a moderately defensible business valuation report. Typical uses for this report are: Assisting an owner, broker or m&a advisor to establish an initial asking price for the sale of a businesses, Estate planning, Business planning, Developing a “preliminary” value for litigation matters, Any matter where an “initial” or “calculation” of value is acceptable, businesses with an EBIDTA of less than $300K. The report is 30-33 pages. Price: $2,300. To view a sample Calculation of Value Report – View Sample

Comprehensive Business Valuation Report This type of report explains in full detail how the value was derived as directed by the Uniform Standards of Professional Appraisal Practice (USPAP) and American Society of Appraisers (ASA). A comprehensive business valuation incorporates broad and complex business reviews, financial reviews and analysis. This valuation is very accurate and defensible. It utilizes seven to ten valuation methodologies. This type of report is used for the following: Business sale, Acquisition or Merger, SBA or conventional financing, Estate tax or gifting purposes, Any matter where the intended users are “familiar” with the subject to be valued, When an accurate and defensible valuation is vital, Businesses with an EBIDTA of $300K or more. The report is 40-50 pages. Price: $4,000. To view a sample Comprehensive Valuation Report – View Sample

American Fortune Business Valuation Services

Business Valuation Report Sample

ABC Company

Prepared for:

John R. Smith, Owner

Prepared by:

Brian S. Mazar, CBI, MBA, AVA

The following is a Sample Business Valuation Report, it is not intended for the purpose of determining business value by unqualified individuals.

The sample business valuation report contained 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 Report Sample

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 Report 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 (Sample Business Valuation Report)

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 Weight Extension

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

Business Valuation Report – 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 (Business Valuation Report Sample)

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 business valuation 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 Business Valuation Report sample 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 Business Valuation Report sample 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 (Sample Business Valuation Report)

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 Business Valuation Report sample 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 sample 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

Market Value of a Company

Determining the Market Value of a Company

If you’ve struggled with uncertainty in valuing your company, then it’s time to dive into understanding market value of a company. A company’s market value should provide a fair and unbiased assessment of the value of your business in its whole state. The market value will vary from your company’s book value. Ideally, it will prove a higher worth than the book value. That’s a relief for most business owners.

When looking at market value, investors and potential sellers will use specific factors. These factors include possible growth, risks, your EBITDA, and concentration regarding customers and products.

These factors play key roles in valuing a business because it provides a realistic picture of what a buyer or investor should expect from the company. In terms of daily operations and future obstacles or success, the book value of a company simply isn’t enough.

Understanding Business Values and the Open Market

How the owner of a business values their business may be dramatically different from the company’s market value. Most business owners rely on their financial documents to estimate their value. Book value is the company’s total assets minus the total liabilities, including depreciation. Alternatively, publicly traded companies would calculate book value differently by dividing their outstanding common shares by the stockholder’s equity.

Book value is one method for business valuation, but it’s not the best. The open market nature of our nation means that investors or buyers know that they aren’t purchasing what the company is, they’re buying into what it could be.

Buyers and investors show the biggest interest in elements that aren’t present in a company’s book value. They will calculate their expected ROI. However, they want an honest layout of the risk factors and possible growth opportunities. This element of the open market value can sway a potential buyer’s decision.

Growth and Risk Projections

Uncertainty is the key word of this portion of a market valuation. Through various valuation models and equations, business people have spent decades, if not centuries, trying to pin down expected growth in company size and cash flow. Of course, with growth possibilities, comes various risks.

Typically business owners rely on a straight-line growth rate or a compound growth rate calculation. These both use past performance to indicate future expectations. They also present a more conservative approach to growth projections, which can boost confidence in potential buyers.

A high growth rate could bring in numerous buyers and investors. If you don’t balance that out with manageable risk projection, you could lose all of that interest. Risk is a huge factor, and while anyone buying a business is certainly making a gamble, they want a fair look at the odd before they throw their money in.

Risk calculations present many issues because it’s more concept and feeling than hard numbers. The riskiness of negative cash flow, chances of bankruptcy, and default risk are the key focus. In the past, some companies have really turned it around, but these are the long-shots and certainly aren’t common. To get to the root of possible risk regarding cash flow, bankruptcy, and default, a valuation will look at labor and management resources in addition to current financial stability.

If there are downfalls in management or labor, the situation will demand more from the investor or buyer. That would substantially bring down the value of the business. Other factors won’t go overlooked. Competition, predictability in the industry, diversity, and marketability also factor into risk projections.

