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Business Valuation Experts

Business Valuation Experts: Determining Expert from Amateur

Accurate valuations are the difference between a profitable sale and barely getting out of the business with a dollar in your pocket. Business owners frequently misvalue their companies and end up selling for far less than they should, and the only way to avoid that is to rely on an expert. Unfortunately, there aren’t clear requirements on what it takes for someone to call themselves a business valuation expert.

You can learn about business valuations and the professionals that perform those valuations to find an expert to work with confidently. It’s not easy to sort out the amateurs that are good at selling everything a valuation should be. From the experts, you can create those useful reports.

What Experience Should a Business Valuation Expert Have?

There is not a clear-cut requirement to claim you’re a business valuation expert. The International Revenue Service, courts, and various other authorities require a “credentialed valuation advisor.” The idea of a credential doesn’t refer to a single test or certificate. Often, it comes down to a professional proving that their experience allows them to dedicate most or all of their skilled efforts into providing business valuation services. Experience is always the focus.

Business valuation experts should have years of experience in appraising, evaluating, and crafting defensible valuation reports. Of course, business valuation professionals need to start somewhere. Many of these professionals will have years of experience and formal education in accounting, finance, or business, such as an MBA degree. Valuation experts will have years of experience handling business sales and acquisitions.

The amount of experience varies, but a business valuation experts should always have:

Years of experience in mergers and acquisitions
Experience handling valuations relative to your specific needs.
Experience in appraising
Experience in creating defensible valuation reports
Formal education in accounting, finance, or business.

Experience doesn’t directly produce a better valuation, but an expert should have varied experience. Another important element of experience is that the valuation expert learns from a range of resources – internal knowledge from other business valuation experts and external knowledge from formal education and personal experience through other work environments.

Business brokers, CPAs, and similar professionals can show their prowess or dedication to valuation ethics and principles through associations with formal entities. Formal entities, including for-profit and non-profit organizations, may help indicate the prowess of business valuation experts.

Are There Formal Entities That Oversee Business Valuation Experts?

Yes, there are many formal entities; however, there is no federal requirement to operate as a business valuation professional. As mentioned earlier, the IRS and the legal systems have expectations. Ultimately, there is not a nation-wide practicing requirement such as a credential.

It is beneficial to establish membership, credentialed association, or affiliation with these formal entities. These formal entities serve the public, the industry, the business community, and finally, business valuation experts. Most of these associations, societies, or communities seek to establish a high level of ethical conduct and standard practices.

In short, if you’re seeking out a valuation, it is generally good to see the logos of a few well-established international or national organizations. Some of the entities listed here provide many benefits and resources to brokers and can showcase the professional’s dedication to constantly expanding their knowledge on valuations. However, other associations, including state associations, may serve as more of a news source or professional network.

The American Society of Appraisers (ASA)

The ASA is an international organization and the oldest entity of its kind. They emphasize that members will benefit from a network of collective knowledge as well as industry resources. The idea of keeping a membership with the ASA shows that the professional shares a dedication to high standards for ethics, education, and professionalism.

ASA members aren’t exclusively for business valuation. The ASA represents all types of appraisers. Some business valuation experts place value in an ASA membership while others believe it covers too broad of a scope.

The National Association of Certified Valuators and Analysts (NACVA)

The National Association of Certified Valuators and Analysts® (NACVA®) provides training and certification for individuals to conduct business valuations. This entity seeks to set a high bar for professionals working with business valuations, and through the NACVA, a business professional can become a Certified valuation Analyst (CVA).

Before the NACVA will take on a CVA applicant, they must hold a CPA license or:

Hold a business degree.
Two years of experience working in business valuation or a related field
Pprovided a significant role in at least ten business valuations with credit in the valuation report.
Ddemonstrates substantial knowledge of valuation methodology, theory, and practice.
And more.

The NACVA stands out as a highly-credible association or credential for a business valuation professional. It shows that they have not just paid fees but undergone extensive review and consideration before being accepted as a member.

Our team at American Fortune has a deep respect for the NACVA and carries a membership.

International Business Brokers Association (IBBA)

Although accountants, CPAs, and others can perform business valuations, the most qualified and reliable professionals are business brokers. The International Business Brokers Association is a non-profit association that aims to assist business brokers in their professional development and enhance public awareness of what to expect when working with a business broker. Business valuation experts should carry an IBBA membership.

