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Private Company Valuation

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private company valuation

Using a Private Company Valuation for a Business Sale (800)248-0615

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

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Business Valuation Companies

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Business Valuation Companies

Business Valuation Companies at (800)248-0615

Traditionally, the common choice of a professional to evaluate a business’s worth was an accountant, an accounting firm, or other financial 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.

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Business Valuation Report

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Business Valuation Report

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

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