PURPOSES OF BUSINESS VALUATION

Business valuations can be performed for a number of different reasons. Here are the most common:

1) Buy or sell due to retirement, illness, unhappiness, boredom or un-profitability, etc.

2) Divorce or Property Settlement

3) Death, Insurance, Estate and Gift Tax Purposes

4) Financial Considerations or Requirements: bank loans,

loan collateral, taking a company public, etc.

5) Merger, Acquisition or Consolidation of a Business

6) Dissenting Shareholder or Minority Shareholder Buy out

7) Shareholders Buy and Sell Agreements

8) E.S.O.P.'s (Employee Stock Option Plans)

 BUSINESS VALUATIONS - APPROACHES AND METHODS

The value of a business is derived from its future benefits but those benefits cannot be measured with great certainty. All companies have different earnings, and different associated risk factors. Therefore, different approaches and methods have evolved over the years. These approaches and methods provide us with the ability to determine the estimated future value of the business.

Generally Accepted Theory

“In the simplest sense, the theory surrounding the value of an interest in a business depends on the future benefits that will accrue to the owner of it. The value of the business interest, then, depends upon an estimate of the future benefits and the required rate of return at which those future benefits are discounted back to the valuation date.”

Pratt—Reilly—Schweihs

Three Approaches to Business Valuation

There are three basic approaches to business valuation: The Income Approach, The Market Approach and The Cost or Asset Approach. Within each approach, there are a number of methods employed.

RULES OF THUMB

Four types of rules of thumb:

*1) multiple or % of sales

*2) multiple or % of adjusted earnings

*3) unit multiplier - "x" dollars per unit

*4) multiple of earnings or sales plus assets or

% of earnings plus assets

* Values calculated under any of the above types usually do not include inventory

“Rules of Thumb may be self-fulfilling prophesies, the more one is used, the more people are willing to accept it."

Jeff Wright, Author, "What a Business is Worth"

“A Rule of Thumb is a market-inspired pricing tool, based on collective feelings of those in the business or closely associated to it, that indicate what a business should sell for or could be purchased for."

Tom West

Why Should A Business Owner Consider An Independent Business Valuation?

In today market, many business owners still leave substantial money on the table when they sell their companies – most often because they do not truly have a handle on their company’s value. For that reason, the valuation process is a true asset to the business owner and a thorough, professionally prepared valuation will assist them in:

• Helping identify the key value drivers, major strengths, and more importantly, the major weaknesses of a company allowing the owner to solve both obvious and hidden problems prior to the selling process.

• Determining a reasonable selling price. Many owners rely on general rules of thumb, casual advice from friends, or other similarly unreliable sources. Values determined by general multiples or rules of thumb may be too high or too low. Unless the business owner goes through the valuation process, he just will not know. If the owner’s expectation of value is too high, it will prolong the selling process until a price concession is made. If the price is too low, money is left on the table.

• Fully understanding the value of the business will assist during negotiation. In this market, one can expect buyers to be sophisticated and experienced. They will conduct a rigorous analysis of the company even if the seller has not. They will look at those factors and value drivers that the owner and his advisors should consider in valuing the company, and they will use that information against the seller in negotiations if allowed.

Whether you need a "Business Value Analysis" or a "Full Third Party Valuation" call TBE for a free confidential review. 

4310 Belair Frontage Road Suite 3 Augusta GA 30909 (706) 364-1352 info@bizexchangenet.com