The American Fortune team is a proud IBBA member.

Alliance of Merger & Acquisition Advisors (AMAA)

When we covered the experience that a business valuation expert should have, there was an emphasis on mergers and acquisition knowledge. The Alliance of Merger & Acquisition Advisors provides information, resources, and a network for M&A professionals.

Holding an AMAA membership can serve as proof that the professional has years of experience in working with mergers and acquisitions. Often an AMAA membership and many of the other memberships listed here will substantiate the experience that the business valuator claims.

American Fortune continues to hold an AMAA membership as active M&A professionals.

State Established Trade Associations

Just because a realtor is registered with the local board of realtors or an attorney has passed the state BAR doesn’t mean that they’re an expert, only that they meet the basic expectations. Years of education related to business valuations and business finance can make the business valuator well-qualified to perform accurate, defensible, and reliable valuations.

Florida, Pennsylvania, and California are only a few of the state-based trade associations for business brokers. Business brokers are the best professionals for conducting defensible valuations. If you’re looking for business valuation experts, then it’s likely that you’ll need to turn business brokers.

These state associations typically have a code of conduct and aim to protect the public’s best interest. However, these state associations don’t typically have a lengthy application process. Anyone with the correct licenses can gain access to these associations. It doesn’t mean that a professional who holds a membership has any enhanced experience or skill.

Having a state association membership can showcase that the business broker or business valuation professional is actively practicing in the area. Additionally, these associations are often a resource for business owners who need to find business valuation experts. There is no harm in having a membership with a state-established trade association for business brokers, accountants, or appraisal professionals. However, it doesn’t necessarily prove that they work on an “expert” level.

Do Business Valuation Experts Need a License or Degree?

Not necessarily, essentially someone can act as a business broker or accountant and claim that they can perform a business valuation. An accountant can perform valuations, but a complete business valuation that is defensible and comprehensive often comes from a well-experienced business broker.

Business brokers should have the unique blend of skills, experience, and access to resources to provide a thorough and defensible valuation. Business brokers will have the resume and credentials necessary to enter into the more prestigious or difficult-to-enter societies for valuation experts or business brokers.

There isn’t one single resource for business owners to find business valuation experts. Often a business owner will strike up with the first professional available, and they may not realize that they’re receiving a partial report or a report that isn’t defensible.

For a complete and defensible valuation report that can act as a critical piece in selling a business, estate planning, divorce handling, or tax filing, you need an expert—someone who understands the principles and methodologies and can put them into practice with ease. Business brokers are the one resource for all the experience necessary for a comprehensive valuation reports, and they’re commonly the only ones who could qualify as business valuation experts.

Before agreeing to work with a business valuation professional, ask them about their experience, credentials, licenses, and past reports. You will need someone who has created reports with the same purpose that you need a valuation for and with know-how in accounting, appraising and more.

Contact American Fortune Business Valuation Services to speak with a qualified business valuation expert.

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.

Business Valuation Companies

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Traditionally, the common choice of a professional to evaluate a business’s worth was an accountant, an accounting firm, or other financial professionals. It seems reasonable to use an accountant because they are experienced in evaluating financial reporting, categorizing values, and reporting financial standings. In fact, at one time when there was no such thing as Business Valuation Companies, accountants were probably the best choice for the job of having a business valuation performed. Bank officers who issue a credit to businesses might also seem like a reasonable choice for generating a Business Valuation report because they are experienced in calculating the collateral value, business plan viability and risk factors. Investment Bankers might seem like another good choice because their profession rests on their daily efforts to make educated and calculated estimates about the current business 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 Companies, Business Valuation Professionals, Merger and Acquisition Companies and Advisers, Consulting Firms and Investment Bankers.

Much Value for the Price

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 Companies

Business Valuation Companies, 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, financial reporting, presenting, and closing deals can apply these real market experiences to produce 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 knowledgeable 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 business value. As compared with an accountant or other professional who only performs a few Business Valuations occasionally, a business valuation companies specialize 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.

Qualified Business Valuation Companies can provide a sound business value to hold up to more than just the scrutiny of potential buyers but also their advisers. 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.