Publicly traded companies have a more straightforward approach to calculating risk. They will divide the sum of dividends and stock buybacks by the complete value of the market.

EBITDA

Your Earnings Before Income, Taxes, Depreciation, and Amortization serves to give a clear image of the business’ financial stability and performance. It gives a heavy amount of weight to earnings but removes elements such as capital investments. By leaving in the cost of goods sold, as well as the selling, general, and administrative expenses

The EBITDA metric usually gives a good indicator of the company’s current performance and is a type of proxy for cash flow. A buyer could determine if certain risk factors were a result of poor financial planning or management through the EBITDA. It can also expose a company’s value that could have been inflated from questionable accounting practices.

Finally, EBITDA has such a substantial impact because the EBITDA metric showcases the true potential profitability. It outlines how much work a buyer might need to put in to exercise that profitability and how much revenue the company loses to COGS and SG&A.

The only struggle that comes with EBITDA usage in a valuation is that it’s not recognized broadly under the United State’s Generally Accepted Accounting Principles or by the SEC as a measurement of cash flow. However, there is an outstanding acceptance of this among business people.

Customer and Product Concentration

Concentration is often downplayed, but it can be critical in deciding how to value your company. But for any reason that could be a benefit, it may also be a downfall. These are your double-edged swords.

For example, if you have an extremely diverse customer concentration, it may be a concern that a market shift could have a drastic impact. Conversely, having too few customers would be an issue because losing even one customer or account would impact the business.

In theory, there shouldn’t be any single customer or account supporting more than 10% of the business. However, that may still be a bit conservative. If one customer makes up 10% of the business, and then a small handful comes together to support more than 50% of the company, it could lower its value.

There are ways to offset this decrease in value. When looking at product concentration, which can have the same effect as customer concentration, there are clear examples of beneficial intentional hyper-concentration. One outstanding one is Apple. Until recently, Apple prided themselves on saying “no” to good ideas to bring the outstanding ideas to life. Steve Jobs regularly talked about fitting the company’s entire product line on a small table. Apple took a pitfall and bragged about how great it was, and they were right.

Customer concentration, product concentration, and even market concentration need careful consideration. As part of the company’s value, what could seem like a downfall could justify another part of the valuation or explain away a buyer’s concern. Additionally, what could seem like a win may make buyers nervous, such as an overly diverse customer portfolio. When valuing your company, you’ll want to think through all the possibilities.

Can You Determine the Market Value of a Company with Similar Revenues and Profits within Your Industry?

After a professional valuation of your business, you might start to wonder exactly what it means for your place in the industry. Comparing the market value of a company will always start with your completed valuation in hand. If you only look at EBITDA exclusively from one company to another, it won’t give a full picture for a complete comparison. You want to see all the parts and the whole.

To some degree, comparing one valuation to another can give you an estimate on which is the more desirable investment. However, you can’t overlook elements such as reputation or management teams. Will those teams stay if someone else purchased the company? Would the fans of the company remain loyal if it changed hands?

When comparing businesses, you’ll want to evaluate revenue level, profit, reputation, and EBITDA. It might be apparent that “similar” businesses have drastically different values and profits. For example, Apple’s EBITDA at the year-end of 2019 was $78.6 billion, whereas Samsung’s was $51.6 million. Both have varying reputations and different revenue levels, although they’re known as direct competitors within the electronics industry.

Should a Market Value of a Company be Professionally Valued?

Absolutely! A professional valuation will look at your company’s raw elements without the biased lens of a business owner or employee. It can help you better understand your company’s strengths and weaknesses and is a valuable tool even if you’re not looking to sell your business. A valuation will look at how your company has performed, what you should expect in the near future and a realistic depiction of your assets and cash flow.

If you have concerns about your business’ core operations, then a valuation might expose management problems and troubling financial decisions. It can also bring particular challenges with concentration to light.

Most businesses lean toward having a professional value the market value of a company when they’re looking to sell or bring in investors. These are great reasons for a valuation. If you’re looking to get some investors involved in your business, you want to cultivate an honest relationship and a transparent look at the company. When it comes to selling a business, knowing where your company’s value stands in comparison to others in the industry can make your company a more desirable purchase or help the buyer make a better-informed decision.

To learn more about the Market Value of a Company, Call American Fortune for dependable Business Valuation Services at (800) 248-0615.