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Valuation Reports

Purpose of Valuation ReportValuation Reports

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;


Business Valuation Report Samples

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:
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.


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


Sum of Indicators

Sum of Weights

Weighted Cash Flow
Adjustments 0

Available Cash Flow

Capitalization Rate

Highly Marketable


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

Enter Total Tangible Assets 546,420

Financial Rules of Thumb

ABC Company

Rules of Thumb

Rule of Thumb 1

Weighted Available Cash Flow

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

Excess Earnings
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
Valuation Multiple 5.00
Total Business Value 3,295,036

Rule of Thumb 3

Last Year’s Discretionary Cash Flow
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


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
Monthly Payment 42,704 33,614 27,319

Principal (year 1)
Interest (year 1) 150,963 172,529 194,096
Total Annual Payment 512,444 403,362 327,830

Investment Analysis

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

Return on Down Payment

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

Valuation Multiples

Value Selected


Price to Discretionary Cash Flow (last full year)
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


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.


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.


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.


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.


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;