Qualifications of Business Valuation Companies

Be sure to consider the credibility of the person or company who generated, or will generate, the Business Valuation report from a list of top valuation companies. 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 of 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.

Fairness Opinion

Another service which can be performed by business valuation companies specializing in 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 reporting, 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 Companies 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 Companies 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.

Business Valuation Calculation

How is a Business Valuation Calculation Performed?

Professionals recommend performing a business valuation for a multitude of reasons. Business valuations serve to guide business owners through selling the company and making exit plans. However, business owners should also consider a formal business valuation calculation for tax purposes and estate planning. These calculations vary dramatically depending on the life stage, profitability, and expected growth of the company.

Each business valuation is unique, so there isn’t one simple calculation that will work for every company. A business valuation is necessary to assess and better understand the value of a business. Online calculators are not enough. These calculators are simple and quickly produce somewhat realistic figures. This valuation approach is incomplete because these calculators don’t account for elements not found on financial documents. Strength in the industry risks in the market, and growth or profit opportunity can redefine the company’s worth.

To perform a comprehensive business valuation, an expert will evaluate financial documents and objectively review its performance, products, and customers.

Financial Documents Necessary for a Business Valuation Calculation

These core financial documents establish the foundation of every business valuation. This first step gives a paper value that buyers, investors, or estate planners can use as a starting point.

Proprietary Documents

This section of formal documentation includes:

Deeds
Patents
Licenses
Certifications
Open Contracts – especially long-term contracts
Business Plans
Exit Strategy

Initially, the deeds, licenses, and certifications will serve to establish or confirm the company’s ability to continue business as usual. Open contracts, patents, and the business plan provide some insight into the future of the company. An exit strategy is the proof that there are plans to ease the process of the business changing hands.

Proprietary documents are almost always private, and it’s the company’s record of all their intellectual property. Additional confidential, proprietary information that could impact the company’s value include salary structure, customer lists, and even marketing plans.

Financial Statements

Financial statements include the business’ cash flow statements, income statements, and balance sheets. For a complete business valuation, a company should produce the last three years’ financial statements. The only exception is when the business has not been open for that long.

The balance sheet puts the assets and liabilities side-by-side. A bookkeeper should prepare this regularly, with at least one formal balance sheet annually. However, the income statement looks at the revenue after all the expenses accounting for the cost of goods sold and the operating costs.

These are the documents that investors rely on because it creates a clear image of its financial position.

Tax Filings and Returns

During any business valuation calculation, the tax filings and returns showcase the cash basis earnings and potential investment. When buyers purchase a business, especially a small business, paying taxes on earnings is an investment.

Including these tax documents also surveys how much the tax documents and internal documents tie together. Depreciation, amortization, and some interest payments aren’t reflected in month-to-month internal documents, whereas they would appear in tax documents.

SWOT Analysis

A business valuation agent will conduct a thorough SWOT analysis. A SWOT analysis weighs the company’s strengths, weaknesses, opportunities, and threats. The SWOT analysis is a critical piece of the valuation puzzle because it evaluates the company with the industry and market in mind. It also gauges internal performance. It’s possible that the company may be working on a new product that holds great potential and minimizes threats.

Often business owners will conduct a SWOT analysis when seeking investors. However, this process is also critical when valuing a business for estate planning or looking to sell the business.

It’s vital that a third-party conduct this analysis as a business owner or operator may have a bias when assessing strengths and intentionally downplay weaknesses. A SWOT analysis should present data, facts, and a realistic look at the organization.

Different Business Valuation Calculations

Depending on the business, the industry, and many other factors, there are a variety of different valuation methods. These are calculations that evaluate various elements of the business’ assets, the opportunity for growth, and position in the market.

The Simplest Business Valuation Calculation — The SDE or Seller’s Discretionary Earnings

The Seller’s Discretionary Earnings, or SDE, represent how much the money the owner makes from the business. The owner could represent a single person, a set of partners, or more persons who own, control, and profit from the company. Calculating the SDE is relatively straightforward.

(Net earnings (before taxes) + personal draw (or owner’s draw) + non-essential expenses) – all liabilities = SDE

In a few steps calculating the SDE looks like:

Start with the business’ year-end net earnings before taxes.
Add the owner’s payment.
Add all non-essential expenses – Anything that does not fall into COGS or recurring costs.
Subtract all liabilities such as unsettled bills and debts.
The result of steps one through four produces the SDE.

The most common question regarding the SDE calculation falls onto step three. What expenses are critical, and which are non-essential? Rent, insurance, utilities, and COGS are all essential. However, equipment upgrades, travel expenses, events for staff, and participation in conventions are not essential.

Completing the SDE Calculation with an Industry Multiplier

The SDE calculation would not be complete without applying an SDE Multiple or the industry multiplier. This number will bring the SDE figure and recalibrate it to produce the fair market value of the company.

The multiplier depends on:

Industry
Trends in the market
Size of the business
Company assets (intellectual property and tangible assets)
Additional variables such as branding, marketing success, and company reputation

The SDE multiple factors in elements that the SDE calculation didn’t account for initially. Companies access the SDE multiplier through consultants, professional valuation services, or appraisers. Some business owners choose to use multipliers found in business reference guides, which require that the owner purchase the guide to hopefully find the right multiplier for the company.

Calculations for Up and Coming Businesses

Up and coming or inherently profitable businesses need a unique twist on business valuation calculations. They need a way to show the scale of their growth and profit potential while also addressing the risks or threats that could impact the business.

To do this, businesses that have a consistent growth rate, or a fair amount of opportunity, should use the discounted cash flow calculation. Typically the discounted cash flow will determine a value-based a scaled-back version of the business’ cash flow. By discounting a portion of the value, the calculation should accurately represent the potential of future losses.

The Discounted Cash Flow Calculation

The discounted cash flow calculation is complex. It’s so complex that Microsoft Excel has two prewritten formulas to calculate the DCF.

To calculate the DCF independently, follow these steps:

Determine the discount rate. In the formula, this will stand as “r,” the rate may be a percentage or the weighted average cost of capital.
Determine the time intervals – calculation below uses years.
Determine ‘N’ as the total time.
Follow the calculation

(Cash flow for year 1 / (1+r)¹) + (Cash flow for year 2 / (1+r)²) + (Cash flow for year N / (1+r)^N) + (Cash flow for last year / 1+r)

The excel formulas rely on a series, where the user inputs the data, and then the program runs a calculation. It is only as reliable as the data and the user inputting the information.

How Risk Impacts the DCF Valuation

A discounted cash flow analysis must undergo a risk adjustment. That’s the purpose of this type of valuation. The discounted rate represents the loss or discount in value, and often the weighted average cost of capital (WACC)stands as this rate. This is the ‘r’ of the formula above.

The DCF valuation typically, but not always, uses the average weighted cost of capital to determine the cost of acquiring or financing the business. The benefit of this valuation method is that it presents both the hopeful silver lining and the realistic risk associated with the business.

Advanced Calculations for Established or Successful Businesses

When a company has more advanced assets, hopeful growth projections, or a stable history of increased growth, it may call for more advanced calculations. Those calculations will rely on forecasts, detailed financial history, including financial management strategies, and present value.

To conduct a capitalization of earnings style valuation, the business must present financial reports and tax returns. Then the professional working with the company would determine specific forecasts for risk and profit.

The formula is:

Net Present Value / Capitalization Rate

The only disadvantage of using this method of valuation is that the projections may be off the mark. On occasion, projects are inaccurate. Then there is the chance for the extraordinary and unexpected, but those fall into the potential buyer’s risk tolerance. Typically, companies using a capitalization of earnings valuation leave the risk on potential buyers.

A Business Valuation Calculation Goes Beyond Formulas

Every business valuation is unique, and the idea of a one-size-fits-all approach is impossible. Some companies pitch that they produce instant valuations based on advanced calculators, but those calculators can’t include all elements of risk and possible reward.

A fair and complete business valuation relies on a foundation of quantitative or objective financial information and fact-based information relating to risk and growth. Then a professional should hand the subjective information taking into account various opinions and perceptions. A business valuation calculation must give careful but deserving weight to the strengths and the weaknesses of the company.

For business valuations that evaluate the whole of the company, contact American Fortune, where top analysts and advisors handle individualized valuations.

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.